Financial performance of privatized state-owned enterprises (SOEs) in Vietnam.

Pham, Cuong Duc ; Carlin, Tyrone M.

INTRODUCTION

Since the late 1970s a substantial body of literature calling into question the performance of the government sector has developed. Though this body of work has expanded to vast proportions, some common themes visible include the complaint that the government sector suffers from unclearly defined objectives, inefficient and ineffective policy implementation processes and is excessive in size relative to its economic setting. Further criticisms typically relate to the suggested existence of costly and overly bureaucratic organizational structures, low levels of responsiveness to citizens and a consequent failure to provide either an appropriate quantity or (as the case may be) quality of goods and services to taxpayers (Osborne and Gaebler 1992; Jones and Donald 2003).

Reformist oriented public management literature often links service and organizational sustainability deficiencies with macro level economic difficulties including persistent government sector budget deficits because of excessive costs and spending compared to poorly structured and inappropriately spread taxation bases. (Osborne and Gaebler 1992; Pollitt and Bouckaert 2004).

Many of the sentiments expressed in this body of literature were echoed in the policy settings adopted by reformist governments, most notably those in the United Kingdom, New Zealand and Australia (Carlin 2003; Carlin 2004). Consequently substantial changes in public sector management have emerged since the 1980s with various techniques, including contracting out, commercialization, corporatization, privatization used as a basis for improving cost effectiveness and efficiency in government.

Of these techniques, privatization has been perhaps most consistently employed throughout the world, often under conditions of considerable controversy. Privatization is the process through which governments either wholly or partly sell their interests in state-owned enterprises (SOEs) to private sector investors in the hope that the inefficient performance of these firms can be improved by the application of the discipline associated with private ownership (Megginson, Nash et al. 1994; Brada 1996; Megginson 2000; Megginson and Netter 2001).

Having initially been viewed as a radical, perhaps even desperate policy initiative of the most closely associated with the Thatcher government in Britain from 1979 onwards, privatization has come to be accepted as a potential instrument of economic policy for governments of many persuasions throughout the world. Indeed, the increasing tendency towards the use of this technique shows no sign of slackening in the 21st century (D'souza and Megginson 1999; Megginson and Netter 2001).

Understandably, given the widespread application of privatization as a tool of public policy and the high degree of materiality (in dollar and GDP proportionate terms) of many programs of privatization, the phenomenon has attracted considerable attention from researchers. Some of the work which has resulted from this attention has been empirical in its basis, with a particular focus on the performance implications of a switch from public to private ownership modes.

Despite considerable growth in the volume of extant scholarly literature focused on the question of the impact of management reform in the public sector, comparatively little is known about the impact of such initiatives in the developing world, particularly in instances where sweeping public financial management reform programs are of relatively recent origin.

Vietnam represents a case in point. Only in the post millennium period has the embrace of market based solutions been a significant phenomenon, made more interesting by the continued presence of a one party political system still nominally socialist in its focus. Consequently, this paper contributes to the literature by providing insights into the financial performance and position of a group of former state owned enterprises both before and after their transition to private ownership and listed company status. In doing so, this paper contributes to the development of a better understanding of the impact of financial management reform techniques in settings foreign to those where they originated and were originally implemented. The results may therefore inform policy decisions in economies still in the process of transitioning to greater openness and levels of competition.

The remainder of the paper is structured as follows. Section 2 sets out a review of some relevant literature and how this paper relates to previous work in this field. Section 3 sets out relevant details pertaining to the dataset drawn upon for the purposes of the research reported in this paper and the methodology employed. Section 4 sets out key empirical results, while section 5 sets out some conclusions and suggestions for further research.

LITERATURE REVIEW

A considerable body of literature dealing with the subject of public sector management and financial management reform now exists. Within that, there exists a body of literature focused on the particular phenomenon of privatization. An often cited example of this type of work is embodied in Megginson, Nash and Randenborgh (1994). These authors compared the pre- and post-privatization financial and operating performance on 61 companies in 18 countries spanning 32 industries which had experienced full or partial privatization through public share selling over the period between 1961 and 1990. Their results suggested that after being privatized, former SOEs increased real sales, became more profitable, increased levels of capital spending, improved operating efficiency levels, had lower debt and increased dividend payouts (Megginson, Nash et al. 1994).

This paper provided a methodological guide helpful for other researchers interested in evaluating financial performance in different nations and in various industries. However, the approach taken by Megginson et al contained several obvious drawbacks, including sample selection bias, simple comparisons based on accounting information prepared according to a variety of incompatible standards frameworks and the lack of controls for potentially significant macroeconomic variables, such as industry changes regulatory frameworks and market-opening initiatives (Megginson and Netter 2001).

Furthermore, while providing a range of useful insights, the Megginson et al study sample contained very few firms from developing countries, leading to some concerns about the capacity to meaningfully generalize their results. To overcome this, Boubakri and Cosset used the same basic methodology as had been employed in the Megginson et al study method to conduct two studies. The first examined financial and operating performance of privatized firms in developing countries. Their sample included 79 companies from 21 developing countries and 32 industries which also experienced full or partial privatization over the period 1980 to 1992. Their results were consistent with those reported by Megginson et al (Boubakri and Cosset 1998). A second study examined the performance of 16 African firms which privatized during 1986 to 1996. This study reported significant increases in capital spending in privatized firms but insignificant changes in profitability, efficiency, output (sales) and leverage (Boubakri and Cosset 1999).

