Cablegate: Vietnam: Ambassador's Call On the Minister Of

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

151020Z Nov 04




E.O. 12958: N/A

1. (U) SUMMARY. The Ambassador paid an initial call on
Minister of Industry Hoang Trung Hai on November 10, 2004.
The Ministry of Industry (MOI) is responsible for key
sectors including oil and gas, power generation and
automobile manufacturing. The Ambassador advocated on
behalf of U.S. investors in these sectors and raised general
concerns about the investment climate in Vietnam. He also
urged the GVN to focus on pro-investment policies and
creative responses to development challenges. Hai defended
the possible increase in the special consumption tax on
autos as an antidote to traffic congestion. They also
discussed investment in power generation, MOI's oversight of
PetroVietnam (PV) and the recent scandals at PV. Hai
expressed interest in continuing cooperation on programs to
improve environmental management. END SUMMARY.


2. (U) The Ambassador, accompanied by Econoff, paid a 60-
minute initial call on Minister of Industry Hoang Trung Hai
on November 10. Throughout their meeting, the Ambassador
and Minister Hai discussed the problem areas in and
potential for improving Vietnam's investment climate.
According to Hai's personal assessment, Vietnam has not been
truly successful in attracting foreign investment,
particularly from the United States. The Ambassador noted
that potential U.S. investors weigh key factors including
the degree of corruption, the level of transparency and the
consistency of government policy. Hai contended that
positive change in an underdeveloped country like Vietnam is
inevitable as it integrates and develops its legal
structure. The recent spate of corruption scandals
demonstrates the need for continued "macro-level" changes
such as SOE reform, equitization (privatization), and
development of the private sector in order to curb future
corruption, Hai explained.

--------------------------------------------- ------

3. (U) Foreign automakers in Vietnam have been seriously
affected by the imposition and subsequent increase of a
special consumption tax on automobiles, a tax that MOI has
supported. Asked about this situation, Hai described the
rise in the special consumption tax on autos as a reduction
of privileges rather than a tax increase. Hai portrayed
the tax increase as a way to meet WTO obligations since it
would remove tax breaks for carmakers in Vietnam by
harmonizing taxes and tariffs. The Ambassador countered
that a better approach would be to lower the tariff on
imported autos. Hai argued that Vietnam's inadequate
transportation infrastructure could not accommodate a rapid
increase in the number of vehicles on the road. He cited an
auto production growth rate of 46 percent as evidence that
this sector could overwhelm Vietnam's roadways. The
Ambassador responded that much recent growth had been for
purchases before the tax increase and opined that ultimately
MOI would not be able to constrain the number of cars. Hai
did not respond to the Ambassador's suggestion that Vietnam
could tackle its traffic congestion with more creative
approaches such as private toll roads.


4. (U) MOI regulates the rapidly expanding power sector and
owns the dominant player, Electricity of Vietnam (EVN). Hai
believes that the Law on Electricity passed by the National
Assembly earlier that day will lay the legal foundation for
greater competition in power generation. The law will allow
companies from all sectors to compete in all segments of the
market except transmission. COMMENT: This approach to
increasing competition appears similar to that used to
increase competition in the telecommunications sector in
which five SOEs now compete to provide a variety of services
and can operate limited infrastructure. One of these, VP
Telecom, is a subsidiary of EVN. END COMMENT.

5. (U) EVN manages 89 percent of the power system
infrastructure while foreign investors own most of the
remainder, Hai said. The World Bank (WB) has helped
implement two foreign invested build-operate-transfer (BOT)
power projects. The GVN has requested additional assistance
from the WB to develop and reform the energy sector legal
system. Besides an inadequate legal structure, the GVN has
limited capacity to make the financial guarantees required
by foreign investors. Hai stated that the government must
create legal and commercial conditions to benefit all
parties. Mechanisms used in the past that only brought
benefits to one party have been unsuccessful, he observed.


6. (U) Hai admitted that establishing effective control over
PetroVietnam (PV), the SOE that controls the oil and gas
sector, has been a difficult task ever since MOI was granted
limited oversight in May 2003. MOI has been given a pro-
reform mandate and will carry out vigorous SOE reform, he
asserted. Hai intends to manage the sector "actively"
without creating too many constraints on business. He
frankly admitted that MOI was still very uncertain about how
to proceed at both the national and local level. A key
obstacle is the shortage of trained professionals, he said.

7. (U) Hai anticipates that investigation of the various
corruption scandals at PV will produce results by early next
year. He also hinted at a plan to reorganize the SOEs under
the management of PV into related business groups as part of
wider reform effort within the sector. This initiative,
directed by the Prime Minister, will also introduce a system
of internal and independent audits. According to Hai, one
additional constraint to oversight of PV is MOI's inability
to inspect SOEs directly. He claimed that his ministry must
work through third parties such as banks, auditors, and
insurance companies.

8. (U) Hai predicted that construction would begin on the
Dung Quat Refinery in central Quang Ngai Province by early
next year. Hai lamented that Vietnam has encountered many
difficulties in getting this project off the ground. (Note:
The project was approved in 1997 and should have been
operational by now. End Note.) He predicted that the
refinery will be operational by 2008.

9. (U) In response to the Ambassador's statement that
excessive royalties would restrict further investment in
promising oil and gas discoveries, Hai said that the GVN was
aware of the concerns of U.S. oil companies about royalties.
Hai did not respond when the Ambassador urged him to
consider renegotiating contract terms for subsequent phases
of investment to bring new fields into production.


10. (U) In cooperation with the U.S.-Asia Environmental
Partnership (US-AEP), MOI has established several programs
to improve management capacity in a variety of areas such as
oil spill contingency planning, toxic and hazardous waste
management and responsible care in the chemical industry.
Hai expressed interest in continuing to cooperate with USAID
on developing programs to improve the GVN's environmental
management capacity.


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