US embassy cable - 04HOCHIMINHCITY1359

UNCLAS SECTION 01 OF 03 HO CHI MINH CITY 001359 
 
SIPDIS 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ECON, PGOV, ETRD, EINV, SOCI, PHUM, PREL, KIRF, KPAO, VM, SOE, HIV/AIDS, RELFREE 
SUBJECT: KHANH HOA PROVINCE: DELAYED DEVELOPMENT 
 
REF:  HCMC 1270 
 
SUMMARY 
------- 
 
1.  (SBU) Khanh Hoa Province on Vietnam's central coast is 
attempting a development strategy based on tourism, seafood and 
maritime transport.  Geography, natural resources, and workforce 
give the province excellent development potential and some 
infrastructure investment is underway.  However, a reliance on 
state owned enterprises, and a political insider/Vietnamese-style 
crony state capitalism model may temper prospects for rapid 
growth.  Social investment, for example in HIV/AIDS prevention and 
education, appears to be inadequate.  End Summary. 
 
 
2. (SBU) Consul General visited Nha Trang and Khanh Hoa province 
October 12-13 and met with the Communist Party Secretary 
(reportedly the first Western official to do so), the Chairman of 
the People's Committee, foreign corporations, state-owned 
enterprises, religious figures, civil society leaders, and 
scientific and educational institutes. 
 
STATE CAPITALISM ON THE CENTRAL COAST 
------------------------------------- 
 
3. (SBU) Party officials and the People's Committee focused on 
plans to develop a major seaport and tourism center at Van Phong 
Bay located 50 km north of Nha Trang City.  Party Secretary Nguyen 
Van Tu requested USG assistance in finding investors.  Tu stated 
that although no development of the site has begun, Van Phong 
Bay's deep protected waters make it an ideal seaport and that by 
2020 it would be competing with the largest ports in Southeast 
Asia.  CG asked why Khanh Hoa was pursuing the development of a 
new seaport at Van Phong Bay when facilities already exist in the 
province at Cam Ranh Bay.  Tu said the Vietnamese armed forces 
were not prepared to give up Cam Ranh Bay for commercial shipping. 
He said that former Prime Minister Vo Van Kiet had advocated 
developing Van Phong for ecological tourism with port facilities 
limited to an oil transfer station.  However, he said 
enthusiastically, a Party Central Committee investigation team had 
supported the Van Phong Bay development projects and Prime 
Minister Phan Van Khai had no choice but to approve the ambitious 
plan by the Ministry of Transportation to build an international 
container terminal. 
 
4. (SBU) Deputy Party Secretary Pham Van Chi joined partway 
through the meeting.  He is directly responsible for Van Phong Bay 
and had served until this spring as the Chairman of the People's 
Committee.  (Note: Contacts said that Mr. Chi and his family 
members had extensive interests in business around the province. 
End note.)  In a separate meeting, People's Committee Chairman Vo 
Lam Phi reiterated Khanh Hoa's interest in Van Phong Bay, stating 
that it was the primary focus of the Committee's plans to develop 
the province's transport, tourism, and seafood industries.  When 
asked how the USG and Khanh Hoa Province could best work together, 
Chairman Phi again returned to Van Phong Bay, suggesting that we 
help find investors for the project. 
 
5. (SBU) Secretary Tu also noted Khanh Hoa's success in creating 
more than 1200 new small and medium businesses in the past three 
years. (Note: In contrast, Ho Chi Minh City registers 
approximately 250 new businesses per week. End note.)  These firms 
were creating 21,500 new jobs per year, he said.  Chairman Phi 
pointed to state-owned enterprise Khanh Viet Corporation as a 
model for development in the province, noting that Khanh Viet 
provides 33 percent of the province's tax revenue. 
 
6. (SBU) State-owned enterprise Khanh Viet Corporation (KVC) is 
the primary source of tax revenue for the province based on 
cigarette production.  KVC Chairman Nguyen Xuan Hoang told CG that 
KVC is the largest corporate group in central Vietnam.  Although 
KVC consists of twenty subsidiaries in various sectors, it employs 
only 4000 people.  Mr. Hoang stated that the corporation is based 
upon capitalist principals and ensures equality for all of its 
subsidiaries, although it maintains control of business strategies 
and budget, and reserves the right to move executives.  KVC's 
tobacco interests constitute 70 percent of the corporation, but it 
does not export its tobacco products.  KVC is also involved in 
tourism and textiles and is looking to expand into the production 
of crocodile and ostrich leathers in the near future.  Mr. Hoang 
boasted that of the 80 people KVC has working in its headquarters, 
only five were required to manage its imports and exports.  Mr. 
Hoang also stated that KVC has never been subjected to an outside 
audit. 
 
