Inadequacy in the enterprise valuation: Risk losing tens of trillion dong of the State capital

The State Audit proposed to raise more than 4 trillion dong of the State capital value at the Binh Son Petrochemical Sole member Limited Liability Company after auditing the value of this enterprise in 2016. Photo: collected.

Difference in the trillions of dong

In the equitization process of SOEs, the valuation of the enterprises before the equitization is a key stage, as a premise for approving the later equitization plan. However, the process of determining the enterprise value shows that there are many shortcomings and gaps leading to the State resources in these enterprises may be reduced unless the audit agencies do not participate and detect.

According to Mr. Nguyen Anh Tuan, Chief Inspector of the State Audit Specialty 6, in 2016, under the direction of the Prime Minister, the State Audit was assigned to audit 8 SOEs. Previously, these 8 enterprises had been identified by the valuations consulting organizations according to the asset method. By auditing, the State Audit proposed to increase the State capital more than 8,454 billion dong. Among them, the Binh Son Petrochemical Sole member Limited Liability Company had the largest increase in the State capital with 4,586 billion dong. The holding company of the PetroVietnam Power Corporation (PV Power) ranked the second after the Binh Son company when this company was proposed to increase by 2,029 billion dong, mainly due to the revaluation of financial investments increased 1,331 billion dong; Realization the receivable debts relating to the electricity sale increased 128 billion dong, and declaration lack of 525 billion dong of the advantage value of business… The holding company - the Vietnam Oil Corporation was a difference of 512 billion dong, the holding company - the Vietnam Rubber Corporation was a difference of 440 billion dong, the holding company – the Thanh Le Import Export Corporation was a difference of 72 billion dong.

Representatives of the State Audit also added that among the eight enterprises, there were two units (Saigon Tourist Cable Television Company Limited and Vietnam Television Cable Sole member Limited Liability Company) were enough conditions to apply the valuation under the method of discounted cash flow, but the valuation consultant agencies only determined the value of the enterprise under the asset method. Therefore, when the State Audit determined the value of enterprises under the method of discounted cash flow, the value of enterprises increased 15,684 billion dong compared to the asset method. However, the State Audit did not propose to adjust the value of enterprises, but only recommended the competent authorities to pay attention when evaluating and approving before announcing the officially equitized value of the enterprises.

Thus, preliminary, the difference of only 8 enterprises in the valuation of enterprises reached more than 20 trillion dong. Obviously, there were shortcomings, gaps in valuation of the enterprises. Accordingly, in the inventory, the handling of financial problems, there was the shortage inventory, insufficient current assets or the asset classification for handling was inadequate. Some units did not handle financial items that being eligible to increase the State capital such as turnover, other incomes, receivable debts, payable debts but not paid... but these items were accounted into their income after the time of the enterprise valuation, thus it led to reducing the equitization value of enterprises. In fact, the incorrect valuation of enterprises has delayed the equitization process of SOEs.

At the stage of asset valuation, the State Audit pointed out many limitations such as the valuation of architectural material houses, some units did not comply with the priority on the application of basic construction unit prices, capital investment issued by the competent authorities at the latest time. In some cases, determining the financial investment was not at the right time according to regulations on the time of determining the closing price of shares trading currently on the stock market, declaring lack of the business advantage value, these decreased the value of assets when determining the enterprise value was often lower than prescribed. In addition, contributing the capital by land leasing right, the business advantage of the joint venture companies (implementing under the transfer price agreed by the two parties), without offering price in the market, bidding and auctioning to determine price under the market principle, it led to the determination of the enterprise value not close to the reality, led to losses of the State property easily...

Eliminate weak consulting organizations

According to Dr. Nguyen Ngoc Tuan, Chairman of the Vietnam Valuation Association, currently, the enterprise value determining in our country was only guided two methods including the asset method and the method of discount cash flow, in which the asset method was used in widespread. Although there were many advantages, this method also revealed many limitations due to the enterprise assessment in “static state”, it was no attention the fact that it could be completed and developed in the future, so, it did not reflect reality in many cases, ignored the intangible value that is not accounted on the financial book, it led to a decrease in the assessed asset value, “distorting” the value of enterprises, affecting the interests of the State greatly.

Concerning valuation of SOEs, Dr. Tran Dinh Thien, Director of the Vietnam Institute of Economics, said that equitization of the SOEs was slow and ineffective because the property rights were not established clearly. According to Dr. Tran Dinh Thien, space, land associated with the “prime” location were always the asset with the highest value in all equitized assets of the SOEs, but in the process of equitization, this property was not be evaluated and sold on a marketable principle, because it was subject to “public ownership” and this led to the equitization of the SOEs are easy to turn into a profiteering process that the property owner (the State) always suffered a loss. Specifically, in many cases, the determination of land prices was much lower than market prices, less public and transparent prices, caused losses to the State budget, created opportunities for speculative and profiteering activities. The SOEs used the land use rights to contribute capital to other investors but agreed on the value of land use rights lower than market prices.

In order to improve the efficiency of equitization of the SOEs, according to Dr. Tran Dinh Thien, it was necessary to apply fully market principle in the process of selling the State property, first of all, for the land property. In addition, it was necessary to try to increase the value of SOEs before equitizing by solving debt problems, restructuring to increase the operational efficiency and at the same time strengthening the regime of individual responsibility in the equitization, it was considered as a mandatory requirement.

Many ideas also argued that the difference was due to the fact that the price assessing companies distorted the assessing value because of professional weaknesses, or aim of benefits. To limit this situation, in a series of his recommendations, Dr, Luu Truong Khang, Deputy Chief Auditor, the State Audit Specialty 5 recommended that the Government and relevant Ministries, Branches should issue criteria for rating consultancy organizations so that the owners of equitized enterprises could choose easily the prestigious organizations and ensure quality in the enterprise valuation, should reject resolutely the weak consulting organizations for the type of enterprise valuation, should supply the regulations allowing the foreign valuation consulting organizations take part in the equitization process.