VIETNAM DPM DZUNG DINNER ON CORRPUTION

UNCLAS SECTION 01 OF 05 HANOI 001240

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SUBJECT: VIETNAM DPM DZUNG DINNER ON CORRPUTION


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A) Hanoi 771; B) Hanoi 1090


1. (SBU) Summary and Comment: Deputy Prime Minister (and
putative Prime Minister) Nguyen Tan Dzung gave assurances to
international contributors to Vietnam's economic development
that the Government of Vietnam (GVN) will get to the bottom
of the major scandal involving misappropriation of funds in
several large transportation infrastructure projects (The
PMU-18 case, Refs A and B). During a lengthy dinner
conversation with representatives of major donor
institutions and countries, Dzung acknowledged that the
corruption problem was much broader than the PMU-18 case
alone. He welcomed assistance and advice from the
international community to help Vietnam uncover weaknesses
in its management controls and to continue its economic
reform efforts as the country moves to WTO accession. In
fact, Dzung outlined in some detail the extent that
economic, administrative and legal reforms are
interconnected with getting better control over corruption.
He said that the GVN welcomed help by the press in
identifying "loopholes," but cautioned that the press should
avoid false accusations. He also commented that unless the
Communist Party is able to meet the anti-corruption
challenge, it could lose public confidence and be unable to
keep its leadership role. The proof of GVN commitment will
emerge over time as demonstrated by concrete actions. We
believe that outside audits should be demanded for all
project management units (PMU) involved in managing
multilateral development bank (MDB) loans as well as of the
GVN Development Christian Fund. Nevertheless, we are
encouraged by Dzung's forward leaning posture and clear
commitments. We see the call for donor advice and
assistance as an opportunity to sharpen our ongoing
governance efforts through legal reform. End Summary and
Comment.


2. (SBU) Deputy Prime Minister Nguyen Tan Dzung met
with representatives of international financial
institutions and ambassadors from major donor countries
over dinner May 19. He committed the GVN to a serious
effort to address corruption in Vietnam. Ambassadors,
charges and aid directors from most donor countries had
met the previous week at the World Bank office to
coordinate an approach to the GVN in the wake of the
PMU-18 scandal. World Bank representative Klaus
Rohland informed the donors that DPM Dzung had agreed
to meet with a group from the donor community. (Note:
Dzung has been nominated by Prime Minister Phan Van
Khai to be the next PM, a decision that may be
confirmed soon by the ongoing National Assembly
session.) DPM Dzung suggested that it would be more
effective for him to meet with a small group from key
countries and organizations. Consequently, Minister of
Planning and Investment Vo Hong Phuc hosted the dinner
with the DPM, inviting Ambassadors or charges from
Japan, Germany, France, Australia, Netherlands, the EC
and representatives of The World Bank, the UN, ADB and
DFID. Charge Boardman represented the U.S. Mission.


3. (SBU) DPM Dzung set the stage by pointing out that
Vietnam is at a very important stage in its development
process. The Communist Party has just finished its
Tenth Party Congress and emerged committed and
organized to continue rapid progress in economic
development and in strengthening democracy. The GVN
wants continued help from donors for its reform efforts
as it carries out its social and economic development
plan for the next five years. Following the recent
agreement in principle in the WTO bilateral with the
United States, the GVN is optimistic that it will be
able to accede very soon. Vietnam welcomes assistance
and advice from its friends on how best to structure
itself to fully integrate into the world market and
society. At the same time, the PMU-18 scandal has been
a blow to public and donor confidence. The GVN is
determined to get to the bottom of the case, punish the
guilty, and address systemic weaknesses.


4. (SBU) MPI Minister Phuc expanded on corruption,

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specifically the MPU-18 case. He promised the
investigation will continue until authorities are
satisfied that they have discovered all those involved.
There would be no hesitation in punishing the guilty,
no matter how high culpability should go. Already
seven or eight vice ministers and ministers have been
affected. The Government is also examining weaknesses
in the regulatory, financial and legal systems that
present opportunities for corruption. The GVN will
continue in a transparent manner and keep in close
communication with the donors in the process. Special
assessment missions from Japan, the World Bank and DFID
are already scheduled; the GVN welcomes their help and
suggestions.


