US embassy cable - 03HANOI2113

UNCLAS SECTION 01 OF 07 HANOI 002113 
 
SIPDIS 
 
USDA FOR FAS/EC/Chambliss and Tilsworth 
 
E.O. 12958: N/A 
TAGS: EAGR, EAID, KSEP, VM 
SUBJECT:  VIETNAM: FY-2004 FOOD AID REQUEST 
 
REF: STATE 181481 
 
================================ 
FY-2004 Food Aid Request Summary 
================================ 
 
1.  SUMMARY:  Post requests a food aid grant of $6 
million  (roughly 45,000 metric tons) of wheat.  Most 
of the monetized proceeds will be used to construct 
primary schools and irrigation projects in poor rural 
areas. The remaining funds will be used to continue a 
range of agricultural science and technology projects, 
build and equip a baking vocational school, make small 
grants to local NGOs, and support two agro-business 
projects for smallholder families.  END SUMMARY. 
 
2.  Per REFTEL, Post is attaching as much detail as 
possible. Post is requesting a PL-480 Title I-funded 
Food for Progress food assistance grant to the 
Government of Vietnam. 
 
============= 
Justification 
============= 
 
 
 
3.  Despite encouraging economic performance arising 
from major economic reforms that began in 1986, Vietnam 
remains a very poor country with a limited ability to 
effectively and efficiently utilize its rich resource 
base or productive labor force.  While annual per 
capita GDP has risen over this period from just above 
$100 to roughly $400, Vietnam remains one of the 
world's poorest countries. Vietnam continues to be an 
agrarian economy with 70 percent of the labor force 
engaged in farming. In many ways, this country is only 
at the beginning of its transition to a market economy. 
The 2001 U.S.- Vietnam bilateral trade agreement (BTA) 
and Vietnam's efforts to accede to the WTO indicate 
that Vietnam is prepared to continue reforming its 
economic policies. 
 
4.  To support the continuing economic reforms, Vietnam 
will need an educated and skilled workforce.  To reach 
that objective, the Government of Vietnam (GOV) has 
taken action to greatly expand the number of elementary 
schools and improve student access (lower school fees) 
to those schools.  Despite those lofty goals, the 
current educational situation suffers from a lack of 
resources. 
 
5.  Although the Government has tried to build as many 
elementary schools as it can, the number of schools, 
particularly in rural areas, is not sufficient.  Many 
rural students only spend 3-4 hours per school day in 
class because the schools are forced to have two or 
three shifts each day. 
 
6.  However, the GOV has developed a new plan 
(Education and Training Strategy to 2010) that calls 
for the construction of enough schools so all 
elementary students can attend a full day of school. 
To achieve that goal the GOV (through the provincial 
governments) will have to build thousands of new 
elementary schools. 
 
7.  In addition to the goal of having full-day school 
for all elementary students, the GOV has announced that 
it will increase spending on education from about 3 
percent of the GOV's budget in 1997 to 20 percent by 
2010. A related goal, by 2015, would authorize all 
elementary students free access to schools.  Currently, 
parents pay a small fee for each child attending 
school. 
 
 
 
8.  Even though education will take a 20 percent share 
of the GOV's budget (moving from 3.7 percent of GDP to 
4.2 percent by 2015), the GOV is actively seeking donor 
assistance (ranging from UN agencies to bilateral 
support) to help realize its educational goals. If 
Vietnam does, by 2015, allocate 20 percent of its 
budget to education, it will be one of the few 
countries in the world to devote such a high percentage 
to education. 
 
9.  In compiling the list of projects in this request, 
Post focused on projects that would meet Vietnam's 
compelling humanitarian needs and which will also 
support increased development of economically 
sustainable activities in rural areas. 
 
10.  In addition to meeting some of Vietnam's immediate 
needs, many of the proposed FY-2004 activities (such as 
the ag biotech projects) will pay additional dividends 
by allowing Post to work on ensuring that U.S. 
agricultural commodities are treated in a most-favored 
nation manner. Post particularly supports additional 
assistance for Vietnam's biotech framework law and the 
implementing guidelines. 
 