These works represented important contributions to the literature, especially the insight that the privatization leads to performance improvement which may result from changes in management teams and style (Megginson and Netter 2001). Nonetheless, these left unexplored niches. For example, none of the firms included in the samples drawn upon in the Megginson et al study or the Boubakri and Cosset studies were from socialist countries undergoing the transition to the embrace of market based principles. Further, while the studies used aggregate financial data to characterize the position of firms after the point of privatization, the datasets drawn upon for the basis of this earlier research were not sufficiently rich to allow detailed drilling into the financial causes of the phenomena these authors observed.

Partly filling this gap in knowledge, some authors undertook evaluations of privatization processes in the Czech Republic, Hungary, the former German Democratic Republic, Poland and Russia, all Soviet bloc nations in a process of transition in the post Soviet era. Among these studies Harper (2000) examined privatization in the Czech Republic and concluded that this process resulted in improved profitability, higher efficiency and lower employment levels in divested firms in the second wave of privatization but caused the opposite results in the first divestment round (cited from Megginson and Netter, (2001, p.360)).

Other studies by authors, such as Claessens and Djankov (1999), Frydman, Hessel et al (1999), Smith, Cin et al (1997) were not focused on financial performance and contained various drawbacks, such as significant selection bias, omitted variables, and suffered a range of data validity problems resulting from the massive economy-wide changes occurring concurrently with privatization processes (Megginson and Netter 2001).

A recent study focused on the impact of privatization on financial performance of Chinese firms divested by the State in privatization processes. Wei, D'souza, and Hassan (2003) conducted a study on 208 privatized firms in China, a current socialist country, during the period from 1990 to 1997 and also used the Megginson et al methodology. The results of that study are consistent with those of the earlier studies cited above, save for their conclusions in relation to post privatization profitability. Wei et al documented that, after being privatized, the firms in their sample did not exhibit significant change in profitability (Wei 2003). Again, this research did not aim to discover the reasons for changed/unchanged profitability, for improvement in outputs, for sale efficiency and so forth, so it is not possible to determine from the results any detailed explanation for the observed phenomenon.

Another gap in the existing literature has been the failure of existing studies to document the association between privatization and a range of key business metrics such as working capital management efficiency, capital intensity, cashflow profile and the level of free cashflow generated by enterprises. Yet an understanding of factors such as these is important in the context of developing detailed insights into the journey of transition undertaken by firms as they are reconfigured from public to private ownership.

Vietnam commenced a program of nationwide economic reform, known as Doi Moi, in 1986. This program represented a wide ranging agenda aimed at stimulating economic growth and improving the capacity for Vietnam to achieve both self sufficiency and higher levels of prosperity than had previously been generated. A substantial element of this agenda was a move towards greater private participation in the economic system. At the beginning of Doi Moi in 1986, Vietnam had around 12,300 SOEs many of which were unprofitable and exhibited signs of substantial inefficiency.

A concerted effort to attack this problem commenced in 1989 with the dissolution of many unprofitable SOEs and rearrangement of others. As a result, by the beginning of the privatization process which commenced in 1992, the number of SOEs in Vietnam had declined to around 6,500 enterprises (CIEM 2002; Vu 2005).

The process of privatization, or equitization as it is known in Vietnam, has attracted some degree of attention from researchers. Early studies chiefly focused on explaining privatization in Vietnam in its particular political and institutional setting (CIEM 2002; Mekong Economics 2002; Arkadie and Do 2004; Vu 2005; Sjoholm 2006). While useful, this first wave of literature did not contribute to an understanding of the effects of privatization on the financial performance of privatized firms (Chu 2004; Sjoholm 2006).

To date, two detailed studies have been conducted concerning the financial implications of privatizations in Vietnam. The most substantial of these was conducted by the Central Institute for Economic Management (CIEM 2002).

This study was based on a survey of approximately 422 privatized firms located in 15 cities and provinces of Vietnam. The results of this study, based on data pertaining to sales, value-added, number of workers, wages, total assets, export, and profit on sales ratio led the authors to conclude that privatization could generate positive results. However, the study was not without weaknesses, the most substantial relating to data validity. The data drawn upon for the purposes of the study was largely sourced via questionnaires and interviews with privatized firms' managers. There is some degree of concern that the managers of these organizations were cautious to avoid reporting conspicuous over or under performance, both of which could, in all the circumstances, have given rise to embarrassment (CIEM 2002).

Another considerable study was conducted by Webster & Amin (1998), employing a survey of 14 privatized firms in 1998 with a focus on sales, profits, employment and changes in ownership. The authors of this study also concluded that in general privatization had proved a successful policy. One noteworthy point was the discovery of difficulties in working capital and absence of investment capital financing in the sample of privatized firms. However, the causes of full implications of these factors were not developed in the analysis of the study's results.

This study is based on a detailed dataset compiled from the financial statements of 21 companies listed in Ho Chi Minh security center both before and after their listing. As distinct from previous studies, we report in considerable detail on observed changes in factors such as profitability, liquidity, working capital management, investment policy and cashflow, not only at the point of privatization, but over a period of three years post privatization. Consequently, this study offers insights into the changing face of post privatized SOEs in a socialist transitional economy not previously much available. Further details of the dataset drawn upon and the research method employed for the purposes of the study are set out in section 3, below.

