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Cablegate: Visit of Special Representative for Commercial and Business

DE RUEHHM #1083/01 2680925
R 250925Z SEP 06




E.O. 12958: N/A


HO CHI MIN 00001083 001.2 OF 003

1. (SBU) Summary: During an August 31 to September 1 visit to
HCMC, Special Representative for Commercial and Business
Affairs, Frank Mermoud focused on Vietnam's preparations for WTO
accession, state owned enterprise (SOE) reform and U.S. business
advocacy. U.S. financial, industrial and pharmaceutical sector
representatives remain optimistic about the Vietnamese
commercial environment. However, they expressed concern that
Vietnam may interpret its WTO commitments conservatively and
noted confusion within the GVN bureaucracy on how to implement
new business laws. This could slow foreign investment and
economic growth. Members of the American Chamber of Commerce
also expressed concern over changes to the U.S. tax code
governing foreign earned income, noting that it would impact on
American companies' ability to do business overseas. HCMC
Government, Law school, SOE officials and members of the HCMC
delegation to the National Assembly noted that Vietnam had much
more work ahead of it to improve the business climate in Vietnam
for foreign and domestic investors. They acknowledged that WTO
accession would create stresses as well as opportunities and
were looking for assistance in meeting new economic and legal
challenges. End Summary.

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Discussions with US Business

2. (SBU) During a visit to HCMC August 31 and September 1,
Special Representative for Commercial and Business Affairs,
Frank Mermoud met with the AmCham Board of Governors, the Intel
country representative, and U.S. investors in the financial,
industrial, and pharmaceutical sectors. The U.S.
representatives noted that Vietnam is more open to foreign
investment than ever before. They fretted, however, that there
is a lag effect between the passage of new laws and
implementation. This delay -- and the lack of technical
expertise and transparency in implementation -- creates many
headaches. They expect this problem to worsen over the near
term as the GVN bureaucracy strives to digest the many changes
to the legal code made in the run up to WTO accession.

3. (SBU) The U.S. business reps highlighted teething pains in
implementation of the Unified Enterprise and Common Investment
laws that came into effect on July 1, 2006. Intended to level
the playing field between domestic, state owned and foreign
companies, confusion abounds within the bureaucracy --
particularly within the Ministry of Planning and Investment --
over several key issues including investment registration
procedures and limits on foreign investment in certain sectors.
This confusion is slowing down new foreign investment and
business registration. A representative of KPMG expressed
concern that the GVN may wait until after WTO accession to
release key implementing decrees, leaving the foreign and
domestic private sector in limbo until this happens.
Representatives of the U.S. pharmaceutical sector noted that WTO
commitments which will come into effect in 2009 for the sector
will improve their trading and distribution rights however in
the meantime they complained that they are not allowed to import
their products. The GVN wants to produce locally 60 percent of
drugs consumed in Vietnam. In order to engage in trading and
distribution, the GVN requires U.S. pharmaceutical companies to
establish manufacturing operations to sell drugs locally, which
they are not interested in doing (the industry is closing
factories around the world). The pharmaceutical representatives
are also concerned that Vietnam's legal framework does not
provide them effective legal recourse to protect their interests
should SOEs copy more popular drugs. They described the
pharmaceutical sector as a source of national pride for Vietnam;
they noted that almost every province has its own SOE
pharmaceutical factory.

4. (SBU) The CitiBank representative said he was concerned about
the ABN-AMRO case and the decision of the authorities to
criminalize routine business transactions (see reftel for more
on the ABN-AMRO dispute.) He noted that the diffusion of
responsibility within the GVN between those responsible for
policy development and those responsible for enforcement could
help explain why the ABN-AMRO case came about. He was hopeful
that the industry's ability to access the Prime Minister's
Office and the GVN's openness to private sector input may lead
to a positive resolution of the crises.

5. (SBU) Insurance and pharmaceutical sector representatives
also complained about unfair competition with SOEs. For example
regulatory requirements force U.S. insurance providers to work
through SOE insurance companies. Foreign pharmaceutical
companies must partner with a local Vietnamese company to
distribute their products.

HO CHI MIN 00001083 002.2 OF 003

6. (SBU) U.S. businesses also complained about their inability
to compete for large public works-sector projects because of
tied aid that the Japanese, Koreans and others nations provide
Vietnam. Mermoud was sympathetic, but the USG would not play
that game. That said, as part of Secretary Rice's
Transformational Diplomacy initiative, the State Department is
undertaking a holistic review of how the USG allocates its
foreign assistance to ensure that the aid support critical
foreign policy goals. The business environment is incorporated
into those benchmarks. The Special Representative also
highlighted the Secretary's Award for Corporate Excellence (ACE)
as a means of showcasing and rewarding U.S. companies that are
contributing to their host countries Mr. Mermoud also stressed
the importance of AmCham and U.S. business using avenues of
advocacy already open to them, including the Vietnam Business
Forum to express their positions to the GVN. He also encouraged
U.S. companies to publicize their best practices and support for
the local communities in which they operate as a strategy for
boosting their credibility and image with provincial and central
government officials.

