DAK LAK PROVINCE - CONTROL INHIBITS GROWTH

UNCLAS SECTION 01 OF 02 HO CHI MINH CITY 001493

SIPDIS

SENSITIVE

TREASURY PASS USED IBRD AND ADB
DEPARTMENT PASS TO USTR, ELENA BRYAN
USDOC FOR 4431/MAC/AP/OPB/VLC/HPPHO

E.O. 12958: N/A
TAGS: ECON EINV ETRD EAID PGOV PREL SOCI PHUM VM SOE ETMIN
SUBJECT: DAK LAK PROVINCE - CONTROL INHIBITS GROWTH

REF: A) HCMC 1464 B) HCMC-DEPT EMAIL 10/8/04


1. (SBU) SUMMARY: Local leaders in the Central Highland province
of Dak Lak loathe to relinquish economic control are missing the
chance for growth in tourism, industry and agriculture.
Agriculture, the mainstay of Dak Lak's economy, has been hit by
falling world coffee prices and drought. State Owned Enterprises
(SOEs) dominate the provincial economy and substantial development
assistance from EU members and Japan is focused on infrastructure.
The long-running Krong Ana-McCullagh bilateral investment dispute
awaits resolution in Hanoi. Religious freedom and ethnic minority
issues are addressed Ref A and septel. END SUMMARY.


2. (SBU) The Chairman of Dak Lak's People's Committee, the
Department of Planning and Investment (DPI),and the Department of
Trade and Tourism reported that Dak Lak is growing at an annual
rate of 8 percent. They would like to further develop the
province by focusing on agriculture. Dak Lak produces about 60
percent of Vietnam's coffee with exports of about USD 193 million
in 2003. However, Dak Lak has suffered as a result of falling
world prices. According to coffee farmers, a kilo of raw beans is
currently worth VND 7,500 (about 48 cents),compared to the VND
40,000/kilo in 1994 (about USD 3.50 at the official exchange rate.
Dak Lak is looking to move away from coffee in areas where it is
less productive; substitute crops include cocoa, cotton and corn.
Coffee production in the coming year will also be harmed by
drought, which DPI estimates will cost Dak Lak VND 600 billion
(about USD 38.4 million) in total farm output. Dak Lak also
exports cashews, rubber, pepper, bee honey and wood products; the
province exported USD 250 million in goods in 2003.


3. (SBU) Government leaders stated that agriculture and agro-
industry would be the basis for future growth but were vague on
concrete plans. DPI focused on the province's "7,000 Agent Orange
victims." In response to questions, they said Dak Lak has 1,300
private enterprises, most of them small enterprises with low
levels of capital. The DPI admitted the province had only two
foreign direct investment (FDI) projects, one a UK joint venture
licensed in 1995 and valued at USD 10.5 million. The other was a
failed joint venture between a state-owned coffee enterprise,
Krong Ana, and a U.S. company, McCullagh International Inc.

TOURISM
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4. (SBU) Provincial leaders were similarly vague about plans to
develop tourism in Dak Lak, another stated goal. Dak Lak could
become an attractive location for eco-tourism, with waterfalls, a
national park and cultural activities based on the way of life of
ethnic minorities. However, when we made an impromptu visit to an
ethnic village with a tour guide, police quickly arrived to order
us to depart. The remainder of our tour was promptly cancelled,
as was that of a Danish couple who happened into the area at the
same time. When ECONOff raised this incident with the Department
of Trade and Tourism, officials denied that any part of the
province (other than military bases) was off-limits to tourists.
We pointed out to provincial leaders that ethnic minority-linked
tourism could be a major draw, but to attract substantial numbers
of foreign tourists, they will have to ease controls on access.
Only 16,000 of Dak Lak's 200,000 annual tourists come from
overseas.