5. (SBU) In response to a comment from the World Bank
representative on the role of a free press, DPM Dzung
added that the GVN realizes that the system has
weaknesses. There is a need for a solid legal
framework, institutional structure and good government
officials. The Government must enhance transparency
and democracy so that people can be "masters" of the
system. The press can help in uncovering "loopholes."
The Party and Government, however, have a clearly
defined point of view. The facts will be uncovered,
regardless of whoever is involved, or where the
investigation leads. Government ministers have been
called to account before the National Assembly.
Deputies have commented that never before has an
investigation resulted in action against so many senior
officials. Nor has there ever been such extensive and
open testimony by GVN officials before the Assembly.
Dzung will encourage the press to continue to uncover
facts as the investigation goes forward, but the press
should be careful not to "wrongly accuse." The GVN is
working at two levels on corruption. First, it is
investigating and prosecuting this specific case.
Second, it is trying to determine the "pitfalls" in the
system.


6. (SBU) Minister Phuc reported that the Government
has submitted to the Assembly a resolution on measures
to improve systemic weaknesses. In response to a
question from the Japanese Ambassador, Phuc said that
he expects the PMU-18 investigation to last another
three months. This is "too long," according to the
Japanese Ambassador, who also asked how much foreign
assistance is involved in the PMU-18 case. Phuc
responded that the Government will continue to report
publicly as progress is made. So far, the
investigation has concentrated on the betting scheme
organized by the Director General of PMU-18. According
to computer forensics, USD two million is estimated to
have been diverted, but specific details regarding only
about 100,000 USD had been recovered from computers.
Interrogations indicated that contractors had been
required to give kick-backs of five percent of their
profits. The details are difficult to track because of
cooked books, but audits of major building projects on
National Highways 10 and 18 for two major bridge
projects, including examination of quality control
certificates from Vietnamese and foreign experts, do
not suggest that the projects are below standard. Nor,
based on investigations so far, does it appear that
foreign aid funds were a large percentage of those
stolen.


7. (SBU) The Norwegian Ambassador noted that Vietnam
ranks high on international rankings for concern about
lack of transparency and corruption. This was a clear
reflection of lack of trust by the important
international business community. DPM Dzung responded
that the political leadership is aware of this. He
suggested that WTO-mandated and other economic reforms
would improve the environment. For example, 3,000 of
approximately 5,000 State-owned enterprises (SOE) have
already been equitized. Instances of corruption have
fallen sharply in SOEs already equitized. Most of the
remaining SOE will be equitized in the next two years.
All of the state commercial banks will be equitized in
the next five years. Vietnam's economy is in

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transition from a planned to market system. This is a
great challenge, but reaching the WTO's standard with
the help of the donors will enable Vietnam to carry
through with radical reform and reduce corruption at
the same time.


8. (SBU) The EC Ambassador noted that the EC aid
program has not been touched directly by the PMU-18
scandal, but only because the EC does not trust GVN
auditing and thus has not worked through the PMU
system. The DPM noted that the State Auditing
authority is being brought up to international
standards. The EC representative said that the EC
would prefer to rely on the GVN to police itself and
has hopes for the State Auditing authority and the
Government Inspectorate, which is now being put under
National Assembly responsibility. In most cases,
corruption can be traced to a failure to monitor
closely. Once corruption is discovered, it is not
enough for the government agency to acknowledge the
problem and blame one individual. The agency
responsible should make "restitution" to recover funds
for the project. Dzung said that he agreed. The
Agency should be responsible, but a specific official
must be held accountable.


9. (SBU) The DFID representative reported that UK
public confidence in the Vietnam aid program has been
shaken by the PMU-18 scandal. The UK would like to
increase its assistance to Vietnam, but reassurances of
greater accountability will be necessary. DPM Dzung
said that he too is concerned about public confidence,
in Vietnam and abroad. He repeated that the GVN wants
to address the problem by achieving high rates of
economic growth while putting in place an action plan
to implement the anti-corruption law. He encouraged
the donors to get involved, to send review missions and
let the GVN know of weaknesses and shortcomings
discovered. The ADB representative reported that his
organization would be sending a team to investigate the
relationship between PMU-18 and the Ministry of
Transportation to see if proper checks-and-balances
could be put in place. The ADB is contemplating
increasing its programs in Vietnam by up to 50 percent.
However, the confidence of board members is critical;
they must be satisfied. Monitoring the life style of
suspected malefactors and recovery of stolen money are
important means to restore confidence.


10. (SBU) The EC representative told the DPM that
corruption goes well beyond irregularities in major
public projects. For example, exporters of textiles
estimate that 5 - 6 percent of the export value of
their product is needed just to pay to expedite the
paper work to clear manufacturing inputs through
customs. One way of improving the situation would be
to move more rapidly away from a cash economy. The
World Bank representative stressed that as long as
Vietnam maintained a system of multiple layers of
permits and registration requirements for normal
activities, it would be vulnerable to corruption.
Charge agreed and indicated that as we examined ways to
support Vietnam in WTO compliance we could look at ways
of making some requirements self-enforcing, by the firm
and the individual. Examples could be in the area of
tax reform or even the complex law on associations that
has been in draft for years. The French Ambassador
indicated an interest in helping improve the State
Audit and Government Inspectorate functions. The
German Ambassador advised that transparency and speed
of transactions were also very important for the
business community.


