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Cablegate: Vietnam Consultative Group Meeting

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

UNCLAS SECTION 01 OF 08 HANOI 000158

SIPDIS

STATE FOR EAP/BCLTV, EB/IFD/OMA AND EB/IFD/ODF
STATE PASS USAID FOR ANE/SPO: DMCCLUSKEY AND ANE/AFERRARA
STATE PASS USTR FOR ELENA BRYAN
TREASURY FOR OASIA
USDOC FOR 4431/MAC/IFP/OKSA/HPPHO
USDA FOR FAS/FAA/STEVE HUETE
SECDEF FOR ABLAGG

E.O. 12958: N/A
TAGS: EAID EFIN ETRD ECON PREL VM HIV AIDS ETMIN SOE
SUBJECT: VIETNAM CONSULTATIVE GROUP MEETING

REF: HANOI 02805

1. (U) Summary: The eleventh Vietnam Consultative Group
of Donors (CG) meeting took place in Hanoi December 1-3,
2003. Donors at the meeting, co-chaired by the Government
of Vietnam (GVN) and the World Bank, expressed continued
support to the GVN's action program for 2002-2007 and
emphasized the need for balance between the pace and
quality of growth. Additionally, donors raised concerns
about the growing HIV/AIDS epidemic. In the opening
session, five key targets were identified for the
Government and donors: continued implementation of
policies to reach the country's target of rapid and
equitable growth; execution and roll-out of the expanded
Comprehensive Poverty Reduction and Growth Strategy
(CPRGS) and its integration with the Public Investment
Program and five-year plan; improving the competitiveness
of enterprises and the economy; addressing social and
economic challenges in relation to HIV/AIDS; and
enhancing the effectiveness of development assistance and
reducing transaction costs in aid delivery. Delegates
emphasized the need to promote trade and integration in
the global and regional economy and to reduce corruption
and its potential threat to sustainable poverty
reduction. They also stressed the important role of the
private sector in future efforts aimed at growth and
poverty reduction. In a historically candid discussion,
participants raised concerns about the need for a
multisectoral coordinated response to the growing
HIV/AIDS epidemic and addressed gender inequity and
underserved populations, including ethnic minorities.

2. (U) The U.S. delegation, co-chaired by Ambassador
Burghardt and USAID Acting Regional Mission Director Leon
Waskin, made pointed and well-received interventions
regarding the importance of increased access to capital
and land, reduction in the size of state sector, the need
for greater space for private enterprise, and further
commitment to the Bilateral Trade Agreement (BTA) as a
means to World Trade Organization (WTO) accession. The
U.S. delegation also made strong and resonating
statements regarding HIV/AIDS, encouraging the government
that the epidemic still can be curbed, stressing the
importance of reduction in stigma and discrimination and
of responding with a coordinated and multisectoral
effort, and stressing the need to keep HIV/AIDS on the
next CG agenda in order to monitor and discuss progress.
In the final session, the USG pledged 50 million USD in
assistance to Vietnam, contingent on the availability of
funds. This amount reflects an increase of roughly 14
million USD over the last year's contribution. The total
contribution to Vietnam in the form of grant and loan
assistance totaled 2.8 billion USD for the coming year -
an overall increase from last year's total of 2.5 billion
USD. This development was viewed as a continued positive
commitment from the donor community. End summary.

3. (U) The Consultative Group for Vietnam met under the
co-chairmanship of Mr. Vo Hong Phuc, Minister of Planning
and Investment, and Mr. Klaus Rohland, the World Bank's
Country Director for Vietnam. Deputy Prime Minister Vu
Khoan and Minister Phuc led the Vietnamese delegation.
In his opening remarks, Deputy Prime Minister Vu Khoan
established the overall themes of the meeting: review of
social and economic achievements under the five year plan
and the CPRGS, including challenges in balancing rapid
growth and the quality of growth in the coming years; the
economy's competitiveness and experiences with the
enterprise law; the need to address the HIV/AIDS
epidemic; and harmonization of ODA procedures. DPM Vu
Khoan noted that relations between donors and Vietnam had
evolved significantly, and that the country had recorded
important achievements in the ten years since the first
CG meeting was held in Paris in 1993. The DPM expressed
his appreciation for the support provided by the donors
in the past and stated that Vietnam was looking forward
to continued cooperation and assistance in the coming
years, not least in relation to further integration with
the world economy under the WTO and bilateral trade
arrangements. DPM Vu Khoan also touched on the importance
of striking a balance between speed and sustainability of
development. He closed with a request for assistance in
developing infrastructure, improving healthcare and
poverty reduction, encouraging the creation of small and
medium enterprises, deepening Vietnam's integration into
the regional and world economy, and enhancing public
administration reforms.

