VIETNAM BUSINESS FORUM: ENTERPRISES DIALOGUE WITH GVN ON

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SUBJECT: VIETNAM BUSINESS FORUM: ENTERPRISES DIALOGUE WITH GVN ON
ECONOMIC DEVELOPMENT NEEDS

(U) THIS CABLE IS SENTSITIVE BUT UNCLASSIFIED. DO NOT POST ON THE
INTERNET.


1. (SBU) Summary: During the May 30 Mid-Term Vietnam Business Forum,
timed in connection with the June 1 Mid-Term Vietnam Consultative
Group Meeting, foreign and domestic trade associations held a
dialogue with the Government of Vietnam (GVN) on ways that Vietnam
can capitalize on recent economic successes and continue to improve
its business and investment climates. Business community
representatives consistently delivered messages on the need for the
GVN to: improve human resource development and training activities;
accelerate infrastructure development; fully implement its WTO
commitments on market access; continue banking and financial sector
reforms; and, improve transparency and good governance practices.
The GVN responded to these concerns by reaffirming its commitment to
continue institutional reforms and implementation of its
international commitments to meet the demands of the international
and domestic business communities. End Summary.


2. (U) At the May 30 Mid-Term Vietnam Business Forum (VBF) Meeting
in Hanoi, timed to coincide with the mid-term donor Consultative
Group meeting, the Government of Vietnam (GVN) exchanged views with
domestic and foreign trade associations on how Vietnam can
capitalize on its recent economic success, including its January
2007 accession to the World Trade Organization (WTO),to increase
trade and investment opportunities and sustain strong economic
growth. In addition to a session for trade associations to present
their perceptions of the investment climate here, the Forum
discussed: banking and capital markets; implementation of WTO
commitments; implementation of the Enterprise and Investment Laws;
and, heard reports from the Port, Tourism and Mining Working Groups.



3. (U) The GVN side, led by Minister of Planning and Investment Vo
Hong Phuc (who also served as VBF Co-Chairman),confirmed Vietnam's
commitment to continue improving the business environment, including
expanded market access and financial and banking sector reforms.
These measures will be critical to helping Vietnam reach its goal of
becoming a middle income country by 2010, Minister Phuc said.


4. (U) Forum Co-Chairs Martin Rama, Acting World Bank Country
Director, and Mr. Sin Foong Wong, International Finance Corporation
(IFC) Country Manager, commented in their opening remarks that this
20th meeting of the VBF provided an opportunity for the GVN and the
business community to discuss what is needed to bring Vietnam even
further along its path of economic development. Acknowledging the
progress made as Vietnam pursued WTO membership, Rama noted that
more complex and challenging reforms will be required for Vietnam to
continue to the next stage of economic development. Referencing the
day's discussion agenda, the Co-Chairs said that Vietnam will need
to follow through on its WTO commitments, continue financial sector
reforms and upgrade its infrastructure if it is to overcome the next
set, or "second generation," of challenges and issues as it
continues the transition to a market economy.

BUSINESSES REVIEW VIETNAM'S INVESTMENT CLIMATE
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5. (SBU) In the opening session of the forum, foreign and domestic
trade associations raised concerns and issues on behalf of their
members. Throughout the session, speakers noted their appreciation
for the opportunity to dialogue with the GVN through the VBF, while
encouraging even closer coordination as Vietnam works through new
challenges and seeks to capitalize on the opportunities of its WTO
membership. Notably, representatives from several Vietnamese trade
associations, including the Ho Chi Minh City Association of Garment,
Textile, Embroidery and Knitting (AGTEK),the Can Tho Business
Association and the Hanoi Young Business Association joined their
international counterparts in expressing concerns and requesting GVN
action to improve the business climate. (Note: AGTEK also used
part of its five minutes to decry the U.S. Department of Commerce's
apparel import monitoring mechanism, stating that the program is
"illogical" in its nature. End note.)


6. (U) HUMAN RESOURCES: Participants consistently raised the
shortage of adequately trained human resources as a restraint to
further economic development. Many firms are struggling to hire and
retain skilled professionals, particularly at the mid-management
level, business representatives explained. The Eurocham
representative stated that the private sector and the GVN must work

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cooperatively to find solutions for this problem. Participants
raised several suggestions, including calling on the GVN to lift
restrictions on the establishment of foreign-invested education and
training institutions, establishing a public-private committee to
review the workforce development issue and increased GVN support to
provide professional education and skills training.


7. (U) INFRASTRUCTURE: Vietnamese and foreign trade associations
consistently raised the need to accelerate infrastructure
development, particularly seaports and electricity supply.
Businesses described how the current infrastructure system is
insufficient to keep up with the growing volume of exports and the
expected increase in demand as Vietnam's economy continues to open -
threatening future foreign direct investment (FDI). The AmCham
representative encouraged the GVN to open infrastructure development
to more private sector participation. A Ministry of Transportation
official responded that the GVN has set up an inter-ministerial
committee to examine infrastructure problems, noting also that the
GVN has made a determination to transfer some development projects
from state-owned enterprises (SOEs) to the private sector as a way
to address Vietnam's infrastructure needs.


