Supervising the use of state capital in enterprises under the vietnamese law nowadays

lations, enforcement, implementation and mechanisms of supervising function of equitization of state capital in enterprises. According to Pham Thi Hong Nhung (2016), entities have the right to supervise state capital in an enterprise include state management agencies and SOEs. Research works related to law enforcement on supervision of the use of state capital in enterprises in practice: the CIEM (2015) argues that the soft budget regime and differential treatment for SOEs leading to SOEs have spread investment, and focus on scaling up rather than efficiency. Vu Thi Nhung (2017) argues that the control of state capital has reformed the mode from management to investment and trading, to gradually limit administrative intervention of state management agencies into enterprises activities. 1.1.3. Research works on solutions of improving the law and efficiency of law enforcement on supervision of the use of state capital in enterprises Research works related to solutions of improving the law on supervision of the use of state capital in enterprises: the CIEM’s studies pointed out, whether applying the model run by Ministry or setting up a specialized agency must also ensure the principle that each enterprise just has one monitoring representative agency. Vu Thi Nhung (2017) and Nguyen Thi Minh Phuong (2018) also agree that it is necessary to maintain the SCIC model and establishing specialized agencies with ownership function but without function of state administrative management. Research works related to solutions of improving the efficiency of law enforcement on supervision of the use of state capital in enterprises: According to the CIEM (2018), it is necessary to build and operate the data 7 system on enterprises so that the supervisory agency can learn and collect information. At the same time, renewing the salary regime and leverage system to create motivation for staffs at enterprises. 1.2. Evaluating research situation 1.2.1. The research results are inherited by the dissertation Theoretically, research works have clarified the concept of state capital in enterprises and the basic features such as formation mechanism, forms of existence. Regarding the reality of the law: previous works have basically analyzed and evaluated previous and current provisions of the law on the mechanism of management and use of state capital in enterprises including mechanisms of supervising. Some works have outlined the achieved results and inadequacies of supervising the use of state capital in enterprises in practice in Vietnam and its causes. Regarding solutions: previous works have proposed solutions to improve the law and efficiency of supervision of the use of state capital in enterprises such as personnel solutions, facilities, and disclosure information of SOEs. 1.2.2. The issues need to further examine Theoretically: previous research works have not comprehensively examined and analyzed supervision of the use of state capital. Regarding the reality: the study continues to comprehensively examine, analyze and evaluate the reality of the Vietnamese law on supervision of the use of state capital in enterprises. Regarding solutions and recommendations: the study continues to update the development orientation and offer specific solutions to improve the law and efficiency of enforcing the law on supervision of the use of state capital in enterprises in Vietnam in the coming years. 1.3. Theoretical basis and research questions 1.3.1. Theoretical basis To ensure the science of research results, the dissertation uses a number of research theories such as market economy theory, state ownership theory, supervision theory, representation theory, State’s “tangible hand” theory and comparative jurisprudence theory. 1.3.2. Research questions and hypotheses * First, theoretically: 8 Research question: What is connotation of supervising the use of state capital in enterprises? Which are institutions of theoretical model of supervising the use of state capital in enterprises? Research hypothesis: In terms of current legal aspect, there is no unified view and concept on supervision of the use of state capital. Institutions of the law to supervise the use of state capital in enterprises include entities of supervision, subjects of supervision, mechanism of supervision and the implementation of supervising results. * Second, on the reality of the law: Research question: How is the reality of the provisions of the law and practice of enforcing law on supervision of the use of state capital in enterprises in Vietnam? Are there limitations and inadequacies that need to be improved? Research hypothesis: the law on supervision of the use of state capital in enterprises in Vietnam has been formed but it is still inconsistent. Limitations and inadequacies of the law and other causes have led to extremely weak supervision of the use of state capital in enterprises in Vietnam. * Third, on solutions: Research question: How are the directions and solutions of improving the law and efficiency of enforcing law on supervision of the use of state capital in enterprises in Vietnam today? Research hypothesis: Currently, the limitations and inadequacies of the provisions of the law on supervision of the use of state capital in enterprises have not been thoroughly overcome. On the basis of the Party's and State's viewpoints, orientations and schemes of restructuring SOEs in order to offers correct and complete solutions in many aspects to complete basically the law and improve the efficiency of enforcing law on supervision of state capital investment in enterprises in Vietnam in the coming years. 9 Chapter 2 THE THEORETICAL ISSUES AND LAW ON SUPERVISION OF THE USE OF STATE CAPITAL IN ENTERPRISES 2.1. Overview of state capital in enterprises and the use of state capital invested in enterprises 2.1.1. State capital in enterprises 2.1.1.1. The concept of capital Capital is defined as amount of money of all assets-invested in trading to make profits. 