4. (U) H.E. Mr. Vo Hung Phuc, Minister of Planning and
Investment, co-Chair of the CG meeting together with the
World Bank's Country Director, Klaus Rohland, identified
five key targets for the Government and donors: continued
implementation of policies to reach the country's target
of rapid and equitable growth; implementation and roll-
out of the expanded CPRGS and its integration with the
Public Investment Program and the five-year plan;
improving the competitiveness of enterprises and the
economy; addressing social and economic challenges in
relation to HIV/AIDS; and enhancing the effectiveness of
development assistance and reducing transaction costs in
aid delivery.

5. (U) This year's Consultative Group meeting focused on
several issues. The first day of the official meeting
reviewed progress on socio-economic development during
2001-2003 and challenges to achieving the goals laid out
in the Comprehensive Poverty Reduction and Growth
Strategy (CPRGS). In addition, there was discussion on
the competitiveness and effectiveness of Vietnamese
enterprises, with a focus on ensuring a level playing
field. The second day of meetings concentrated on the
socio-economic challenge of HIV/AIDS, improving official
development assistance (ODA) effectiveness, and the
traditional announcement of ODA commitments for the
following year.

Competitiveness and Sustainable Development
-------------------------------------------

6. (U) MPI Phuc opened the first session with a review
of the socioeconomic development of Vietnam for the years
2001-2003 and outlined the measures that the GVN would
like to take, including maximizing resources from
external and internal sources, addressing private sector
resources, ensuring sustainable development,
administrative reform, good governance, combating
corruption, and using Official Development Assistance
(ODA) to speed up disbursement. He noted that growth
reached 7.3% this year and that the rate should be
between 7.5% and 8% by 2004.

7. (U) The first discussion session, which was led by
the representatives of the ADB, UNDP, Australia, and the
IMF, prompted comments that fit broadly within the themes
outlined by DPM Vu Khoan. Discussion topics included
balancing the need for rapid and quality growth,
promoting trade and integration in the global and
regional economy, implementing the CPRGS, and undertaking
large-scale infrastructure projects and the Public
Investment Program (PIP). The delegation from Australia
made a particularly pointed statement about the
inadequacies of the PIP and encouraged the GVN to examine
the prioritization of investments. This intervention was
reiterated by the IMF delegation, using this year's World
Bank report on government spending as a reference. The
IMF also noted the need to increase transparency in an
effort to strengthen institutions.

8. (U) The NGO delegation's representative noted the
widening poverty gap and gender inequality and raised
concerns regarding the inaccessibility of marginalized
peoples in the Central Highlands. The NGO delegation also
highlighted the need to build capacity at the local level
in a more structured fashion, including input from
beneficiaries. In concert with the NGO delegation, the
Like-Minded Donor Group, an ad hoc grouping of nine
bilateral donors (UK; Denmark; Netherlands; Finland;
Canada; Norway; German; Sweden; Switzerland), stressed
that the poverty rate among ethnic minority peoples has
actually increased. Many delegates spoke about the need
to prioritize social sector development, with particular
emphasis on ensuring affordability for the poor and
providing equitable access to high quality social
services. They also discussed the need to invest in
"human" and "social infrastructure," explaining that
certain investments, such as in early childhood
development, could yield very high returns.

9. (U) With regard to corruption and good governance, a
number of participants noted that corruption could pose a
threat to the sustainability of poverty reduction, as
some types of corruption impact directly on the poor.
Donors suggested including corruption as a substantive
agenda item for next year's CG meeting. They also
recommended taking far-reaching steps to combat
corruption as a result of a Swedish-supported diagnostic
study. This report identified six areas for action on
which the Government could work immediately: 1) creation
of a comprehensive legal framework for anti-corruption;
2) reform of public administration; 3) introduction of
transparency and accountability; 4) expansion of the
media's role; 5) SOE and financial sector reform; and 6)
careful review of the mechanisms for screening policy
lending. In response, the GVN noted that there had been
extensive debate on the proposed Ordinance on Corruption,
which included the possibility of upgrading it into Law.
The Ordinance also involves establishing a strengthened
oversight function within the National Assembly.