8. (SBU) IMPLEMENTING WTO COMMITMENTS: A number of participants
urged Vietnam to meet its WTO obligations as soon as possible,
particularly its commitments on trading and distribution rights.
The Amcham, Eurocham and AusCham speakers each raised the need for
the Ministry of Trade (MOT) to issue implementing guidance on
trading rights for foreign invested enterprises (Decree 23) as soon
as possible. Citing the example of how the Ministries of Trade
(MOT) and Industry (MOI) worked with the U.S. business community to
develop an apparel export licensing system, the Amcham
representative, Jocelyn Tran, expressed the hope that the GVN would
also work with the business community to develop effective,
WTO-compliant policies in other areas. (Note: Ms. Tran's
presentation included an encouragingly positive picture of the state
of U.S.-Vietnam bilateral apparel trade, stating that MOT's export
license system has helped to "preserve" apparel trade "despite
Commerce's Import Monitoring Mechanism," with apparel exports in the
first four months of 2007 up more than 20 percent over last year.
The U.S. industry as a whole does not necessarily share Ms. Tran's
view of the effectiveness, desirability or utility of export
licenses. End note.)


9. (SBU) TRANSPARENCY AND CORRUPTION: Many speakers raised concerns
over corruption and weak or opaque legislative reforms. One
representative characterized corruption as "one of the greatest
concerns" among foreign firms looking to do business in Vietnam.
Domestic trade associations also called on the GVN to improve
transparency. In its submitted statement, the Hanoi Young Business
Association said that "Vietnamese corporate governance is
inappropriate," for foreign companies, noting that Vietnam still
lacks transparency and reliability in meeting its international
commitments.

JAPANESE SURVEY IDENTIFIES HIGH INVESTMENTS COSTS
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10. (U) In a presentation of its findings from a November 2006
survey of 30 major cities in Asia, the Japan External Trade
Organization (JETRO) concluded that while in many categories Vietnam
remains a competitive destination for investment, there are several
areas where costs here are much higher than other cities in the
region. For one, mid-level management wages are higher than the
regional average, largely due to a shortage in supply. Vietnam also
has the second highest costs for office rent of the 30 areas
surveyed, behind only Singapore, highlighting the need for
additional office space. Finally, the JETRO survey stated that
higher-than-average telecom costs must also be addressed to improve
Vietnam's competitiveness as an investment destination.

FIRMS ADVOCATE FOR INTERNATIONAL BANKING PRACTICES
-------------- --------------


11. (U) The VBF Banking Working Group (BWG) recognized the State
Bank of Vietnam (SBV) for its progress in passing regulations in the
banking sector. Working Group Chair Charly Madan (Citigroup Country
Officer Vietnam) noted, however, that Vietnam still has more work to
do to bring banking regulations in line with international practices
and its WTO commitments, especially in achieving a level playing
field for foreign and domestic banks. One area requiring more work

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is the foreign exchange system, according to Madan, who urged
Vietnam to conduct a comprehensive review of regulations governing
foreign exchange transactions. The Vietnamese legal system should
also recognize and apply international law to cross-border
transactions, said the BWG speaker, commenting that foreign banks
need access to the court system rather than settling disputes
through arbitration, which is the current practice. SBV Deputy
Governor Phung Khac Ke responded that the SBV will issue further
implementing documents on foreign exchange transactions soon and
will continue its work to ensure the banking sector is
WTO-compliant.

CAPITAL MARKETS: MORE COORDINATION NEEDED FOR STABILITY
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12. (U) The Capital Markets Working Group called for better GVN
inter-agency coordination and cooperation to ensure stability and
guard against possible risks in the face of rapid growth of the
capital market in Vietnam. The Working Group was pleased with the
progress the GVN has made in licensing more than 100 institutions to
participate in the capital markets here, but cautioned that the GVN
must regulate these licensed entities appropriately in order to
protect investors. The Working Group also suggested that the GVN
consider allowing private firms to raise capital through issuance of
corporate bonds (SOEs can already issue bonds). Finally, the GVN
should provide incentives for long-term mobilization of funds in the
market, said the Working Group speaker. One measure to accomplish
this would be to allow non-state employers to set up retirement or
provident funds, he continued.


13. (U) Vice Minister of Finance Tran Xuan Ha agreed that
inter-agency coordination will be critical to ensure market
sustainability. He also noted that the MOF has issued regulations
to govern bond issuance by private firms, and advised that it is in
the process of establishing credit rating agencies so that
enterprises can evaluate their risk before issuing bonds. Finally,
VM Ha noted that given the rapid institutionalization of the capital
markets, the GVN must be diligent in ensuring that these
institutions are transparent. He also suggested that these new
organizations will need to focus on staff training and development.

