Cablegate: Staffdel Gudes Talks Budgeting in Hcmc

VZCZCXRO0327
RR RUEHDT RUEHPB
DE RUEHHM #0879/01 2390111
ZNR UUUUU ZZH
R 270111Z AUG 07
FM AMCONSUL HO CHI MINH CITY
TO RUEHC/SECSTATE WASHDC 3025
INFO RUCNARF/ASEAN REGIONAL FORUM COLLECTIVE
RUEHHM/AMCONSUL HO CHI MINH CITY 3232

UNCLAS SECTION 01 OF 03 HO CHI MINH CITY 000879

SIPDIS

SENSITIVE
SIPDIS

STATE FOR EAP/MLS BLACKSHAW, USTR FOR DBISBEE, H FOR JCHARTRAND

E.O. 12958: N/A
TAGS: ECON EFIN OTRA OVIP VM
SUBJECT: STAFFDEL GUDES TALKS BUDGETING IN HCMC

HO CHI MIN 00000879 001.2 OF 003

1. (SBU) Summary: During an August 14-15 visit to Ho Chi Minh
City (HCMC), Senate Budget Committee Minority Staff Director
Scott Gudes and Committee Chief Economist Daniel Brandt
discussed bilateral relations (touching on U.S. assistance) with
the HCMC External Relations Office, U.S. trade and investment
with the HCMC American Chamber of Commerce, and municipal
funding mechanisms and long-term growth strategies with the HCMC
People's Committee and HCMC Institute for Economic Research.
Topics discussed ranged from Vietnam's process for meeting WTO
commitments to HCMC's new rules for assisting poor residents
dislocated by urban renewal projects. The visit yielded a
number of insights into HCMC's challenging budgeting process and
provided an outstanding peer-to-peer opportunity to share
insights. End summary.

American Chamber of Commerce
----------------------------
2. (SBU) American Chamber of Commerce (AmCham) Executive
Director Herb Cochran began by describing both his organizations
membership (400 members: 50 percent U.S. companies, 40 percent
multinational and 10 percent Vietnamese) and HCMC's unique
economic role in Vietnam. With roughly 7 percent of the
population (officially), HCMC accounts for 21 percent of
Vietnam's GDP, 30 percent of industrial output, one-third of
state budget revenues, 38 percent of exports, two-thirds of
international departures, and 70 percent of container traffic.

3. (SBU) Asked about AmCham's overall assessment of Vietnam's
progress in implementing WTO obligations and the accompanying
legal framework, Cochran replied that Vietnam has adopted more
than eighty laws and decrees to implement its WTO obligations
and has generally followed a very transparent process, actively
soliciting industry comment on most draft legislation and then
acting upon suggestions offered. Cochran noted, however, that
AmCham's members are not happy about all aspects of the WTO
accession process and that trading and distribution rights
currently top AmCham's action agenda. Cochran noted generally
that the GVN has been unclear about how it plans to implement
its WTO commitments in this area and that GVN officials argue
that rapidly opening up the retail sector to international
competition will destroy domestic retail companies. While he
highlighted this issue, Cochran also acknowledged that not all
U.S. companies retailing in Vietnam have trading/distribution
rights problems.

4. (SBU) Asked about the challenges facing U.S. firms in
Vietnam, Cochran first mentioned corruption. He noted that
Korean, Taiwanese, and Japanese companies seem to have fewer
problems because the OECD anti-bribery convention they are
subject to is not as restrictive as U.S. rules. He added that
corruption is not the only way to lock in a role in major
projects, noting that an abundance of official development
assistance (ODA) enables the Japanese, in particular, to lock up
big infrastructure projects like the planned HCMC subway. The
last major challenge Cochran noted originated purely in the USA.
He believes that changes to U.S. tax policy for professionals
living overseas (including classifying housing allowances as
income) mean that many flagship U.S. companies (e.g., 3M,
Proctor and Gamble and IBM) have shifted to non-American
managers in Vietnam.

External Relations Office: Role of U.S. Assistance
--------------------------------------------- ------
5. (SBU) External Relations Office (ERO) Deputy Director Le Hung
Quoc explained that his office is the foreign affairs advisor to
the HCMC People's Committee and the southern branch of the
Ministry of Foreign Affairs. The HCMC ERO has two sections and
20 staff working on issues relating to the United States and the
U.S. Consulate. StaffDel Gudes described the 1995 normalization
debate from the Senate staff perspective, noting the importance
that POW/MIA issues played at that time. Quoc replied that now
we face more opportunities than challenges, adding that progress
in U.S.-Vietnam relations is slower than Vietnam's progress with
other countries though we are working hard to narrow the gaps.
Quoc also said that the GVN is working to lift the living
standard of its citizens, to address rural/urban inequality, and
to raise the awareness of overseas Vietnamese about current
conditions in Vietnam.

6. (SBU) Quoc said that Vietnam faces human resource and capital
constraints. Vietnam receives a lot of aid, including from the
United States, with the Vietnam Education Foundation (VEF) and
Fulbright programs helping Vietnam develop human resources and
the Support for Trade Acceleration (STAR) program helping
Vietnam to play by the rules of the WTO. He added that the
President's Emergency Plan for AIDS Relief (PEPFAR) also
addresses critical needs in Vietnam. Gudes agreed that Vietnam
needs to address human resources problems, noting that when he
ran the National Oceanic and Atmospheric Agency (NOAA) human
resources were also his priority.