10. (U) The U.S. Delegation, represented by Leon Waskin,
noted the need for increased access to capital and land
for small and medium enterprises. He also noted that
while the GVN remains committed to a reduction in the
number of State-owned Enterprises (SOEs), SOEs still
maintain a majority hold on enterprise in Vietnam. Waskin
recommended providing more space for the private sector,
including in infrastructure. Waskin further suggested
that the GVN should reserve 25-30 percent of
infrastructure projects for private sector contractors or
financiers. Finally, he hailed continued commitment to
the Bilateral Trade Agreement as means of brokering WTO
accession.

11. (U) In discussions regarding the development of the
next Public Investment Program (PIP), select delegates
noted the critical importance of focusing on improved
efficiency of public investments. Furthermore, these
investments should be based on an analysis of their
contribution to growth and poverty reduction. Finally,
they stressed that one should not assume that all
infrastructure projects necessarily yield positive
returns. The World Bank summary of this session
highlighted that "weak planning, inefficient
implementation, corruption, and lack of evidence-based
allocations, all contribute to poor (and worsening)
performance. This inefficiency diverts resources away
from other high priority investments. Though large-scale
infrastructure could play an important role in growth
promotion, it would not necessarily do so if the wrong
investments were chosen or if the projects were poorly
conceived or badly-managed." The Koreans also pointed out
that their own experience showed that one must
incorporate environmental protection early into planning
for sustainable growth, lest costs be greater in the long
term. The WHO delegation reiterated concerns about poor
access to quality services for marginalized communities,
pointing out a growing urban-rural disparity in terms of
quality and access. Suggestions included higher
investment in health and education and reform for pricing
and payment policies.

12. (U) MPI Phuc responded to these comments by noting
that the GVN has a monitoring system for transaction
processes. In addition, the GVN reviewed public finance
mechanisms this year, including management of debt, SOEs,
customs, and reserves. Though he admitted that the pace
of equitization has been slow, he reaffirmed that Doi
Moi, or the opening of the economy, cannot be reversed.
He reiterated his desire for large-scale infrastructure
to remain a strong area of focus for international and
private investment, especially in disadvantaged areas. In
response to numerous comments made by donors regarding
the BTA, Phuc said that GVN would look to the United
States for assistance in carrying the BTA forward and
will not let disputes stall the process. Finally, he
asserted that "prisoners of conscience" do not exist in
Vietnam and, in response to statements made regarding the
inordinate use of capital punishment, contended that
capital sentences are delivered only for special cases.

13. (U) The Ministry of Planning and Investment then
began a review of the integration of the Comprehensive
Poverty Reduction and Growth Strategy (CPRGS) by noting
that the number of households below the poverty line had
decreased from 58 percent in 1993 to 29 percent in 2003,
meaning that twenty million people had been lifted out of
poverty. A new chapter of the CPRGS suggested by the
Japanese regarding large-scale infrastructure was adopted
the previous week. The GVN's goal in making this
addition was to identify projects in key regions in order
to cause spin-offs, because Vietnam's lagging
infrastructure affects the country's competitiveness. To
meet the GVN's goals in this area, MPI asserted that it
must strengthen planning, diversify resources, improve
maintenance, and decrease costs.

14. (U) A Japanese report on economic growth and
infrastructure outlined the impacts that include
investment inducement, regional economic activation, and
social benefits. It also elaborated on the requirements
to sustain projects, including appropriate resource
allocation, effective inputs to the infrastructure, and
mitigation of impacts. The Like-Minded Donor Group
welcomed the new chapter but pointed out that capital and
recurrent expenditures must be integrated in order to
ensure adequate maintenance. The NGO representative and
Australia asserted that large-scale infrastructure
projects are not necessarily pro-poor. Proper assessment
regarding investments must be undertaken and utilization
capacity must be increased. Furthermore, Australia
pointed out the necessity of undertaking other reforms,
because building bridges to take people to markets will
not matter if these markets are constrained.

