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Evaluation of Financial Management Mechanism in State Economic Groups

Borrowing causes capital imbalance and reduces financial autonomy coefficient, in the long term will negatively affect the group's capital initiative.

b. Asset management

Since Decree 199/2006/ND-CP was amended and supplemented by Decree 09/2009/ND-CP, it has initially brought about effectiveness to the management mechanism of asset use at State-owned economic groups. The fixed asset depreciation regime has been clearly innovated, the regulation on the principle of calculating depreciation must be consistent with the level of wear and tear of fixed assets has gradually encouraged the implementation of the accelerated depreciation method to facilitate modernization and technological innovation. The fixed asset depreciation regime has created conditions for State-owned economic groups to preserve and develop business capital, while enhancing their responsibility to the State for asset management activities.

As analyzed in section 2.2.1, while the total revenue of most of the State-owned economic groups increased, the profits of the groups had different adjustments, increasing and decreasing, showing that the efficiency of asset use of the groups tended to decrease. Table

2.9 shows that the highest asset utilization efficiency is that of TKV Group which is quite high (nearly 1 and above 1), the lowest are VNS and EVN. However, also a natural resource exploitation and management enterprise, PVN Group only achieved an average asset utilization efficiency over three years of 0.59.

Table 2.9: Asset utilization efficiency of state-owned economic groups


Group

Revenue/Total Assets (times)

2006

2007

2008

VNPT

0.48

0.46

--

VRG

0.65

0.59

0.67

VNS

0.21

0.26

0.32

TKV

1.35

1.18

1.19

PVN

0.67

0.53

0.57

Textile

1.35

1.09

0.93

EVN

0.33

0.31

0.32

Bao Viet

0.42

0.23

0.46

Synthetic

0.52

0.46

0.44

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Source: Business Finance Magazine No. 10/2009

The management and use of assets of state-owned economic groups have not brought high efficiency, so the return on assets (ROA) of the groups is generally quite low (chart 2.8).

Chart 2.8: ROA of 6 State-owned enterprises in 2008


Source: Author's own calculation from data compiled from VNR Database and Business Finance Magazine No. 10/2009

PVN has the highest ROA ratio of 14.82%, while the textile group has the lowest ROA ratio (0.25%). Although it has the highest asset utilization efficiency, the ability to generate profits from assets is too low. It can be seen that the main reason is the poor cost management mechanism. Investing a lot in assets but the increase in profits does not keep up with the increase in assets.

The main contents of the current management and use mechanism of assets in State-owned economic groups in our country include:

- Leasing and mortgaging assets: The Group has the right to lease, mortgage, and pledge assets under its management for reinvestment and technological innovation.

- Asset sale and liquidation: member units of the State-owned economic group proactively prepare liquidation and sale plans and submit them to the parent company for decision.

- Fixed asset depreciation: Fixed asset depreciation of the HTDL unit is left for use at the unit, of the HTPT unit (except in cases where the unit borrows and pays by itself) and is managed and used centrally at the parent company.

- Assessment and handling of fixed asset losses: after equitization, enterprise restructuring or purchase and sale, merger, the accounting of differences, increases or decreases of State capital due to inventory and revaluation of assets in State-owned economic groups is approved by the financial authority.

2.2.3 Management and profit distribution mechanism

While the State-owned economic groups have mobilized capital in their own ways, the management and distribution of profits requires the groups to comply with the provisions of Decree 09/2009/ND-CP and the group's charter. In general, the management and distribution mechanism of the State-owned economic groups is currently implemented as follows:

- The current profit distribution mechanism is applied by the State-owned economic groups in a mixed form. That is, there are regulations on profit levels for the power system units and only manage profits according to statistical methods to develop new business strategies for the power system units. However, this is only the first step in applying this mechanism, so the State-owned economic groups are still confused. Even in some groups such as EVN, this is only a form, but in fact the groups still follow the old mechanism, which is in a centralized form.

