US embassy cable - 04HANOI3273

UNCLAS SECTION 01 OF 03 HANOI 003273 
 
SIPDIS 
 
UNCLASSIFIED 
 
SIPDIS 
 
STATE FOR EAP/BCLTV, EB/IFD/OMA: L. GALLAGHER 
TREASURY FOR OASIA/MDM: J. FRANCO 
 
E.O. 12958: N/A 
TAGS: EFIN, EAID, VM 
SUBJECT: VIETNAM: TRANSPARENCY OF BUDGETS/MILITARY SPENDING 
 
REF: STATE 239929 
 
1. Summary:  The transparency of Vietnam's budget and audit 
process has improved since the last reporting on this issue. 
The Law on State Budget effective January 2004 made 
significant changes including giving the National Assembly 
(NA) final approval over the budget and its allocation to all 
GVN entities, requiring disclosure of budget data and 
charging the Ministry of Finance's (MOF) inspectorate with 
verifying compliance.  Another mechanism of civilian 
oversight of State budget settlements is the State Audit of 
Vietnam (SAV) whose independence the NA just moved to enhance 
by shifting SAV reporting to the NA from the government in a 
new law that should be passed in the May legislative session. 
Based on these procedures, civilian authorities review 
receipts and expenditures funding military and security 
activities.  From this information, Embassy considers Section 
576 (A) of the Foreign Operations Act of 1997 inapplicable in 
the case of Vietnam.  End Summary. 
 
State budget development and approval process 
--------------------------------------------- 
 
2.  Decree 60 issued in June 2003 governs the budget process 
for all central government ministries and agencies, including 
the Ministries of Defense (MOD) and Public Security (MPS). 
This process, which post verified with MOF's Department of 
the State Budget, is as follows:  Each year, by May 31, the 
Prime Minister (PM) issues a directive on budget estimates 
based on the Government's socio-economic development 
objectives.  Before June 10, MOF and the Ministry of Planning 
and Investment (MPI) issue circulars guiding the development 
of budget estimates to include projected overall figures for 
all Government agencies.  Based on this directive and MOF and 
MPI's circulars, each agency, including MOD and MPS, must 
negotiate and prepare a budget estimate plan for MOF and MPI. 
MOF and MPI compile the national budget and budget allocation 
plan for submission to the Government.  The PM then 
authorizes MOF to report and justify the plan to seek NA 
approval.  Based on the NA's resolutions on the state budget 
estimate and budget allocation plan, MOF submits the final 
approved plan to the PM for assignment to each government 
agency by November 20. 
 
3. In the national and local budgets, productive development 
objectives are prioritized over non-productive objectives. 
The law on state budget lists development investment 
(including construction of infrastructure, investment and 
support for SOEs, addition to the State reserve fund) as the 
first budget expenditure objective. Expenditures for defense 
and security, described in Articles 31 and 33, are part of 
regular expenditure and listed after expenditure for 
education and training, health care, social affairs and 
culture and information. 
 
4. Regarding off-budget items, Deputy Director To Nguyen of 
MOF's Department of the State Budget said that according to 
law, all ministries must report every item for both revenues 
and expenditures, including MOD and MPS.  On unallocated or 
discretionary spending in the budget, he stressed that every 
ministry and agency must fully allocate its proposed budget. 
Only the Office of the Government (OOG) and provincial 
governments have an unallocated portion generally between two 
and five percent. 
 
5. According to the law, once the budget has been approved, 
in case of major changes that require an overall budget 
adjustment, the Government shall estimate the budget 
adjustment and submit to the NA for a decision at its next 
session. For urgent national defense or security needs, or if 
an adjustment of a ministry or agency's budget that does not 
cause changes to the overall budget is required, the 
Government must seek a decision from the NA's Standing 
Committee and report to the NA at its next session. 
 
New Law on State Budget 
----------------------- 
 
6. A new State Budget Law was passed in December of 2002 and 
took effect January 1, 2004, replacing Vietnam's first Law on 
State Budget passed in 1996.  According to Mr. Nguyen, the 
major change that took effect in 2004 is a decentralization 
of budget authority to the local level.  One significant 
aspect of the New Law on State Budget is a strengthening of 
the public disclosure provisions in Article 13.  Since 1996 
the State Budget Law has required the publication of both the 
National Budget and the audit result of the state budget. 
The breakdown of MOD and MPS numbers in the approved budget 
settlements for 2003 and in the budget estimate for 2005 will 
be published for the first time under the new State Budget 
Law.  In the past, these numbers were published only as an 
overall figure under National Defense and Security.  The law 
requires that budget settlements must be published within 18 
months and budget estimates must be published within 60 days. 
The budget settlement for 2003 is scheduled to be approved by 
the NA in April or May of 2005.  The budget estimate for 2005 
has been passed by the National Assembly and will be put 
online by mid January or February of 2005. 
 
