Amid rising pressure on State-owned enterprises to reform andcritical problems that hinder the process, Ethiopis Tafara, VicePresident and General Counsel of the International Finance Corporation(IFC), a member of the World Bank Group, talked with Vietnam NewsAgency's English-language daily Vietnam News about this issue.
Q:Over the last two years, only 16 enterprises were equitised,compared to 800 from 2004-05 and 636 from 1997-2002. What do you thinkabout this pace?
A: I think this pace presents opportunities.Having heard the expression of political will from the Prime Ministerto accelerate the State-owned sector reforms, we see certainopportunities for progress of the reforms. We understand that theytarget to restructure 400 companies. This requires a concreteequitisation plan and relevant regulatory reforms, and other factors forimplementing the reforms. In short I see these prospects of the largenumber of companies available for equitisation as opportunities andlooking for concrete equitisation plan as a road.
There is aneed to improve the governance of many institutions and one of the bestways to do that is to equitise. In our experience, equitisation willbring in private shareholders who will help instil a certain disciplineon corporate governance level, and I expect the desire now for theequitisation programme is to accelerate the improvements in corporategovernance and risk management, which will allow the economy to growsustainably. I expect that the design now for the State groupequitisation programme or the State-owned enterprises equitisation isaccelerate and improve the governance that seems necessary to improvethe economic growth of the country.
Q: The Government'sexpression to pursue the SOE reform is clear, however, the revisedConstitution 1992 reaffirms the basic path of the national development,pursuing the socialist-oriented market economy and recognising thesignificance State economy. What does this scenario tell you? Will SOEreform be difficult to achieve?
A: In my experience, majorchange is always difficult but we have heard the political willexpressed by the Prime Minister to actually tackle problems of SOEs andreform the sector. I don't expect something that can happen overnight,particularly taking into account constraints at the present that youmentioned.
But I think the expression of the political willactually does it. It's pretty significant and in that way, we areintending to support as far as we can because it's a good direction togo ahead.
In terms of the transferring model that has beendeployed in the restructuring process, we do agree that SOEs shouldfocus only on their core business and go ahead with divesting fromnon-core business.
However, there is a need to tackle fundamental problems to make transferring process work effectively.
Q: Regarding the banking reform, it seems there is a massive debtrefinancing operation when the Vietnam Asset Management Company (VAMC)has bought bad debt of banks by issuing low-yield bonds, and banks haverestructured maturing debts. Do you think that the Government quietlyallows to rolling over debt to avoid default or a sharp downturn ingrowth?
A: In the banking sector, we see there is a need torestructure and to recapitalise, and equitisation is a good opportunityto allow that recapitalisation and restructuring process. Theestablishment of the VAMC is clearly an important initiative to helpaddress the problems of NPLs and clean the books and balance sheets. Ithink it's a good idea and a good tool; however, I think, morefundamentally, it's more important to tackle the root of the problems,which has more to do with corporate governance and risk management.That's part of the reason why we encourage the Government to pursuefurther equitisation, which will introduce more robust corporategovernance and some good risk management practices which are really atthe root of the NPL problem.
Q: It is said that roll-overdebts practices did cause some big problems in some Western economies.So, what are recommended lessons for use before taking roll-over debtpolicy more seriously?
A: Certainly, my experience in Westerncountries with regard to bad debts is that it is very important to getit off the book as quickly as possible so the institution can startextending credit again. But equally important for the survival of theinstitutions is to improve corporate governance and risk management.
So you see even in the Western world, they actually got bad debtsoff their books, but at the same time they have been pursuing verystrong reform in risk management and corporate governance.
Q: What are you specifically advising our Government and the Prime Minister?
A:We are advising the Government to pursue exactly that, to pursueimprovements in risk management and corporate governance throughequitisation. We do believe that extending the shareholder structure toallow more investors is one of the ways to improve governance and bringin more risk management measures. So that's one thing that we areadvising the Government to do in the interests of addressing those twoissues.
Equitisation needs to be accompanied and complementedby legal reforms. We have been having conversations with the Governmenton the necessary reforms that we think should complement equitisation.The Law on Bankruptcy, for example, should be a focus and we are helpingthe Government improve that framework. That will facilitate companiesto announce bankruptcy and help banks to begin the process of recoveringcollateral.
Looking ahead, I think big changes are likely tocome with the Trans-Pacific Partnership, EU free trade agreement andASEAN+6. These represent huge opportunities for Vietnam and in many ofthese agreements, Vietnam could be one of the biggest beneficiaries.Those agreements will make Vietnam's economy more competitive as therewill be more competition from overseas. More competition meansmonopolies will dismantle and all of Vietnam's companies stand tobenefit. All of these will make SOEs become much more efficient than theway they currently operate. Improving efficiency is about improvingaccountability, improving transparency and improving corporategovernance. So the free trade agreements are a driver of reform to makeVietnam SOEs and the whole economy more efficient and effective to reapthe benefits of integration.
