BUILD IT AND THEY WILL COME, OR MAYBE NOT: THE LAOS-VIETNAM

UNCLAS SECTION 01 OF 03 HO CHI MINH CITY 000533 SENSITIVE SIPDIS E.O. 12958: N/A TAGS: ECON ETRD EINV ELTN EWWT PREL PGOV LA VM SUBJECT: BUILD IT AND THEY WILL COME, OR MAYBE NOT: THE LAOS-VIETNAM EAST-WEST ECONOMIC CORRIDOR REF: A. 07 HCMC 921 ("EWEC CONFERENCE") ¶B. VIENTIANE 88 HO CHI MIN 00000533 001.2 OF 003 ¶1. (SBU) Summary. Although the bridges, the state-of-the-art tunnel, and the all-weather road that knit Thailand, Laos, and Vietnam together via the "East-West Economic Corridor" (EWEC) have been built, initial hopes for a surge in investment and trade along the route remain unfulfilled. For a number of reasons, including the fact that the road traverses very undeveloped regions, not much has come to Vietnam via the EWEC except a modest number of Thai tourists. While Laos' cheap land and labor are attracting Vietnamese resource-extraction firms, these firms are stymied by the same obstacles hindering other development along the EWEC. Poor harmonization of border procedures and opaque Laotian investment requirements -- not to mention the context of the lightly populated, poverty-stricken area traversed by the route -- conspire to make the EWEC more of rural road project than an economic corridor, according to Vietnamese Government (GVN) officials as well as Vietnamese and international investors. While Danang officials acknowledge the EWEC's thus-far unfulfilled potential and appear willing to subsidize social and economic development along the Laotian portion of the corridor, they are also lobbying multilateral development banks to line up support for a more southerly "EWEC 2" that they claim would provide immediate benefits by connecting existing economic centers and following the route that trucks actually take. End Summary. Breakfast in Thailand, Lunch in Laos, Dinner in Danang -------------- -------------- ¶2. (SBU) At a 2007 conference in Danang inaugurating the EWEC, Vietnam's Ministry of Foreign Affairs predicted that the boom in trade and investment generated by the 1,450 km Burma-to-Vietnam corridor would render Danang an international hub of trade, finance, and industry (Ref A). Although crucial EWEC infrastructure components such as the Mukdahan bridge spanning the Mekong River between Thailand and Laos and the $200 million USD Hai Van tunnel north of Danang now make it possible to drive the 500 km from the Thai-Lao border to Danang in a day, the predicted boom in trade and investment has failed to materialize. During a four-day traverse of the Lao-Vietnam portion of the EWEC in mid-June, a delegation from USCG HCMC and Embassy Vientiane heard the same story from many different officials and business people: burdensome border paperwork, opaque Laotian investment procedures, and the lack of economic activity on the sparsely-populated and poverty-stricken Laotian stretch of the EWEC stifle the corridor's potential. Danang officials noted that the only bright spots were a modest increase in the number of Thai tourists and the volume of Lao lumber -- much of it likely illegal -- entering Danang. ¶3. (SBU) Major Vietnamese investors in Laos -- typically state-owned enterprises or large, politically well-connected private firms, such as Foodinco Song Da Corp, Sovico or the Saigon Investment Group (which are involved variously in rubber, cassava, hydropower, mining, and real estate) -- all noted that in Laos, it appears that all business starts with politics. It is essential for high-level GVN officials to arrange matters with their GoL counterparts before any project could proceed. As Mr. Luu Huy Bien, General Director of the state infrastructure conglomerate Song Da Corporation, put it, "Company to company contact is impossible." Even high-level Government of Laos (GOL) support is no guarantee of expediency. The Savan-Seno Special Economic Zone (SSEZ) located at the western Laotian terminus of the EWEC, is a case in point. The SSEZ is administered directly by the Office of the Lao Prime Minister, not the Ministry of Planning and Investment, as normal procedure would dictate. Licensed in 2003, the SSEZ is still in the land-clearance stage, and has leased only 60 of a total of 234 ha, according to the Executive Director of the Malaysian firm licensed to develop the SSEZ, Mr. Ong Chin Chai. Tourism Up, Border Hassles Steady -------------- ¶4. (SBU) While increased tourism is a bright spot, tourism service providers complain that much larger numbers of leisure travelers would use the EWEC if border procedures were simplified. The Amcit general counsel of "Savan Vegas," a U.S.