Mr Minh said, “Keep up the good work. I’ll support you.”

Doai said: “How can you tell what’s good or bad when you’re working for the government ? Just remember that Doai here has always been good to you.”

Thirty years later – having undergone economic reforms, WTO membership, an investment boom, a financial crisis and a surge in foreign direct investment – the same spirit dominates state-owned companies.

These entities are profitable in areas where they enjoy monopolies and privileged access to credit but they are poor at innovation and their non-core businesses lose money when they compete without a government crutch.

“The government hopes equitisation will lead to more competition, efficiency, independence and the acquisition of foreign expertise,” said Le Hoai Anh, who heads Vietnam investment banking at Credit Suisse. “The reality, though, is that it’s hard to do.”

In Thiep’s story, a family’s patriarch could not understand the social and economic changes taking place around him, not least his dissolute sons using their modern education to seek status in Hanoi. Only traditional peasant values salvage the family’s unity.

Just as the fictional family is without a king, so Vietnam too is lacking disciplined leadership. Patronage, rather than planning, has become the loadstone of minister and bureaucrat. This is why any state-owned enterprise that can generate a lot of cash is in privatisation limbo.

Delay, delay, delay

As with Thiep’s family, the loss of discipline and social solidarity – being without a king – has made it almost impossible for the government to privatise the biggest SOEs, despite the exhortations of its prime minister.

Delays have bordered on the comical: VMS Mobifone, the third-largest mobile telecommunications provider in the country, has been slated for “equitisation” since 2005. (Equitisation is the government’s term for turning an SOE into a joint-stock company, although the actual listing and trading of shares can take additional years.)

The central government in Hanoi wants to see privatisation happen. It needs the money to pay for infrastructure, which is becoming dependent on FDI, and for military upgrades. Moreover, the prime minister, Nguyen Tan Dung, recognises that SOEs require foreign strategic partners if they are to become more efficient.

Dung regularly exhorts SOE regulators and executives to get on with it. He has set out a plan to sell minority stakes in 432 companies by the end of 2015, including big companies such as Mobifone, Vietnam Airlines and garments maker Vinatex, as well as subsidiaries of PetroVietnam.

But the companies’ management, and the ministries or provincial governments supervising them, don’t want to change the status quo. Access to cash is one reason. Another is a fear of outside scrutiny, whether because of corruption or the risk of losing face because of mismanagement.

So they have come up with one reason after another to prevaricate. A classic example is Mobifone, whose owner Vietnam Posts and Telecommunications Group (VNPT) stalled first by suggesting the company be merged with some of its other units. Then, last year, it abruptly transitioned Mobifone’s long-serving chief executive officer to the parent company and parachuted in a VNPT executive to run the mobile group.

Botched process

Bankers and fund managers are sceptical any of the partial privatisations of big companies such as Mobifone, Vietnam Airlines or Vinatex will happen this year because of continued opposition of vested interests. “The equitisation process gets criticised for being slow but who’s motivated to speed things up?” said Andy Ho, chief investment officer at VinaCapital in Ho Chi Minh City.

Managers faced with privatisation or the prospect of foreign shareholders wonder if they’ll keep their job or whom they will report to. They are unprepared for the pressures of shareholder capitalism. They also lack incentives; with valuations low – as they have been since the stock market crashed in 2008 – the potential upside from an initial public offering is limited.

There is often little demand for some of these big companies, further complicating any selloff.

In some cases, the books look bad because the companies are a mess. In others, say local investors, the books are made to look bad so that outsiders take little interest – allowing executives and connected insiders to privatise the company for a song.

Sometimes this is because they want to turn it into a private, competitive little dynamo; in others, because they simply want to grab company assets like real estate.

Just as often, particularly with the larger companies, privatisation is done badly and there is little foreign investor appetite. “Instead of mixing good and bad companies together, the government often just tries to sell the bad ones,” Louis Nguyen, CEO of Saigon Asset Management, said.

Another problem is the poor free float allotted to private investors. PetroVietnam Gas Corporation, for example, is a huge company that accounts for 20% of the Vietnam Stock Index (VN-Index), the benchmark of the Ho Chi Minh City bourse. Yet this represents only 3% of VN Gas’ shares. Such a limited free float puts it off limits to many foreign investors. It also signals to strategic buyers that their input is not welcome.

Hard to love

In other cases, such as Vietnam Airlines or Mobifone, the government plans to sell up to 20% to a strategic and another chunk to the public market. But that’s no guarantee of success.

Firstly, there is a limit on foreign ownership for listed companies (49%, rising to 60% for banks). Given the small size of the Vietnamese stock market, which as of the end of July had a market capitalisation of about $50 billion, the most desirable companies have maxed out their allowed foreign ownership.

Secondly, strategic buyers are mandated to lock in their capital for five years when participating in an IPO. Combine that with pathetic float sizes and it’s no wonder a company like Vietnam Airlines can’t find strategic partners – there’s no way to impose a restructuring or negotiate side deals such as access to domestic routes, and no way out either. Oh, and the company is losing money.

Thirdly, it is not clear which part of the government will end up controlling a company once it lists. In theory, government shares of all “equitised” companies should transfer to the State Capital Investment Corporation, a Temasek-like entity that is Vietnam’s single biggest shareholder with a portfolio of more than $3 billion.

