STATE ENTERPRISES GROW, FDI FLOPS IN CAN THO

UNCLAS SECTION 01 OF 02 HO CHI MINH CITY 000154 SIPDIS STATE PASS TO USTR FOR EBRYAN USDOC FOR 3132/OIO/EAP/KELLEHER USDOC FOR 1431/MAC/AP/HPPHO USDA FOR FAS/FAA AND FAS/FFPD E.O. 12958: N/A TAGS: EAGR ECON ETRD VM SOE SUBJECT: STATE ENTERPRISES GROW, FDI FLOPS IN CAN THO ¶1. SUMMARY: CAN THO, THE MEKONG DELTA'S ECONOMIC AND COMMERCIAL HUB, IS HUNGRY FOR FOREIGN INVESTMENT, SAY LOCAL OFFICIALS, BUT THE CITY'S POOR TRANSPORTATION LINKS AND STRING OF FAILED FOREIGN PROJECTS SUGGEST REAL DIFFICULTIES IN DEVELOPING AN ECONOMY BASED ON FDI. THE PROVINCE SEEMS TO HAVE FOUND EASIER SUCCESS WITH STATE-OWNED ENTERPRISES (SOES) IN GENERATING EXPORT AND OVERALL ECONOMIC GROWTH. WHETHER RELIANCE ON SOES WILL RESULT IN SUSTAINABLE GROWTH IS OPEN TO QUESTION. STRONG ECONOMIC GROWTH -------------- ¶2. CAN THO PROVINCE, WITH A THRIVING SEAFOOD INDUSTRY AND A STRONG AGRICULTURAL BASE, IS THE ECONOMIC AND COMMERCIAL CENTER OF THE MEKONG DELTA. OFFICIAL GVN STATISTICS, WHICH ARE PROBABLY INFLATED, POINT TO ECONOMIC GROWTH AVERAGING 8% OVER THE PAST 5 YEARS, REACHING AN IMPRESSIVE 9.65% IN 2001. EVEN IF THESE NUMBERS ARE OPTIMISTIC, CAN THO IS EXPERIENCING STRONG, STEADY ECONOMIC GROWTH. BASED ON A VISIT BY CONGENOFFS TO THE PROVINCE LATE LAST YEAR AND IN SUBSEQUENT CONVERSATIONS WITH LOCAL OFFICIALS AND BUSINESS PEOPLE, IT APPEARS THAT CAN THO IS COUNTING ON INFRASTRUCTURE DEVELOPMENT AND STATE-OWNED ENTERPRISES (SOES) TO KEEP THE ECONOMY GROWING. BUT ALMOST NO FOREIGN INVESTMENT -------------- ¶3. THIS GROWTH HAS NOT BEEN DUE TO FOREIGN DIRECT INVESTMENT (FDI),WHICH HAS BEEN DISMAL. TOTAL IMPLEMENTED UNCLASSIFIED PAGE 03 HO CHI 00154 01 OF 02 210957Z FOREIGN CAPITAL AMOUNTS TO ONLY ABOUT $55 MILLION FOR THE ENTIRE PROVINCE OVER THE LAST TEN YEARS. THIS COMPARES TO MORE THAN $4.8 BILLION FOR HO CHI MINH CITY DURING THE SAME PERIOD. ¶4. TOURING THE SLEEPY TRA NOC INDUSTRIAL ZONE JUST OUTSIDE CAN THO CITY, CONGENOFFS SAW VEGETABLES GROWING ON LAND WHERE IT WAS HOPED THAT FOREIGN COMPANIES WOULD BUILD PRODUCTION FACILITIES. TO BE FAIR, LOCAL OFFICIALS CLAIM THAT THE THREE INDUSTRIAL PARKS IN THE PROVINCE EMPLOY ABOUT 10,000 PEOPLE, AND A THAI-OWNED SEAFOOD PROCESSING PLANT AND A TAIWAN-INVESTED NAIL FACTORY WERE LOCATED IN THE IZ. MORE NOTEWORTHY, HOWEVER, WERE THE WIDE-OPEN SPACES. ¶5. WHEN CONGENOFFS POINTED OUT ONE GLEAMING BUILDING IN THE PARK AND ASKED WHAT IT WAS, THE DIRECTOR OF THE AUTHORITY GRIMLY REPORTED THAT IT WAS A CUBAN-INVESTED RAT POISON FACTORY THAT HAD NOT PAID ITS RENT FOR MORE THAN A YEAR AND A HALF. HE WENT ON TO STATE THAT DUE TO CUTS IN THE COST OF LAND RENTS AT THE