Enterprises - Competitiveness and Effectiveness in the
Vietnamese Economy
--------------------------------------------- ----

15. (U) The second session of the meeting focused on the
Vietnamese economy's effectiveness and competitiveness
with respect to the laws on enterprises, SOEs, and
competition. This session also reviewed the outcome of
the Business Forum session conducted the previous day.
Dr. Tran Xuan Lich, Vice President of the Central
Institute for Economic Management, presented the GVN's
experience with the Enterprise Law over the past four
years as a key component of the move towards a market
economy. Lich noted that achievements include a vast
improvement in business freedom, which is reflected in
strong output growth and the performance of the export
sector. He emphasized that the business environment has
also benefited from the Enterprise Law's spillover effect
into more general areas, including legal reform and
institutional development. Lich thanked donors for their
support in drafting the law and translating it into
reality. According to Lich, the law's major weakness is
the limitation of its primary impact to urban areas, with
barriers to entry remaining high in rural areas. Lich
also admitted that there remains a great extent for
improvement of administrative procedures and coordination
among agencies related to the implementation of the law.
Lich mentioned that the GVN would place greater emphasis
on building awareness about the importance of individual
entrepreneurship in the process of economic development.

16. (U) Led by the Like-Minded Donor Group and supported
by France, UNDP, and China, donors emphasized the
importance of the private sector in future efforts for
growth and poverty reduction. A summary of discussions at
the Vietnam Business Forum (VBF), where this issue was
more fully discussed, especially highlighted the
constructive and frank nature of the exchange between the
Government and private sector representatives. Delegates
welcomed the efforts aimed at strengthening Vietnam's
competitiveness in the context of preparations for WTO
accession. UNDP noted that following leadership was
identified as a key factor for success in a nine-province
review of private sector development. UNDP further
highlighted the importance of the media. The ADB and IMF
representatives commented on the continuing difficulty
faced by private enterprises in licensing and high
production and transaction costs. The Chinese stressed
the importance of creating favorable conditions for small
and medium-sized enterprise (SME) development, offering
to assist given their experience in Vietnam and the
region. Some delegates noted the contrast between the
increasing importance of SMEs in fuelling growth and
poverty reduction with the fact that this sector remains
largely informal, in part due to "over-regulation".

17. (U) In response, the Vice Minister of Finance
explained that VAT reforms will reduce the overall rates
criticized by donors and that the National Assembly will
develop a new law on personal income tax. Additionally,
import tariffs will be reformed in accordance with the
BTA and an agreement with the EU. To enhance
understanding of these new laws, the GVN stated it would
introduce a tax counseling system in major cities. The
Vice Minister also announced the GVN's intention to
separate policy making from tax supervision. Following
final comments by the delegations from Japan, IFC, and
Germany, Minister Phuc noted that the GVN plans to revise
decrees on the private sector, including amending the
Enterprise Law, Foreign Investment Law, and Domestic
Investment Promotion Law. He closed the session by saying
that registration and licensing would be reformed in
order to treat foreign investors more favorably.

HIV/AIDS - A Social and Economic Challenge
------------------------------------------

18. (U) Although this session was not the first time
that HIV was discussed in a CG Meeting, it was the first
time that it was included officially on the agenda. The
donor-led discussion for this session was remarkably
candid and concerted - a stark contrast to the relatively
uncoordinated response delivered by Professor Le Ngoc
Trong, Vice Minister of Health. The session opened with a
Ministry of Health presentation on the draft National
Strategy on HIV/AIDS developed during the final quarter
of 2003. The principal objective is to maintain an HIV
prevalence rate of 0.3 percent or lower through the year
2010 and to alleviate the socioeconomic impact of HIV on
the population. Trong noted that the specific objectives
of the strategy include multisectoral collaboration on
prevention by targeting 100 percent of ministries and
provinces, control of transmission among high-risk groups
through condom social marketing and safe injections among
drug users, care and treatment for 90 percent of HIV+
adults and 100 percent of positive children, anti-
retroviral medicine for 70 percent of all HIV positive
people, improved surveillance, and improved blood
screening. Trong also pledged that the overall investment
in HIV/AIDS would increase by 50 percent for 2004.