=============== 
Project Summary 
=============== 
11.  On behalf of the Government of Vietnam (GOV), Post 
requests approximately 45,000 metric tons of wheat 
(monetized value of $6 million) to carry out six sets 
of projects: 
(1) construct 20 primary schools in poor, rural 
mountainous regions [50% of total funds], 
(2) undertake five irrigation projects to enhance food 
security [25%], 
(3) provide technical support to various ag S&T 
(including biotechnology) projects [12%], 
(4) construct and equip a baking vocational school 
[8%], 
(5) provide small humanitarian grants to local NGOs 
[3%], and 
(6) support two ag-business projects (dairy goats; 
mushrooms) for smallholder families  [2%]. 
 
 
 
12.  The GOV's Ministry of Finance will coordinate the 
projects with relevant ministries, including the 
Ministry of Planning and Investment, Ministry of 
Education and Training, Ministry of Health, Ministry of 
Agriculture and Rural Development, and other 
appropriate government and NGO groups at the central, 
provincial, district, and communal levels. The U.S. 
Embassy's Office of Agricultural Affairs will be 
involved as a monitor during the monetization process, 
and will be fully-informed as the GOV implements the 
plan of operation. 
 
13.  NOTE: The list of projects provided in paragraph 
11, and described in more detail below, is meant to 
identify areas for possible projects. Wherever 
possible, we provide information on what a specific 
project is meant to achieve. In areas where we propose 
to augment ongoing projects, we provide information on 
the current project. And if possible, we suggest how 
the project might be expanded. This is only intended to 
be a menu of options. Clearly, Post must carefully 
coordinate with the GOV and with other donor 
organizations to develop a final list that reflects 
both GOV priorities and the areas where we can make the 
biggest impact. END NOTE. 
 
========================================== 
 GOV's Capability to Implement the Program 
========================================== 
 
14.  The GOV, through the Ministry of Finance, has 
carried out two successful Section 416b programs (in 
FY-1999, and FY-2000) and a Food for Progress grant in 
fiscal year 2002. Based on the positive economic 
reforms the GOV has taken since 1986, the World Bank 
and the IMF have recently increased their support for 
Vietnam. Vietnam is one of the fastest developing 
countries in the world, and is now the largest 
recipient of World Bank IDA funds. 
 
==================== 
Need for the Program 
==================== 
 
 
 
15.  Ever since the 'doi moi' economic liberalization 
policy was implemented in 1986, Vietnam has made 
incredible progress. However, that was starting from a 
very closed, poor, and food-deficit starting point. 
Although Vietnam has made a great start, the 
distribution of economic benefits has been greatly 
skewed toward the urban populations in Hanoi and Ho Chi 
Minh City. Given that most of the rural areas remain 
based on subsistence agriculture, rural life has not 
greatly improved. According to Vietnamese national 
budget statistics, many of the rural provinces are only 
able to supply about 30 percent of the funds needed for 
key projects (including construction of elementary 
schools). Although the national budget and foreign 
donors supply additional funds to the poorer provinces, 
there are many rural projects (and schools) waiting for 
funding. 
 
16.  Roughly 70 percent of the labor force is still 
engaged in subsistence agriculture. Out of Vietnam's 80 
million people, about 30 million people are estimated 
to be below the poverty line and most of them are rural 
farm families. While income has grown over the last 17 
years, the average GDP per capita is still estimated at 
roughly $400. As noted above, the distribution is quite 
uneven B with urban families enjoying average incomes 
$1,000- $3,000 while many rural, mountainous families 
are surviving on less than $100 per year.  All of the 
projects in this FY-2004 proposal are directly aimed to 
enhance the lives and incomes of rural poor families. 
 
=============== 
Project Details 
=============== 
 
17.  Schools: The largest share of the funds is 
allocated to construction of primary schools in rural 
mountainous areas. According to the Ministry of 
Education and Training (MOET) the key to improving the 
lives of the rural poor children is to make sure that 
each child has the opportunity to attend an elementary 
school, within the district or commune. Vietnam, with 
roughly 80 million people, has 53 different ethnic 
groups. While the vast majority of the population is 
ethnic Vietnamese, many of the smaller ethnic groups 
have migrated over the centuries into very desolate and 
resource-poor areas. 
 
18.  Schools:  MOET announced at a recent conference 
that its first priority in the rural, poor regions is 
to make sure all children have the opportunity to 
attend primary school and have access to basic health 
services (through the school). In addition to educating 
the children, the schools will sponsor outreach 
activities to disseminate basic nutritional and family 
care information.  The schools will: 
 
- Prepare the next generation by ensuring access to 
primary education, 
- Provide basic health services to rural areas, 
- Reduce childhood malnutrition due to lack of 
information, and 
- Ensure that poor, ethnic children learn to read and 
speak Vietnamese in addition to their ethnic languages. 
This will further their own and their families' 
integration with the rest of the nation. 
 
