MILITARY OWNED ENTERPRISES IN SOUTHERN VIETNAM

UNCLAS SECTION 01 OF 02 HO CHI MINH CITY 000957 SIPDIS SENSITIVE SIPDIS E.O. 12958: N/A TAGS: ECON PGOV EIND KCOR PINR VM SUBJECT: MILITARY OWNED ENTERPRISES IN SOUTHERN VIETNAM REF: HCMC 0411 B) IIR 6 950 0015 06 C)IIR 6 950 0014 06 HO CHI MIN 00000957 001.2 OF 002 ¶1. (SBU) Summary: Military Owned Enterprises (MOEs) in southern Vietnam are tied in with the Ministry of Defense (MOD) much as other State Owned Enterprises (SOEs) interact with their respective owner/ministries, according to HCMC officials. The economic impact of MOEs is hard to gauge due to the wide range of their activities, murky corporate governance structures and a general unwillingness by the MOD to discuss its role in the economy of southern Vietnam. The justification for MOEs is derived from Vietnam's military doctrine, which emphasizes self-reliance for critical warfighting production. However, our discussions suggest that MOE activities go far beyond defense industries and are equally important as a source of financing for the military. This sector also reflects the Communist Party's policy of maintaining the "leading role" of the State-owned sector in the national economy. As with SOEs, MOE managers see the merits in equitizing smaller subsidiaries, but do not foresee the equitization of MOE holding companies or any changes to the fundamental ownership structure of the Ministry of Defense. And like the SOEs, resistance to reform and privatization appears to be driven as much by management self-interest as by ideology. End Summary. The Reach of Military Owned Enterprises -------------- ¶2. (SBU) The Department of Economics of the Ministry of Defense (MOD) lists 141 military-owned enterprises (MOEs). This is not an all inclusive list. The number of MOEs is likely much higher, depending on source material and how individual entities are classified. According to Mr. Duong Cong Minh, a partner of Him Lam Company, a private firm with significant MOD contacts, the military owns small, medium and large companies. The MOEs operate in fields in line with the military's doctrine of self-reliance including agriculture, construction, telecommunication, and textiles, but their output is not limited to military goods or military customers. Most of these companies market products and services in multiple sectors. Per refs B and C, the relationship between MOEs and the MOD is complex. Not all MOEs fall under the General Departments of the MOD; some fall under regional military commands or branch commands. (Note: Him Lam participates in several large-scale projects involving military-owned properties and Mr. Minh, owner of Him Lam, a former member of the military, is said to have high level family contacts within the MOD. End Note) ¶3. (SBU) According to Minh, the MOD's role in the Vietnamese economy can be broken down into several broad categories: --ammunition and most weapons are produced by MOD-owned and MOD-operated facilities that do not follow SOE laws and regulations; --MOEs whose activities have dual-use applications, such as explosives producers; and, --enterprises without any clear national security purpose, such as hotels and construction firms. While MOEs such as printing houses are not traditionally identified as national security-related industries, they are often classified as such. By being included as national security exemptions, these MOEs can avoid equitization and remain wholly controlled by the MOD. The Financial Relationship Between MOEs and the MOD -------------- -------------- ¶4. (SBU) Our contacts at the Saigon New Port and Him Lam Company tell us that some MOEs contribute a portion of their earnings directly to the MOD, although they all pay taxes to the GVN. MOEs, like SOEs, are exempt from paying rent when occupying MOD properties, a cost-saving advantage over private enterprises. Rent exemption, as an indirect subsidy to MOEs, deprives the GVN of rental income normally gathered when private companies operate on MOD owned properties. ¶5. (SBU) For example, Lt. Col. Tran Khanh Hoang, manager of the Operation and Planning Department of MOE Tan Cang, or Saigon New Port (SNP),told us that his company pays "less than five percent of total revenue" directly to the MOD. SNP is one of Vietnam's leading container terminal operators. In 2005, SNP's container volume reached 1,086,242 TEUs (twenty-foot equivalent units) or approximately 40 percent of the national market. A U.S. naval facility during the Vietnam War, the complex was underexploited and in disrepair until 