Q: Turn back to IFC's riskmanagement practices, it sounds like the IFC is getting into troublewith risk mismanagement, including non-financial risks in investments inpalm oil plantations in Honduras. What are you going to do to improveyour non-financial risk management and keep World Bank's social andenvironmental safeguards?
A: These environmental and socialstandards that we have developed and that we administered together withour clients are considered to be the best. And our objects are to helpour clients raise their standards with regards to environmental andsocial performance. And we have done this with clients around the world.We have done it successfully in many instances.
That is notto suggest that things never go wrong from environmental and socialstandpoint. There are a number of investments in which we identify therisks and put in place plans but nevertheless things go wrong. The ideathere is to learn from those and take those lessons to apply them innext investments with the next clients.
So you'll find enoughportfolios. There are some successful environmental and socialperformances in which plans are put in place. And there are some instantthings that don't go according to the plans, where things have gonewrong at some level. And what we learn from those is to take them andapply them in our next investments.
In terms of particularcase you refer to in Honduras, one of those didn't go according to plan.And actually, we are taking those lessons, review and consider them andapply them as better as we can and going forward.
Q: Would you cite a specific lesson that you've learnt from Honduras case?
A:Sure. We invested in a processing plan owned by a largeagribusiness, and we invested at the time when there was relative peacein the country. At some point after we actually made our investment,there was trouble violations in the region. And the client that we hadhad a security force and apparently there was a land invasion. Therewere some fights between other clients and some local peasants, andthere were deaths on both sides.
What we've learnt from thatis if working with clients that have security forces, importantly itmust be sure that these forces are trained appropriately with respecthow they engage in some certain circumstances when violence breaks out.We expect that in next investments that involve clients with securityforces, we spend a lot of time to talk about the training of thoseforces to be sure that the things happened in that particular investmentwould not replicate themselves elsewhere.
Q: Regarding whathappened with your investment in Honduras, what are you going to do tohave your clients in Vietnam comply with your performance standards? Forexample, the Nam Long Housing Project in Ho Chi Minh City?
A:All projects that we involve must comply with or achieve performancestandards. We don't expect them to achieve that on the day one of theinvestment but we do expect to have a plan in place with all about planshow we are going to achieve and when we are going to achieve.
When we are working on a project, we are looking for sponsors that haveability and willingness to work with us to achieve performancestandards.-VNA
Q:Over the last two years, only 16 enterprises were equitised,compared to 800 from 2004-05 and 636 from 1997-2002. What do you thinkabout this pace?
A: I think this pace presents opportunities.Having heard the expression of political will from the Prime Ministerto accelerate the State-owned sector reforms, we see certainopportunities for progress of the reforms. We understand that theytarget to restructure 400 companies. This requires a concreteequitisation plan and relevant regulatory reforms, and other factors forimplementing the reforms. In short I see these prospects of the largenumber of companies available for equitisation as opportunities andlooking for concrete equitisation plan as a road.
There is aneed to improve the governance of many institutions and one of the bestways to do that is to equitise. In our experience, equitisation willbring in private shareholders who will help instil a certain disciplineon corporate governance level, and I expect the desire now for theequitisation programme is to accelerate the improvements in corporategovernance and risk management, which will allow the economy to growsustainably. I expect that the design now for the State groupequitisation programme or the State-owned enterprises equitisation isaccelerate and improve the governance that seems necessary to improvethe economic growth of the country.
Q: The Government'sexpression to pursue the SOE reform is clear, however, the revisedConstitution 1992 reaffirms the basic path of the national development,pursuing the socialist-oriented market economy and recognising thesignificance State economy. What does this scenario tell you? Will SOEreform be difficult to achieve?
A: In my experience, majorchange is always difficult but we have heard the political willexpressed by the Prime Minister to actually tackle problems of SOEs andreform the sector. I don't expect something that can happen overnight,particularly taking into account constraints at the present that youmentioned.
But I think the expression of the political willactually does it. It's pretty significant and in that way, we areintending to support as far as we can because it's a good direction togo ahead.
In terms of the transferring model that has beendeployed in the restructuring process, we do agree that SOEs shouldfocus only on their core business and go ahead with divesting fromnon-core business.
However, there is a need to tackle fundamental problems to make transferring process work effectively.
Q: Regarding the banking reform, it seems there is a massive debtrefinancing operation when the Vietnam Asset Management Company (VAMC)has bought bad debt of banks by issuing low-yield bonds, and banks haverestructured maturing debts. Do you think that the Government quietlyallows to rolling over debt to avoid default or a sharp downturn ingrowth?