SOEs CONTINUE TO DOMINATE
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5. (SBU) ECONOff visited state-owned coffee, cashew and rubber
companies. The Ea Ka Cashew-Nut Company is slated for
equitization in 2005, and the Dak Lak Rubber Company plans to
equitize parts of the company not directly involved in rubber
production, such as its wood-processing factory. The three
companies obtain raw agricultural goods from farmers in a variety
of ways, including buying from agents, harvesting from their own
lands, and buying the harvests of farmers to whom the companies
have provided land and investment capital. Under the latter
system, the companies provide land and/or plants, as well as
supplies like fertilizer. With the coffee and cashew companies,
the farmers must sell a portion of their crop back to the
companies, but they may keep a portion (sometimes as much as 50
percent) to sell independently. The rubber company requires
farmers participating in its "small-holder" program to sell the
rubber they harvest to the company for 20 years; for the remaining
10 years of the trees' productivity, the farmers may sell the
rubber independently, and they receive any revenues from selling
the trees for wood processing after that.


6. (SBU) Hiep Phuc Trading and Tourism Company is one large
private enterprise that has had success in Dak Lak. Ms. Nguyen
Chi Phuc, owner of the family-held company, said Hiep Phuc started
out as a coffee trading enterprise and exports 10,000 tons of
coffee a year. The company operates a water park that attracts
about 3,000 visitors a year; Ms. Phuc admitted she had no plans to
expand this part of her business because of the province's anemic
tourism sector. Hiep Phuc also develops real estate in Dak Lak,
as well as in coastal Khanh Hoa province and Hanoi. Ms. Phuc, a
Khanh Hoa native, would not disclose the volume or value of the
company's real estate investments, nor who her partners are. Hiep
Phuc's palatial offices, complete with fountains and crystal
chandeliers, seem to indicate that Hiep Phuc's "investments" -- as
Ms. Phuc called them repeatedly -- are paying off.


7. (SBU) All the companies, state-owned and private, indicated
they employ a small percentage of ethnic minorities. The Dak Lak
Rubber Company employs the largest number; about 1,000 of its 4779
employees come from ethnic minorities. Of the 1,155 households
participating in the company's small-holder program, 1038 are
ethnic minority. The other companies reported that ethnic
minorities made up fewer than 25 percent of their personnel. Ms.
Phuc reported that her ethnic minority employees generally had a
poor work ethic compared to her Kinh employees.

ODA FOCUSED ON INFRASTRUCTURE
--------------

8. (SBU) People's Committee Chairman Lang reported Dak Lak has
received commitments for more than USD 100 million in bilateral
official development assistance (ODA),including USD 70 million
from Denmark. USD 42 million of the Danish ODA was to improve the
water supply of Buon Ma Thuot, Dak Lak's capital city. USD six
million in Danish ODA was for administrative reform and eight
million for clean water supplies in villages. (COMMENT: Lang
observed that Denmark's interest in Dak Lak likely stems from the
fact that the family of the Queen's husband owned a coffee
plantation in Dak Lak. END COMMENT.) USD 15 million in Japanese
ODA was focused on roads and power, as was the bulk of the USD 12
million in German ODA. Kuwait has committed USD five million for
irrigation development. Additionally, the World Bank is helping
the province develop its roads and rubber industry, and the Asian
Development Bank is funding the construction of a 1,000-bed
hospital in Buon Ma Thuot as well as some rural health clinics.

MCCULLAGH-KRONG ANA DISPUTE
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9. (SBU) ECONOff visited Krong Ana Coffee Company, which has been
mired in an investment dispute since 1997 with McCullagh, its U.S.
joint venture partner. Krong Ana's director, Tran Tam, reported
the partners are still waiting for GVN approval of the proposed
settlement to the dispute. (Ref B) According to Tan, under the
deal, which has the blessing of the partners and provincial
authorities, Krong Ana would buy out McCullagh's share of the
coffee processing venture for USD 557,000 and would shoulder the
venture's USD 476,000 in debt. Tam reported that McCullagh
provided about USD 878,000 in investment capital when the joint
venture started in 1995.

COMMENT
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10. (SBU) Dak Lak appears to have significant economic potential,
particularly in the area of agriculture and agricultural
processing. Private enterprise is virtually untapped in the
province. However, in conversation after conversation with
provincial authorities there was a lack of desire and vision to
push Dak Lak's economic development much further. As our meeting
with Dak Lak's main private enterprise indicated, vested interests
get what they need to live comfortably; further development and
opening up of the province would only threaten these interests and
reduce the government's ability to keep a lid on socio-economic
forces in the district, particularly in the substantial and
restive ethnic minority community.

WINNICK