REFORMS, OPPORTUNITIES, AND CHALLENGES FOR STATE-OWNED ENTERPRISES Edited by Edimon Ginting and Kaukab Naqvi JULY 2020 ASIAN DEVELOPMENT BANK REFORMS, OPPORTUNITIES, AND CHALLENGES FOR STATE-OWNED ENTERPRISES Edited by Edimon Ginting and Kaukab Naqvi JULY 2020 ASIAN DEVELOPMENT BANK Creative Commons Attribution 3.0 IGO license (CC BY 3.0 IGO) © 2020 Asian Development Bank 6 ADB Avenue, Mandaluyong City, 1550 Metro Manila, Philippines Tel +63 2 8632 4444; Fax +63 2 8636 2444 www.adb.org Some rights reserved. Published in 2020. ISBN 978-92-9262-282-4 (print), 978-92-9262-283-1 (electronic); 978-92-9262-284-8 (ebook) Publication Stock No. TCS200201-2 DOI: http://dx.doi.org/10.22617TCS200201-2 The views expressed in this publication are those of the authors and do not necessarily reflect the views and policies of the Asian Development Bank (ADB) or its Board of Governors or the governments they represent. 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Cover design by Mike Cortes with photos from Mark Floro, Deng Jia, Nikita Makarenko, Zen Nuntawiny, and Ariel Javellana for ADB. All Rights Reserved. iii Contents Tables, Figures, and Boxes vi Preface xii Acknowledgments xvi Abbreviations xviii Contributors xx 1. State-Owned Enterprises and Economic Development in Asia 1 1.1 Introduction 1 1.2 Definition and Origin of SOEs 3 1.3 Evolving Role of SOEs 4 1.4 Stylized Facts and Data Set 6 1.5 SOEs’ Financial Performance and Objectives 10 1.6 Productivity and Efficiency Analysis 12 1.7 Return on Equity and Profitability 18 1.8 Quality of Output 21 1.9 Public Asset Management and Macroeconomic Risks 23 1.10 Reforming and Restructuring SOEs 25 1.11 Relevance of SOEs in Asia’s Next Transition 30 1.12 Pathways to SOE Reform 36 1.13 Summing Up 38 Appendix A1.1: Labor Productivity Decomposition 39 and Shift–Share Analysis Appendix A1.2: Data Envelopment Analysis 40 and Operational Efficiency References 43 2. State-Owned Enterprises in the Republic of Korea 45 2.1 Introduction 45 2.2 Definition and Classification of SOEs 46 2.3 Roles, Policies, and Reformation of SOEs 49 in Economic Development iv Contents 2.4 Contribution of SOEs to the Economy 67 2.5 Assessment of SOE Policies 71 2.6 Lessons from SOE Policies 73 Appendix A2.1: Case Study – Pohang Iron and Steel Company 76 References 81 3. Enhancing the Development Contribution 84 of Indonesia’s State-Owned Enterprises 3.1 Introduction 84 3.2 Overview of Indonesia’s SOEs 86 3.3 SOEs and the Overall Economy 96 3.4 Financial Performance of SOEs 103 3.5 SOE-Related Revenues, Subsidies, Costs, and Risks 110 3.6 Recommendations 116 3.7 Conclusions 129 References 132 4. Performance of State-Owned Enterprises in Kazakhstan 135 4.1 Background 135 4.2 The Role and Structure of SOEs 138 4.3 Performance of SOEs 145 4.4 Measuring the Efficiencyf o SOEs 158 4.5 Performance of Joint-Stock Companies 160 4.6 Macroeconomic Risks and Poor Performance of SOEs 169 4.7 Evaluation of Reforms 176 4.8 Conclusions and Way Forward 186 References 188 5. State-Owned Enterprises in the People’s Republic of China 190 5.1 Introduction 190 5.2 SOE Overview 192 5.3 Comparison of SOEs and Private Counterparts 196 5.4 Empirical Analysis of Efficiency and Productivity 202 5.5 Public Sector Management and Fiscal Risks 206 5.6 SOE Reforms 210 5.7 Evolution of the Corporate Governance Structure 213 5.8 Conclusions and Way Forward 217 Appendix A5.1: SOE Efficiency and Various Channels 218 Appendix A5.2: Case Study – Oil Industry Reforms 221 References 224 Contents v 6. State-Owned Enterprise Reforms in Azerbaijan 226 6.1 Introduction 226 6.2 Importance of SOEs in the Economy 227 6.3 SOEs’ Contribution to GDP 230 6.4 Performance of SOEs by Sector 233 6.5 Fiscal Implications 248 6.6 Reforms to Improve SOE Performance 253 6.7 Possible Ways Forward 263 Appendix A6.1: Financial Metrics and Key Performance Indicators 