US embassy cable - 05HOCHIMINHCITY529

UNCLAS  HO CHI MINH CITY 000529 
 
SIPDIS 
 
 
SENSITIVE 
 
DEPARTMENT PASS EXIM BANK AND OPIC 
DEPARTMENT PASS USTR, ELENA BRYAN 
STATE FOR EAP/BCLTV AND EB/TPP/ABT/BTT 
USDOC FOR 4430/MAC/ASIA/OPB/VLC/HPPHO 
USDOC FOR ADVOCACY CENTER 
PARIS FOR USOECD 
 
E.O. 12958: N/A 
TAGS: ETRD, BEXP, BTIO, EAID, PREL, VM 
SUBJECT: U.S. EXPORTER MENACED BY JAPANESE ODA 
 
 
1. (U) This is an action request for State, Commerce and ExIm 
Bank.  See paragraphs 2 and 11. 
 
2. (U) SUMMARY:  A U.S. manufacturer is about to lose a $4.6 
million deal to supply jetways or passenger boarding bridges 
(PBB's) for a new terminal at HCMC's Tan Son Nhat Airport. 
Vietnamese airport authorities want the U.S. PBBs, but are under 
extreme pressure to switch to Japanese PBBs from the Japanese 
company overseeing the terminal project.  Though the original 
project contract stipulated that U.S. PBBs must be used, the 
Japanese contractor now claims Japanese PBBs must be used to 
qualify to meet the terms of the loan from the Japanese Bank for 
International Cooperation (JBIC) that is financing the project.  A 
U.S. company stands to lose substantial business as a result of 
manipulation of loan requirements.  Post requests Washington's 
assistance in formulating a strategy to save this deal, which is 
the deal the Vietnamese themselves prefer.  END SUMMARY. 
 
3. (U) Thirteen years ago when the Southern Airports Authority 
(SAA) and Civil Aviation Authority of Vietnam (CAAV) went looking 
for financing to support the construction of a new terminal at Tan 
Son Nhat Airport in Ho Chi Minh City, it was delighted to receive 
an offer that proved in the end to be too good to be true. 
Japan's Japanese Bank for International Cooperation (JBIC) came to 
CAAV with a soft loan proposal to finance 85 percent of the $216 
million project that included a 40-year loan at interest rates 
below one percent and ten year grace period.  This was a tied aid 
loan, meaning that the main project contractor and any consulting 
service providers must be Japanese and under standard JBIC terms 
at least 51 percent of the total project cost must be sourced from 
Japan. 
 
4. (U) Compared to prevailing commercial lending rates at much 
higher interest rates and no grace period, the JBIC loan must have 
seemed like a no-brainer to the Vietnamese airport authorities.  A 
loan agreement between JBIC and the Vietnam Ministry of Finance 
was signed on March 29, 2002 for 22.768 billion yen, and a public 
tender for the turnkey construction contract was issued in mid- 
2004.  The winning bidder was Kajima Taisei Obayashi Mieda (KTOM), 
a Japanese joint venture company formed exclusively for the 
purpose of performing this contract in Vietnam. We understand that 
even before the tender was announced, it was generally known 
within the Japanese business community that by agreement KTOM 
would be the winning bidder. 
 
5. (U) Following the formal award, KTOM began negotiating a 
detailed contract with the SAA.  During the negotiations, SAA 
specified its requirement for passenger boarding bridges (PBBs) 
manufactured by FMC Technologies, Inc. -Jetway, based in Ogden, 
Utah.  SAA had previously purchased eight PBBs from FMC and was 
pleased with their performance.  They wanted to stick with FMC 
PBBs not only because of their proven quality, but also to 
minimize training and other ancillary costs by having a unified 
system.  SAA provided KTOM with catalogues and other materials 
from FMC to clearly specify the models to be supplied.  KTOM 
accepted these specifications as part of the contract, which was 
eventually signed with SAA on August 3, 2004.  The contract price 
was about $182.6 million. 
 
