PAROCHIALISM AND THE STATE SECTOR LIMIT HUE'S ECONOMIC

UNCLAS SECTION 01 OF 03 HO CHI MINH CITY 000667

SIPDIS

SENSITIVE

E.O. 12958: N/A
TAGS: PGOV ECON EINV PREL SOCI ETRD PHUM VM SOE
SUBJECT: PAROCHIALISM AND THE STATE SECTOR LIMIT HUE'S ECONOMIC
PROSPECTS

REF: A) HCMC 623; B) HCMC 586; C) 04 HCMC 1528; D) 04 HCMC 1270


1. (SBU) Summary: Party and local government leaders of the
central Vietnam province of Thua Thien Hue extolled the economic
potential of the province to Consul General May 23-24. The
potential is clearly there -- Hue has the attributes to become a
tourism and knowledge-based economy leader. However, unless Hue's
leaders show greater initiative, particularly in breaking the
province from its dependency on inefficient state-owned
enterprises, the province will continue to be eclipsed by its more
aggressive and pro-business neighbors to the south. End Summary.


2. (SBU) On May 23-24, the Consul General made official calls on
the provincial leadership of the central province of Thua Thien
Hue, the northernmost province in HCMC's consular district. He
met with the Vice-Chairman of the People's Committee Nguyen Ngoc
Thien, Provincial Party Secretary Ho Xuan Man, and Deputy Director
of the provincial Department for Planning and Investment (DPI) Le
Dinh Khanh. The CG also met with the Director of the University
of Hue Nguyen Vien Tho, past participants in the International
Visitor's program, and the seven Americans resident in Hue.
Economic development and religious freedom were core focuses of
the visit. (Religious freedom issues in Hue are covered in refs A
and B.)

Local leadership: Proud and Comfortable
--------------


3. (SBU) In their official presentations, Thua Thien Hue's party
and provincial government leaders emphasized that the province has
the attributes to become Vietnam's premier tourism and services-
sector magnet: a low-cost, well educated workforce; a
comprehensive university system; beaches, mountains and national
parks; and some of Vietnam's most impressive cultural and
historical heritage sites. They acknowledged that infrastructure
needs further upgrading, but is sufficient to support development.
They were convinced that the June 2005 opening of the 4.6
kilometer Hai Van tunnel will spur growth as Hue becomes better
integrated into the regional economy, particularly with the harbor
and international airport in neighboring Danang.


4. (SBU) Provincial leaders said that their economic stewardship
has been effective; Per capita GDP had reached USD600 and GDP
growth was over nine percent in 2004. In 2004 the industrial
sector grew by 16 percent, agriculture by four percent and
services, including tourism, by 6 percent. Hue attracted over one
million domestic and international tourists in 2004. They added
that in the first five months of 2005, tourist arrivals were up 30
percent from the comparable period in 2004.


5. (SBU) Hue's leaders were in the throes of shaping the
province's 2006-2010 five-year plan. They had not yet decided
what the major emphasis should be: industry and the related
infrastructure it requires -- such as an expanded deep-water port
-- or tourism. The provincial Party Chairman explained that the
ultimate shape of the plan would depend on how the Party applied
Hanoi-level guidance to local conditions and assessed the various
"potentials" that each sector has to offer. Our follow-on
briefing at the DPI reflected the uncertainty about Hue's economic
direction. The DPI Director told us that the province was seeking
investments in sectors as varied as: informatics, biotech,
resorts, eco-tourism, industrial parks, aquaculture, health care
and handicrafts manufacture. All were priorities.

Numerous requests for U.S. assistance
--------------


6. (SBU) Thua Thien Hue officials presented the CG with a laundry
list of assistance requests: to help promote Hue with U.S.
investors, secure ODA for infrastructure development, assist the
province to build new health clinics, clear unexploded ordinance
(UXO) remaining from the war, intercede with the State of Hawaii
to speed up ratification of a pending cooperation agreement, and
help the Hue University system develop collaborative relationships
with U.S. academic institutions.


7. (SBU) In his official meetings and press outreach, the CG
welcomed and encouraged Hue's efforts to expand ties with the
United States. Our bilateral economic relationship is growing
rapidly and there is no reason why Hue cannot participate much
more fully in this success story. That said, it was up to Hue to
promote Hue. More broadly, the province should not make a
distinction between domestic and foreign investors; rather, it
should create a climate conducive for business. Foreign investors
go where domestic entrepreneurs succeed, the CG emphasized.
Similarly, Hue's educational institutions needed to do a better
job of leveraging their contacts with U.S. institutions to develop
long-term partnerships. The CG observed that Hue should look to
the market, not ODA, to satisfy its infrastructure needs. While
concessional ODA may seem attractive at first blush, ultimately
the projects may not be as cost effective. Finally, the USG
supported Vietnam's efforts to deal with war-legacy issues such as
UXO removal. If there was a need for U.S. assistance, the Hue
provincial government needed to make its case to the GVN first.

