Vietnam advised to set up sovereign wealth fund

vietnam stock exchangeIn order to boost productivity at its large but lethargic state-owned enterprises, Vietnam should look into the possibility to set up a government investment fund modeled on Singapore’s Temasek Holdings and Malaysia’s Khazanah Nasional Bhd, consulting firm McKinsey said.

Vietnam is currently trying to raise competitiveness and efficiency at state companies as economic growth slows after the Communist Party said in 2011 that unprofitable government-controlled firms had become “a burden.” Prime Minister Nguyen Tan Dung approved a master plan to force the companies to focus on core businesses and accelerate public share sales.

“Such enterprises could be managed professionally with business incentives in mind,” McKinsey said.

In Singapore, Temasek manages $169 billion in investments, and Khazanah’s net asset value reached $27 billion at the end of 2012. Both models allowed the state investment firms to introduce common corporate governance practices and impose higher management standards. They have successively sold shares in former state companies and then reinvested the proceeds outside their home countries.

In Vietnam, the government has difficulty giving state-owned companies more independence because they often serve as vehicles for state policies and are not run according to business principles.

Vietnam has taken small steps to replicate entities like Temasek with its State Capital Investment Corp., which was formed in 2006 to manage government shareholdings and operates under the Ministry of Finance. However, due to the fragmented power structures the fund has not been very successful so far as it has difficulties to get assets.

Productivity in manufacturing and services must improve by 50 per cent for Vietnam’s economic growth to return to more than 6 per cent, McKinsey said, as the country cannot rely on the two other drivers of economic expansion alone, its cheap labour force and urbanisation for growth.

“Unless state-owned enterprises are not fundamentally changed, Vietnam will end up more at 4.5 to 5 per cent growth,” the consulter added.