January 24, 2015
– At the nascent stage of the economic renovation in Vietnam, most enterprises aimed to enhance their capabilities and expand their market share. However, at present, many have resorted to seeking preferential treatment and privileges by fostering ties with politicians and State-owned enterprises.
When many giant State-owned enterprises selected to be the growth engines of the economy tend to lack discipline and are showered with too much preferential treatment, corruption may become rife. Since the mid-2000s, several key policies have aggravated matters.
First, State-owned conglomerates, which used to be established on a pilot basis only, have proliferated.
The Government’s support has enabled State-owned conglomerates to swiftly swell and venture into myriad fields. Endowed with more autonomy, many of these groups have entered industries riddled with speculation such as real estate, banking, finance and the stock market.
After they are allowed to hold a stake in banks, these companies can use the new funds to finance their projects instead of relying on the State’s coffers. Advantages in access to land, which, according to the Constitution, are owned by the people but managed by the State, have prompted many State-owned conglomerates to scramble for strategically located land. The new situation has heated up the realty market, still plagued by bubbles. The same issue has haunted finance and the stock market.
As small banks with a charter capital of merely a few dozen billion dong expand into urban banks with a minimum charter capital of VND1 trillion, these financial intermediaries have to mobilize funds from external sources. Consequently, a number of firms, especially State-owned groups, have had a say in how banks run. Cross ownership starts to rear its ugly head in the banking sector, as many analysts have warned.
Furthermore, rapid credit expansion that disregards limited managerial capabilities has worsened bad debt and triggered deleterious impacts that have yet to be fully addressed.
The third policy that warrants scrutiny is rising decentralization in terms of investment, budget, land and resource management.
Fiscal decentralization means local authorities must pull out all the stops to meet higher spending needs. Meanwhile, the structure under which the central and local authorities share the available budget barely changes and the transfer of funds from the former to the latter has been on the wane.
Since the dynamism of enterprises has a significant influence on the local State budget, decentralization encourages some localities to actively improve the business environment to lure enterprises and boost budget revenue. However, it has also led to rampant sent-seeking behavior among enterprises and caused some firms to resort to questionable means to nurture good ties with local politicians.
The fastest way to collect a large amount of revenue in the short term for local authorities is to cash in on land and natural resources.
For example, to increase revenue from land use right transfer tax, a provincial people’s committee can, through an administrative decision, convert hundreds of hectares of farm land into that for industrial or urban use and then transfer the right to use it to investors for a hefty return. This has given rise to wide-spread corruption.
According to the State Inspectorate, there were over 1.2 million complaints submitted to the authorities in 2003-2010, 70% of which pertained to land. Statistics from the Ministry of Natural Resources and Environment indicate that from 2004, when the 2003 Land Law started to come into effect, to 2007, the number of complaints tripled.
Decentralization has pressured local authorities to transform some key State-owned enterprises in the localities into avenues through which infrastructure projects can be implemented and financial resources mobilized. These firms can seek preferential treatment, improve the public’s welfare, or give rise to a combination of these two, depending on the local authorities’ stance on socio-economic development.
Some localities even nurture certain private firms into channels through which funds from the central Government can be tapped into. They are authorized to raise funds for the localities’ key projects. Such authorization allows them to promote the projects by trying to include them in the central Government’s planning and then seeking financial support from the Ministry of Finance.
Another approach entails claiming that funds are mobilized for economic development and then borrowing from the Development Bank, commercial banks or some stimulus funds at favorable interest rates. For example, when the economy was stagnant, funds flowing from the central Government to local authorities were on the rise or even doubled year-on-year in 2009 in some localities thanks to the influence of private companies with strong ties with local politicians.
The decline of institutions and the business environment can hamper the growth of the private sector. At the nascent stage of renovation, most enterprises aimed to enhance their capabilities and expand their market share. However, at present, many have resorted to seeking preferential treatment and privileges by fostering ties with politicians and State-owned enterprises, as evinced by some recent lawsuits.
The report on provincial competitiveness in 2013 by the Vietnam Chamber of Commerce and Industry shows that when over 8,000 private companies in 63 provinces and cities were asked for their view on whether contracts, land and key resources were under the control of enterprises that enjoy close ties with the authorities, 96.6% in a median province agreed. This is hardly surprising.
(By Dr. Vu Thanh Tu Anh – The Saigon Times)