DATA AND METHODOLOGY

Since the objective of this study is to provide detailed evidence pertaining to the impact of the transition from state owned enterprise to private venture, the sample of organizations examined were all originally configured as SOEs but were subsequently reconfigured as private sector enterprises.

Unlike other studies where the data relied upon for the purposes of analysis has been drawn from surveys, interviews and other similar sources, this study, focusing as it does on the financial dimension of the public to private transition, requires a richer and more consistent dataset. For that reason, the study is based on disclosures contained in annual audited (and published) financial statements. In Vietnam, under present regulations, these are only readily available from enterprises listed on one of the two official stock exchanges. One of these operates in Hanoi. At the conclusion of 2006, there were 87 firms listed on the Hanoi exchange. The other operates in Ho Chi Minh City, where 104 firms were listed by the same point.

However, the Hanoi exchange is a more recent phenomenon than the Ho Chi Minh City exchange, with the result that most listings on the former took place in 2005 or later. Therefore, given that a key objective of this study is to track the changing fortunes of post privatized SOEs over a medium term time frame, it was not possible to gather a meaningful research sample based on Hanoi listed entities. This therefore led to a focus, for the purposes of this paper, on organizations listed on the Ho Chi Minh City Securities Exchange.

For inclusion in the research sample, it was necessary that firms had been state owned enterprises prior to privatization (as opposed to private businesses which had taken advantage of an initial public offering process), and that audited financial statements were available for the organization for the year immediately prior to listing and for a period of three years thereafter. These requirements yielded a total research sample of 21 firms. Of these, 5 were listed in 2000, 4 in 2001, 10 in 2002 and 2 in 2003. Approximately two thirds of the organizations in the sample were from the manufacturing and materials sectors, while the remainders were service enterprises. Details of the set of firms included in the research sample are set out in appendix 1.

Because each listing year also yields a research sample too small for meaningful analysis, this study employs a data pooling technique whereby irrespective of the actual calendar year of listing, all data pertaining to each firm's year prior to listing, year of listing and each successive year post listing is pooled for the purposes of aggregate analysis.

This resulted in a dataset comprising 21 observations for the year prior to listing (t-1), the year of listing (t=0), one year post listing (t=1), two years post listing (t=2) and three years post listing (t=3). The aggregated t-1 data set comprised 5 firm year observations drawn from 1999 (relating to the five firms which listed for the first time in 2000), 4 from 2001, 10 from 2002 and 2 from 2003, respectively. Each of the other pooled datasets was constructed in the same manner. For each year each firm is included in the research sample, a variety of data pertaining to five key dimensions was gathered. These were:

1) Profitability;

2) Liquidity,

3) Working capital efficiency;

4) Financing; and

5) Cash flow.

To measure these categories, after considering data availability, the ratios set out in Table 1, below, were gathered.

Table 1: Ratios used for analyzing financial performance of
privatized firms

Categories Indicators

Profitability Return on Assets = OPBT/Average
 Total Assets

 Asset Turnover = Net Sales/Average
 Total Assets

 Profit Margin = OPBT/Net Sales

 Gross Profit Margin = Gross Profit/
 Net Sales

 Selling and Admin. on Sales = Selling &
 Admin Expenses/Net sales

 Cost of Doing Business on Sale = CODB/
 Net Sales

 Cost of Doing Business = Selling Exp. +
 Admin. Exp. + Other Expenses

Liquidity Current Ratio = Current Assets/
 Current Liabilities

 Quick Ratio = Cash, Cash Equivalents &
 Receivables/Current Liabilities

 Working Capital on Sales = (Current
 Assets- C. Liabilities)/Net Sales

Working Capital Efficiency Account Receivable Days = 365*Average
 AR/Net Sales

 Account Payable Days = 365*Average A.
 Payables/Purchase

 Purchase = COGS + (Ending Inv. -
 Beginning Inv.)

 Inventory Days = 365*Average Inventory
 /Cost of Goods Sold

 Cash Conversion Cycle = AR Days +
 Inventory Days - AP Days

Financing Debt to Equity = Total Debts/Total Equity

 Financial Leverage = Total Asset/Average
 Owner Equity

 ROE = ROA*Financial Leverage

Free Cash Flow (FCFF) FCFF = EBITDA - Changes in Net Working
 Capital - CAPEX- Income Tax

Time series data pertaining to each of the five dimensions was pooled and analyzed, with the results being set out in section 4, below.

RESULTS

Effects on Profitability:

To measure profitability, the study uses six ratios: return on assets (ROA); asset turnover; profit margin; gross profit margin; selling and administration on sales; and cost of doing business on sales. The key findings were that profit margins earned by the firms in our sample over the three years post listing declined, on average. The main driver for this decline in profitability seems to have come on the pricing side of the equation, with downwards pressure on prices not being offset by less material declines in cost structures post listing. These results are set out in more detail in Table 2.

Effects on Liquidity

To examine the liquidity or solvency of former SOEs, the study employed three ratios: the current ratio, quick ratio, and net working capital on sales. The analysis is also carried out in three dimensions: 1) whole sample with 21 firms; 2) four groups by listing year: 2000-listing, 2001-listing, 2002-listing, and 2003-listing; and 3) two sub-groups by industry: manufacturing-company group; and trade and services one. The results of calculation are represented in mean and weighted mean.