-invested casino in Savanakhet often referred to as "Lao Vegas," at the western Laotian terminus of the EWEC, said the operation was losing money because the Mukdahan bridge border HO CHI MIN 00000533 002.2 OF 003 crossing, which the casino's primarily Thai customers cross to return home, closes at ten pm. Because of slow processing, customers must leave the casino by six or seven pm to ensure they can return to Thailand. In Danang, Mr. Le Nguyen Hong of the Danang Department of Culture, Sport, and Tourism (DoCST) outlined city efforts to cater to the increasing number of Thai tourists, including the "Night Beach" project that keeps the city's beaches open and lit 24/7. He admitted, however, that due to safety concerns regarding left-vs-right-side driving, private Thai vehicles are not allowed in Vietnam (and vice versa) except when traveling in registered caravans, a restriction that essentially bars most Thais traveling by private vehicle. And tourism is further impeded by the lack of lodging and restaurant options along the route. (Note: Between Savannakhet and the Lao Bao border crossing with Vietnam, our delegation searched in vain for a public bathroom, too.) Cheap Land, Cheap Labor, and Less Competition in Laos -------------- -------------- ¶5. (SBU) Despite the border hassles and circuitous investment procedures, Vietnamese investment in Laos is increasing. Drawn by cheap land, cheap labor, and less competition ("You only have to worry about the Chinese," said Managing Director Mr. Luu Duc Khanh of infrastructure investor Sovico Holdings),firms with sufficient political clout to access the GOL hierarchy are investing in industrial agriculture (rubber, cassava),mining (gold, copper) and hydropower. Mr. Le Thanh Hung of the Quasa-Geruco company, a subsidiary of Vietnam Rubber Co., said that he leases 9,000 ha along the EWEC for seven dollars per ha per year, while lower quality land in Vietnam now costs $30 USD per year. Mr. Tang, manager of Foodinco's cassava and rubber plantation along the EWEC, said that he leased land for the Vietnam-equivalent annual rate of $30 USD per ha, but noted that price was not the issue, saying "there is no more land for rubber in Vietnam." Mr. Ong of the Savan-Seno Special Economic Zone said that once the zone is up and running, average wages for light industrial work at the zone would average one to one and a half USD per day. (Comment: This is slightly less than the minimum wage in rural Vietnam and considerably less than the minimum wage in urban Vietnamese centers. End comment.) ¶6. (U) The challenges in this part of Laos are nevertheless daunting, even when considering the economic potential. The Lao portion of the EWEC, Road 9, runs through some of the country's most desolate and heavily scarred areas; the old Ho Chi Minh Trail bisects the road a few kilometers from the Vietnam border, and consequently this area remains highly contaminated with unexploded ordinance (UXO). Most interlocutors we met along the road said the extent of UXO contamination was much worse than they had anticipated, and was causing them to rethink their business plans. Moreover, as one travels away from Savannakhet the ethnic Lao population declines as a share of the total and is replaced by primarily illiterate Mon-Khmer who live in very primitive conditions and are generally less prepared to enter a modern industrial labor force. Most homes here have no electricity or running water. One Vietnamese entrepreneur told us that he had to radically adjust his calculations of how much training his workers would need, and that he also now has to factor in schools, clinics, and wells when planning for his workforce. Danang Already Lobbying for "EWEC 2" -------------- ¶7. (SBU) Danang political, economic, port, tourism and customs officials all acknowledged that EWEC has been a disappointment. Officials reiterated that land and labor are cheap along the EWEC, but emphasized that the sparsely populated landscape cannot provide enough workers to maintain plantation agriculture, let alone an industrial economy. Port officials told us that the only export of note from Laos was timber, which was accumulating at such a rate that the port was running out of warehouse space. Dr. Le Huu Doc, Vice Director of the Danang Department of Planning and Investment, proposed a more southerly "EWEC 2" running from Bangkok (through Pakse to Sekong) to Danang (on route 14B in Vietnam). If a remaining 80-km stretch of dirt road could be paved, this route would generate an immediate boost to Danang's economy because it ran through the "very rich and productive" Boloven plateau, according to Dr. Doc. Doc has already pitched EWEC 2 to the Director of the ADB, and JETRO has sent a team to do a feasibility study. HO CHI MIN 00000533 003.2 OF 003 COMMENT -------------- ¶8. (SBU) As more than one interlocutor told us, the greater Mekong sub-region now has a transportation corridor, not an economic corridor. The road has been built and, in contrast to the Lao portion of the North-South Economic Corridor (ref B), remains in good condition. Despite this successful engineering, the economic results thus far are mixed at best. One thing is clear: Vietnam's influence in Laos is growing, as the "bigger brother" endeavors to both develop and take advantage of Laos' much weaker human resources and much more abundant (if rapidly dwindling) natural resources. It's an old story, the saga of the "brothers" Laos and Vietnam, and one that predated their partnership in constructing the old Ho Chi Minh trail complex. Today, as before, their common destinies are bound up in the fate of a road. End comment. ¶9. (U) This cable was coordinated with Embassy Vientiane and Embassy Hanoi. FAIRFAX