2.1.1.2. The concept of state capital and state capital investment in enterprises State capital is defined as state-owned capital and formed from the state budget or originating from the state budget. State capital investment in enterprise is defined as capital originating from the state budget and other state-managed funds that are directly invested in enterprises and owned by the state. 2.1.1.3. Characteristics of state capital in enterprise - State capital includes capital allocated from budget, capital derived from the budget, credit guaranteed by the state and other capital sources invested by the State. - State capital invested in enterprises can be money, property, and property rights. - State capital invested in enterprises with ownership of the whole people, in which the State is the owner representative. - Profit is not the sole and primary goal of state capital investment, but it also aims at the larger goal that is serving the public interest. 2.1.2. Using state capital in enterprises 2.1.2.1. The concept of using state capital in enterprises The use of state capital in enterprises means the enterprises allocate and invest state capital in enterprise and beyond to maximize economic efficiency and complete other goals that the owner has set up. 2.1.2.2. Characteristics of the use of state capital in enterprises - The entities use state capital to be SOEs. 10 - The entities use state capital are not the State but they are enterprises. - The use of state capital includes using it within and outside enterprises. - The goals of using state capital in enterprises including economic efficiency and social efficiency. - Using state capital must comply with a strict process. 2.1.2.3. Principles of using state capital in enterprises - The use of state capital in enterprises must be consistent with socio- economic development objectives, strategies and plans. - The use of state capital in enterprises must base on the principles of capital preservation and development. - The use of state capital in enterprises must ensure the principles of public disclosure and financial transparency. 2.2. Supervising the use of state capital in enterprises 2.2.1. The concept of supervision Supervision is the competent entity activities to be performed by the act of monitoring, examining, inspecting and evaluating activities of the supervised object. 2.2.2. The concept of supervising the use of state capital in enterprises Supervision of the use of state capital in enterprises means the entities monitor, examine, inspect and evaluate the use of state capital in enterprises to warn risks, detect and recommend measures of handling violations in the process of using state capital in enterprises. 2.2.3. The base of supervising the use of state capital in enterprises - Arising from the State’s owner role toward the state capital invested in enterprises. - Arising from the State’s economic management function. - Arising from the need of preserving and developing state capital of the enterprises. 2.2.4. Characteristics of supervising the use of state capital in enterprises - Supervising the use of state capital is conducted by many entities. - The subject-supervised is enterprises and the owner's representative agencies. 11 - Supervising the use of state capital in enterprises with supervision contents and methods associated with each subject-supervised. - The tools to supervise the use of state capital in enterprises including administrative tools and economic tools. - The objective of supervising is to ensure enterprises comply with the law, complete the assigned objectives and tasks, and to warn and handle risks while using state capital of enterprises. 2.3. The law on supervision of the use of state capital in enterprises 2.3.1. The concept of the law on supervision of the use of state capital in enterprises The law on supervision of the use of state capital in enterprises is the whole legal regulations issued and recognized by the State to regulate social relations arising from supervision, inspection and assessments of state management agencies, representatives of owners of state capital, representatives of state capital in enterprises and other subjects towards the use of state capital investment in enterprises. 2.3.2. The content of the law on supervision of the use of state capital in enterprises - Regulations on subject-supervised. - Regulations on supervising mechanisms including regulations on objects, contents, tools, modes and procedures of supervision. - Regulations on the implementation of supervising results. 2.4. The law on supervision of the use of state capital in enterprises in the world and lessons for Vietnam 2.4.1. Model of subject-supervised First, the decentralized model: In this model, SOEs are managed by Ministries that is the line Ministry and relevant Ministries. Second, the mixed model: this model’s feature is that the line Ministry and specialized Ministry have the right to manage ownership, for example, Ministry of Finance or Ministry of Planning and Investment. Third, the centralized model: SOEs from the line Ministries will be gathered in a specialized agency or economic organization having the function of management and supervision. 