VIETNAM CONSULTATIVE GROUP MEETING

UNCLAS SECTION 01 OF 06 HANOI 003331

SIPDIS

SENSITIVE

STATE FOR EAP/BCLTV, EB/IFD/OMA, EB/IFD/ODF AND S/OGAC
STATE PASS USAID FOR PATTY CHAPLIN
STATE PASS USTR FOR ELENA BRYAN
TREASURY FOR OASIA
USDOC FOR 4431/MAC/IFP/OKSA/HPHO
USDA FOR FAS/FAA/
SECDEF FOR ABLAGG

E.O. 12958: N/A
TAGS: EAID EFIN ETRD ECON PREL VM KKIV AFLU HIV AIDS SOE WTO
SUBJECT: VIETNAM CONSULTATIVE GROUP MEETING


1. (U) Summary: The Twelfth Vietnam Consultative Group (CG)
Meeting took place December 1-2, 2004 in Hanoi. Minister of
Planning and Investment Vo Hong Phuc and World Bank Country
Director for Vietnam Klaus Rohland co-chaired the meeting.
A wide range of Vietnamese Government officials and
representatives of all major bilateral and multilateral
donors attended. The Ambassador and USAID Mission Director,
Regional Development Mission/Asia Tim Beans co-chaired the
U.S. Delegation. The Government of Vietnam (GVN) intends to
maintain its economic path and to join the World Trade
Organization (WTO) as soon as possible and is preparing to
start drafting its next five-year plan. Donors called on
the GVN to speed up financial sector and SOE reforms,
improve transparency and accountability, reduce corruption
and to seek to focus more on the quality of growth rather
than on numerical targets. The donors also encouraged the
GVN to reduce income disparity especially in regions such as
the Central Highlands. Assistance pledges for the coming
year totaled USD 3.4 billion, about USD 600 million higher
than last year with USD 170 million due to exchange rate
changes and about USD 100 million due to the inclusion for
the first time of international NGOs in this year's CG
pledge.


2. (SBU) In his meeting with delegation heads, Prime
Minister Phan Van Khai stated that the private sector should
become the engine of economic growth. He pledged to improve
the business climate, reduce SOE advantages and decisively
tackle financial sector reform. He also acknowledged that
his government must improve the lives of Vietnam's ethnic
minorities and support religious activities, lest these
issues become threats to Vietnam's stability and economic
growth. This CG was more useful than those in previous
years because there were more signals that the GVN
understands and is focused on making progress, but the
donors must wait to see the results. End Summary.


3. (U) The Twelfth Vietnam Consultative Group Meeting took
place December 1-2, 2004 in Hanoi. Minister of Planning and
Investment Vo Hong Phuc and World Bank Country Director for
Vietnam Klaus Rohland co-chaired the meeting. Led by Deputy
Prime Minister Vu Khoan and Minister Phuc, the Vietnamese
delegation included representatives from all major economic
and policy agencies of the government and Communist Party
along with representatives from mass organizations, research
organizations and NGOs. Representatives of all major donors
attended. They included 25 national aid agencies, the
European Commission, the Asian Development Bank,
International Monetary Fund, World Health Organization and
the UNDP and its sister agencies. The Ambassador and USAID
Regional Development Mission/Asia Mission Director Tim Beans
co-chaired the U.S. Delegation.

Deputy Prime Minister Vu Khoan: Next Five-Year Plan
-------------- --------------


4. (U) In his opening remarks, the Deputy Prime Minister
noted that fast and sustainable development coupled with
poverty reduction was his government's top priority. He set
the focus for the meeting by describing the GVN's plans for
the Socio-Economic Development Plan (SEDP),2006-2010
discussion and drafting of which will soon start. The
Deputy Prime Minister said that the GVN intends to speed up
GDP growth and SOE "rearrangement," to create a more
favorable environment for all sectors, to use resources more
efficiently, to ensure political and economic stability, to
enhance global competitiveness and to move Vietnam out of
poverty by 2010. He thanked donor countries and
international organizations for their valuable support and
stressed his government's intention to join the World Trade
Organization (WTO) "as soon as possible."

Donors Voice Concerns
--------------


5. (U) In response, donors and NGOs were positive about
Vietnam's economic and social progress to date. They
expressed continued support for the objectives and approach
of Vietnam's Comprehensive Poverty Reduction and Growth
Strategy. Donors emphasized the need for Vietnam to
accelerate implementation of reforms in order to reach its
full potential, to continue to reduce poverty and to
alleviate emerging income disparities. They called on the
GVN to improve the quality of growth, accelerate reform in
the financial sector and SOEs, level the playing field for
business, control corruption, enhance transparency, prevent
excessive economic inequities, target assistance to
disadvantaged areas, improve access to social services,
strengthen civil society, improve human rights and protect
the environment. Many donors underscored the need for a
dynamic domestic private sector to boost productivity and
the quality of economic development in Vietnam. Donors
voiced support for Vietnam's WTO bid, but questioned
Vietnam's readiness for WTO compliance and for global
competition.