Audit of State Budget 
--------------------- 
 
7. The State Audit of Vietnam (SAV) was established in 1994 
as a civilian authority attached to the Government.  The Law 
on State Budget states that SAV has authority to audit and 
certify:  the accuracy and lawfulness of the settlements of 
State budget at various levels, the final settlement of the 
state budget, the final settlement and financial reports of 
agencies or organizations using State budget, and general 
compliance with the law in managing and using the State 
budget and public property.  The law also confirms that when 
performing its tasks SAV is independent and is held 
responsible before the law for its auditing conclusions.  The 
auditing of budget settlements must be carried out each year 
before the National Assembly and the local People's Councils 
ratify the new budget.  According to Mr. Nguyen of MOF, SAV 
has been an effective instrument especially in inspections 
and in identifying violations by ministries. 
 
8.   Among the SAV's tasks and powers are to promulgate, 
guide and inspect the implementation of professional auditing 
criteria and procedures.  The SAV must also supply the 
auditing results to State agencies and publicize the annual 
audit report.  SAV has the right to request any audited 
agency or organization to provide their annual settlements or 
financial reports including vouchers, accounting books and 
relevant documents necessary for the audit.  In addition to 
its duties to inspect and settle complaints and 
denunciations, combat corruption, negative acts and handle 
violations in the auditing activities, SAV should also 
propose appropriate amendments and supplements of mechanisms, 
policies and regulations to the Government, the PM and the 
Sate management agencies. 
 
9. SAV has functional auditing departments including the 
State Budget Audit, Investment - Project Audit, SOEs Audit, 
Financial Institutions Audit, and Special Programs Audit.  It 
also has five regional offices located in Hanoi, Nghe An, Da 
Nang, Ho Chi Minh City and Can Tho.  The PM currently 
appoints and dismisses the State Auditor General and State 
Auditor Deputy Generals. However, the new draft law on state 
audit further strengthens independent civilian oversight by 
proposing that the State Auditor General and State Auditor 
Deputy Generals should instead be appointed or dismissed by 
the NA. 
 
Draft Law on SAV 
---------------- 
 
10.  While there were no significant changes in the new State 
Budget Law regarding SAV, a new draft law on the State Audit 
is currently awaiting a decision.  The key elements being 
debated are whether SAV should be attached to the Government 
or should report to the NA and, as mentioned above, who has 
the authority to assign the position of Chief Auditor. 
According to the local press, the NA has voted to make SAV an 
agency attached to it, rather than to the Government, to 
ensure its independence. The NA Information and Press 
Department confirmed that a majority had voted to change the 
draft law to have the SAV report to the NA rather than to the 
OOG.  As a result, the draft law will need to be revised by 
SAV and resubmitted to the NA.  A review of the revised draft 
law on SAV is already proposed for the official agenda for 
the NA's May 2005 session. In addition to the annual audit, 
OOG currently has the authority to request ad hoc audits of 
specific agencies or ministries.  Under the new law on state 
audit currently being revised, the NA would be able to call 
for such audits. 
 
MOF budget inspection - Financial Inspectorate 
--------------------------------------------- - 
 
11.  The Law on State Budget stipulates that besides SAV, 
MOF's Financial Inspectorate also is responsible for 
verifying compliance with the state budget law and checking 
the management of state properties by organizations and 
individuals, including the MOD and MPS.  When performing its 
tasks, the Financial Inspectorate can request relevant 
documents from organizations or agencies being inspected.  If 
a violation is found, the Finance Inspector has the right to 
propose that competent agencies recover the amounts in 
violation of the State budget.  Depending on the nature and 
the seriousness of the violation, the Financial Inspector can 
either deal with or request that the relevant State agency or 
ministry deal with the violation.  Reflecting the importance 
and magnitude of its duties, the Financial Inspectorate is 
the largest department in MOF.  Mr. Nguyen of the Department 
of the State Budget confirmed that this internal verification 
and inspection process has received increasing attention and 
MOF has promulgated a decision that directs each ministry to 
also set up an internal audit process. 
 
12.  The World Bank and International Monetary Fund 
representatives both said that Vietnam had made great strides 
in budget transparency in recent years.  Once the new audit 
law is in place, the system will be further improved. 
 
13.  Comment:  Section 576 (A) of the Foreign Operations Act 
of 1997 requires the U.S. executive directors of 
international financing institutions to vote against lending 
to countries not having in place functioning systems for 
reporting to civilian authorities financial audits or defense 
and security activities.  The State budget estimate process 
and public disclosure provisions in Vietnam's Law on State 
Budget, the Financial Inspectorate receipts and expenditures 
verification activities of MOF, and current State Audit of 
Vietnam appear to indicate that receipts and expenditures 
funding military and security activities are reviewed by and 
reported to civilian authorities in Vietnam.  The new State 
Budget Law that took effect in January 2004 strengthens 
public reporting requirements, particularly in the case of 
defense and security spending.  In addition, a new draft law 
on state audit, currently under revision, further increases 
civilian oversight over the state audit agency and its 
practices.  Based on this information, Embassy considers 
Section 576 (A) of the Foreign Operations Act of 1997 
inapplicable in the case of Vietnam. End Comment. 
 
MARINE