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Cablegate: Vietnam's State Capital Investment Corporation

VZCZCXRO3030
RR RUEHHM
DE RUEHHI #1153/01 1731058
ZNR UUUUU ZZH
R 221058Z JUN 07
FM AMEMBASSY HANOI
TO RUEHC/SECSTATE WASHDC 5719
INFO RUEHHM/AMCONSUL HO CHI MINH 3297
RUEHGP/AMEMBASSY SINGAPORE 2416
RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS SECTION 01 OF 02 HANOI 001153

SIPDIS

TREASURY FOR OASIA
SINGAPORE FOR REGIONAL TREASURY ATTACHE BAKER
STATE PASS FEDERAL RESERVE SAN FRANCISCO FOR DFINEMAN

SENSITIVE BUT UNCLASSIFIED
SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN VM
SUBJECT: Vietnam's State Capital Investment Corporation

REF: HANOI 1149

2. (SBU) Summary: The State Capital Investment Corporation (SCIC)
officially opened its doors in August 2006, by order of the Prime
Minister, in order to become the repository of the GVN's shares in
most equitized state-owned enterprises. With a current capital base
of $315 million, SCIC expects to implement a rapid-fire disposal
program of the vast majority of the small stakes it will receive in
equitized companies so that it may re-deploy those funds in
companies and industries deemed strategically important. SCIC
officials seem to want to create an efficient and relatively
transparent organization that can meet Vietnam's strategic needs
while contributing to a more vibrant private sector economy. End
Summary.

2. (U) This is one of five cables reporting on Regional Financial
Attache Susan Baker's May 29-June 1 visit to Vietnam. This message
reports her findings and impressions of the State Capital Investment
Corporation.

SCIC MANAGEMENT PHILOSOPHY SEEMS SOUND
--------------------------------------

3. (U) Vietnam's State Capital Investment Corporation (SCIC)
officially opened its doors in August 2006, by order of the Prime
Minister, in order to become the repository of the Government of
Vietnam's (GVN) shares in most equitized state-owned enterprises
(SOEs). According to an SCIC publication detailing its investment
as of February 7, 2007, SCIC Chairwoman Le Thi Bang Tam believes
that "continuous improvements to the State management of SOEs are
crucially important to achieve stronger growth and economic
integration with the rest of the world. This requires a distinct
separation between regulatory and supervisory function, complete
business autonomy, removal of all state subsidies and preferential
capital grants to SOEs and more efficient and flexible mechanism for
state capital investment." SCIC, established as a "special economic
organization of the State," has a government mandate to:

* "(i) act as the sole representative of State ownership in state
invested enterprises;
* (ii) invest state capital in key sectors where state dominance is
needed;
* (iii) raise capital from domestic and overseas markets;
* (iv) provide financial advice and business support; and
* (v) promote international cooperation in the areas of investment
and corporate finance."

4. (SBU) SCIC officials said they expect to have three categories of
holdings. SCIC would maintain stakes in strategically important
companies in the first category indefinitely. Staff expects this
category to contain only around 10 firms, such as Vinamilk,
technology company FPT, and large financial institutions. In the
second category, they would include 50 to 60 medium-sized companies
in need of restructuring. They would expect gradually to sell these
companies off to strategic shareholders. Finally, the vast majority
of holdings would fall into a third category of small holdings to be
sold.

5. (SBU) SCIC officials reported that they intend to promote early
engagement of consultants and strategic shareholders to introduce
high standards of corporate governance in their companies. SCIC
will encourage all its companies to be audited and publicly listed.
Currently 18 of their companies are listed, with another 20
expecting to list soon. SCIC recognizes that its limited staff will
not be able to monitor carefully each company, and as such will need
to rely on market pressure to encourage good corporate performance.
So far, SCIC officials sit on less than 10 of the boards of
directors for the companies in its portfolio, but SCIC said that in
many cases the directors representing line ministries would "report"
to SCIC on company issues. SCIC noted that its Singapore
counterpart Temasek had recommended promoting independent directors
rather than attempting to staff boards itself. (Note: SCIC reported
having discussions and studying the models of other sovereign wealth
funds from Singapore, Malaysia and Qatar.)

6. (SBU) SCIC itself expects to have its financial statements
audited by a Big Four accounting firm and to publish them on its
website. (Note: this would be a higher level of transparency than
other similar organizations in the region.) SCIC's management board
will meet quarterly, chaired by a former Deputy Minister of Finance
who works for SCIC full time. Other management board members
include the Deputy Minister of Planning and Investment, the Deputy
Minister of Industry and SCIC's chief auditor. SCIC also expects to
have various investment committees focusing on specific sectors.

HANOI 00001153 002 OF 002

BUT MANY COMPANY EXCEPTIONS
---------------------------

7. (SBU) SCIC is currently not slated to receive government shares
in a set of large holding companies that the government will
establish to hold shares in what the government considers to be 12
to 19 key industries (reportedly including, for example, textiles,
rubber, shipyards, airlines, minerals and oil & gas). Moreover,
SCIC is currently not slated to be the repository of the equitized
shares of state-owned commercial banks in which the government
intends to maintain control, although SCIC officials confessed that
they hoped to take over these financial institutions' shares. This
would require a change to a government decree on transformation of
state-owned banks, which SCIC staff hoped would occur in June 2007.

AGGRESSIVE PLANS FOR DISPOSAL
-----------------------------

8. (SBU) SCIC officials reported that as of end May 2007, SCIC held
stakes in 600 equitized companies, with ownership share averaging 40
percent, but reaching as high as 90 percent in some cases. By the
end of 2007, they expect to receive stakes in 400 more companies,
giving them up to 1000 different stakes worth less than US$ 1
million per company. Saying that they intended to only hold 100-200
of these stakes for any length of time, SCIC officials said they
were working with several consulting firms and investment banking
firms on strategies for block sales. For example, they may sell
stakes in several companies in a particular industry as a group to
an interested party.
SCIC reported that they had signed more than 50 international
partnership arrangements on a non-exclusive basis. SCIC's proposal
to open a joint venture security company with Morgan Stanley has
raised questions about SCIC's ability to engage with multiple
foreign investment advisors.

CONSTRAINTS TO GROWTH
---------------------

9. (SBU) SCIC was seeded with $315 million in capital, but
officials expect the Prime Minister to approve a capital transfer of
up to $1 billion. SCIC officials also hope to raise capital through
the securities markets, but noted that SCIC needed a three year
track record before it could issue bonds. (Note: it might also have
to be officially "equitized" itself.) After eight months in
operation, SCIC has a staff of 55 people, which they hope to double
by the end of 2007. Recognizing the very competitive market for
financial talent in Vietnam, SCIC had requested "special status" to
provide higher salaries and structure its remuneration differently
than typical civil service policy.

10. (SBU) Comment: SCIC's rhetoric and corporate set-up generally
seem in line with international best practices of state-owned
enterprise management. However, the large exceptions to the assets
they are given brings into question whether they will ever be as
powerful as regional counterparts such as Singapore's Temasek and or
Malaysia's Kahzanah. There is a risk that SCIC will end up holding
many small stakes in problematic companies. If it is stuck with bad
assets, its admirable start with respect to transparency may prove
difficult to maintain in the future. End Comment.

ALOISI

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