Overall, the results suggest that post listing, the firms included within the sample improved their working capital management practices. Thus, the mean observed values for the current and quick ratios fell, while the level of net working capital required to sustain a unit of sales activity fell. While the absolute level of liquidity exhibited by the sample firms fell in the three years immediately post listing, there was no evidence to suggest that the level achieved by that stage had declined to levels which would suggest, per se, that the continued financial viability of the sample enterprises ought be treated as doubtful. Overall results are summarized in Table 3, below.

Table 3: Summary of effects on liquidity of privatized firms after
listing

Ratios Meaning for Whole sample Group by listing
 examination year
 (Hoggett,
 Edwards et al.
 2003)

Current Ability of firm High rate before Moderate value,
Ratio to meet short- listing; Strong but 2000-listing
 term debt ability to pay firms in
 obligations; short debts; pre-listing;
 High ratio means Decrease from Strong ability to
 strong ability to 3.0 to lower meet short debts;
 pay short rate at Decrease from
 obligations; Too around 2.0 various rate to
 high ratio means around 2.0
 firm invest more
 capital in low
 profitable
 assets;
 Rule of thumb
 for safety is 2.0

Quick Similarity as High rate before Moderate value,
Ratio current ratio, listing; Strong but 2000,
 but no inventory ability to pay 2001-listing
 used for short debts; firms in
 calculation Decrease from pre-listing; Strong
 because of its 2.0 to lower ability to meet
 transferability rate at short debts;
 to cash; Rule of around 1.0 Decrease from
 thumb for safe is various rate to
 1.0 around 1.0

Net Amount of Improvement in Firms listed in
Working working capital using net 2000 and 2003
Capital used to generate working capital have significant
on one VND of net improvement
Sales sale; The lower
 ratio the higher
 efficiency of
 using working
 capital

Ratios Manufacturing Trade & services Generally
 company companies verified sources
 of change

Current High rate in Moderate value There is an
Ratio pre-listing; pre-listing; improvement in
 Strong ability to Ability to pay structure of
 pay short debts; short debts; current assets
 Big adjustment Ratio varies and current
 from around 4.0 around rate of liability toward
 to around 2.0 2.0 lower current
 assets and higher
 current
 liabilities.

Quick High rate in Moderate value There is an
Ratio pre-listing year; pre-listing; improvement in
 Strong ability to Ability to pay structure of
 pay short debts; short debts; current assets
 Big adjustment Ratio varies and current
 from around 2.5 around rate of liability toward
 to around 1.0 1.0 lower current
 assets and higher
 current
 liabilities.
 Inventory takes
 high portion in
 current assets

Net Significant Insignificant There is a trend
Working improvement improvement of lower current
Capital assets and higher
on Sales current
 liabilities;
 Significant
 increase in sales

Effects on Working Capital Efficiency

Consistent with the commentary pertaining to liquidity, there was strong evidence that the sample firms actively improved their working capital management practices over the three years immediately post listing.

Our data suggests that the main driver of this overall improvement lay in better receivables management, with average days receivable across the sample as a whole falling from approximately 100 days at the commencement of our measurement interval to around 60 days by the third year post listing.

By way of contrast, average inventory days lengthened slightly, though the overall result in this dimension was dominated by the impact of substantial inventory days lengthening in the case of the subsample of firms listed in 2002. However, even allowing for the potential impact of this phenomenon, there was far less clear evidence of systematic improvement in inventory management than was the case in relation to receivables.

The data also suggests that firms in the sample on average took longer intervals to pay their suppliers (in the order of approximately 20 days) at the three year post listing point than had been the case at listing. However, there is no evidence that this resulted from financial distress or a lack of liquidity on the part of these firms, which, according to our data (see table 3 and related discussion, above) had maintained liquidity at lower, albeit adequate levels at the 3 year post listing point when compared to the position at listing.

Finally, consistent with the observations set out above, the overall funding gap position for the firms in our sample improved, suggesting an improved overall free cashflow position. The results are set out in more detail in Table 4, below.

Table 4: Summary of effects on working capital efficiency

Ratios Meaning for Whole sample Group by
 examination listing
 (Hoggett, year
 Edwards et al.
 2003; Flanagan
 2005)

Account Days one Significant Significant
Receivable company need to reduction of time reduction
Days collect their collection days in firms
 receivables. The from around 100 listed in
 gradually shorter days to around 2000, 2002;
 period reveals 60 days Little
 the improvement adjustment in
 of credit sale firms listed in
 management 2001, 2003

Inventory Number of days Insignificant Nine firms
Days which inventory lengthening listed in
 remains in days for sale 2002 have
 reservation of goods and significant
 before sale; The services; increase time
 short period Dominated by for inventory
 reflects the high firms listed turn, other
 speed of selling in 2002 groups have
 goods and insignificant
 services reduction of
 days

Account Number of days Longer time to Longer period
Payable which a pay suppliers occurred in
Days company takes firms listed
 to pay suppliers. in 2000, 01,
 The long time noise in 02
 indicates ability listing firms
 to appropriate and shorter
 suppliers' time in firms
 capitals without listed in
 interest 2003