SOE Domination
--------------


8. (SBU) Thua Thien's Hue's economy is dominated by state-owned
enterprises (SOEs). Even in the tourist sector, almost all the
province's major hotels are either fully state-owned or the local
government has a controlling interest. Although the People's
Committee Vice Chairman emphasized that the province is committed
to expanding the private sector, since 2000 when the Enterprise
Law was passed, the province has registered 1000 private
enterprises, 348 in 2004. Of these, only 10 percent have assets
of more than USD 70,000. (In 2004, over 37,000 private
enterprises were registered nationwide; HCMC receives 10 to 15 new
registration applications every day.) To date, the province has
attracted only 30 FDI projects with a total registered capital of
USD 170 million. Five U.S. FDI projects have been licensed, but
only one is operating. Despite Hue's reputation as a university
town, only one small software developer has set up shop in the
province with a capital investment of USD 20,000, the DPI
reported.

Industry: Lagging Behind
--------------


9. (SBU) If Thua Thien Hue's industrial sector grew by 16 percent
in 2004, it did so from a very small base. A tour of Phu Bai
industrial park, which according to its Director is one of the
province's development centerpieces, made it clear that tourism,
not industry, is Hue's competitive advantage. Established in late
1998, the industrial park had a few operational factories, a
handful more under construction and many more empty lots. The
park had none of the bustle that we saw in the export processing
zone in neighboring Danang, let alone the scope of industrial
activity in HCMC and its neighboring provinces (refs C and D). A
project that was touted to us as being "Chinese FDI," was in
reality, a 70 percent Vietnamese investment, with a minority
Chinese stakeholder. That investor, a businessman from HCMC, told
us that he invested in Hue out of a sense of obligation to his
family's native province. He convinced his long-time Chinese
partner to take a 30 percent stake in the factory, which makes
inexpensive ceramic ware for the domestic market. While he is not
losing money, his factories in the HCMC area were more productive
and profitable he said, despite a 50 percent wage premium. Other
domestic investors have no reason to come to Hue, he said
privately.

Tourism: Growing But Lackluster
--------------


10. (SBU) Despite all it has to offer, at the moment Hue is an
also-ran to the smaller and less culturally and historically
endowed coastal town of Hoi An, located some 60 miles to the south
in Quang Nam province. Tourists vacation in Hoi An. They visit
Hue for the day or stay overnight. Hoi An has a lively yet
dignified "scene" and a variety of shops to extract maximum
revenue from tourists. Tourists and developers -- domestic and
foreign -- have invested in the Hoi An/Danang corridor because Hoi
An has marketed itself extremely well and the Quang Nam and Danang
provincial governments have established pro-business reputations.
In contrast, despite the importance of the tourism sector to the
local economy, Thua Thien Hue province has just approved the first
FDI hotel project, a Dutch resort outside Hue city.

Comment
--------------


11. (SBU) Hue's leaders are right when they claim that the
province has all the physical attributes to become a tourist
Mecca. They are rightly proud of and determined to preserve Hue's
reputation as a socially conservative, cultural and historical
center of Vietnam. What Hue lacks are the intangibles needed to
put it on a path of high economic growth. Its leaders lack vision
and self-confidence. They are rooted heavily in the "Party
planners know best" philosophy of management. Their repeated
requests for assistance demonstrated a naivete about how the world
outside Hue works. The Provincial Competitiveness Index on the
Business Environment in Vietnam, a product of the USAID-funded
Vietnam Competitiveness Initiative (VNCI) reflects the province's
lackluster approach to business: the province was ranked well
below neighboring Danang and industrial dynamos Dong Nai and Binh
Duong.


12. (SBU) Despite successful models elsewhere in southern
Vietnam, state control and caution are still seen as the route to
job security by many provincial leaders in Vietnam. Hue's leaders
are no exception. They feel no pressure to change their way of
doing business. The province's state-run hotels are making some
money and the economy is on an upswing. The Party and the SOE
managers enjoy their sinecures safe from the pressures of
competition with the private sector. Hue provides another example
that profitable but inefficient SOEs are more of threat to the
economy than their bankrupt brethren. Hue cannot afford to be
complacent. If the province does not work hard to capitalize on
its cachet and make the province more appealing for long-term
vacationers, the newly opened Hai Van tunnel might actually erode
the Hue tourist market as day trips from Danang and Hoi An become
that much more convenient.

WINNICK