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Cablegate: U.S. Joint Venture Dispute in Dak Lak Province

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 02 HANOI 001918

SIPDIS

SENSITIVE

STATE FOR EB and EAP/BCLTV
STATE PASS USTR BRYAN
STATE ALSO PASS USAID FOR ANE/DEL MCCLUSKY
TREASURY FOR OASIA
USDOC FOR 4431/MAC/AP/OPB/VLC/HPPHO

E.O. 12958: N/A
TAGS: EINV ETRD ECON VM BTA
SUBJECT: U.S. JOINT VENTURE DISPUTE IN DAK LAK PROVINCE

REF: A) HANOI 1826

B) 02 HO CHI MINH CITY 1260

1. (U) Summary. On July 24, Ambassador met with the
Director of the Dak Lak Provincial Department of Planning
and Investment (DPI) to discuss a joint venture dispute
involving an American company, McCullagh International. Nhu
admitted that the case could have a "negative impact on
business investment," but expressed a hope that a buyout
would resolve matters by end of the third quarter. However,
in a separate July 23 meeting, the assertion by the
province's People's Committee chairman that the venture's
equipment was "outdated" and "must be thrown away" could
presage a U.S. investor facing less than equitable
compensation. End Summary.

2. (U) Ambassador raised the issue of fair dealing for U.S.
investors with provincial GVN officials during recent travel
to Vietnam's central highlands, specifically citing the
"McCullagh-Krong Ana" coffee processing joint venture in Dak
Lak. DPI Director Do The Nhu recounted the troubled history
of the joint venture, claiming DPI had refused to approve
McCullagh's earlier offer to buy out partner Krong Ana,
because Krong Ana had changed plans, subsequently
establishing a second processing plant that left two
processing companies in the same area, competing for the
same limited supply of beans. Nhu also contended that
additional "traffic problems" would exist if McCullagh were
to operate as an independent concern. According to Nhu,
both processing plants would be along rural Route 4 south of
the provincial capital, Buon Me Thuot.

3. (U) McCullagh had originally sought to buy out Krong Ana
in 2001. With Ambassador's personal intervention with
senior-level GVN officials (ref B), McCullagh received
approval from Ministry of Planning and Investment (MPI) for
the buyout. Dak Lak authorities, however, refused to
implement MPI's decision. Nonetheless, during the
Ambassador's call on Nhu, Nhu additionally contended that
DPI would have approved the McCullagh buyout if McCullagh
had been willing to relocate to a new area. He added that
this solution was now viewed as "too complicated." (Note:
It is unclear if this reference was the opinion of one or
both of the parties and/or of DPI. End Note.)

4. (SBU) Nhu assessed that, given that Krong Ana had
established independent operations, that DPI had refused to
approve McCullagh's buyout of Krong Ana's 40% share, and
that McCullagh was ready to leave Vietnam, the only probable
way forward would be for Krong Ana to buy out McCullagh's
60% interest. Nhu stated that the Provincial Department of
Finance would complete an audit of the joint venture
equipment. When pressed if an independent audit would be
available, Nhu confirmed that "Yes, if dramatic differences"
existed between the parties' valuations.

5. (SBU) In a July 23 meeting, however, provincial People's
Committee Chairman Lang stated that the equipment was worth
"a couple hundred million Vietnamese Dong." (Note:
equivalent to under approximately USD 14,000. McCullagh
asserts that a buy-out based on its earlier proposal would
value McCullagh's stake at around USD 850,000. End Note.)
Lang also stated that the decision to buy out the U.S.
partner was only made "to be nice" and that the equipment
could not be used and would have to be "thrown away." Lang
further argued that the inferior coffee produced by the such
equipment would damage the provincial coffee's reputation.
Ambassador reiterated that the issue of a fair valuation had
been raised previously with MPI Minister Phuc (ref A) and
that he had received assurances that an MPI officer would be
sent to Dak Lak to assist in reaching a fair resolution.
Ambassador reminded Nhu of Minister Phuc's pledge to see
this issue addressed.

6. (SBU) Comment: This case presents elements of bad faith
on the part of Krong Ana and may implicate collusion by Dak
Lak's DPI. If nothing more, the DPI has intervened in
business affairs in an effort to substitute its judgment for
market forces by determining where coffee processing plants
should be located, how many plants the local market can
bear, and even impliedly assessing the market value of
processing equipment, all in favor of the local state-owned
enterprise partner in this joint venture. The effort to
educate provincial authorities on market principles and
obligations under international trade agreements, such as
the U.S.-Vietnam Bilateral Trade Agreement (BTA) is a battle
that has scarcely begun. This McCullagh-Krong Ana joint
venture illustrates how joint ventures can go amiss in
Vietnam, while setting a notorious precedent of local-level
disregard of ministerial-level directives and policy -
particularly those related to Vietnam's obligations under
the BTA. We are discouraged by this latest response from
the DPI and People's Committee, and plan to write MPI
Minister Phuc again urging MPI to send a representative to
Dak Lak soonest.
BURGHARDT

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