A: In the banking sector, we see there is a need torestructure and to recapitalise, and equitisation is a good opportunityto allow that recapitalisation and restructuring process. Theestablishment of the VAMC is clearly an important initiative to helpaddress the problems of NPLs and clean the books and balance sheets. Ithink it's a good idea and a good tool; however, I think, morefundamentally, it's more important to tackle the root of the problems,which has more to do with corporate governance and risk management.That's part of the reason why we encourage the Government to pursuefurther equitisation, which will introduce more robust corporategovernance and some good risk management practices which are really atthe root of the NPL problem.
Q: It is said that roll-overdebts practices did cause some big problems in some Western economies.So, what are recommended lessons for use before taking roll-over debtpolicy more seriously?
A: Certainly, my experience in Westerncountries with regard to bad debts is that it is very important to getit off the book as quickly as possible so the institution can startextending credit again. But equally important for the survival of theinstitutions is to improve corporate governance and risk management.
So you see even in the Western world, they actually got bad debtsoff their books, but at the same time they have been pursuing verystrong reform in risk management and corporate governance.
Q: What are you specifically advising our Government and the Prime Minister?
A:We are advising the Government to pursue exactly that, to pursueimprovements in risk management and corporate governance throughequitisation. We do believe that extending the shareholder structure toallow more investors is one of the ways to improve governance and bringin more risk management measures. So that's one thing that we areadvising the Government to do in the interests of addressing those twoissues.
Equitisation needs to be accompanied and complementedby legal reforms. We have been having conversations with the Governmenton the necessary reforms that we think should complement equitisation.The Law on Bankruptcy, for example, should be a focus and we are helpingthe Government improve that framework. That will facilitate companiesto announce bankruptcy and help banks to begin the process of recoveringcollateral.
Looking ahead, I think big changes are likely tocome with the Trans-Pacific Partnership, EU free trade agreement andASEAN+6. These represent huge opportunities for Vietnam and in many ofthese agreements, Vietnam could be one of the biggest beneficiaries.Those agreements will make Vietnam's economy more competitive as therewill be more competition from overseas. More competition meansmonopolies will dismantle and all of Vietnam's companies stand tobenefit. All of these will make SOEs become much more efficient than theway they currently operate. Improving efficiency is about improvingaccountability, improving transparency and improving corporategovernance. So the free trade agreements are a driver of reform to makeVietnam SOEs and the whole economy more efficient and effective to reapthe benefits of integration.
Q: Turn back to IFC's riskmanagement practices, it sounds like the IFC is getting into troublewith risk mismanagement, including non-financial risks in investments inpalm oil plantations in Honduras. What are you going to do to improveyour non-financial risk management and keep World Bank's social andenvironmental safeguards?
A: These environmental and socialstandards that we have developed and that we administered together withour clients are considered to be the best. And our objects are to helpour clients raise their standards with regards to environmental andsocial performance. And we have done this with clients around the world.We have done it successfully in many instances.
That is notto suggest that things never go wrong from environmental and socialstandpoint. There are a number of investments in which we identify therisks and put in place plans but nevertheless things go wrong. The ideathere is to learn from those and take those lessons to apply them innext investments with the next clients.
So you'll find enoughportfolios. There are some successful environmental and socialperformances in which plans are put in place. And there are some instantthings that don't go according to the plans, where things have gonewrong at some level. And what we learn from those is to take them andapply them in our next investments.
In terms of particularcase you refer to in Honduras, one of those didn't go according to plan.And actually, we are taking those lessons, review and consider them andapply them as better as we can and going forward.
Q: Would you cite a specific lesson that you've learnt from Honduras case?
A:Sure. We invested in a processing plan owned by a largeagribusiness, and we invested at the time when there was relative peacein the country. At some point after we actually made our investment,there was trouble violations in the region. And the client that we hadhad a security force and apparently there was a land invasion. Therewere some fights between other clients and some local peasants, andthere were deaths on both sides.
What we've learnt from thatis if working with clients that have security forces, importantly itmust be sure that these forces are trained appropriately with respecthow they engage in some certain circumstances when violence breaks out.We expect that in next investments that involve clients with securityforces, we spend a lot of time to talk about the training of thoseforces to be sure that the things happened in that particular investmentwould not replicate themselves elsewhere.
Q: Regarding whathappened with your investment in Honduras, what are you going to do tohave your clients in Vietnam comply with your performance standards? Forexample, the Nam Long Housing Project in Ho Chi Minh City?
A:All projects that we involve must comply with or achieve performancestandards. We don't expect them to achieve that on the day one of theinvestment but we do expect to have a plan in place with all about planshow we are going to achieve and when we are going to achieve.
When we are working on a project, we are looking for sponsors that haveability and willingness to work with us to achieve performancestandards.-VNA