Funding Number of days Significant Significant
Gap a firm takes to shortening in shortening in
 complete its one funding gap funding gap
 business cycle; from 130 days
 The shorter gap to 83 days.
 indicate the Dominated by
 short time a manufacturing
 firm has cash firms
 available

Ratios Manufacturing Trade & Generally
 company services verified
 companies sources
 of change

Account Significant Significant Effective
Receivable shortening time shortening time approaches for
Days for collection for collection credit sale
 have been
 applied: credit
 selection,
 terms,
 collection
 techniques;
 Reduction of
 selling price
 and other
 incentives.
 These led to
 lower
 profitability;
 New methods of
 selling have
 possibly
 applied

Inventory Insignificant Significant Manufacturing
Days shortening time increase in firms have not
 for turning days changed their
 inventory for turning plan of
 inventory. production,
 reservation.
 Trade and
 service firms
 have purchased
 and stored more
 inventory than
 the sale
 requirements

Account An increase Decrease from An improvement
Payable from around 40 104 days to 90 in manufac-
Days days to around days for paying turing firms;
 60 days for suppliers Trade and
 paying suppliers service firms
 are under
 suppliers'
 pressure or
 being self-
 motivated to
 pay debts

Funding Significant Significant Improvement in
Gap shortening in lengthening in account
 funding gap funding gap. receivable
 from 152 to 82 Increase from dominates the
 days 48 to 88 days shortening
 funding gap of
 manufacturing
 firms; Funding
 gap of trade
 and service
 firms is
 dominated by
 shortening of
 payable days
 and lengthening
 inventory days

Effects on Financing

In order to assess capital structure and efficiency of capital usage of divested firms we use four ratios: debt on equity ratio, financial leverage, current liabilities on total debts, and return on equity (ROE). Also, the calculations are carried out in three dimensions: whole samples with 21 companies; four groups by listing year; and two sub-groups by industry classification. The main observations pertinent to the financing strategies adopted by firms in the post listing period is that they did increase their reliance on debt capital, relative to equity capital.

As the balance sheets of our sample firms expanded in the post listing period, they exhibited a preference for debt financing over equity financing, with the result that classic measures of capital structure including the debt / equity ratio and the leverage ratio all increased (on average) by a substantial margin.

Interestingly, much of the additional debt taken on by the firms in our sample appears to have been short term in its maturity profile. It is difficult to know the precise reason for this, but it is possible that explanations include the relative ease of obtaining short term financing products versus longer term financing products in the Vietnamese marketplace, and the relative cost and complexity of longer term financing arrangements versus shorter term arrangements.

Assuming the capacity to roll over debt facilities with maturities shorter than those of the assets to which they relate, this may represent a viable financing strategy, but does suggest an increased degree of structural financial risk embedded in the capital structures of our sample firms by the third year post listing.

Over the same period, due principally to the decline in profitability we reported above, the overall levels of returns on equity declined, suggesting a worsened risk / return tradeoff position, at least in the short run.

The results are summarized in Table 5, below.

Table 5: Summary of effects on financing

Ratios Meaning for Whole sample Group by listing
 examination year
 (Hoggett,
 Edwards et al.
 2003; Flanagan
 2005; Nguyen
 2005)

Debt to Proportion of Significant Increase in all
Equity debt and equity increase and groups except for
Ratio that a firm peak value at one which listed
 finance its year two in 2001
 assets; post-listing
 High ratio
 indicates high
 portion of debt
 in assets. It
 also reflects
 higher profita-
 bility but
 high risk of
 bankruptcy

Financial Portion of Gradual Gradual increase
Leverage equity one firm increase in groups except
 used to finance after for one listed in
 its assets; listing; 2001
 High financial Highest value
 leverage leads at year
 to high two post
 return on listing
 equity (ROE)

Current Measure the Current Current
liabilities solvency level; liabilities liabilities
on Total High ratio account for account for high
Debts reveals high around 90% of portion in total
 risk but high total debts debts
 profitability.
 This ratio might
 reflect the
 firm's difficul-
 ties in
 approaching the
 long-term loans.

Return on Firm's Significant Significant
Equity efficiency decrease decrease in
(ROE) at generating groups except for
 profits from one listed in
 every dollar of 2001
 net assets; The
 bigger ROE, the
 higher
 efficiency

Ratios Manufacturing Trade & Generally
 company services verified sources
 companies of change

Debt to Significant Insignificant Management
Equity increase and increase but awareness of
Ratio peak value at highest value using more debts
 year two at year other than using
 post-listing two post equity; High
 listing demand of
 capital for
 operation,
 especially at
 year two
 post-listing

Financial Significant Nearly It seems that
Leverage increase from unchanged, firms get to the
 1.8 to 2.2; swing around marginal point at
 Highest value 2.5; Highest 2.5; Higher
 at year two value at year demand of
 post listing two post capital for
 listing operation;
 Highest debt in
 year two
 post-listing lead
 to highest
 financial
 leverage

Current Current Current Possible reasons:
liabilities liabilities liabilities high interest
on Total account for account for rate of long-term
Debts around 90% of around 90% of debts; complex
 total debts total debts procedures and
 condition for
 long term loans;
 Financial
 managers'
 decisions; High
 portion of
 current assets to
 maintain the safe
 liquidity level

Return on Insignificant Significant Dominated by
Equity decrease; Swing decrease. ROA and
(ROE) around 20% Maintain Financial
 at 30% Leverage; The
 increase of
 financial
 leverage could
 not cover the
 decrease of ROA

Effects on Free Cash Flow for the Firms

Our final element of financial analysis was to estimate the free cashflow to the firm (FCFF) generated by our sample of enterprises over the period under review. We estimated free cashflow to the firm by adjusting EBITDA for net changes in working capital (consistent with our discussion above), capital expenditure and taxation costs.