IZ, THE GOVERNMENT AUTHORITY RESPONSIBLE FOR MANAGING THE SITE COULD NO LONGER AFFORD TO EFFECTIVELY ADVERTISE AND MARKET TO PROSPECTIVE TENANTS. POOR TRANSPORT MAY IMPROVE A BIT -------------- ¶6. ONE PROBLEM IN ATTRACTING FDI HAS PROBABLY BEEN CAN THO'S POOR TRANSPORTATION INFRASTRUCTURE. THE PROVINCE HAS NO AIR OR RAIL SERVICE. TRAVELING BY ROAD FROM HCMC TAKES 3.5 TO 4 HOURS AND REQUIRES A FERRY CROSSING. THE ROAD IS FILLED WITH EVERY KIND OF CONVEYANCE IMAGINABLE, AND BRIDGES POP UP EVERY MILE OR SO, AND THEIR ABRUPT SLOPES UP AND DOWN UNCLASSIFIED PAGE 04 HO CHI 00154 01 OF 02 210957Z MAKE FOR A BOUNCY - OR BONE JARRING - RIDE DEPENDING ON YOUR POINT OF VIEW. PORT FACILITIES ARE ALSO LACKING. THE RIVER CHANNELS AND LOCAL PORTS CAN ONLY ACCOMMODATE SHIPS OF UP TO 10,000 TONS, WHICH LIMITS WHAT CAN BE CHEAPLY SHIPPED IN AND OUT OF THE CITY. MOST OF THE SEAFOOD AND AGRICULTURAL PRODUCTS ARE NOW TRUCKED UP OR FLOATED UP ON SMALLER BARGES TO HCMC WHERE THEY ARE THEN TRANSFERRED TO OCEAN-GOING VESSELS. ¶7. PROVINCIAL OFFICIALS, HOWEVER, POINT OUT THAT WITH SEVERAL PROJECTS UNDERWAY, TRANSPORT LINKS ARE IMPROVING. JAPAN IS FINANCING A $400 MILLION BRIDGE TO SPAN THE HAU RIVER, WHICH WILL ELIMINATE THE NEED FOR A FERRY CROSSING ON THE ROAD TO HCMC. THE BRIDGE SHOULD BE COMPLETED IN 2006. LOCAL OFFICIALS STATE THAT CIVIL AIR SERVICE WILL START UP AGAIN IN THE THIRD QUARTER OF THIS YEAR, BUT ONLY WITH FLIGHTS TO/FROM HANOI. MORE IMPORTANTLY, THE WORLD BANK IS FINANCING MOST OF AN $80 MILLION PROJECT TO EXPAND PORT FACILITIES AND WIDEN THE RIVER CHANNEL TO ALLOW LARGER BOATS TO REACH CAN THO. WHERE ARE ALL THE FOREIGN INVESTORS? -------------- ¶8. TRANSPORTATION IS NOT CAN THO'S ONLY PROBLEM. THE PROVINCE HAS FACED A RUN OF BAD LUCK - WHICH SOME WOULD SAY IS SELF-INFLICTED - WHEN IT COMES TO ATTRACTING FDI. OF COURSE, CAN THO HAS HAD SOME SUCCESSES WITH FOREIGN INVESTORS, INCLUDING AMERICAN ONES. AMERICAN INTERNATIONAL GROUP OPENED AN OFFICE THERE LAST YEAR, AND THEY CLAIM IT HAS BEEN WILDLY SUCCESSFUL. CARGILL ALSO HAS A SMALL FEED MILL HERE. BUT SOME OF THE PROVINCE'S FAILURES HAVE BEEN SPECTACULAR. ONE OF THE MOST FAMOUS IS THE NOW DEFUNCT AMERICAN RICE, WHICH PRODUCED INSTANT RICE FOR EXPORT. AFTER FOUR YEARS OF BATTLING WITH ITS LOCAL PARTNER, THE FIRM FOLDED IN 1998. THE COMPANY'S EXPERIENCE IN CAN THO HAS BEEN WRITTEN UP IN A CASE STUDY THAT IS USED IN BUSINESS SCHOOLS THROUGHOUT THE UNITED STATES. CAN THO MADE THE NEWS AGAIN IN 1999 WHEN PEPSI SIGNED A LEASE TO BUILD A NEW BOTTLING PLANT AT THAT SAME SLEEPY INDUSTRIAL ZONE OUTSIDE THE CITY. AFTER PEPSI BEGAN PURCHASING EQUIPMENT AND MAKING IMPROVEMENTS ON THE