VZCZCXRO4026
RR RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHHI #1817/01 2921008
ZNR UUUUU ZZH
R 191008Z OCT 07
FM AMEMBASSY HANOI
TO RUEHC/SECSTATE WASHDC 6548
INFO RUEHHM/AMCONSUL HO CHI MINH 3832
RUCNASE/ASEAN MEMBER COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
UNCLAS SECTION 01 OF 03 HANOI 001817
SIPDIS
SENSITIVE
SIPDIS
STATE PASS USTR FOR DBISBEE
E.O. 12958: N/A
TAGS: ECON EAID EIND EINV ETRD OTRA PGOV VM
SUBJECT: VIETNAM'S REGIONAL OVERVIEW: THE CENTER PLAYS CATCH-UP
REF: HCMC 921 (East-West Corridor)
HANOI 00001817 001.2 OF 003
THIS CABLE IS SENSITIVE BUT UNCLASSIFIED. NOT FOR INTERNET.
1. (U) Summary: Central Vietnam understands that it needs to
improve its competitiveness or risk falling further behind the
booming urban clusters of Hanoi and Ho Chi Minh City. A visit to
three central provinces showed the difficulties in assembling the
necessary components of a successful investment strategy. The slow
flow of investment thus far, despite infrastructure development and
incentives, has local authorities scratching their heads. There are
encouraging signs that, at least in one of the provinces, the pace
is picking up. End summary.
2. (U) Members of the economic sections of both the Embassy and the
Consulate General are visiting various provinces to get a better
picture of economic development through Vietnam. With this cable,
we launch a series on Vietnam's provinces and regional
competitiveness. From October 9 to 11, we traveled to the provinces
of Quang Nam, Quang Tri and Thua Thien - Hue in central Vietnam to
discuss the development and investment strategies at each place with
regional government, NGOs and the private sector.
3. (U) Economic development in central Vietnam has historically
lagged behind the north and south. As many leading indicators show,
this is still the case. Poverty rates in the central region exceed
30%, and in the north-central region we visited, they are even
higher. Average wages are almost half of the national average, and
incomes a third lower. Almost a third of all the children in one of
the provinces we visited suffer from malnutrition, according to an
international NGO active in the area.
4. (U) Against this backdrop, there are positive signs. The
provincial administrations, whose top leadership are appointed by
Hanoi, are full of young reformers and technocrats. The central
government and the Asian Development Bank have spent lavishly in an
"East-West Corridor" that links ports in Central Vietnam to the road
networks of Laos, Thailand and Burma (Reftel). Some central
provinces have been inching up in the USAID-funded Provincial
Competitiveness Index, including Danang, which received the second
highest marks in the 2006 survey. (The 2007 Index is expected to be
released on November 8.
ENTICING INVESTMENT: BUILD IT, BUT WILL THEY COME?
--------------------------------------------- ---
5. (U) The three provinces we visited on this trip have pinned their
hopes of drawing in investors with newly-built infrastructure
projects and low-cost incentives. Thua Thien - Hue ("Hue"), for
instance, touts the Chan May - Lang Co economic zone, which consists
of 27,000 hectares of cheap land smack in the middle of the
East-West Corridor. Hue provides investors with a guaranteed low
corporate tax rate of 10% for 15 years and taxes below the national
rate of 29% for the following decade. The zone's managers claimed
that at $20 per square meter, their industrial land is about a
fourth cheaper than their competitors' in the industrial areas
around Ho Chi Minh City (HCMC). In addition, Hue's Chan May offers
a new deep-water seaport, which is able to handle 30 ton-capacity
ships (and in the near future up to 50 tons).
6. (U) Quang Nam and Quang Tri's economic zones offer even more
competitive incentives. Quang Nam's Chu Lai and Quang Tri's Lao Bao
do not charge for land at all during the first decade of operation,
and cap rent for decades thereafter. After the first 10 years, Chu
Lai applies a monthly rent of $0.25 per square meter for the next 40
years; and after the first 11 years in Lao Bao, rent is fixed
indefinitely at 30% of the average cost of rural land rentals in
Quang Tri. Taxes are also capped, at 10% in Quang Nam for the first
decade and a third of the national rate for the next 30 years. In
Lao Bao, Quang Tri offers four years of tax exemption, followed by 9
years at 15%, and 10% indefinitely thereafter. All goods sold in
Lao Bao are not subject to value-added tax and all imports can enter
the zone duty-free. If the goods leave the zone and enter the rest
of Vietnam, however, the tax and duty exemptions disappear.
7. (U) Hue and Quang Nam have fared much better at attracting
investment than Quang Tri. The former two are already the sixth and
tenth most successful provinces in the nation this year with $553
million and $207 million of registered investment, respectively.
Quang Tri, on the other hand, trails all other provinces in the
country with a paltry $20,000 of investment in 2007, according to
Vietnam's Office of General Statistics.
THE CHALLENGES
--------------
8. (U) The three provinces face significant challenges, some common
to all, others due to intrinsic conditions, and others of their own
HANOI 00001817 002.2 OF 003
making. Quang Nam's industrial zone is built up and ready to go,
but poor access roads and even worse port facilities choke off its
access to the mainstream economy. Hue, which has roads and ports,
has no budget to build up its own zone. Quang Tri expected to
benefit from cross-border trade that never materialized.
TOO LITTLE OR TOO MUCH INFRASTRUCTURE
-------------------------------------
9. (U) A recurrent problem we noticed was the lack of a good match
between infrastructure supply and demand. Whereas Hue and Quang Tri
had plenty of underutilized infrastructure, Quang Nam was in
desperate need of good access to suitable ports. Despite having
spent $750 million to modernize its Vietnam war-era airport, it is
still unable to accommodate anything larger than twin-engine
propeller planes and none capable of transporting cargo. Quang
Nam's port is another legacy from the war, lacking cranes or
machinery, and unable to receive any ship over seven tons. Most
exporters opt to ship out from the larger port of Danang, only 32 km
away but accessible only by a congested and badly maintained
one-lane road.