Overall sample FCFF and its components in pre- and post-listing periods are depicted in Chart 1, below.

[GRAPHICS OMITTED]

Scrutiny of the results suggests that overall FCFF varied insignificantly at the three year post listing point from the position which had been exhibited in the year prior to listing. However, a decomposition of the aggregate result yields interesting insights. While improvements to working capital management had a positive impact on the free cashflow position of the sample as a whole, this was offset by increased capital expenditure profiles, particularly in the first and second year post listing.

A variety of explanations could potentially be offered for this pattern, though one which may explain the increased call on capital expenditures in the post listing period relates to the possibility that on average, the capital stock under the control of the entities within the sample was at or close to the point of obsolescence by the time of listing. The increased managerial freedom and access to capital associated with the listing event may have provided managers with the capacity to rejuvenate their enterprises by injecting capital which in a previous organizational guise had either been unavailable or at least, relatively more scarce.

If this explanation holds true, then our results suggest that after an initial spike, capital demands should return to lower levels, in turn suggesting the possibility of materially improved FCFF levels in future periods--though these are not captured in our dataset.

CONCLUSION

Our results depict the challenges faced by a sample of firms moving from the public to the private domain in an economy itself undergoing rapid transformation. In contrast to earlier literature which tended to paint pictures at relatively aggregate levels, our results have focused on the key individual financial levers which go to building up a profile of enterprise value generation potential.

We show, in contrast to the results published in earlier literature, that improved profitability is by no means a guaranteed outcome of the decision to transition from public to private ownership, particularly if that transition also occurs against the backdrop of a general recourse to greater competition in product and service markets.

The data we gathered in relation to our sample of firms suggests that they faced very substantial challenges in their first years of private operation. They found margin maintenance difficult, and were in general unable to reduce their cost structures by an amount sufficiently great to fully compensate, with the result that profitability fell, even in the face of expanded sales volumes.

They faced the need to replace obsolete equipment in order to better face more competitive open markets being created as other elements of the government's Doi Moi process, and this in turn required them to increase their reliance on external capital, principally debt. The manner in which the capital structure of our sample of firms evolved over time, with substantial reliance on short term debt, suggests difficulties faced in the absence of deep and liquid debt capital markets, and the need for managers within newly privatized organizations to better understand the inherent risks associated with financing strategies characterized by material maturity mismatches.

On the other hand, the enterprises included in our sample did succeed in making improvements on the working capital management side of the business--particularly in relation to receivables and payables, while performance on inventory management lagged. This may be due to the inherently greater level of complexity associated with the management of inventory, when compared against the decisions typically faced in the management of receivables and payables.

Although the overall level of free cashflow generation by our sample of firms had not materially increased by the conclusion of the third year post listing compared to the position at the year prior to listing, it is not accurate to depict the firms as not having undergone substantial change during that period. Overall, we found evidence to suggest that the firms in our sample were managed more leanly (e.g. lower cost structures, lower buffer liquidity holdings), with a greater tolerance and or appetite for risk (material capital expenditures funded chiefly through debt) and with a greater capacity to expand at a rate commensurate with demand, given easier access to capital--notwithstanding the concerns we expressed above in relation to the manner in which that capital was typically structured.

From a policy perspective, the results shed light on the implications of the privatization policy, and its capacity to operate successfully and consistently as an element of a broader portfolio of policies aimed at stimulating economic growth and health. Our results suggest that irrespective of any of the concerns which might typically be raised in relation to privatization programs such as that adopted in Vietnam (e.g. narrow wealth transfer effects, etc), the enterprises were generally more financially and operationally robust after a three year journey into the realm of the private domain than they had been at the point of privatization--and in that sense, more able to contribute to growth and employment on a sustainable basis than may otherwise have been the case.

Appendix 1: Sample of privatized and listed companies in Vietnam

 Stock Company Industry Priv. date
 Code

 An Giang
 Fisheries
 Import
 & Export JS
 1 AGF Com. M 28/06/01

 Bien Hoa
 Confectionery
 2 BBC Corporation M 01/12/98

 Bim Son
 Packaging
 Joint-Stock
 3 BPC Company M 08/01/99

 Chau Thoi
 Concrete
 Corporation
 4 BT6 No. 620 M 28/03/00

 Binh Trieu
 Construction
 and Engineering
 5 BTC JS Com. M 10/12/98

 Halong Canned
 Food
 6 CAN Corporation M 31/12/98

 DA Nang
 Plastic JS M 04/08/00
 7 DPC Company

 Binh Thanh
 Import-Export,
 Production &
 Trade JS Com.
 8 GIL General M 24/11/00