19. (U) Following the GVN strategy presentation, UNAIDS
presented a summary statement and recommendations of the
Community of Concerned Partners, an ad hoc consortium of
international and local partners working in HIV/AIDS and
chaired by the UNDP Resident Representative. UNAIDS
outlined lessons learned from the Thai experience and
outlined four key steps for successful prevention,
mitigation and support measures including: 1) strong
political will and involvement, 2) a coordinated
multisectoral response with inclusion of all relevant
government offices, 3) inclusion of people living with
AIDS in the policy and human rights-based dialogue, and
4) strong anti-stigma and anti-discrimination efforts to
allow for greater support and open communication.

20. (U) The subsequent discussion was marked by candid
and resolute remarks by numerous delegations, many of
whom raised shared concerns. Overwhelmingly, donors
indicated the availability of ample funding for effective
prevention and mitigation programs. The LMDG noted the
increased economic burden of HIV and the need for an
aggressive multisectoral government, private sector, and
population-based response. Like many delegates, the LMDG
touched on the steps necessary to mitigate the epidemic
effectively, including the destigmatization of HIV,
strong prevention messages, condom social marketing,
accessible voluntary testing and counseling services, HIV
education in the school curriculum, good services for the
care and support of people living with HIV/AIDS, and the
involvement of people living with HIV/AIDS in policy and
program decision processes. Regarding these steps,
multiple delegates stressed the importance of a
coordinated, multisectoral response in light of the
government's recent dismantling of its national
coordinating body in an effort to centralize the response
within the Ministry of Health. They also repeatedly
stressed the importance of increasing efforts to reduce
stigma and discrimination of people living with HIV/AIDS.
IMF's personal remarks brought the focus to the human
level in a way rarely seen at such gatherings. This
effectively galvanized the donors and illustrated to the
GVN the need to continue to address this issue more
openly.

21. (U) The U.S., represented by Leon Waskin, made a
resounding statement, which was backed by the World Bank,
France, and New Zealand. Waskin congratulated the GVN for
including HIV on the agenda for this year's CG meeting
and referred to the fact that HIV is one of the top
priorities on Secretary Powell's foreign policy program.
He aligned the U.S. with the LMDG recommendations, noting
that the GVN is still capable of curbing the epidemic
with strong political will and commitment. Waskin then
encouraged the GVN and other donors to consider including
HIV/AIDS prevention, care, and support in all development
programs. He identified four major focal areas necessary
for an effective response, including a super-ministerial
and multisectoral coordinating body, strong political
leadership at all levels, effective efforts to reduce
stigma and discrimination for people living with
HIV/AIDS, and involvement of HIV positive people in
policy and program decision making. Waskin then
recommended that members of the CG should maintain
HIV/AIDS on the agenda in the ensuing years and monitor
progress. The statement was well-received by the GVN,
after which Minister Phuc thanked the United States for
its estimated commitment of 8 million USD for HIV/AIDS
programs for the year 2004 and Waskin for his
recommendation that HIV be a part of subsequent meetings.

22. (U) Other delegations, including Canada, Australia,
Great Britain, and France, stressed concerns regarding
the cumbersome and lengthy disbursement process for HIV-
funded programs. The NGO representative noted the need to
increase the focus on youth, because they are at the
center of the growing epidemic - a comment also made in
the UNAIDS presentation in which youth were identified as
representing almost two-thirds of all new cases. Both the
European Commission and the ADB hailed the GVN for its
coordinated response to SARS and encouraged the GVN to
mobilize parallel efforts across sectors to respond to
the HIV/AIDS epidemic.

23. (U) In response, Vice Minister Trong of the Ministry
of Health gave a rather unprepared and relatively
inadequate response to the concerns raised by the
delegates. Trong highlighted a few new GVN efforts to
boost care and support for people living with HIV/AIDS
and limitations in coordinating all donor support. The
GVN has not yet implemented its National HIV Strategy and
will look to do so beginning next year. Minister Phuc
noted the need to revise the 1995 Ordinance for HIV and
the increased involvement of higher-level leaders.

ODA Effectiveness and Reducing Transaction Costs
--------------------------------------------- ---

24. (U) The fourth session focused on improving ODA
effectiveness and reducing transaction costs. The
Government presented the details of its "Action Plan on
Simplification and Harmonization of ODA Procedures" as
well as its comprehensive capacity building plan for
effective official development assistance (ODA)
management. The GVN announced the upgrading of Decree 17
on ODA management to an ordinance. It noted a number of
weaknesses in ODA effectiveness, including the absence of
an ODA master plan, inconsistencies among some government
regulations on various ODA-related aspects, limited
capacity among project management units, and complex
internal GVN decision-making procedures, in addition to
complex and vague procedures vis--vis some donors.