269 for SOE Analysis 269 Appendix A6.2: Policy Actions under the Improving Governance 271 and Public-Sector Efficiency Program 271 Bibliography 273 7. State-Owned Enterprises in Viet Nam 277 7.1 Introduction 277 7.2 Definitions 279 7.3 SOE Reform 281 7.4 Key Issues, Challenges, and Observations 298 for Continuing Reform 7.5 Proposals for Continuing Reform 317 Appendix A7.1: Case Study – Southern Waterborne Joint Stock 327 General Corporation Appendix A7.2: Case Study – Construction Corporation No. 1 334 Appendix A7.3: Definition of Equitization 341 Appendix A7.4: 11 Key Sectors in which 343 100% State-Owned Enterprises Will Remain Appendix A7.5: Corporations to Be Transferred to the Commission 343 for the Management of State Capital References 345 vi Tables, Figures, and Boxes Tables 1.1 SOEs’ Productivity Decomposition, 2010–2018 14 1.2 Average Assets Turnover Ratio, 2010–2018 15 1.3 Average of Percentage-Point Differences between Return on Equity 19 of SOEs and Private Listed Companies, 2010–2018 1.4 Average of Earnings Before Interest and Taxes Margins, 2010–2018 20 2.1 Classification of Public Institutions 47 2.2 Number of Designated Public Institutions, 2017 48 2.3 Market-Type and, Quasi-Market-Type SOEs in 2017 48 2.4 The First Wave of Privatization and Management Innovation of SOEs 62 2.5 Outline of the Second Wave of Privatization 64 and Management Innovation of SOEs 2.6 Public Enterprises’ Value-Added Share in GDP, 1963–1977 69 2.7 Public Enterprises’ Value-Added Share in Industry, 1963–1977 71 3.1 Financial Indicators for Total SOEs versus 91 the Largest 20/10/5 SOEs 3.2 Financial Ratios for SOEs in Aggregate and by Sector, 2013–2017 108 4.1 Total Assets of SOEs, by Sector, 2009–2017 146 4.2 Return on Equity, by Sector, 2009–2017 148 4.3 Decomposition of Return on Equity for SOEs in Kazakhstan, 2009–2017 150 4.4 Return on Assets, 2009–2017 151 4.5 Allocative Efficiency of Capital, 2009–2017 154 4.6 Contribution of SOEs to Employment, 2009–2017 156 4.7 Decomposition of Labor Productivity Growth, 2009–2017 158 4.8 Decomposition of Return on Equity for Samruk-Kazyna, 2009–2017 162 4.9 Decomposition of Return on Equity for Baiterek JSC, 165 2013–2017 4.10 Decomposition of Return on Equity, 2009–2017 168 4.11 Quality of Infrastructure 175 Tables, Figures, and Boxes vii 5.1 Number of Enterprises and Employment, 2016 192 5.2 SOE Financial Statistics, 2016 193 5.3 Fiscal Space in Selected Asian Countries, Average 2008–2017 207 5.4 Fiscal Cost of Contingent Liabilities, Average 1990–2014 209 A5.2.1 Fortune Global 500 List 2018 223 6.1 Number of SOEs by Sector 229 6.2 SOEs by Sector 235 6.3 Financial Statistics of SOCAR, 2014–2016 238 6.4 Financial Statistics of IBAR, 2015–2017 239 6.5 Azersu Average against Peers, 2014–2017 241 6.6 Azerishiq and Azerenerji, 2014–2017 242 6.7 Financial Results of Transport Companies, 2014–2016 244 6.8 Ports and Shipping Financial Performance, 2014–2016 245 6.9 Azerbaijan Airlines Results Comparison, 2014–2016 245 6.10 Average Performance Benchmark of Azercosmos and Azerpost, 246 2014–2016 6.11 Agrolizing Results, 2015–2017 247 6.12 Government’s Operating Budget, Balance Sheet, 248 and SOE Financial Performance 6.13 Fiscal Risk Assessment from SOE Sectors 252 6.14 Revenue from Privatization, 2015–2017 267 7.1 State Economic Groups 284 7.2 Number of SOEs, 2011–2018 289 7.3 2016 Financial Highlights 290 7.4 Contribution to GDP, 2010–2016 291 7.5 Contribution to Employment, 2010–2016 292 7.6 VNR500 Top-10 Companies, 2018 293 7.7 Value of Nonperforming Loans in State Economic Groups 297 and General Corporations 7.8 EVN and Petrolimex Subsidiary Ownership, 2018 319 A7.1.1 History of Events and Reform Lessons 328 A7.1.2 Key Financial Indicators, 2012–2017 331 A7.2.1 CC1 Equitization Process 337 A7.2.2 CC1 Ownership Structure after Equitization 337 A7.2.3 Financial Indicators, 2012–2016