11. (SBU) DPM Dzung pointed to ongoing banking reform
efforts and explained that the purpose is to make the
Vietnamese system more compatible with international
practices as a WTO member. The State Bank will become
the Central Bank with the role of setting monetary
policy. He repeated that the State commercial banks
will be equitized. The exchange rate will set by
indirect means; there will be a more relaxed control of

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foreign exchange. The private banking sector will be
opened further in accord with WTO commitments. This is
under discussion in the monetary policy committee.


12. (SBU) DPM Dzung summed up by listing five
overarching GVN goals: To transform fully into a
market economy; integrate into the international
economy as a full member of the WTO; practice
democracy; develop sustainable growth while reducing
poverty and protecting the environment; and, carry out
administrative reform and fight corruption. Vietnam
will need cooperation and support from outside to
design necessary reforms. The GVN values development
assistance (ODA) greatly and pledges to use it wisely.
Minister Phuc has presented to the National Assembly a
comprehensive plan to use ODA more effectively. Many
deputies have made constructive comments, and MPI
welcomes suggestions from donors on how to improve the
administration of ODA. The GVN is aware that ODA
consists of loans for use by future generations.


13. (SBU) World Bank representative Rohland thanked
the DPM for allowing the donor community to share its
concern over the problem of corruption and for the
assurances of the highest level of government that this
is being addressed seriously. Rohland noted that the
corruption issue would be further elaborated at the
upcoming Consultative Group meeting, where a joint
GVN/donor action plan would be discussed.


14. (SBU) DPM Dzung remarked that even after 20 years
of success, the Communist Party leadership realized
that the Party could lose its lead role if it loses the
fight against corruption. However, Party leaders are
confident of success, with support from donors. Their
seriousness is indicated in the firing of vice
ministers and ministers. Next the GVN would move to
more comprehensive measures.


15. (SBU) Comment: Reading Dzung's approach to the
international community is not easy. On the one hand it is
not new, and he could merely be paying lip service before an
important audience while continuing the faade of cleaning
up corruption in select cases. On the other hand, it is
possible that he and the leadership could be serious, but we
need to see concrete proof of this commitment through
continued anti-corruption efforts and legal and
administrative reforms. Even though the Standing DPM and
next Prime Minister put himself on record about governmental
responsibility and commitment, other contacts, especially in
the media, have told us that the GVN is moving to limit the
impact of the PMU-18 scandal on the Party as quickly as
possible (Ref A - HCMC 503). Under this reading, the
scandal was brought into the open as part of the maneuvering
around the Party Congress and it is now time to get it back
in the box. Similarly, the open media debate that preceded
the Congress has reportedly been terminated by a party
directive. It is clear from Dzung's attention to this issue
that the GVN understands that PMU-18 could be a pandora's
box in its relations with donors. The dilemma for the GVN
will be balancing the need to reestablish credibility with
donors with the potential domestic damage of revealing too
much. At the same time, the GVN will discuss corruption at
the mid-term consultative group meeting June 8-9 and beyond.
Given the potential liability of various donors and their
growing concern with the current system, the issue could
easily dominate the December Consultative Group meeting.


16. (SBU) These developments underscore the importance of
continued U.S. assistance which is working to develop the
broad legal and regulatory framework necessary for a modern
economy. Our assistance, which is highly regarded, will
help assure that Vietnam's economy is more transparent and
our overall economic relationship is based on international
standards.


17. (SBU) Action Recommendation: The USG does not
directly fund infrastructure projects in Vietnam, but both
the IBRD and ADB do. The current situation provides an
unusual opportunity for the international community to press
hard for greater transparency. We have seen this already on

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the part of bilateral donors in Hanoi, some of whom appear
to have been shocked out of their complacency. We recommend
that the USG and other donors begin by insisting on the
elimination of corruption. One approach could be by
requiring outside audits of all Project Management Units
involved in managing multilateral development bank (MDB)
loans and of the murky GVN Development Assistance Fund that
is the initial depository of most such funds (Ref B 2005
Hanoi cable on DAF). But of course, the key will be the
reliability of the audits since certain MDBs have a strong
motivation to keep pumping money out with less regard for
its utilization.

BOARDMAN