6. (U) The Ambassador emphasized that, in order to compete
in the global economy, Vietnam must move toward a more open
society. Protecting the free flow of information and
freedom of expression are essential. Currently, Vietnam's
economic performance, international reputation and
attractiveness to foreign investors are all constrained by
the limitations Vietnam places on the human rights and
religious freedom of its citizens.


7. (U) The GVN representatives agreed with many of these
concerns, but pushed back in a number of key areas. While
acknowledging that quality and sustainability of growth are
important, the GVN was not willing to relinquish its focus
on the pace of growth. Deputy Prime Minister Khoan
questioned the accuracy of the Ambassador's assessment of
SOEs as a drag on economic growth. He emphasized the
strategic role SOEs have played in advancing the economy and
reaffirmed the GVN's political decision to retain state
control over the economy while increasing its efficiency.
On sharing the benefits of quality health and education
services, the GVN representatives explained increasing
commercialization of health and education as a way to have
those "better off" contribute more to social services to
compensate for the small budget available to provide
services for all. DPM Khoan also said that Vietnam had
enhanced the role of elected bodies such as the National
Assembly and that the proliferation of newspapers reflected
a more open society. However, he stressed that Vietnam will
continue to move in this direction at a pace appropriate for
its culture and unique conditions. He stated that Vietnam
would take lessons from other countries and governments only
where appropriate. To underscore this point, the Deputy
Prime Minister noted that the permissiveness on drugs in the
Netherlands was not suitable for Vietnam. He also
emphasized that the GVN recognized it must focus now on
financial sector reform.

IMF and World Bank Assessment
--------------


8. (U) The IMF representative noted that that Vietnam's
macroeconomic situation was reasonably good, despite the
rise in inflation to about 10 percent due to droughts and
bird flu earlier this year. However, the rising trend in
credit growth from 26 percent in 2003 to 36 percent in 2004,
still propelled by loans to SOEs, was a cause for concern.
He called on the GVN to move forward with SOEs and financial
sector reforms, develop the private sector, to accede to the
WTO and to increase government transparency.


9. (U) The World Bank's chief economist in Hanoi concurred
with the IMF's generally positive assessment. He remarked
on Vietnam's progress toward WTO accession and its efforts
to reduce exclusion and improve governance. He identified
two key challenges: whether Vietnam could implement WTO
commitments and whether the National Assembly and ministries
could pass laws and issue regulations necessary for WTO
compliance on time. He called for longer or more frequent
legislative sessions. The economist also echoed concerns of
other delegations and representatives on maintaining focus
on social development commitments, especially given the
current pressure for economic development and international
integration. One other continuing challenge would continue
whether Vietnam had the political will and ability to
address SOE and banking reform concerns, he added. The
economist noted the limited progress the GVN has made in
managing State budget assets. Although his assessment was
that the problem had not yet become a crisis, he cautioned
that postponing a solution would prove more costly in the
future and could threaten recent gains in economic growth.
He also noted that no country in history had sustained its
economic growth unless there was also comparable growth in
the quality of health and education.


10. (U) In response, Vice Minister of Finance Le Thi Bang
Tam noted that budgetary transparency was important. She
pointed to recent shifts in SOE valuation methodology and
the planned establishment of a state asset corporation as
positive steps on SOE reform. She acknowledged the need for
stronger oversight of capital markets in Vietnam.

Preparing the Next Five Year Plan
--------------


11. (U) As preparations for the next five Year Plan (SEDP)
begin, the GVN also reported on the main findings of its
second annual progress report of the Comprehensive Poverty
Reduction and Growth strategy (CPRGS). MPI Minister Phuc
said that the next socio-economic development plan would
include a new system of using more qualitative targets and
fewer quantitative ones. Besides economic targets, it would
include targets for quality of life and human development.
As such, the plan would have to incorporate targets set in
the CPRGS. According to the GVN, the plan will be built
from the bottom up and involve many rounds of consultation
with stakeholders, including the private sector. Donors
concurred and said it was essential for the next Five-Year
Plan to shift from the production target-oriented approach
of a planned economy towards the outcome-oriented planning
and the broad-based participatory approach of a market
economy. At the same time, they pledged to support
Government's preparation of the next SEDP using CPRGS
methodology. Donors supported addressing growing
inequalities driven by ethnicity, location and gender. The
Canadian representative noted that with 14 percent of the
total population the Central Highlands had 30 percent of the
population under the poverty line. Likewise the World Bank
pointed out that of the 10 percent of children not in
school, 46 percent of those were ethnic minorities.

