U.S. JOINT VENTURE DISPUTE IN DAK LAK PROVINCE

UNCLAS SECTION 01 OF 02 HANOI 001918 SIPDIS SENSITIVE STATE FOR EB and EAP/BCLTV STATE PASS USTR BRYAN STATE ALSO PASS USAID FOR ANE/DEL MCCLUSKY TREASURY FOR OASIA USDOC FOR 4431/MAC/AP/OPB/VLC/HPPHO E.O. 12958: N/A TAGS: EINV ETRD ECON VM BTA SUBJECT: U.S. JOINT VENTURE DISPUTE IN DAK LAK PROVINCE REF: A) HANOI 1826 B) 02 HO CHI MINH CITY 1260 ¶1. (U) Summary. On July 24, Ambassador met with the Director of the Dak Lak Provincial Department of Planning and Investment (DPI) to discuss a joint venture dispute involving an American company, McCullagh International. Nhu admitted that the case could have a "negative impact on business investment," but expressed a hope that a buyout would resolve matters by end of the third quarter. However, in a separate July 23 meeting, the assertion by the province's People's Committee chairman that the venture's equipment was "outdated" and "must be thrown away" could presage a U.S. investor facing less than equitable compensation. End Summary. ¶2. (U) Ambassador raised the issue of fair dealing for U.S. investors with provincial GVN officials during recent travel to Vietnam's central highlands, specifically citing the "McCullagh-Krong Ana" coffee processing joint venture in Dak Lak. DPI Director Do The Nhu recounted the troubled history of the joint venture, claiming DPI had refused to approve McCullagh's earlier offer to buy out partner Krong Ana, because Krong Ana had changed plans, subsequently establishing a second processing plant that left two processing companies in the same area, competing for the same limited supply of beans. Nhu also contended that additional "traffic problems" would exist if McCullagh were to operate as an independent concern. According to Nhu, both processing plants would be along rural Route 4 south of the provincial capital, Buon Me Thuot. ¶3. (U) McCullagh had originally sought to buy out Krong Ana in 2001. With Ambassador's personal intervention with senior-level GVN officials (ref B),McCullagh received approval from Ministry of Planning and Investment (MPI) for the buyout. Dak Lak authorities, however, refused to implement MPI's decision. Nonetheless, during the Ambassador's call on Nhu, Nhu additionally contended that DPI would have approved the McCullagh buyout if McCullagh had been willing to relocate to a new area. He added that this solution was now viewed as "too complicated." (Note: It is unclear if this reference was the opinion of one or both of the parties and/or of DPI. End Note.) ¶4. (SBU) Nhu assessed that, given that Krong Ana had established independent operations, that DPI had refused to approve McCullagh's buyout of Krong Ana's 40% share, and that McCullagh was ready to leave Vietnam, the only probable way forward would be for Krong Ana to buy out McCullagh's 60% interest. Nhu stated that the Provincial Department of Finance would complete an audit of the joint venture equipment. When pressed if an independent audit would be available, Nhu confirmed that "Yes, if dramatic differences" existed between the parties' valuations. ¶5. (SBU) In a July 23 meeting, however, provincial People's Committee Chairman Lang stated that the equipment was worth "a couple hundred million Vietnamese Dong." (Note: equivalent to under approximately USD 14,000. McCullagh asserts that a buy-out based on its earlier proposal would value McCullagh's stake at around USD 850,000. End Note.) Lang also stated that the decision to buy out the U.S. partner was only made "to be nice" and that the equipment could not be used and would have to be "thrown away." Lang further argued that the inferior coffee produced by the such equipment would damage the provincial coffee's reputation. Ambassador reiterated that the issue of a fair valuation had been raised previously with MPI Minister Phuc (ref A) and that he had received assurances that an MPI officer would be sent to Dak Lak to assist in reaching a fair resolution. Ambassador reminded Nhu of Minister Phuc's pledge to see this issue addressed. ¶6. (SBU) Comment: This case presents elements of bad faith on the part of Krong Ana and may implicate collusion by Dak Lak's DPI. If nothing more, the DPI has intervened in business affairs in an effort to substitute its judgment for market forces by determining where coffee processing plants should be located, how many plants the local market can bear, and even impliedly assessing the market value of processing equipment, all in favor of the local state-owned enterprise partner in this joint venture. The effort to educate provincial authorities on market principles and obligations under international trade agreements, such as the U.S.-Vietnam Bilateral Trade Agreement (BTA) is a battle that has scarcely begun. This McCullagh-Krong Ana joint venture illustrates how joint ventures can go amiss in Vietnam, while setting a notorious precedent of local-level disregard of ministerial-level directives and policy - particularly those related to Vietnam's obligations under the BTA. We are discouraged by this latest response from the DPI and People's Committee, and plan to write MPI Minister Phuc again urging MPI to send a representative to Dak Lak soonest. BURGHARDT