 
 
19.  Irrigation Projects:  The second largest 
allocation is targeted to irrigation and food security 
projects. In Vietnamese, the words for country 'dat 
nuoc' mean 'land' and 'water'. The amount of land 
available for agriculture will not increase (in fact as 
the urban centers expand, the total planted area is 
dropping), so water management is becoming increasingly 
important.  Water management B irrigation, water 
reserves, storage systems, and canals B is the key to 
achieving food security for the subsistence farmers in 
many areas. Unusual droughts and floods in the last 
three years have increased the need for better water 
systems, especially in the central and south coastal 
provinces. 
 
20.  Irrigation Projects:  Irrigation projects will be 
undertaken in five poor districts that have been 
alternating between drought and floods. Over the last 
three years, several central and south coastal 
provinces have suffered from droughts during the 
growing season and then floods during the harvest 
period. In these coastal provinces, excess rain in the 
mountains rapidly turns into floods along the coast. 
Population pressure and deforestation are exacerbating 
the flooding. The irrigation projects will: 
 
- Improve rural incomes and food security by better 
managing the flow of water (both droughts and floods), 
- Encourage farmers to conserve forests along hilly and 
sloping terrain, 
- Encourage farmers to have multiple crops on the same 
field, rather than clear new (formerly forested) land, 
and 
- Stabilize production, hence income and food supplies. 
 
 
21.  S&T / Biotechnology:  About 12 percent of the 
funds are going to continue a number of agricultural 
science and technology projects. Post strongly supports 
a biotechnology 'law' project, which is developing the 
legal framework to support the soon-to-be-released 
Vietnamese-developed biotech products. In the FY-2002 
Food for Progress program, a small amount of funding 
was made available to buy equipment to further prepare 
for Vietnam's first field trials of biotech crops. Now 
the constraint is not equipment or biotech planting 
material, but the lack of a comprehensive biosafety 
law. The two leading ag research institutions 
(Institute of Biotechnology B IBT and Agricultural 
Genetics Institute B AGI) have developed biotech crops 
that are ready for field trials. Once the biosafety law 
and implementing regulations are prepared, the biotech 
field trials will begin. A biotech/biosafety law will: 
 
- Boost and diversify rural incomes by promoting new 
crop varieties and crops that do not need as many 
chemical inputs (fertilizer, pesticides, herbicides), 
- Continue efforts to develop new export-oriented crops 
(such as shelf-stable papaya and fruit-fly free mangos, 
dragon fruit, etc.), 
- Allow Vietnamese scientists to bring internationally 
developed biotech plants into Vietnam for further 
refinement for use in Vietnam's agricultural sector, 
- and, after the biosafety law and implementing 
regulations have been released, allow Vietnam to start 
controlled field trials of Vietnamese-developed biotech 
crops. 
 
22.  Other potential agricultural S&T Projects: 
 
A.  Soil /Climate Mapping: Fund a multiple-year program 
to conduct detailed soil and climate surveys necessary 
to develop modern sustainable practices for resource- 
poor farmers to combat land degradation, particularly 
on hilly tracts under coffee cultivation. This project 
would be conducted as part of USDA Natural Resources 
Conservation Service>s (USDA/NRCS) existing cooperation 
with Vietnam's National Institute for Soils and 
Fertilizers. Under an expanded project, USDA/NRCS would 
engage in professional training and development. 
 
B.  Timber Usage: Develop use for melaleuca timber as 
an alternative fiber source for engineered wood 
products in cooperation with USDA/FAS/ICD's research 
and scientific exchanges division (RSED). 
 
C.  Upland Farming Techniques:  Develop environmentally 
sustainable alley cropping systems in the uplands, 
building on joint research being conducted by Auburn 
university with Vietnamese scientists. 
 
D.  Rice Power: Support Louisiana State University's 
rice hull co-generation project which aims to convert 
Vietnam's rice hull waste into energy. 
 
E.  Flooded Soybeans: Build on cooperative research 
already being sponsored by USDA to evaluate several 
strains of Vietnamese soybean germplasm for tolerance 
to flooding and disease that will ultimately benefit 
both U.S. and Vietnamese farmers. 
 