6. (U) Construction of the new terminal commenced in September 
2004.  That's when the problems began for SAA and its chosen 
supplier, FMC.  Without warning, KTOM stopped talking with FMC and 
notified SAA that it wanted to use a Japanese supplier of PBBs, 
Shinmaywa, instead of FMC.  The explanation for this switch was 
that they needed to buy from a Japanese supplier in order to 
comply with the 51 percent minimum Japanese content rule for JBIC 
loans.  SAA wrote to KTOM that this substitution of Shimaywa for 
FMC was unacceptable, and they insisted that KTOM comply with the 
terms of their contract.  However, KTOM refused to budge, and 
basically ignored SAA's pleas. 
 
7. (U) Using FMC's offer price to KTOM of $4.6 million for its 
PBBs, the PBBs represent approximately 2.5 percent of the total 
contract.  Both FMC and SAA argued to KTOM that they could easily 
satisfy the 51 percent requirement by sourcing other systems from 
Japan.  KTOM replied to FMC that they had already made the 
decision to source from Shinmaywa and that any further discussion 
on this subject was closed.  KTOM then gave an ultimatum to SAA 
that if it did not sign off on the contract substitution then the 
 
entire project would be delayed and that the fault would lie 
entirely with SAA. 
 
8. (U) FMC sought the assistance of the USG in Vietnam beginning 
in early 2005.  ConGen Commercial Officer met with SAA officials 
to discuss this situation.  At that meeting, SAA officials 
admitted that they were being squeezed by KTOM and that they did 
not have any practical leverage to prevent KTOM from ignoring the 
contract terms.  They asked for USG assistance to put pressure on 
JBIC officials to comply with the contract.  There was also 
concern that KTOM and JBIC would bring pressure to bear at the 
higher government levels in Hanoi to force SAA to accept 
Shinmaywa.   Ambassador Marine met with the Minister of 
Transportation Dao Dinh Binh to discuss this matter and urged him 
to hold firm on the contract specifications, but Binh said that 
the Ministry would defer to SAA on this issue.  Embassy officials 
also raised this issue with the Director General of CAAV in Hanoi. 
At the same time, Embassy Tokyo raised this issue with JBIC.  The 
Japanese officials, in turn, referred the issue back to Vietnam. 
 
9. (U) Over the last four months, SAA and KTOM exchanged several 
letters, each time disagreeing on the substitution of Shinmaywa 
for FMC.  On May 19 HCMC CommOff met again with FMC and SAA 
officials to discuss the situation.  An SAA senior official told 
us that he was now under extreme pressure from KTOM and JBIC to 
sign off on the final equipment supply list that includes 
Shinmaywa by the end of May.  He also said that he is under 
pressure from the central government authorities to complete the 
project on schedule, and that any further delay is unacceptable. 
 
10. (SBU) COMMENT:  This situation is a textbook example of unfair 
competitive practices in ODA procurement.  In this case, FMC and 
SAA were hit with a classic bait and switch.  Once Vietnam had 
accepted the terms of the tied aid loan, the Japanese consortium 
and lender held all the cards and  SAA finds itself unable to 
force KTOM or JBIC to comply with the terms of the agreement.   We 
understand that the competing Japanese PBBs are actually more 
expensive that the FMC product and we would guess that the price 
charged for other inputs to this project more than makes up for 
the grant element in the financing.  END COMMENT. 
 
11. (SBU) ACTION REQUEST:  SAA only has ten more days to sign the 
equipment supply list or it will jeopardize the timely completion 
of the project.  Post requests Washington agencies coordinate on 
an immediate initiative to get the Japanese to back down and honor 
the original construction specifications.  KTOM and JBIC are 
abusing ODA procedures at the expense of both the U.S. supplier 
and the recipient country.  Post requests any further guidance on 
how pressure may be brought to bear in support of FMC. 
 
WINNICK 
 
 
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