HO CHI MIN 00000879 002.2 OF 003

People's Council - Paying for the Future
----------------------------------------
7. (SBU) StaffDel called on Budget Sub-Committee of the People's
Council of HCMC Vice Chairman Nguyen Minh Hoang, who explained
that the sub-committee advises the People's Council on
development and infrastructure issues. Hoang noted that HCMC is
growing faster than the rest of Vietnam. He estimated 12.5
percent in 2007, as opposed to 8.5 percent for the country as a
whole. Hoang stated that this is in no small part because
public administration reforms are going well in HCMC.

8. (SBU) Hoang said HCMC is reviewing and adjusting its urban
planning-land zoning approach (originally drafted in 1998) and
recently produced a report on urban development plans through
year 2020. The GVN and HCMC governments are reviewing
compensation rates for land and developing new support
mechanisms (e.g., vocational training) to assist low-income
residents displaced by urban redevelopment projects. Hoang said
public health care, education and training, urban traffic
systems and environmental protection are also big challenges,
adding that increased cooperation and investment would be
welcome in any of these.

9. (SBU) Hoang outlined HCMC's budget development process,
saying HCMC will collect 78,000 billion VND ($4.8 billion USD)
in tax revenue this year, which is more than 30 percent of the
official State budget. The central government is placing an
increasing tax burden on HCMC because it is the nation's
wealthiest city and the primary engine of Vietnam's economic
growth. While the city government is responsible for collecting
tax funds, it is allowed to retain only 26 percent of the
revenue for the HCMC budget. Hoang said the budget process
starts in August when The People's Council develops a draft city
budget based on its own internal review as well as negotiations
with the Ministry of Finance and National Assembly. In
practice, most details are worked out with Ministries before the
budget reaches the National Assembly, whose main role is to
adjust provincial/municipal budgets to reflect national
development priorities.

10. (SBU) Hoang noted that HCMC has 2 million unofficial
migrants and asked Gudes for advice in addressing public health,
sanitation, education and public transport needs of these
unofficial residents. Gudes responded that a combination of
Federal, State and Local government programs and approaches help
the United States address both national disasters and the stress
that migration puts on local systems.

Institutive for Economic Research
---------------------------------
11. (SBU) StaffDel Gudes met with HCMC Institute for Economic
Research (IER) President Tran Du Lich, a National Assembly (NA)
member and member of the NA Committee for Economic Affairs.
Senior Economist Brandt suggested leveraging Vietnam's high
domestic savings rate for development through domestic savings
bonds. Lich agreed, stating that HCMC began issuing domestic
savings bonds in 2003. The city currently has 8,000 billion VND
(USD $500 million) in mid- and long-term bonds outstanding. Of
those, 80 percent are held by institutions and 20 percent by
individuals. He added that a central government cap on
international bond issuances by HCMC means that the city can't
rely on overseas financing for infrastructure projects.

12. (SBU) When Gudes asked Lich about the National Assembly's
budget oversight role, Lich described the operation of Vietnam's
system of maintaining a single, central budget. The overall
budget process starts with budget data (both projected revenues
and projected expenditures) collected from provinces and is
negotiated with the Ministry of Finance (MOF) before being
forwarded to the National Assembly (NA) for final action and
approval. In the end, the budget for each of the 64 provincial
and municipal governments is allocated by the central government
back to the provinces from whence it came. When negotiating its
own budget contributions, the HCMC People's Committee negotiates
with the Ministry of Finance (MOF) on such key variables as GDP
growth and estimates of revenue (e.g., import taxes, income
taxes, and property taxes) to be collected by the municipality.
Once negotiations with MOF are finished, the budget data goes to
the Budget Committee of the NA. Most changes are implemented by
the committee before the budget is forwarded to the entire NA
for approval. In general, the NA changes only those funding
requests affecting national priorities. Once the process is
finished and total expenditures for a province/municipality are
allocated by the central government, the provincial governments
decide how to spend funds according to MOF regulations governing
expenditures (e.g., civil service salaries generally follow an
MOF schedule).

13. (SBU) Lich said for 2006 and 2007 HCMC expenditures as a

HO CHI MIN 00000879 003.2 OF 003

percentage of total revenue collected was set at 26 percent, so
that for every $100 of revenue collected, $74 goes to other
provinces. He noted that HCMC is allowed broader authority than
many other provinces. For example, the city can borrow up to
100 percent of the value of its annual budget investment capital
while other provinces are capped at 30 percent. HCMC has also
been the beneficiary of ODA (e.g., $1 billion USD for a
Japanese-built highway or $20 million USD for World Bank
community water projects) that provides investment funds over
and above those included in its annual budget.

14. (SBU) Lich said that over the course of the budget process,
the people of HCMC have various opportunities to learn about the
budget. They also have opportunities to comment on the budget
when the HCMC People's Council debates it. Lich said rural
constituents typically lambaste the People's Council for
neglecting rural roads and city dwellers criticize the Council
for not spending enough money on city services such as
education.

Comment
-------
15. (SBU) StaffDel Gudes provided an outstanding peer-to-peer
opportunity to better understand the HCMC municipal budgeting
process. Chief economist Brandt observed that HCMC's
disproportionate contribution to Vietnam's State budget may yet
constitute a catalyst for political change. There are only 23
HCMC representatives on the 498 person National Assembly yet
HCMC accounts for over 30 percent of State revenues. The
widening economic gap between HCMC and other provinces may
provide additional impetus for future political change as other
provinces seek to mimic the city's formula for success.

This cable was coordinated with Embassy Hanoi and StaffDel was
given an opportunity to comment. End Comment.
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