 Forwarding &
 9 GMD Agency T&S 24/07/93

 Corporation
 10 HAP HAPACO JS M 28/10/99

 Company
 Hanoi P&T
 Construction &
 Installation
 11 HAS JS Com. T&S 13/10/00

 Khanh Hoi
 Import Export
 Joint-Stock
 12 KHA Company T&S 07/03/01

 Long An Food
 Processing
 Export JS
 13 LAF Company M 01/07/95

 Petroleum
 Mechanical
 14 PMS Stock Company M 31/05/99

 Refrigeration
 Electrical
 Engineering
 15 REE Corporation M 13/11/93

 Cables And
 Telecom
 Materials
 Joint- Stock
 16 SAM Com. M 30/03/98

 Import-Export
 & Economic
 Co-Operation
 17 SAV JS Com. T&S 10/04/01

 Sai Gon Hotel
 18 SGH JS Company T&S 15/01/97

 Trans-
 Forwarding And
 Warehousing
 19 TMS Corporation T&S 03/12/99

 Sea Food Joint-
 Stock Company
 20 TS4 No. 4 M 11/01/01

 VTC
 Telecommunicat
 ions JS
 21 VTC Company T&S 08/09/99

Stock Listing Total Assets
Code date

 One year At end One year
 pre-listing listing year post listing

AGF 02/05/02 127,138,000 167,499,000 209,828,000

BBC 19/12/01 107,175,000 162,869,000 177,199,000

BPC 11/04/02 51,867,000 54,148,000 59,997,000

BT6 18/04/02 176,123,000 216,744,000 255,556,000

BTC 21/01/02 43,933,000 40,840,000 33,250,000

CAN 22/10/01 59,143,000 66,360,000 80,522,000

DPC 28/11/01 37,200,000 28,176,000 26,955,000

GIL 02/01/02 59,626,000 93,336,000 116,737,000

GMD 22/04/02 429,650,000 448,143,000 514,659,000

HAP 04/08/00 19,566,000 29,718,000 39,722,000

HAS 19/12/02 85,850,000 97,497,000 101,872,000

KHA 19/08/02 60,226,000 76,721,000 1,102,730,03

LAF 15/12/00 67,034,000 60,118,000 97,471,000

PMS 04/11/03 55,436,000 52,759,000 78,001,000

REE 28/07/00 212,427,000 271,467,000 343,177,000

SAM 28/07/00 155,038,000 164,698,000 183,132,000

SAV 09/05/02 114,076,000 174,377,000 254,084,000

SGH 16/07/01 24,971,000 22,815,000 24,142,000

TMS 04/08/00 65,153,000 80,981,000 66,411,000

TS4 08/08/02 25,304,000 39,338,000 45,854,000

VTC 12/02/03 35,875,000 48,957,000 62,925,000

 Shares Charter Share holding at listing (%)
 Volume capital
Stock standing at at listing
Code listing date date

 Pre-
 listing

 State Others

AGF 4,179,130 41,791,300 100 0

BBC 5,600,000 56,000,000 100 0

BPC 3,800,000 38,000,000 100 0

BT6 5,882,690 58,826,900 100 0

BTC 1,261,345 12,613,500 100 0

CAN 3,500,000 35,000,000 100 0

DPC 1,587,280 15,872,800 100 0

GIL 1,700,000 17,000,000 100 0

GMD 17,718,454 171,784,550 100 0

HAP 1,008,000 10,080,000 100 0

HAS 1,200,000 12,000,000 100 0

KHA 1,900,000 19,000,000 100 0

LAF 1,930,820 19,308,200 100 0

PMS 3,200,000 32,000,000 100 0

REE 15,000,000 150,000,000 100 0

SAM 12,000,000 120,000,000 100 0

SAV 4,500,000 45,000,000 100 0

SGH 1,766,300 17,663,000 100 0

TMS 2,200,000 22,000,000 100 0

TS4 1,500,000 15,000,000 100 0

VTC 1,797,740 17,977,400 100 0

 Share holding at listing (%)

Stock
Code

 Post-
 listing

 State Others

AGF 20 80

BBC 3.5 96.5

BPC 65.3 34.7

BT6 50 50

BTC 19 81

CAN 30.7 69.4

DPC 31.5 68.5

GIL 9.8 90.2

GMD 15.8 84.3

HAP 1.3 98.7

HAS 30 70

KHA 29 71

LAF 30 70

PMS 35 65

REE 25.1 74.9

SAM 48.9 51.1

SAV 20 80

SGH 38.9 61.3

TMS 10 90

TS4 25 75

VTC 45 55

REFERENCES

Arkadie, B. V. and D. D. Do. (2004). "Economic Reform in Tanzania and Vietnam: A Comparative Commentary." The William Davidson Institute Working Paper Number 706, June 2004

Boubakri, N. and J.-C. Cosset (1998). "The Financial and Operating Performance of Newly Privatized Firms: Evidence from Developing Countries." The Journal of Finance 53(3): 1081-1110.

Boubakri, N. and J.-C. Cosset (1999). "Does Privatization meet the expectation? Evidence from African Countries." Working Paper , Ecole des HEC, Montreal.

Brada, J. C. (1996). "Privatization is Transition- Or Is It?" Journal of Economic Perspectives 10(2): 67-86. Carlin, T. (2003). Financial Management Reform in the Victorian Public Sector 1992-2002. MGSM. Sydney, Macquarie University PhD: 316.