- Regarding wage policy: wages are calculated in cost price and taken from revenue, but due to low revenue, the proportion of wages in revenue in state-owned economic groups is still low. Workers do not live on wages but on income. In total income, wages only account for 1/4-1/3, the rest is provided by the units. Companies in need of capital as well as companies with excess capital are all distributed, leading to a disorder in distribution. In addition, workers also have income from other jobs. This makes wages not a driving force to attract workers and a lever to promote economic development.

- Fund allocation: The State stipulates many types of compulsory funds for State-owned economic groups, making it difficult to concentrate capital. Basing on salary to allocate two reward funds and welfare funds is unreasonable and unfair.

- Currently, corporations use a number of profit distribution policies such as

after:


after:


Determine the profit distribution ratio: for state-owned economic groups with stable profits like PVN, determine a stable distribution ratio based on the group's operating regulations and reinvestment capacity.

For corporations with unstable profits like EVN, the corporation applies 2 ways of handling:

Dividends must grow at a rate lower than the growth rate of profits.

Dividends must decrease at a rate lower than the rate of decrease in profits.

- The current State-owned enterprises are applying the profit payment method in 3 ways:


Cash payment: State-owned enterprises pay dividends to owners and investors in cash.

Payment by shares: State-owned enterprises pay dividends to owners and investors by newly issued shares, which is essentially a form of capital mobilization.

Payment by assets: The State-owned enterprise pays dividends by the group's assets in the form of the group's products or the group's existing assets. However, this is the least used form because it is not favored by investors.

2.2.4 Financial control mechanism

a. State control over state-owned economic groups

Recognizing the important roles of the financial control mechanism, the State assigns the responsibility of monitoring and inspecting the efficiency of the use of state capital and assets in State-owned economic groups to SCIC. State-owned economic groups are responsible for reporting to SCIC on business results and efficiency of the use of state capital and assets quarterly and annually.

However, due to the lack of transparency in the financial statements of the State-owned economic groups, it is very difficult for SCIC to properly assess the performance in order to make a decision to maintain or divest from these State-owned economic groups. Since the pilot establishment, the discrepancy and failure to reflect the actual assets, revenue and business results have been quite common in the financial statements of many groups such as: TKV Group; EVN Group... or VNPT's many violations in the process of equitization of the group. For this reason, not only the State Audit Department but also inspectors closely inspect and supervise the State-owned economic groups. After each inspection, the State Audit requires adjustments to increase or decrease the revenue, expenses, assets, and budget payments to the State. In 2008, the State Audit discovered and recommended increasing the State budget revenue by 4,166 billion VND (mainly from taxes, fees and charges); Propose to reduce state budget expenditure by 2,731 billion VND (including incorrect expenditure, incorrect settlement of regimes, incorrect funding sources...); adjust to increase more than 137 billion VND in assets and capital sources; nearly 564 billion VND in revenue; reduce nearly 159 billion VND in expenses, increase pre-tax profit by over 722 billion VND from State-owned economic groups 26 .

b. State-owned economic groups inspect and supervise internal financial activities.

The Vietnamese State-owned Economic Group has just been piloted from the conversion from the 91 Corporations, but it must also demonstrate the nature of the economic group, that the relationship between the parent company and the subsidiary must be a capital investment relationship, accordingly, the management method, especially the financial management of the groups must also change. That is, the State-owned Economic Group needs to manage its subsidiaries through a financial control system. The financial control system is one of the important elements of the modern management system and has a great influence on the effectiveness of the management system in general and financial management in particular in the economic group. Financial control is an important tool to implement the management goals of the parent company towards its subsidiaries in the capital investment relationship.

For current Vietnamese economic groups, the financial control system has not been systematically built, and financial control functions are still overlapping. The financial control system in economic groups includes: owner control


26 Electronic Finance Magazine No. 80, February 15, 2010

For the Group's Board of Directors, the Group's Board of Directors' control over subsidiaries is carried out according to the following system:

Diagram 2.3: Financial control layers in state-owned economic groups

(1)


(2)


- Level 1: At the first control level, the State-owned economic groups establish a Control Board to perform the following tasks:

Inspect and supervise the activities of the Group's Board of Directors: general meeting of shareholders, board of directors, general director, deputy general director.