But SCIC lacks the political heft Temasek has in Singapore. While it does hold big stakes in some large companies that have been partially privatised, such as Vinamilk, it often loses bureaucratic turf wars. Line ministries or provincial governments are just as likely to retain their stake – often at the behest of the management.

“Who’s really in charge – the supervising ministry or the companies it’s meant to regulate? That is not always clear,” Sanjay Kalra, who heads the International Monetary Fund’s office in Hanoi, said.

So in spite of the government’s privatisation programme he sensed no real “change of heart about the role of the state in the economy.”

Two big maybes

Some companies are too big, however, for local investors or executive insiders to absorb. Portfolio managers told that Mobifone is valued at around $3 billion and Vietnam Airlines at around $1.5 billion.

Together these two represent an estimated $2.2 billion that must be sold to the private market. “That’s too much for domestic demand,” said Avinash Satwalekar, CEO and CIO at Vietcombank Fund Management in Hanoi, a joint venture between Vietcombank and Franklin Templeton.

In the case of the airline, foreign interest is limited. “Maybe they’ll just sell 3% and raise $15 million,” speculated Rory McAllister, head of institutional broking at VietCapital Securities in Ho Chi Minh City.

Mobifone, on the other hand, is a prize: last year it contributed $300 million in tax revenues, and is by far VNPT’s most profitable company.

“Mobifone offers the most interesting story to most investors,” Lawrence Brader, a portfolio manager at PXP Asset Management in Ho Chi Minh City, said. “They’ve restructured and are ready for the market.” Eventually the management will bow to pressure from the prime minister’s office and sell but no one knows when.

Despite these obvious and long-running problems, however, equitisation is not a complete bust. It may not offer large, attractive opportunities for big offshore portfolios but nimbler players are doing well.

The real privatisation

To be sure, quietly, usually to avoid outside involvement, many small companies have in fact privatised, with local businessmen or related parties taking control.

So far in 2014, according to a local fund house, Dragon Capital, the government has raised $120 million from the sale of 40 enterprises. These were rush jobs with no prospectuses or bookbuilding exercises, and the government received much lower proceeds than it wanted, according to several investors and brokers.

The insiders enjoyed a final one-off payment but now the companies will have to move on.

“Even if only half of the government’s agenda for equitisation gets done, that’s still good,” Fiachra Mac Cana, head of research at HSC Securities in Ho Chi Minh City, said. “The government can’t go back and renationalise those companies.”

Eventually better opportunities will emerge. The non-core assets of PetroVietnam, for example, may look bad on paper but some of these companies could be restructured.

The government recently amended its rules to allow non-core assets to be spun off at a discount, a measure aimed at letting PetroVietnam offload some of its loss-making businesses in finance and real estate. Once that is done PetroVietnam itself will be ready to equitise its mid-stream and downstream businesses (although the government is unlikely to ever sell its exploration or production platform).

It’s several years away but that is a potentially transformational deal. Even the little stuff, however, can be interesting to fund managers willing to kick the tyres of obscure Vietnamese companies. “Privatisation is the big opportunity over the next two years,” said Bill Stoops, CIO at Dragon Capital in Ho Chi Minh City.

And while selling small stakes to foreign strategic investors or to the public may not lead to meaningful restructuring, it is a step forward. “It allows companies to introduce things like incentives based on market performance,” said Pham Hong Hai, local head of global banking and markets at HSBC in Ho Chi Minh City.

SOEs appear increasingly challenged in a country where the private sector is quickly expanding. SOEs today account for roughly 60% of Vietnam’s capital but only 30% of GDP output, said PXP’s Brader.

“The private sector is taking business away from SOEs,” said Chris Freund, founder of local private-equity firm Mekong Capital. “SOEs are now having to fight to keep their advantages. It’s getting harder for them.”

Change, despite everything

Several factors are leading toward a more level playing field. The average age in this country of 90 million is 30 years, so it is still young; consumption has been muted since the stock market crash of 2008 but is starting to recover.

FDI has become the major source of growth as multinationals in textiles, automobiles and electronics ramp up production in Vietnam as an alternative to China or Thailand. And the expectation of entering the Trans-Pacific Partnership trade talks with the US, Japan and other Pacific nations is likely to give a boost to sectors such as agriculture – a transformation for which SOEs have failed to prepare.

In this environment, listed companies that perform should deliver bonuses to their managers. Bankers and fund managers try to argue with SOEs and their ministries that real privatisation can bring upsides, not just risk, to insiders.

The sky is the limit for CEO bonuses – and it’s legitimate money that doesn’t need to be hidden or laundered. “We argue that if the business improves, that will be reflected in the stock price,” Pham Ngoc Bich, CEO at Vietnam Holding Asset Management, said. “But they still fear losing face if the stock declines.”

Vietnam is a country without a king. The prime minister’s power stems not from divine right or dictatorship but from sitting atop the vast web of patronage and corruption that is manifest among incompetent SOEs and legitimised by communist ideology. Dung can’t command economic restructuring; the incentives have to add up.

The privatisation programme is therefore frustrating to investors looking for an easy market entry but ordinary Vietnamese will not accept the status quo. Nguyen Hui Thiep’s fictional patriarch gave way to his sons’ ambitions but traditional values kept the family intact. In real life a similar dynamic is forcing change upon Vietnam’s sclerotic government.

By Jame DiBiasio - Haymarket Media Limited / FinanceAsia - September 10, 2014