12 2.4.2. Mechanism of supervising state capital Regarding supervising tools: Many countries have built up a supervising information system for SOEs. Some countries have applied supervising tool to be contract-agreed between the owner's representative agency and enterprise. - Process of supervising: OECD (2010) has set up a supervision process of owner for SOEs including 5 stages: Setting goals and tasks; Evaluating the performance of goals and tasks; Verifying evaluation; owner agency report; publicity and transparency of information on SOEs. 2.4.3. Lessons for Vietnam - Lessons on selecting and operating model of supervision: it is necessary to apply the centralized model for identifying representative subject of state capital owners in enterprises. - Lessons on the use of supervising tools: it is necessary to use economic supervising tools and administrative supervising tools. - Lessons on setting up a strict supervising process: supervising the use of state capital should be defined as a regular and continuous task of the owner’s representative agency. Chapter 3 THE REALITY OF LAW AND THE LAW ENFORCEMENT ON SUPERVISION OF THE USE OF STATE CAPITAL IN ENTERPRISE IN VIETNAM TODAY 3.1. The reality of law on supervision of the use of state capital in enterprises in Vietnam 3.1.1. Overview of law on supervision of the use of state capital in enterprises in Vietnam Before 2003, the legal document system hardly mentioned the mechanism of state capital supervision nor supervising SOEs performance. In the period 2003 - 2013, a legal corridor for supervising SOEs and state capital in enterprises began to be formed from the 2003 SOE Law and was constantly supplemented and completed. 13 Since 2013, the current legal documents in Vietnam have regulated supervision of the use of state capital in enterprises with two groups: the first group, legal documents with general institutions of supervising state capital in enterprises or relating to supervising state capital in enterprises, and supervising and evaluating SOEs performance. The second group, legal documents directly regulate mechanism of supervising and evaluating the use of state capital in enterprises including provisions on methods, modes, tools, contents and subject-supervised. 3.1.2. Regulations on subjects-supervised the use of state capital in enterprises 3.1.2.1. Model of supervision implemented by the State (i) Subjects-supervised including NA and specialized agencies: (ii) Subjects-supervised consider the owner's representative agency including Commission for the Management of State Capital at Enterprises (CMSC), Ministries, Ministerial-level agencies, Provincial People's Committees and State Capital Investment Corporation (SCIC). 3.1.2.2. Internal supervision model in enterprises Internal supervision in enterprises where the State holds 100% of charter capital is done by the following entities: - The owner’s direct representative of state capital invested in enterprises: currently, the provisions of the law on supervisory functions of the Member Board and President of SOEs are still unclear. In particular, subjects represent the direct owner are also manager of business may cause un-objectivity and un-transparency for internal supervision results at the enterprises. - Supervisory Board, Supervisors: the existing law still has some inadequacies in the activities of the Supervisory Board. - Internal Supervisory Board: In addition to the Supervisory Board established by the owner’s representative agency, some Decrees on the Charter of the Economic Corporations or State Corporations have provisions on the assistance of the Member Board, and established by the Member Board called the Internal Supervisory Board. 14 - Internal audit: the existing law just considers internal audit to be a work and task must implement, but not requiring setting up the specialized department. 3.1.3. Provisions on supervisory mechanism of the National Assembly - The subject of supervision: Government, the owner’s representative agencies, enterprises. The current law still lacks of specific provisions on the NA’s supervision towards the owner’s representative agencies in implementing functions and tasks of managing state capital in enterprises. - The contents of supervision: regulations on supervising contents are still general, do not specific and clear criteria of evaluation. - The modes of supervision including reviewing agency and organization reports; reviewing illegal documents; questioning and answering questions; supervising subject and settling complaints and denunciations; take a vote of confidence and vote for positions elected by the NA. - The process of supervision including reviewing reports by the Government at the year-end meeting; the Government, PM and relevant entities answer questions; establishing the supervisory team. - The NA’s supervisory tools: it is mainly annual report results of using capital submitted by the Government. The professional committees and the State Audit will verify the report accuracy. 3.1.4. Regulations on the supervisory mechanism of state management agencies - Supervisory objects are enterprises - Supervisory contents: Supervising the use of state capital in enterprises of Ministries and branches along with the owner’s representative agencies specified by different legal documents. - Supervisory modes: based on coordination with the owner’s representative agencies. Due to the legal regulations are not clear, this leads to overlapping supervision by many agencies, sectors, fields. - Supervisory process and tools: the supervision is conducted by coordinating with the owner’s representative agencies for each relevant supervisory content. Thus, the supervisory process and tools will be 15 conducted along with the supervisory process of the owner’s representative agencies. 3.1.5. Regulations on the supervisory mechanism of the owner's representative agencies - Supervisory objects: the supervisory objects of the owner’s representative agencies are enterprises to be established or managed by themselves. - Supervisory contents: The current legal regulations on supervision of the owner’s representative agency have not mentioned much about the efficiency of supervising capital use. Such Such a regulation may cause the distraction and subjectivity of the enterprise when focusing on the efficiency of capital mobilization and investment rather than the efficiency of capital use. - Supervisory modes are carried out on the basis of coordination between the owner’s representative agency and financial agency including direct and indirect supervision, pre-supervision, supervision later and inside. - Supervisory process: The Vietnamese law has adopted well OECD practice in setting up procedures of supervising SOEs. However, the process of supervising the use of state capital in enterprises has not clearly regulated but it is in different legal documents. - Supervisory tools: The owner's representative agency uses mainly periodic financial reports (six months and annually) of projects using state capital in enterprises. In addition, the supervision is also based on the results of inspections, examinations and audits at the project of functional agencies (if any), the provisions of the law and regulations on the use of capital. 