Changes to Section 911 of the U.S. Tax Code

7. (SBU) Many U.S. business representatives expressed concern
over recent changes to the U.S. tax code governing exemptions
for overseas earnings for U.S. taxpayers. These changes make it
economically prohibitive for companies to have U.S. employees
overseas. The changes not only hurt U.S. global
competitiveness, but also reduce the U.S. "presence" overseas.
In Vietnam, U.S. businesspersons work with all level of society,
from government officials to factory workers. They are the face
of America abroad, the AmCham representatives said. Mr. Mermoud
noted that Under Secretary Karen Hughes and other working on
public diplomacy would be interested in AmCham's views and
committed to raising the issue back in Washington.

Ho Chi Minh City Law School

8. (SBU) Ms. Mai Hong Quy, Acting Rector of the HCMC Law School
(the alma mater of PM Dung), acknowledged that more needed to be
done to prepare the nation for WTO accession. For example,
while on many issues, such as intellectual property, Vietnam's
laws code may be compliant with WTO standards, questions remain
over implementation and clarifying decrees need to be issued.
Public awareness of the impact of WTO also is limited.
Preparing her students for a post-WTO environment is her number
one priority. At least one third of law students are doing
their thesis on WTO related topics. The school also is working
to reduce lecture and theory-based education and to incorporate
practice and case study work. She welcomed the idea of
partnering with U.S. companies in Vietnam to develop internship
programs for her students, an initiative Mr. Mermoud shared with
AmCham. Madame Quy also welcomed expanded cooperation with the
USG and U.S. educational institutions to develop and further
professionalize the law faculty.

Ho Chi Minh City Department of Trade

9. (SBU) Pham Hong Ha, Director of the HCMC Department of Trade
described to Mr. Mermoud and the Consul General how HCMC is
working to become the export transshipment point for the entire
southern region of Vietnam by 2015 or 2020. Mermoud noted that
the recent approval of the Cai Mep port project, a joint venture
between SSA International Holding Ventures of Seattle and
Saigon Port of Vietnam to build and operate two of six new
container berths for the Saigon Port Authority, is clearly in
line with HCMC's development goals. So too is the pending Cai
Lan port development project. He hoped that this project would
be approved before the President's visit to Vietnam for the APEC
Summit in November.

10. (SBU) Ha said that in September the Trade Minister will
publicize Vietnam's WTO "package." The HCMC Department of Trade
already has begun to update its website with information on WTO
for the private sector to utilize in its preparations. Ha
acknowledged that Vietnam's small and medium enterprises would
be challenged by WTO entry, but HCMC plans to support its SMEs
through land grants and promotion of industrial zones. He added
that Vietnam's SOEs are getting better at functioning without
government subsidies.

11. (SBU) Responding to the CG's question about an apparent
slowdown in new investment registrations, Ha noted that all

HO CHI MIN 00001083 003.2 OF 003

leaders are very cautious when implementing new laws. He said
that, nonetheless, Vietnam's economy grew rapidly. Ha conceded
that the current business registration process is difficult.
The Department of Trade is focused on ways to improve this
situation and the commercial environment for U.S. investors
generally. The Consul General cautioned that Vietnam should not
slow investment and business approvals when international
interest is at a peak.

HCMC National Assembly Members

12. (SBU) Mermoud and the CG also met with Nguyen Thi Nghia and
Nguyen Kim Thoa, National Assembly delegates from HCMC. Both
are businesswomen serving as General Director of the Saigon
Co-Op grocery store chain and the Saigon Cosmetics Corporation
respectively. The private sector is looking at WTO accession
with fear and anticipation. Ms. Nghia said that larger
companies have a more realistic view of opportunities and
challenges of WTO accession. Regarding the new Investment and
Enterprise laws, both delegates said that the National Assembly
is in the process of making additional clarifications and
modifications to the laws.

13. (SBU) Nghia and Thoa said that the process of SOE
equitization was working well and is a step to making SOEs
independent. They noted the importance of the SOEs to the
national budget, but acknowledged many are weak and
under-performing. They attributed this to an excess of state
control hampering SOE management. Equitization was would make
SOEs more efficient, giving management new flexibility in hiring
and firing and developing incentive programs to reward and
retain high performing employees. The government support to
equitized companies was temporary to assist this restructuring.
Mr. Mermoud pressed the representatives on whether this process
actually weeds out good from bad companies, or if equitization
(and GVN supports) artificially propped up companies that should
rightly fail in a competitive marketplace. The delegates said
that the complaints about unfair advantage of SOEs are outdated.
SOEs are now under stricter consideration for tax incentives.
The loans they receive are at commercial rates and the SOEs must
put up collateral, just as the private sector does. The
National Assembly will shift its attention to SOE monopolies in
sectors such as aviation and telecom.
14. (U) This cable was cleared by Special Representative

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