DEVELOPMENT IN CENTRAL VIETNAM: A VISIT TO QUANG NAM, DANANG

UNCLAS SECTION 01 OF 03 HO CHI MINH CITY 001276 SIPDIS USDOC SENSITIVE SIPDIS DEPARTMENT FOR EAP/MLS USDOC FOR 4431/MAC/AP/OPB/VLC/HPPHO E.O. 12958: N/A TAGS: ECON ETRD EINV EWWT PGOV VM SUBJECT: DEVELOPMENT IN CENTRAL VIETNAM: A VISIT TO QUANG NAM, DANANG AND THUA THIEN HUE REF: 05 HCMC 1118 B) 05 HCMC 1270 HO CHI MIN 00001276 001.2 OF 003 ¶1. (SBU) Summary: In a recent visit to the coastal provinces of Central Vietnam, Econoff discussed with area contacts the region's economic development, particularly infrastructure upgrades and its impact on attracting investment. The region has yet to see a significant influx of foreign investment in non-tourist sectors of the economy, despite expectations following road and seaport upgrades. There are indications, however, that China and Japan are planning large-scale investment in the region. Despite infrastructure upgrades, human resource weaknesses and a lack of capital for domestic private investment continue to be some of the biggest challenges to the provinces' sustained economic growth. End Summary. ¶2. (SBU) EconOff visited Quang Nam and Thua Thien Hue provinces and the centrally-administered city of Danang in Central Vietnam September 18 - 20. 2005 GDP per capita is below the national average of USD 640 in Quang Nam (USD 390) and Thua Thien Hue (USD 500),while far above in Danang City (USD 1,015). In 2005, the three provinces experienced above-average annual economic growth rates -- Thua Thien Hue at 11.3 percent, Quang Nam at 12.45 percent and Danang at 14 percent -- in comparison to Vietnam's national growth rate of 8.4 per cent, according to provincial Departments of Planning and Investment (DPI). ¶3. (SBU) An HCMC-based economist who works as a consultant in central Vietnam told EconOff that provincial growth statistics are inflated by the inclusion of infrastructure expenditures and do not reflect real rates of provincial economic growth, which he believes to be much lower. Growth in central Vietnam is mostly generated by tourism projects and not the large-scale manufacturing the province's infrastructure upgrades were designed to attract. The economist added that some high-ranking GVN officials fault Danang's Party Secretary, Nguyen Ba Thanh, for spending large amounts on infrastructure upgrades that have failed to generate investment. DIFFERING PATHS TO DEVELOPMENT -------------- ¶4. (SBU) Planning and Investment officials were unanimous in their desire to see increased investment in Danang City and the provinces of central Vietnam. Vice Director of Danang DPI Le Huu Duc admitted, however, that investment in non-tourism related projects in Danang has been slower than expected. He hopes that further infrastructure upgrades, official development assistance (ODA),and the completion of the East-West corridor linking Burma, Thailand, and Laos to Vietnam (Ref B) will improve the region's prospects. ¶5. (SBU) While meeting with representatives from the DPI of Thua Thien Hue, two different perspectives on the role of government in development emerged. Both Phan Canh Huy, head of international economic cooperation at the Hue DPI, and Le Van Thu, Director of the Management Board of the Chan May - Lang Co Economic Zone, highlighted the natural advantages of the province as well as the positive impact that unfettered foreign investment can have on the province. The two stressed the importance of the provincial government's role in improving infrastructure and providing a positive investment climate to attract investment, downplaying the role of central planning in specific project development. ¶6. (SBU) Huy and Thu's comments contrasted with those of their superior, Le Dinh Khanh, Deputy Director of the Provincial DPI. His late entry to the meeting with EconOff silenced Huy and Thu. Khanh echoed his colleagues' positive assessment of the investment potential of the province, then turned to a detailed description of how the provincial government was managing and planning individual projects, even highlighting his personal preference to have three cement plants in the province as opposed to the currently planned two. Khanh then turned his attention to the United States, blaming the US for dioxin defoliation that allegedly is the cause of the lack of tourist visits to the western part of the province. (Note: the A Shau and A Luoi valleys were a key portion of the Ho Chi Minh trail and the scene of fierce fighting during the Vietnam War. End Note.) He also criticized American firms for not investing heavily in the province and urged the USG to provide ODA for provincial infrastructure projects. ¶7. (SBU) While Khanh in Hue stressed the importance of state-led development and investment, officials in Quang Nam Province have HO CHI MIN 00001276 002.2 OF 003 a different approach, one that lets investors take the lead. For example, the GVN has given Quang Nam permission to negotiate build-operate-transfer (BOT) deals with foreign firms. DPI