Report from Vietnam Business Forum
--------------


12. (U) The CG also featured a report on the November 29
Vietnam Business Forum's issues of concern to foreign firms
seeking to operate in Vietnam. Deputy Prime Minister Khoan
attended this meeting as well. The list of issues is
essentially the same ones that have been on the agenda for
some years. Frustration among business representatives with
lack of progress was evident. The message to the GVN is
that most investors in Vietnam want to expand and many
factors are attractive, but the lack of a transparent,
adequate legal framework and sufficiently developed
infrastructure are significant deterrents. Investors seek
improved development and application of policies on fair
treatment and reduced corruption. Local private businesses
want access to credit and land and improved public
administration. They also called for the improved behavior
of parties in labor relations and better performance by
local authorities in enforcing and applying new policies.
The international business community seeks stiffer IPR
penalties that will compensate owners of rights and
trademarks, improved enforcement and access to an effective,
fair judicial system. There was a strong pitch for the GVN
to remove the three percent cap (Decree 105) on foreign
employment. The Government responded that few enterprises
were affected and that they have submitted an amended draft
that provides for certain exceptions or waivers to small
employers on a case-by-case basis. In addition, the
Government noted that it was seeking infrastructure
investment from abroad and was considering revisions to the
1993 BOT law. DPM Khoan called for the creation of a
committee comprised of government, private sector, and donor
representatives to explore improvements to Vietnam's
infrastructure woes.

Corruption
--------------


13. (U) The CG featured a special session on Vietnam's fight
against corruption. Frankly acknowledging the problem, the
GVN representatives described recent initiatives to tackle
corruption. The GVN and donors agreed that corruption
increases the cost of doing business and that too often the
poorest and most vulnerable members of society are the
victims of corruption. Donors encouraged the GVN to use the
diagnostic assessment currently being conducted for the
Communist Party with Sweden's support as a basis for a
coherent anti-corruption strategy. Donors suggested that
elements of a solution to corruption issues in Vietnam would
include: a comprehensive legal framework, public
administration reform, transparency, accountability, a
greater role for the media, SOE and financial sector reform,
and a careful screening of policy lending. While
acknowledging the GVN's commendable confirmation of
corruption, donors opined that implementation would be
difficult. Better transparency in public financial
management, resource allocation, procurement, audit and
inspection and fees and charges for public services, as well
as on the essential role of a free press in fighting
corruption would be key to progress, donors stressed. Both
this effort and government's efforts at financial sector
reform would be reviewed at the CG's mid term review.


14. (U) On ODA effectiveness, donors complimented the GVN
for its progress achieved in implementing the harmonization
action plan. For some donors this has meant moving to more
generalized budgetary support while for others, such as
USAID, it has resulted in enhanced HIV/AIDS coordination and
other common shared efforts. New ODA Decree 17 and the new
ODA master plan should help facilitate aligning the ODA
utilization with the new five-year plan.

HIV/AIDS: Coordination is Key
--------------


15. (U) The frank session on HIV/AIDS included admonitions
from the donor community on the need to deal in a
coordinated fashion with the growing epidemic. The UNAIDS
Representative in Vietnam stressed the need for a
multisectoral, supra-ministerial coordinating body to
coordinate HIV/AIDS activities across ministries and donor-
supported projects in Vietnam. She called for improved
management of resources through collaboration of ministries
including the Ministries of Finance, Health, Planning and
Investment, and Labor, Invalids and Social Affairs. Besides
a multisectoral coordination body, she said there was a
growing need for a task force to monitor and evaluate
government programs. She reiterated the crucial need for
more proactive involvement of the highest level of
government in a concerted campaign to fight stigma and
discrimination at all levels of society.


16. (U) Following this a number of donors made interventions
on HIV/AIDS. The United Kingdom representative noted the
Government's overtaxed capacity to manage donor-supported
programs, especially since they are all funneled through the
Health Ministry. He urged the Government to consider
adopting the United Nations 3-1s initiative, which calls for
each country to have one coordinating body, one monitoring
and evaluation system, and one framework to manage the
epidemic. Representatives of Japan and Sweden stressed the
importance of mainstreaming HIV/AIDS activities in all
development projects as well as the increasing need to
address stigma. The Australian representative said more
participation of people living with AIDS was needed both in
actual work and policy development in the National Strategy.


