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