US embassy cable - 04HANOI3082

UNCLAS SECTION 01 OF 02 HANOI 003082 
 
SIPDIS 
 
STATE FOR EAP/BCLTV AND EB 
STATE PASS USTR FOR DDWOSKIN AND EBRYAN 
 
E.O. 12958:  N/A 
TAGS: EIND, ETRD, EINV, VM, SOE 
SUBJECT:  VIETNAM:  AMBASSADOR'S CALL ON THE MINISTER OF 
INDUSTRY 
 
 
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. 
 
INVESTMENT CLIMATE:  COULD DO BETTER 
------------------------------------ 
 
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. 
 
AUTO TARIFFS AND TAXES TO REDUCE TRAFFIC CONGESTION 
--------------------------------------------- ------ 
 
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. 
 
POWER GENERATION: COMPETITION FROM OTHER SOEs 
--------------------------------------------- 
 
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. 
 
PETROLEUM SECTOR ISSUES 
----------------------- 
 
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. 
 
ENVIRONMENTAL COOPERATION 
------------------------- 
 
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. 
 
MARINE