ONGOING WTO IMPLEMENTATION CONCERNS
--------------


14. (SBU) Fred Burke, speaking on behalf of the Manufacturing and
Distribution Working Group, raised a number of ongoing concerns over
Vietnam's implementation of its WTO commitments. Worried about what
Burke called the proliferation of requirements for "baby permits,"
the Working Group urged Vietnam to issue guidance to implement
Decree 23 on Trading Rights for Foreign-Invested Enterprises as soon
as possible. Foreign companies are not able to receive their
licenses for trading rights until these regulations are completed,
causing a significant delay in their ability to avail themselves of
their rights under the WTO, said Burke. The Working Group also
asked the GVN to clarify licensing procedures for foreign trading
branches, as no licenses have been issued to date.


15. (U) The Working Group suggested that the GVN should use the
criteria in Vietnam's Investment Law to distinguish between foreign
and local companies, meaning that if a company is 51 percent owned
by a Vietnamese national, it should be treated as a local company.
They also encouraged Vietnam to view its WTO commitments as a
"floor" and not a "ceiling," encouraging market liberalization above
and beyond commitments made as part of the WTO accession process.
Finally, the Working Group noted that Vietnam has instituted a
number of "impediments" to trading activities, including requiring
an Economic Needs Test and instituting burdensome requirements for
foreign representative offices to re-register.


16. (U) MPI's Legal Department Director General Pham Manh Dzung
explained that MPI is drafting a decree to implement some of
Vietnam's WTO commitments, which they have shared with the business
community through the VBF. Dzung said that this document would
recognize the principle that Vietnam's WTO commitments are a "floor"
and would provide flexibility for sectors to open earlier or provide
more favorable treatment than provided in the WTO Agreement, if the
GVN so decides. On the issue of representative office
re-registrations, he agreed that MPI experienced some "initial
problems," but it has instructed local authorities to proceed with
registrations, and consult with the MPI if they have any questions.

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He said that following this guidance, re-registrations are "going
better" but that MPI may consider extending the window to give
enterprises sufficient time to complete the process.


17. (U) Ministry of Trade's Multilateral Trade Department Director
General Tran Quoc Khanh welcomed the business community's comments,
and reaffirmed Vietnam's seriousness to implement fully its WTO
commitments. On implementing guidance for Decree 23 on trading
rights, he explained that its issuance has been delayed due to the
"complexity" of the commitment, but assured the VBF that it would be
issued very soon. Khanh continued by reminding the audience that
Vietnam distinguishes between import rights and distribution rights,
and they are working to make this distinction clear in the draft
regulation. Responding to concerns over Vietnam's Economic Needs
Test requirement, Khanh explained that this is intended to protect
Vietnam's many small retailers from being forced out of business.
Finally, DG Khanh said that on foreign trading branches, businesses
should refer to Decree 72, which provides guidance on this issue.
He continued by stating that Vietnam's WTO commitments do not
require it to allow trading branches in many areas, including
distribution services and advertising, for example.

IMPLEMENTING THE INVESTMENT AND ENTERPRISE LAWS
-------------- --


18. (U) Mr. Tran Anh Duc from the Manufacturing and Distribution
Working Group presented a laundry list of areas where it sought
further work by the GVN to clarify implementation of the Enterprise
and Investment Laws. The Working Group requested additional
guidance on:

-- Vietnam's Decree 108 providing guidance on activities in
Vietnam's conditional sectors.

-- Converting Business Cooperation Contracts (BCCs) into Joint
Ventures.

-- Operational aspects of enterprise activities, including
qualifications of a company director and managers.

-- Loosening restrictions in Article 84.5 of the Investment Law on
transferring shares of local firms to foreign investors.


19. (U) MPI's Legal Department DG Dzung reported that his ministry
is drafting additional guidance to address all of these concerns,
except conversion of BCCs into Joint Ventures. He explained that
guidances provided under the Investment and Enterprise Laws already
address this process, but he agreed to review them one more time to
ensure that they are complete.

PORTS, TOURISM AND MINING WORKING GROUP PRESENTATIONS
-------------- --------------


20. (U) Representatives from the Port, Tourism and Mining Working
Groups all discussed the progress they have made through
consultations with the relevant GVN agencies, but pushed for
continued coordination in the future. The Ports Working Group
largely reiterated concerns raised earlier about the need to
accelerate infrastructure development in Vietnam. The Tourism
Working Group noted that Vietnam faces several obstacles to keep
apace of growing tourism demand, including improving service quality
and developing more hotels and better transportation systems to
facilitate the needs of foreign and domestic tourists. On a less
positive note, the Mining Working Group lamented that Vietnam's
mineral potential will remain largely untapped unless the GVN adopts
a more open and welcome policy for foreign investors in this sector.


CLOSING REMARKS
--------------


21. (U) In his closing remarks, Planning and Investment Minister
Phuc noted his appreciation for the valuable contributions of the
business community during the Business Forum. He committed to
ensuring the GVN's continued implementation of its market access
commitments and work on institutional reforms to meet the demands of
the international business community, but noted that Vietnam "can't
do everything overnight." The World Bank's Martin Rama closed by
summarizing the common themes raised throughout the meeting - market
access, financial sector reform, human resource development and

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infrastructure needs - noting that these were all "challenges driven
by Vietnam's own success." He expressed confidence that ongoing
cooperation through the VBF would contribute significantly to
meeting those challenges.

MARINE