25. (U) Generally, delegates welcomed the GVN's capacity-
building plan and ownership of a harmonization action
plan as a follow up to the DAC/OECD conference in Rome.
Many also presented their own plans for simplification
and harmonization of procedures. Some urged the GVN to
use the "Harmonization Action Plan" as a framework for
donor-donor, donor-government and intra-government action
and to develop a joint Government-Donor forum. They
suggested that guidelines provided by the DAC/OECD good
practice paper could be used to improve harmonization
across various stages of the project cycle.

26. (U) In addition, some delegates urged the GVN to
continue to develop and improve the GVN's own core
systems, including public financial management and
procurement systems, and encourage donors to support
these efforts. Others stressed the need to maintain a
diversity of aid instruments, suggesting that aid
modalities should not be mixed up with aid effectiveness.
One donor requested that the GVN more clearly elaborate
its selection criteria in the PIP, as well as the
relationship between capital and recurrent costs. Many
agreed that the diversity of views on aid instruments
should not distract donor attention from the need to look
for common ground on harmonization and focus on practical
issues.

27. (U) The NGO representative stressed that the GVN
should focus on areas with higher poverty rates and
consider marginalized communities, such as those living
with HIV/AIDS, trafficking victims, and women and
children. The delegation noted that infrastructure alone
will not bring about change - it must be balanced with
supportive policies that encourage capacity building at
the grassroots level. The UNDP noted the sensibility of a
pooled funding mechanism, because it reduces transaction
costs. The delegation also noted that ODA effectiveness
depends on the quality of investments and their level of
efficiency. Some noted that the quality of ODA use
depends on the quality of public expenditures. Donors
pointed to a strong role for public administration reform
at all levels of government in improving aid
effectiveness. In this regard, the importance of
distinguishing between administrative efficiency and
allocative efficiency was observed.

28. (U) Delegates agreed on the need to proceed quickly
with the design of the "Comprehensive Capacity Building
Program" with a view to finalizing this program by the
time of the mid-term CG in June 2004 at the latest. This
project would support improvements in the overall
framework for ODA management, enhance the GVN's capacity
to manage ODA project instruments, and explore non-
project aid modalities. The GVN stressed that the
capacity-building initiative should cover the local
levels, not being limited to the central level. A number
of donors offered to help with capacity building at the
local level and emphasized the importance of greater
coordination and participation at this level regarding
ODA utilization and management. The GVN also noted the
need to build awareness about new aid instruments,
coordinate national execution of ODA, and provide
technical assistance in improving effectiveness and
management.

29. (U) Donors collectively pledged 2.8 billion USD in
assistance, exceeding the prior year's pledge level by
three hundred million dollars (i.e. an increase of 12
percent from the previous year). Waskin indicated the
USG's intention to provide 50 million USD in assistance
to Vietnam, subject to Congressional approval and
availability of funds. In support of Embassy MPP goals,
this assistance will be comprised of technical training
and support in numerous faculties including health,
trade, and the environment, as well as humanitarian
assistance, disaster relief, education, and food
assistance. USG agencies involved include USAID, the
Centers for Disease Control, the Department of Labor, the
Department of Defense, the Department of Agriculture, and
the Ambassador's Emergency Response Funding Mechanism.

30. (U) Comment: This year's CG was characterized by
continued positive support for the GVN's progress in
developing plans and strategies to increase development
and combat poverty, with simultaneous concern over the
need for faster reforms in the banking and SOE sectors.
Delegates noted a need for more efficient transactions
and harmonization in ODA disbursement and utilization.
Comments by the U.S. were well received and supported.
Following the final session, the World Bank co-chairman
requested that Waskin report to the Prime Minister in the
Heads of Delegation and Ambassadors session following the
CG on concerns raised regarding HIV. Waskin accepted and
delegated a part of his report to the UNAIDS coordinator
in a joint collaborative effort. Their presentation was
well received, with the Prime Minister affirming his
support and expressing a commitment to the effort.
BURGHARDT

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