Check and monitor the financial activities of subsidiaries through the Supervisory Boards of the subsidiaries.

- Level 2: The next level of control is the operation of the subsidiary control boards. The subsidiary control boards have two main tasks, which are:

Check and monitor financial activities of subsidiaries

Report the results of the above process to the Group's Board of Supervisors.

State-owned economic groups are highly aware of the role of financial control in their subsidiaries and affiliated companies. Therefore, in recent times, the internal audit teams of these

The State Auditing Corporation was established and audited the following contents at member companies: revenue, expenses and determination of business results, receivables, payables, fixed assets and business capital. Focusing on building a professional internal audit team, the State Auditing Corporation increasingly sets higher recruitment requirements for candidates and regularly organizes short-term training courses for auditors.

In general, the financial control mechanism in SOEs is highly regarded, but its transparent and close implementation is still a requirement that SOEs have not yet fulfilled.

2.3. Evaluation of financial management mechanisms in state economic groups

2.3.1 Results achieved

The group model in Vietnam has been discussed since 1994-1995 and the establishment of the 91 Corporations is a transitional step. Implementing the policy of the Party and the Government, the 91 Corporations have converted to the economic group model according to Decision No. 91/TTg to overcome the limitations of the General Corporation model while improving production and business efficiency, competitiveness and moving towards international economic integration. On the basis of existing member companies, the State-owned economic groups have innovated and improved the organizational model and financial management to change the group from an administrative relationship, capital allocation to a capital ownership relationship. With those efforts, the financial management has been changed and brought about encouraging results:

- The CCQLTC has now established the ownership and the right to use the State's capital and assets at the State-owned economic groups, and at the same time created the initiative in mobilizing capital to serve the production and business of the State-owned economic groups. Currently, with the clear regulation of capital and assets owned by the State, the CCQLTC has basically solved the problem of capital allocation, management and use of State capital and assets at the State-owned economic groups (parent company and subsidiaries). The CCQLTC has created conditions for the parent company and subsidiaries to mobilize capital to serve the needs of production and business in many different forms. Mobilizing capital in the form of loans from commercial banks without having to mortgage assets has created many favorable conditions for the group.

- In recent years, the State-owned economic groups have exploited and balanced capital sources to ensure production and business needs and basic production investment, purchase equipment, supplement working capital for subsidiaries, solve capital difficulties for newly established or merged companies, contributing to ensuring balance in the State-owned economic groups.

- The State Economic Group has innovated its financial management mechanism, increasing its assets, equity, revenue, profit and contribution to the state budget at a fairly high rate.

- The capital mobilization and utilization mechanism has promoted innovation and modernization of equipment throughout the industry. Based on that, we can exploit and meet the needs and tastes of customers and enhance the competitiveness of the State-owned economic groups.

- The changes in the capital mobilization and capital management mechanism of State-owned economic groups have promoted Vietnam's international economic relations with countries in the region and the world.

- The State-owned economic groups have been gradually reformed since the transformation of the State-owned economic groups from the 91 Corporations. Therefore, the State-owned economic groups have completed most of the important responsibilities and tasks assigned by the State, contributing to promoting the national economy and stabilizing the lives of many workers.

2.3.2 Limitations

Although the State-owned economic groups are making efforts to improve their financial management, there are still some shortcomings in financial management in the State-owned economic groups, which are:

- The mechanism for capital mobilization and use has not yet fully promoted the initiative and creativity of subsidiaries: Decentralization and delegation of authority, especially the right to invest, purchase, transfer, lease or mortgage assets to borrow or lend, lend... have not yet been established. Therefore, there is always a situation of submitting to superiors for approval or superiors formally authorizing subordinates, causing difficulties and confusion for subsidiaries. Business decisions of subsidiaries are sometimes slow and passive because of this.

- The implementation of capital mobilization mechanisms is still limited due to many subjective reasons. The mechanism for internal capital mobilization is still very modest while the ability to mobilize more for production and business is due to cumbersome and rigid procedures, low loan limits, and failure to ensure capital for projects on schedule and time.

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