10. (SBU) Poor infrastructure planning also hinders investment.
Hue, for example, began development on the housing and tourism parts
of its Chan May Park around an aging industrial park that contains
wood chip and paper factories. The park developers hoped that these
notoriously polluting factories would somehow be persuaded to leave
or switch to cleaner methods of production, and that "cleaner"
industries would move in to replace them. So far, this wish for
transformation has not happened.
11. (SBU) The park currently has little supporting infrastructure to
offer prospective businesses and its managers could not articulate
how they intended to attract better investors. As a result of
expenditures on the non-industrial projects and because of limited
funding, the construction budget for Chan May will run out by the
end of 2007 with the industrial zone still lacking an electrical
grid or water system, or with the land not even cleared or leveled.
The park managers told us that they would resort instead to finding
investors to develop the industrial park's infrastructure.
12. (SBU) Another anomaly is that Hue and Quang Tri's brand-new
roads, ports and real estate developments are, for the most part,
underutilized. The Lao Bao East-West Corridor Gateway on the Quang
Tri side of the border with Laos is virtually derelict, with a few
mom-and-pop shops selling cheap household goods and fake watches
taking up the space of what was once intended to become a burgeoning
shopping center. The adjacent economic zone, which opened to much
fanfare in 1999, has attracted only a handful of investors, mostly
in the retail sector, and a boom in cross-border traffic has failed
to materialize (merely 300 vehicles cross the border daily, from 150
in 1999).
13. (SBU) The port of Danang itsef is operating under capacity.
While it is a modern facility that can berth cargo vessels of up to
30,000 tons, its low volume increases the time it takes to fill a
ship. A Danang seafood exporter, for example, prefers to make the
two-day drive to the ports in HCMC, where his goods can get to Japan
in six days, rather than wait the 13 days that it would take if he
were to ship out of Danang. This does not bode well for Hue's hopes
for the Chan May deep water port, just an hour north of Danang.
SKILLED LABOR: KEEPING AND LURING GRADUATES
-------------------------------------------
14. (U) Shortage of skilled labor is another common and persistent
challenge to the central provinces. Hue has a leg up by virtue of
being one of the country's foremost academic centers, with 2,000
university lecturers and 50,000 college students enrolled at its
eight universities. Hue, however, has not been able to generate
enough jobs or high-enough salaries to retain them. "Most of them
go south," lamented a top official from Hue's Department of Foreign
Affairs.
15. (U) Quang Nam has only one center of higher education for its
1.4 million people, while Quang Tri's 633,000 people have none at
all. The head of Quang Tri's Planning and Investment department
estimated that as many as half of all high school graduates leave
the province in search of jobs or higher education. Thus, Quang Nam
and Quang Tri face the additional challenge of having to lure their
graduates back after they complete higher education elsewhere.
16. (U) Increased investment may help temper the flight of skilled
labor. The General Director of an American electronics plant in
Quang Nam, for example, told us that he had succeeded in hiring 35
local engineers and that he was confident that, as long as there
were good jobs on offer, local professionals would prefer to stay
close to home.
HANOI 00001817 003.2 OF 003
GOVERNANCE: A CLEAR VISION HELPS
--------------------------------
17. (SBU) Despite its relative success in attracting investment this
year, Hue seems to be having difficulties in figuring out how to
maximize its competitiveness. The 2006 Competitiveness Index had
Hue at the bottom half of almost all important categories, and its
legal institutions and provincial government got some of the lowest
marks among the central provinces. The provincial administrators we
met were unable to discuss the province's investment strategies in
detail and, when asked, were unable to identify what comparative
advantages, if any, they had to offer. The managers of the Chan May
park in Hue were equally at a loss to explain how they intended to
attract investors. "Hue seems to be coasting, there isn't much
thought going on," a national competitiveness expert told us.
18. (SBU) Quang Tri's government is equally stumped for ideas, but
the officers we met were much realistic than their counterparts in
Hue about their current predicament. "We need to enact further
administrative reforms and create a more favorable investment
climate," the head of the Planning and Investment Department told
us. "But even that won't do it, we're simply not in a position right
now to attract FDI."
19. (SBU) Quang Nam, on the other hand, has shown more clarity and
resourcefulness at exploiting its competitive advantages and making
the best of the infrastructure hand that it has been dealt. Its
local government and legal institutions ranked among the highest in
the country in the 2006 Competitiveness Index, and Quang Nam came in
as the country's 15th most competitive province (out of 64).
20. (SBU) Quang Nam's local authorities, for example, successfully
pitched to an American manufacturer of high-value electronic
components that does not rely on heavy cargo hauls. "The province's
people convinced us that this was the right fit," the General
Director of the American plant said, "and so far it has worked." He
added that, despite its infrastructure shortcomings, Quang Nam
offered a much better labor climate and investment terms than
Thailand or HCMC, the two other locations his company had
considered.
COMMENT
-------
21. (SBU) There is no quick fix for central Vietnam. A good
infrastructure base is important, but evidently not as much as
having a good sense of needs and priorities. Aptly led, Quang Nam
appears to be on the right track. Hue's outstanding new port and
roads, and its proximity to the boomtown of Danang may save the day,
despite its leadership's apparent lack of vision. Whether rural and
impoverished Quang Tri can keep up with its neighbors is more
uncertain. Clearly, its strategies need rethinking -- but at the
very least its government appears serious in trying to find a
solution.
22. This report was coordinated with Ho Chi Minh City.
ALOISI