Finding the balance between autonomy and oversight in state-owned enterprise reforms

Võ Trí Thành

*Võ Trí Thành

A major reform in the management of State capital in enterprises is taking shape.

The draft Law on State Capital Management and Investment in Enterprises (referred to as Law 69) has been presented to the National Assembly at its 8th session for feedback, with approval planned for the 9th session in May 2025. The new law is expected to come into effect on January 1, 2026.

The draft Law 69 will replace the current Law on Management and Use of State Capital Invested in Production and Business at Enterprises (Law 69/2014/QH13), which has been in effect since 2014. The new law can be seen as a 'revolution' in changing the mindset and innovating the way state capital is managed in enterprises.

Reforming state-owned enterprises has been a continuous but challenging process. It began when the State changed its view on the role of these enterprises in a socialist-oriented market economy. The inherent characteristics of state-owned enterprises, such as ownership roles, conflicts of interest and decentralisation, have made the reform process difficult.

According to a Government report, there are currently 841 enterprises with state capital, with a total state investment amounting to VNĐ1.752 quadillion (US$69 billion). Pre-tax profits in 2023 decreased by 13 per cent compared to the previous year.

This data shows that state-owned enterprises are not performing as expected given their resources. One reason is that they lack the autonomy and responsibility to operate according to market mechanisms. Therefore, the new draft law is seen as a crucial step to unlock the potential of state-owned enterprises, address limitations and seize development opportunities.

The revised Law 69 introduces a new legal framework with many positive changes, as reflected in its name. The law now focuses on state capital management and investment, removing the phrase "production and business". This change broadens the law’s scope to include different types of investment, not just in certain sectors. It shows a simpler, more flexible approach, making the law easier to understand while reflecting the spirit of reform and innovation in managing state capital.

A key point of the draft Law 69 is the separation of the state’s ownership role from its management role. Once the state invests capital in an enterprise, it becomes the enterprise's legal property. The state acts as a professional investor without directly managing the enterprise. It only oversees the capital flow, while the enterprise operates according to business law. After investment, the state capital is considered the enterprise's asset, clearly defining and decentralising the management of state capital in enterprises.

The draft law redefines "state capital invested in enterprises" to better reflect its true economic nature. It defines state capital as the portion owned by the state and invested in an enterprise, which the enterprise receives based on its ownership share.

The draft also clearly outlines the roles and responsibilities of the Government, the Prime Minister, ministries, provincial People's Committees, state capital representatives, and enterprises in managing state capital invested in businesses, ensuring a clear distinction between state management and state ownership representation.

However, the revised Law 69 is a complex law with many new provisions and complications that need thorough analysis.

The main challenges stem from inherent issues with state ownership, such as principal-agent problems, conflicts of interest, moral hazard and the layers of representation. There are also concerns about the capacity, accountability and oversight of representatives. These problems are particularly hard to solve in large state-owned enterprises and key corporations.

For example, decentralising state capital ownership representation may limit the autonomy and creativity of enterprises. However, decentralisation is still necessary, as enterprises often lack the long-term vision of state management agencies. The main challenge is to find a balance between granting enterprises the freedom to make decisions in production, business and investment, while ensuring sufficient oversight of policies.

The current version of Law 69 faced many difficulties as it did not clearly define the boundary between “state capital” and “enterprise capital”. According to the current regulations, state capital invested in enterprises is still considered state property, which means that enterprises cannot operate autonomously, for example in borrowing, raising capital or distributing dividends, without approval from management agencies. This creates complex procedures, delays decision-making and hampers the flow of capital worth billions of đồng.

A typical example is enterprises with capital contributions from the State Capital Investment Corporation (SCIC). Currently, if it is not clarified whether the capital belongs to SCIC or the state, the enterprise will continue to be constrained by rigid regulations under the Law on State Capital Management, instead of being managed under the more flexible Law on Enterprises. The ambiguity also causes difficulties in identifying the managing body, creating confusion when business activities need to be approved.

The new law is expected to resolve these issues by clarifying that state capital, after being invested in an enterprise, becomes the enterprise’s capital, belonging to and managed by the enterprise. This change will allow enterprises to be more flexible in using capital to invest, expand production and restructure. Enterprises will also have the freedom to decide on matters such as dividend distribution or raising capital without waiting for approval from management agencies.

Workers from the Power Transmission Company No.1 inspect the equipment at the 220 kV Xuân Mai substation in Hà Nội. Many suggest the Government should create a list of key enterprises in important industries, with tailored regulations and financial management rules. VNA/VNS Photo Huy Hùng

For key enterprises, many have suggested that the Government should create a specific list of enterprises that play a leading role in managing the country's important industries at each stage, along with regulations and financial management rules suited to these enterprises.

Since these enterprises operate at a micro level, they cannot cover all overarching issues, and the complexity of their tasks involves factors beyond capital efficiency. Therefore, decisions need to be made with a comprehensive view.

The goal of state investment in these key enterprises is not only to create profits but also to ensure national security, defence and other areas that serve the country's development. This legal revision aims to help state-owned enterprises operate with the same flexibility as other businesses on the market, fulfilling their current functions and tasks to the fullest.

Proposals for sharing authority with key state-owned enterprises may include the state making high-level decisions, enterprises proposing opportunities or potential areas to the Government, or enterprises operating independently within approved strategies, with risk compensation and oversight from relevant authorities.

The biggest challenge is finding a solution that balances oversight with autonomy. If management is too lax, risks will increase; conversely, strict management will stifle creativity and flexibility. Therefore, it is essential to quickly improve the legal framework to create a business environment that is conducive to growth, helping state-owned enterprises, especially key enterprises, maximise their role in the economy.

The draft law also needs to clarify the levels of authority and responsibility among the parties involved, from capital representatives to directly managed enterprises. The issue lies in coordinating powers and ensuring that enterprises have flexibility and creativity, while also maintaining tight supervision by the state.

Due to time pressures and the need for rapid transformations to seize new and global opportunities, there is little time for hesitation. The market won't wait, we need to speed up the law revision, create a more flexible system, and give state-owned enterprises, especially key ones, more autonomy and creativity to reach their full potential.

*Võ Trí Thành is former vice-president at the Central Institute for Economic Management (CIEM) and a member of the National Financial and Monetary Policy Advisory Council. With a doctorate in economics from Australian National University, Thành mainly undertakes research and provides consultation on issues related to macroeconomic policies, trade liberalisation and international economic integration. Other areas of interest include institutional reforms, financial systems and economics of development. He authors the Việt Nam News column Analyst’s Pick.