1989, when the GVN established SNP and granted it use of the port's property and facilities. HO CHI MIN 00000957 002.2 OF 002 ¶6. (SBU) According to these contacts, the MOD does not exercise direct influence over the operation and management of MOEs. For example, the GVN and MOD have given SNP relative freedom with regard to daily operations, management, and even long-term planning, allowing it to function as a traditional commercial enterprise. By comparison, HCMC municipal authorities play a much larger role in the planning and strategic development of the Saigon Port Authority, often complicating matters and hindering foreign investment (ref A). ¶7. (SBU) Mr. Minh of Him Lam told us that one of the primary sources of off-budget revenue for the MOD comes from land and property rents. The MOD contracts the management of its designated commercial properties to separate management companies, and these third-party entities receive 10 percent of the total rent. The real estate market in Vietnam has experienced a boom over the past several years, fueling demand for property and elevating average real estate prices. Real estate management contracts, often large in value, are awarded at the discretion of the MOD. As with other SOEs, lack of transparency in awarding contracts provides ample opportunity for graft. Corporate Structure of MOEs -------------- ¶8. (SBU) According to the MOD's Department of Economics website, MOEs vary in size and structure. Some have a specific manufacturing base, but many operate multiple subsidiary companies. Company 32, also know ASECO, is the MOD's "showcase" enterprise, and is included on every official U.S. military college visit to southern Vietnam. ASECO has six subsidiaries specializing in the production of footwear and garments and is one of the companies specifically mentioned in the EU's anti-dumping case on shoe imports from China and Vietnam. The company has 5,000 employees and is managed by a team of twelve military officers. These officers continue to belong to the General Department of Logisitics chain of command, but they are paid by the MOE. According to Mr. Nguyen Xuan Binh, Deputy Director of Company 32, many of these officers have been at the company for several years, with no intention of returning to active duty and lower MOD salaries. ¶9. (SBU) Other companies such as Thasimex (or Thaison) operate a broad range of entrepreneurial activities, including joint-ventures with foreign-owned enterprises. These firms resemble holding companies with many independent operating subsidiaries, often horizontally and/or vertically integrated with each other. Compared with ASECO's 5,000 employees, Thasimex officials told us that they employ only 1,000 workers, but the company has greater capitalization and is financially stronger. According to Deputy Director Dr. Pham Gap, Thasimex subsidiaries operate in construction, chemical and fertilizer production (including a joint venture with the Norwegian firm Yara); real estate development (including the Long Binh Hi-Tech Park in association with a Japanese company); educational training centers; and even include a supermarket in Russia. Each of these entities functions independently, with Thasimex holding majority stakes in each subsidiary. Dr. Gap noted that Thasimex hoped to equitize some of its smaller companies in the future. Dr. Gap said that the MOD has no plans to change its relationship with Thasimex, despite the claim that the company does not directly contribute revenue to the MOD. ¶10. (SBU) Comment: ConGen's contacts with the military establishment in southern Vietnam are limited and our discussions are generally anodyne. MOD officials in HCMC have rebuffed overtures to discuss the role of MOEs. While the information provided by our contacts modestly expands our understanding of the role of these enterprises, it is noteworthy that the discussions are happening at all. The overall impact of MOEs on the Vietnamese economy remains opaque, but the MOD is clearly influential in key sectors of the economy, including telecom and infrastructure. The MOD is likely to resist equitization of MOEs, using national security exceptions as its justification, and also following Party directives to protect the "leading role" of the State-sector in the economy. The MOD's self-reliance doctrine is used to justify MOD holdings in non-defense sectors even as other SOEs in those sectors equitize. As in all SOEs, MOE managers have defacto ownership of their firms and can profit handsomely from their positions. End Comment.WINNICK