3.1.6. Regulations on mechanism of internal supervision at enterprises - Supervisory contents The Board of Members and the company’s president will regularly supervise and in charge of investment efficiency of the enterprise to report progress of project to the owner’s representative agencies every 6 months and annually. Supervisory Board will implement development strategy, business plans, supervise and evaluate the implementation of rights and 16 obligations of the Member Board, Director or Director-General of the company. Internal audit will approve inspection, evaluation and consultation. Providing independent and objective assurances and recommendations on the contents to be set up and operate properly to prevent, detect and solve risks. - Supervisory modes, process and tools: The absence of legal provisions on the basic principles how to operate the internal supervisory system leading to SOEs have not uniform and standardized supervision 3.1.7. Regulations on execution of supervisory results - Executing NA’s supervisory results: Article 7 of the Law on NA’s supervisory activity and the People’s Council 2015 stipulates that agencies, organizations and individuals must strictly abide by the NA’s supervision resolution. If the object-supervised obstructs or fails to comply with conclusions of the subject-supervised, the subject-supervised will request competent agency or organization to handle criminal liability of such agency, organization and individual. - Executing supervisory results of the Ministry of Finance: based on the results of supervision, the Ministry of Finance shall warn enterprises with signs of financial insecurity, and shall respond to enterprise’s recommendations and proposals. - Executing supervisory results of the owner’s representative agency: the supervising results of the use of state capital in enterprises conducted by the owner’s representative agency are mainly annual general reports on the situation of using state capital. - Executing internal supervisory results: Enterprises must make annual reports on internal financial supervision results (Article 12 of Decree 87/2015/ND-CP). 3.2. Implementing the law on supervision of the use of state capital in enterprises in practice in Vietnam today 3.2.1. The practice of using state capital in state-owned enterprises - The efficiency of using capital of SOEs is not commensurate with the scale of state capital invested in enterprises - State capital investment has achieved low efficiency 17 - There are still many violations in using state capital invested in enterprises. 3.2.2. The practice of supervising the use of state capital in enterprises by NA and state management agencies - NA’s supervision is ineffective because the NA held twice meetings per year while each meeting has many contents and the time is limited, the NA could not evaluate comprehensively. The Ministry of Finance just mainly synthesizes reports from the owner’s representative agencies. The financial supervision is not carried out continuously, but just base on supervision, inspection and auditing and towards observance of the law. 3.2.3. The practice of supervising the use of state capital invested in enterprises of the owner's representative agency First, models of ownership representation of state capital in enterprises. Vietnam has begun to transition from a decentralized model to a centralized model of state capital management in enterprises by establishing SCIC and then CMSM. However, it is still maintaining the owner’s representative mechanism of the Ministry and the Provincial People's Committee, while CMSC has not really transformed its operating model under the market mechanism. Second, there is a lack of consistency in the content of supervision of the owner representative agency: The existence of mechanism of “supervisory coordination” between the owner’s representative agency and Ministries and branches leading to the inconsistence of supervisory contents of the owner representative agency. Third, the modes of supervision are not flexible and do not meet the supervision requirements: The owner’s representative agencies still mainly use post-supervision and indirect supervision, not focusing on direct supervision, pre-supervision and inside supervision. This supervision has not basically met the requirements of regular and continuous supervision, and decreasing the effectiveness of supervision. Fourth, the supervision process of the owner representative agencies has not been fully and thoroughly implemented by the law: In fact, 18 assigning and approving the objectives and tasks of SOEs is quite passive. The system of internal inspection and control is ineffective, not sensitive enough to promptly monitor and warn the owner representatives while violations not occurring. Many violations over the years have just discovered after inspecting and auditing. Fifth, on supervisory tools: there is still no unified and full database that update state capital and assets in enterprises. The reporting system is just administrative. 3.2.4. Internal supervision in enterprises First, the internal management and governance of many SOEs is a weak and slow stage. Second, the effectiveness and efficiency of the internal control system, the supervisory board, and controller of SOEs in Vietnam are still low, even ineffective. 3.2.5. Executing supervisory results in practice There are still many cases that the NA’s supervisory conclusions have not been taken seriously, responsibility of subject supervised by the NA has not been strictly determined and handled thoroughly