17. (U) The Ambassador endorsed the UNAIDS statement and key
major points made by the UNAIDS coordinator. He also noted
that Vietnam has a window of opportunity to make great
strides in curbing the epidemic, but must mobilize all
resources including civil society, involving both private
and religious organizations to achieve the greatest impact.
He also said that high-level leaders need to do more to
counter stigma and discrimination. Given that the majority
of cases of HIV are injecting drug users and sex workers,
more focus should be on convincing men to change their
behavior, he added. The UNDP representative advocated that
Vietnam shift its messages away from scare tactics to more
informative public messages that support people living with
HIV/AIDS.


18. (U) In response, Vice Minister of Health Trong
highlighted the relatively young epidemic in Vietnam and
thanked donors for their assistance to curb stigma and
discrimination. Noting that changing perceptions on HIV/AIDS
takes time, he said that people with aids (PWA) are now
viewed as people with a disease who should be taken care of
by their communities. He noted that the GVN had assigned
the Ministry of Health to provide treatment to PWA. The
solid support the GVN is receiving from the international
community is enabling them to develop treatment facilities
in infectious disease departments of hospitals in Hanoi, Hue
and Ho Chi Minh City. Although VM Trong's comments did not
address the need for greater coordination across sectors, in
his closing remarks Deputy Prime Minister Khoan told the
donors that Deputy Prime Minister Nguyen Tan Dung is ready
to meet with the donors on this subject. DPM Khoan also
singled out the United States for special thanks for its
help in combating HIV/AIDs.

WHO: Bird Flu Pandemic Warning
--------------


19. (U) The local WHO representative gave a presentation on
why the World Health Organization expects that an influenza
pandemic is likely to occur in the next few years when the
avian flu virus changes to infect humans. The WHO
representative's statements came along with public warnings
from the WHO that same day throughout Asia. He offered dire
predictions of the result when (not if) the pandemic comes.
Various donors called for efforts to try to improve the
ability of Vietnam to respond to such a situation.

Results of Pledging
--------------


20. (U) The final total assistance pledges came to USD 3.4
billion in assistance for the coming year, approximately USD
600 million higher than last year with USD 170 million due
to exchange rate changes and about USD 100 million due to
the inclusion for the first time of international NGOs in
this year's CG pledge. Co-delegation head, Tim Beans,
Director of the USAID Regional Development Mission/Asia led
the U.S. delegation at this session and said that the United
States planned to expend USD 61 million in support of
Vietnam's efforts primarily in the areas of economic growth,
HIV/AIDS, disabilities and the environment.


21. (U) In his closing remarks, the World Bank Country
Director for Vietnam underlined that this meeting was taking
place at a decisive juncture. In the next five years,
Vietnam should have acceded to the WTO and completed its
transition to a market economy, he said. With a diminished
role for Government as a producer of goods and services, the
GVN would instead focus more on strengthening the
foundations of a market economy to encourage business
development. The Government's role would be essential in
areas where the market could not provide such as targeted
poverty reduction programs, social protection,
infrastructure development and ensuring a clean and safe
environment for future generations.

Prime Minister Khai Meeting with Heads of Delegation
-------------- --------------


22. (SBU) The Heads of Delegation wrapped up this year's CG
with a private meeting with Prime Minister Phan Van Khai.
World Bank Country Director Rohland opened the 45-minute
meeting by summarizing the results of the CG.
(Inexplicably, Rohland failed to mention the HIV/AIDS
discussion.) An obviously well-briefed PM Khai then took
the floor. After thanking the donors for their generosity,
the PM listed several other areas on which his government
will focus. These included the quality of growth, human
resource development (both within the government and the
general population),and balancing environmental protection
and economic growth. The GVN will expand its efforts to
encourage the private sector to invest in Vietnam's
education and health systems, he said. In addition, the PM
acknowledged that his government must do a better job
protecting and lifting up Vietnam's ethnic minorities and in
providing room and support for religious activities.
Otherwise, he warned, these issues may become threats to
Vietnam's stability and economic growth. PM Khai promised
to provide a level playing field for the private sector and
foreign investors by eliminating the advantages now enjoyed
by the state-owned enterprises. He declared that he wants
the private sector to become Vietnam's primary engine of
growth. He also promised that the GVN would move decisively
to tackle the issue of financial sector reform in the year
ahead. PM Khai closed by calling for donor support for
Vietnam to host a major conference on combating the HIV/AIDS
epidemic in 2005.


23. (SBU) Comment: This year's CG was more useful than those
in previous years. Throughout the meeting, the GVN
acknowledged that there are significant social and economic
problems that it needs to address. However, we and the
other donors will have to wait to see whether the GVN will
translate this general understanding will be translated into
effective policies. End Comment.

BOARDMAN