Vice Director Truong Quanh Dung reported that a planned upgrade of the Chu Lai Airport will be the first BOT project negotiated by Quang Nam authorities. CHINA AND JAPAN TAKE AN INTEREST -------------- ¶8. (SBU) As part of Danang's ongoing push to upgrade its infrastructure, city authorities are working with a Chinese company from Guangdong Province to expand the capacity of Danang's port, known as Linh Chieu Seaport. The port, currently Vietnam's deepest, is 12 meters deep and is capable of supporting ships up to 50,000 deadweight tons (DWT) and handling five million tons of cargo annually. Officials anticipate that the expansion project, which will be partially funded by ODA from the PRC, will allow the port to handle up to 10 million tons of cargo annually. (Note: Danang port operates well below capacity at present, resulting in both longer delays and higher shipping costs than the overextended Ho Chi Minh City ports. Danang officials have long counted on the East-West Highway connecting Danang with northern Thailand to provide economies of scale for port operations. End Note.) Danang contacts told EconOff that prominent Ho Chi Minh City businessman Vuu Khai Thanh is reportedly acting as intermediary for the Chinese government in the port project negotiations. Thanh, a Vietnamese of ethnic Chinese background, founded Biti's, one of Vietnam's largest footwear companies. (Note: In addition, Vietnamese media recently reported that the China Railway Sixth Group Ltd. signed a VND 1 trillion (USD 67 million) deal with the state-owned Vietnam Railway Corporation to upgrade Vietnam's rail network from Vinh in north central Vietnam to Danang. This project is being funded by a preferential loan from the PRC. End note.) ¶9. (SBU) A HCMC industrialist that leads the Vietnam-Japan Association and joined Prime Minister Nguyen Tan Dung on his recent trip to Japan told EconOff Japanese business is restructuring its investment in Vietnam, with roughly 20 percent going to the Danang area. Some Japanese companies are looking to increase their presence in central Vietnam in order to benefit from the completion of the East-West corridor. In addition, the Government of Japan (GOJ) plans to provide ODA to upgrade the corridor's road system as well as improve roads linking northern and southern Vietnam by way of Danang. Our source said that the GOJ's upgrade of central Vietnam's infrastructure is reportedly a step in a strategic reorientation by Japan to shift investment from China to Vietnam. HUMAN RESOURCE AND CAPITAL ACCESS CONSTRAINTS REMAIN -------------- -------------- ¶10. (SBU) Contacts in all three provinces stressed a lack of human resources and educational opportunities as a major impediment to further economic growth. Nguyen Cuong, Vice-Director of the Danang chapter of the Vietnamese Chamber of Commerce and Industry (VCCI),reported that a recent survey by the EU ranked service standards in the city 2.5 out 5, highlighting the province's continued need for experienced managerial and service personnel. Thua Thien Hue DPI Deputy Director Khanh said the province, a traditional center of learning in Vietnam and home to several universities, lacked the managerial and human resource capacity to compete on an international level. Quang Nam province, home to 1.5 million people, currently has no colleges or universities. There are plans to open a university in 2007 in Hoi An, Quang Nam's tourism hub. ¶11. (SBU) Provincial planning and investment officials also cited inadequate access to capital as an additional impediment to private sector development in the region. Quang Nam DPI Vice Director Dung and Thua Thien Hue Vice Director Khanh both blamed deficient investment capital on the lack of provincial financial institutions and hoped that foreign banks would enter the local market to fill the void. Phan Canh Huy, head of international economic cooperation at the Hue DPI, added that local entrepreneurs lack the expertise to adequately package and defend their investment proposals, with the result that local banks are reluctant to support privately invested projects. None of the DPI officials cited preferential treatment enjoyed by state-owned enterprises in receiving loans from state-owned HO CHI MIN 00001276 003.2 OF 003 banks as a culprit in the capital crunch. COMMENT -------------- ¶12. (SBU) Officials in Central Vietnam, particularly in Danang, have spent the last few years heavily focused on improving the region's infrastructure, particularly transportation networks. However, they still are waiting for the new infrastructure to bring significant investment. Authorities in Danang and Thua Thien Hue in particular seem to have an "if we build it, they will come" mentality and are short on other initiatives to attract investment, particularly much needed regulatory reform. And while they are concerned about human resource and capital access deficiencies, local officials did not spell out clear plans for how they would confront these problems. WINNICK