Carlin, T. (2004). "Output Based Budgeting & the Management of Performance." MGSM Working Paper in Management MGSM WP 2004-7.

Chu, T. (2004). Accounting changes in a transition economy: The case of Vietnam. School of Accounting and Finance-Falcuty of commerce. Sydney, University of Wolongong. PhD: 375.

CIEM (2002). Vietnam's Equitized enterprises: An ex-post study of performance, problems and implication for policy: 1-73.

Claessen, S. and S. Djankov (1999). "Enterprise Performance and Management Turnover in the Czech Republic." European Economic Review 43(1999): 1115-1124.

D'souza, J. and W. L. Megginson (1999). "The Financial and Operating Performance of Privatized Firms during the 1990s." The Journal of Finance 54(4): 1397-1438.

Flanagan, G. J. (2005). Principle of Managerial Finance, Australia Pearson Addison Wesley.

Frydman, R., M. Hessel, et al. (1999). "When Doest Privatization Work? The Impact of Private Ownership on Corporate Performance in Transition Economy." Quarterly Journal of Economics 114(3): 1153-1191.

Harper, J. T. (2000). "The Performance of Privatized Firms in in the Czech Republic." Working Paper, Florida Atlantic U., Boca Raton.

Hoggett, J., L. Edwards, et al. (2003). Accounting in Australia, John Wiley & Sons.

Jones, L. R. and F. K. Donald (2003). "Assessing Public Management Reform in an International Context." International Public Management Review Vo.4(Issue 1): 1-19.

Megginson, W. (2000). "Privatization." Foreign Policy, Spring 2000(118): 1-14.

Megginson, W. and M. J. Netter (2001). "From State to Market: A Survey of Empirical Studies on Privatization." Journal of Economic Literature 39(2): 321-389.

Megginson, W. L., R. C. Nash, et al. (1994). "The Financial and Operating Performance of Newly Privatized Firms: An International Emparical Analysis." The Journal of Finance 49(2): 403-452.

Megginson, W. L. and J. M. Netter (2001). "From State to Market: A Survey of Empirical Studies on Privatization." Journal of Economic Literature 39(2): 321-389.

Mekong Economics. (2002). "SOE Reform in Vietnam." Background Paper by Mekong Economics.

Nguyen, C. V. (2005). Chuyen khao ve bao cao tai chinh: lap doc, kiem tra, phan tich bao cao tai chinh (Monograph about financial statements: Preparation, Examination, and Analysis of Financial statements). Hanoi, Vietnam, Financial Publisher.

Osborne, D. and T. Gaebler (1992). "Reinventing Government: How the Entrepreneurial Spirit is Transforming the public sector." New York, NY: Plume.

Pollitt, C. and G. Bouckaert (2004). Public Management Reform:" A comparative analysis, Oxford University press.

Sjoholm, F. (2006). "State owned enterprises and equitization in Vietnam." from http://www.hhs.se/eijs.

Smith, S. C., B.-C. Cin, et al. (1997). "Privatization Incidence, Ownership Forms, and Firm Performance: Evidence from Slovenia." Journal of Comparative Economics 25(2): 158-179.

Vu, T. T. A. (2005). "Vietnam- The Long March to Equitization." from http://wdi.umich.edu/files/publications/ policyBriefs/2005/pb33.pdf.

Wei, Z. (2003). The financial and operating performance of China's newly privatized firms, Financial Management Association.

Cuong Duc Pham, MGSM- Macquarie University, Australia

Tyrone M Carlin, University of Sydney, Australia

Table 2: Summary of effects on profitability of privatized firms after
listing

Ratios Meaning for Whole sample Group by listing
 examination year
 (Hoggett,
 Edwards et al.
 2003)

ROA Amount of Gradual decrease Gradual decrease
 OPBT(*)
 generated by one
 VND of assets

Asset Amount of sales Up-down, Increase
Turnover generated by one increasing trend
 VND of assets

Profit Amount of Significant Significant
Margin OPBT generated decrease decrease
 by one dollar of
 net sales

Gross Amount of gross Significant Decrease, except
Profit margin generated decrease firms listed in
Margin by one dollar of 2001
 sales

Selling Ability to Insignificant Decrease, except
and minimize decrease for firms listed
Admin. expenditures for in 2000, 01
on Sale selling and
 administration

Cost of Ability to Insignificant Decrease, except
Doing minimize decrease for firms listed
Business expenditure for in 2000, 2001
on Sale selling,
 administration,
 and
 extraordinary
 activities

Ratios Manufacturing Trade & services Generally
 company companies verified sources
 of change

ROA Gradual decrease Gradual decrease OPBT increased
 at lower rate
 than average
 total assets

Asset Increase with Insignificant Net sales
Turnover oscillation increase increase at
 higher rate than
 total assets do

Profit Significant Significant Reduction in
Margin decrease decrease selling price,
 increases in
 cost of goods
 sold and other
 expenses

Gross Insignificant Significant Reduction in
Profit decrease decrease selling price,
Margin and

Selling Insignificant Significant Management
and decrease decrease team tried to
Admin. minimize the
on Sale expenses, but
 not much

Cost of Insignificant Significant Management
Doing decrease decrease team tried to
Business minimize the
on Sale expenses, but
 with little
 effect

(*) OPBT used to eliminate the effect of tax regulation of the State