 
F.  Natural Resource and Biodiversity Conservation:  As 
Vietnam's population and economy continues to grow, 
human impact on the environment increases, resulting in 
land and forest degradation which will result in even 
worse flooding in Vietnam's river basins than the 
disastrous floods of recent years.  While many donors 
are working in the conservation area, we would look for 
the areas in which U.S. technical assistance would 
produce important results. 
 
G.  SPS Regulation of Plant and Animal Trade:  Fund 
joint SPS (sanitary and phytosanitary) activities 
between the GOV and the USDA Animal and Plant Health 
Service (APHIS). Once the necessary exchange of 
protocols has been completed, additional training would 
be developed aimed at improving the professional 
standards of Vietnam's plant and animal quarantine 
service. This activity would also expand the GOV's 
capacity to actively participate in regional and 
multilateral food standard-setting bodies such as the 
Food and Agriculture Organization (FAO), Codex 
Alimentarius, and the international union for the 
protection of new varieties of plants (UPOV). 
 
23.  Baking Vocational School: About 8 percent of the 
funds will be allocated to construct and equip a 
vocational school focusing on practical training in 
baking techniques and food handling skills. Hopefully 
NGOs working with street and orphaned children will 
sponsor many of the students. A U.S. wheat commodity 
association has indicated that they will partially fund 
the school and would be willing to provide technical 
expertise for the project, including providing some of 
the initial teachers. 
24.  Small Humanitarian Grants:  A small amount of 
funds will be used as small grants to local NGOs 
working on a wide range of humanitarian projects. Over 
the last three food aid donations, the Embassy has been 
able to direct these small grants to many projects that 
can have a big impact on the targeted community. In the 
FY-2002 program, the Embassy, working with local NGOs, 
directed funds to an orthopedics and rehabilitation 
center, to two orphanages building additional 
dormitories, to two projects protecting the unique 
biodiversity of Vietnam, to a program working with HIV 
positive street kids, and to a water sanitation program 
in an ethnic minority village. 
 
 
 
25.  Dairy Goats & Mushrooms:  The remainder of the 
funds is going to support two rural business 
development projects B dairy goats and mushrooms.  The 
rural development projects are based on existing 
research, from two of Vietnam's leading institutions in 
Ba Vi and Hanoi that have developed production models 
that need to be tried under actual field conditions. 
The Agricultural Genetics Institute (AGI) with mushroom 
production and the Ba Vi Goat and Rabbit Research 
Institute have been selected based on the results of 
their limited trials. Model farms, to demonstrate best 
practices, will be set-up close to the existing 
institutions outside of Hanoi. If this activity goes as 
expected, then additional model farms would be set-up 
throughout the nation. While the model farms will be 
organized by the GOV, several international NGOs are 
quite eager to try out these new income-generating 
additions to the normal cropping pattern. Now that the 
research has been done, these larger field tests will 
development a business model for rural families to use. 
These activities will: 
 
- Boost and diversify rural incomes by promoting two 
new economic activities B dairy goats (for milk and 
meat) and mushroom production, 
- Continue efforts to develop additional non-seasonal 
rural projects that are income generating and market 
(local and export) developing, 
- Develop model farms for 'best practices' 
demonstration days. 
 
26.  Project Funding Summary Table: 
 
Project Activity                            Funding 
================                           ========== 
(1) Construction of 20 Elementary Schools  $3,000,000 
(2) Irrigation Projects                    $1,500,000 
(3) Ag S&T Project / Biotech Law             $700,000 
(4) Baking Vocational School                 $500,000 
(5) Small Humanitarian Grants                $200,000 
(6) Agro-Business (Dairy Goats / Mushrooms)  $100,000 
========================================== ========== 
Total                                      $6,000,000 
 
 
 
NOTE:    If actual proceeds differ from expected 
proceeds, the number and/or size of the irrigation 
projects will be scaled up or down as required. 
 
27.  Recognition:  Each school and irrigation project 
will have a small sign or plaque identifying the USG as 
a donor for that project. Similarly the other projects 
will note that funding was provided by the USG through 
a USDA commodity monetization. The Ministry of Finance 
and the U.S. Embassy will issue press releases to 
highlight the start of each of the major components of 
this program. 
 