LAND, ITS BUSINESS LICENSE WAS SUSPENDED, APPARENTLY TO BENEFIT A WELL-CONNECTED LOCAL BOTTLING CONCERN. PEPSI NEVER BUILT THE PLANT. ¶9. WHEN ASKED ABOUT FDI IN MEETINGS WITH CONGENOFFS, LOCAL OFFICIALS SEEMED TO DWELL ON THE PROVERBIAL "ONE THAT GOT AWAY" (WHICH VARIED FROM INTERLOCUTOR TO INTERLOCUTOR): --THE AMERICAN COMPANY THAT PROMISED TO TURN LANDFILL GARBAGE INTO FERTILIZER - AND DID NOTHING, -- A PROPOSED BELGIAN PRESSED WOOD PLANT THAT NEVER GOT OFF THE GROUND, UNCLASSIFIED PAGE 03 HO CHI 00154 02 OF 02 210957Z --A FRENCH FOOD PROCESSING COMPANY THAT NEVER ACTUALLY FOLLOWED THROUGH ON PLANS TO START A PROJECT HERE, AND ETC. THE OFFICIALS APPEARED CONFUSED ABOUT HOW TO KEEP THIS FROM HAPPENING AGAIN. SOES TO THE RESCUE! -------------- ¶10. OFFICIALS SEEMED MUCH MORE COMFORTABLE TALKING ABOUT SEVERAL PROJECTS WITH SOE'S TO STIMULATE EXPORT GROWTH. ACCORDING TO THE DEPARTMENT OF PLANNING AND INVESTMENT, THE PROVINCE IS TRYING TO LURE VINATEX, THE COUNTRY'S STATE- OWNED TEXTILE CONGLOMERATE, TO OPEN TEXTILE PRODUCTION IN THE PROVINCE AS WELL AS WORK WITH LOCAL FARMERS TO RAISE COTTON IN LIEU OF "LESS EFFICIENT CROPS." VINAMILK, ANOTHER SOE, IS ALSO WORKING WITH FARMERS TO RAISE DAIRY COWS TO SUPPLY A LOCAL MILK FACTORY. SONG HAU FARM, THE HIGHEST GROSSING AND MOST PRODUCTIVE STATE-OWNED FARM IN THE COUNTRY, EMPLOYS MORE THAN 10,000 PEOPLE AND PRODUCES A VARIETY OF AGRICULTURAL PRODUCTS FOR EXPORT AND LOCAL MARKETS. ¶11. ONE OF CAN THO'S MOST NOTABLE SUCCESS STORIES IS THE SEAFOOD PROCESSOR CAFATEX, WHICH IS AN SOE OWNED BY CAN THO PROVINCE. THIS YEAR THE COMPANY PLANS TO PRODUCE 10,000 TONS OF SHRIMP AND 3,000 TONS OF FISH FOR PRIMARY MARKETS INCLUDING THE UNITED STATES AND JAPAN. THE COMPANY CURRENTLY EMPLOYS OVER 5,000 PEOPLE AND IS EXPANDING. COMMENT UNCLASSIFIED PAGE 04 HO CHI 00154 02 OF 02 210957Z -------------- ¶12. ALTHOUGH CAN THO HAS BEEN ABLE TO TURN IN A ROBUST ECONOMIC PERFORMANCE OVER THE LAST FEW YEARS, IT IS UNLIKELY TO CONTINUE THIS LEVEL OF GROWTH WITHOUT INCREASING FDI. PLANNED INFRASTRUCTURE IMPROVEMENTS MAY OFFER ADDITIONAL INCENTIVES, BUT IT IS UNCLEAR WHETHER THEY WILL BE SUFFICIENT TO DRAW INVESTMENT TO CAN THO. THERE ARE SOME KNOWLEDGEABLE, CAN-DO OFFICIALS, BUT THEY ARE SCATTERED THROUGHOUT SLOW-MOVING DEPARTMENTS WITH FEW RESOURCES AT THEIR DISPOSAL. AT LEAST FOR NOW, THE OVERALL LOCAL LEADERSHIP SEEMS TO BE WAITING FOR FDI TO COME COURTING CAN THO, RATHER THAN REALIZING THAT THERE IS LOTS OF COMPETITION THROUGHOUT THE SOUTHEAST ASIA REGION FOR THE FDI DOLLAR. AS A RESULT, THE MEKONG DELTA'S POTENTIAL TO ATTRACT FOREIGN INVESTORS GOES LARGELY UNNOTICED AND UNTAPPED. YAMAUCHI UNCLASSIFIED