28.  Private Sector Participation in the Sale of the 
Commodities: The Aid Reception and Coordinating unit 
(AIDRECEP) of the Ministry of Finance will advertise 
the availability of the wheat in local newspapers, as 
well as contacting all known wheat millers and traders. 
AIDRECEP will hold an open tender, with all bidders 
welcome to attend. Each bidder will have to be 
qualified by submitting financial information to 
demonstrate that appropriate funds are available should 
that bidder win the tender. At the start of the open 
tendering process, AIDRECEP will announce the pre-set 
floor price. Each qualified bidder will then submit 
written bids in a series of 3-5 rounds. At the 
conclusion of each round the high bid will be 
announced. If during that process, the prices exceed 
the pre-set floor price, AIDRECEP will announce the 
final round and the winner of that round will be 
awarded the wheat. If the bids are below the pre-set 
floor price, a second bidding process will take place, 
with smaller lot sizes. 
29.  Bidding:  The bidding process will be open to 
private and public sector buyers. AIDRECEP anticipates 
receiving bids from at least seven of the 9-11 major 
wheat millers (Vietnamese, foreign-owned, and joint 
ventures) now operating in Vietnam. In addition to the 
established wheat millers, several Vietnamese trading 
companies have also participated in previous AIDRECEP 
commodity tenders, and are expected to participate in 
the wheat tender as well. 
 
 
 
30.  Procedures for Assuring Receipt and Deposit of 
Sale Proceeds:  The AIDRECEP unit of the Ministry of 
Finance will receive payment for the wheat from the 
buyer through a bank guarantee. Companies always pay 
AIDRECEP knowing that the Ministry of Finance has the 
power to close the company over any non-payment issues. 
AIDRECEP will require a bank bond to be confirmed prior 
to the export of the commodity, and expects full 
payment for the wheat upon presentation of export 
documentation. As noted earlier, AIDRECEP has 
successfully handled three U.S. wheat monetizations, as 
well as commodity transactions for other donors. The 
proceeds will be deposited in a separate non-interest 
bearing account for a short time, until the funds are 
directly transferred to accounts under the control of 
the local or a provincial group charged with overseeing 
each project. 
 
31.  Port & Logistical Issues:  The wheat will be sold 
(to one or several buyers) at the port complex of Ho 
Chi Minh City (HCMC), the largest port in Vietnam, the 
port complex of Hai Phong, the second largest port in 
Vietnam, or the new Thi Vai private-sector port. All of 
the ports are fully capable of handling a wheat 
shipment of 45,000 tons, although the vessel would have 
to be lightened before entering the HCMC or Hai Phong 
port.  The new panamax-capable port (and wheat mill) on 
the Thi Vai river east of HCMC, will likely be a bidder 
for this shipment. 
 
32. Duty-free Entry:  The GOV authorizes duty and VAT 
tax-free entry for commodities used for humanitarian 
purposes.  The Ministry of Finance would ensure all the 
required details and documents have been submitted. 
 
33.  Economic Impact:  Before 1995, there were only two 
wheat mills in Vietnam (state-owned companies). Since 
then more than 15 private and joint venture wheat mills 
have been constructed. Over the last eight years, the 
Vietnamese wheat flour market has soared; especially as 
domestic wheat millers have been able to supply low- 
cost wheat flour compared to expensive imported wheat 
flour. Vietnam does not produce wheat. Imports of wheat 
have jumped from about 250,000 metric tons in 1995 to 
slightly more than 855,000 metric tons in 2002.  Post 
expects Vietnam's import demand for wheat to continue 
expanding rapidly. 
 
 
 
34.  Bellmon Determination:  The domestic demand for 
wheat flour, even with the rapid growth seen in the 
last eight years, exceeds the supply, generating a 
flour deficit.  Vietnam has had a wheat flour deficit 
for many years, probably ever since the French started 
producing baguettes in Indochine. The amount of wheat 
to be supplied under this proposed food aid grant 
represents less than 5 percent of total wheat flour 
consumption. Therefore, the proposed importation will 
not disrupt normal commercial trade channels or 
discourage existing local production for this or a 
similar substitute commodity. A fully detailed Bellmon 
analysis will be conducted when the donation is 
announced. 
 
35.  COMMENT:  Post appreciates USDA (and inter-agency 
Food Coordinating Committee) willingness to proceed 
with additional food aid programming for Vietnam.  We 
are pleased with the development of the past programs 
and look to enhancing this development tool in the 
future; both the United States and Vietnam stand to 
gain much from doing so.  END COMMENT. 
 
BURGHARDT