BUSINESS SUCCESS STORIES 
------------------------ 
 
7. (SBU) Hyundai-Vinashin Shipyard (HVS) represents the first 
heavy industry development in Khanh Hoa.  Begun in April 1999, HVS 
has grown rapidly, currently employing nearly 4,000 Vietnamese and 
Korean staff.  The yard includes two graving docks and a series of 
quays. Four ships ranging from 50,000 to 150,000 deadweight tons 
were undergoing repair.  The yard can service and repair ships of 
up to 400,000 dwt. Ships average between 5 and 15 days in service 
and yard bills seem to range from USD 250,000 to USD 1.5 million. 
HVS President Sung Woo Lee stated that the company's success stems 
from the availability of skilled and inexpensive labor, 
cooperative local authorities, favorable import/export 
regulations, and a joint venture partner (Vinashin) that has 
played a critical role in working with authorities.  HVS plans to 
begin building ships in the next few years. 
 
8.  (SBU) Philippine-based Rapexco Rattan Export Company currently 
has 7,000 employees working in its two Khanh Hoa factories; the 
firm exports more than 3,000 containers of rattan furniture 
annually and is a major supplier to IKEA and other furniture 
companies.  Rapexco's U.S. citizen country manager explained that 
the company's success was based on the ready availability of 
quality inexpensive labor and an experienced Manila-based business 
office skilled in working with US and international markets. 
 
9.  (SBU) Ms. Le Thi Thu Ha is General Director of Khanh Hoa Trade 
& Investment Corporation (KHTI), a state-owned enterprise under 
the People's Committee with interests in luxury resorts, 
industrial parks, and import/export companies.  She stated that 
KHTI's success is based not only on its relationship with the 
People's Committee but also on a business strategy focused on a 
bottom line.  KHTI is involved in developing projects, each of 
which is managed by a joint venture partner.  Ms. Ha noted several 
factors inhibiting development in Khanh Hoa and Vietnam in 
general, most notably the high cost and slow pace of equitization, 
limitations on foreign land ownership, strict labor laws, and the 
lack of a banking system and capital market. (For example, she 
said that KVC's cigarette factories made the company a cash cow, 
but it did not know what to do with the proceeds and was pouring 
money into poorly planned investments, even as KHTI was starved 
for investment capital for bankable projects.)  Ms. Ha stated that 
these issues were on the agenda for the annual meeting between the 
Vietnam Chamber of Commerce and Industry (VCCI) with the Prime 
Minister.  CG asked directly who in the Party leadership could 
advance these issues effectively.  She responded pessimistically 
that she could think of no one. 
 
CIVIL SOCIETY IN KHANH HOA 
-------------------------- 
 
10.  (SBU) Visits to the Long Son Pagoda and the Sao Bien Major 
Seminary demonstrated that Buddhist and Catholic organizations 
have little trouble operating but face close government 
supervision.  Father Tran Thanh Phong, Rector of the Sao Bien 
Seminary, indicated that because Nha Trang is a tourist center, 
the seminary's activities enjoy a certain level of additional 
protection.  Father Phong said the church is not permitted to 
teach catechism other than as part of Sunday services and that any 
efforts to bring in converts to the Catholic community are 
discouraged. However, he noted that there had not been any 
problems in working with the Vatican.  A meeting with Thich Tri 
Tam, Venerable Bonze of the Long Son Pagoda, was not nearly as 
informative, as the bulk of the meeting featured the Bonze's 
recitation of a prepared statement while under the gaze of 
military police standing just outside the open door.  Bonze Tam 
stated that the pagoda had absolutely no problems with the local 
authorities. 
 
11. (SBU) HIV/AIDS is clearly an emerging issue in Khanh Hoa 
Province.  People's Committee Chairman Phi noted that the province 
has the tenth highest infection rate in Vietnam.  He cited Khanh 
Hoa's active publicity campaign promoting the use of condoms, 
adding that it is the only province to set up a separate 
protection center for victims of HIV/AIDS, the Center for Health 
Education and Communication.  However, Mr. Luong Duc Hoa, a 
project officer with the center, stated that support from the 
local government is inadequate to meet the center's needs.  He 
complained that the total annual budget allocated to the center by 
the PC was only USD 1,000.  Although the center has received some 
funding from the Ford Foundation, Mr. Hoa hopes that further 
funding from PEPFAR may become available for the center, which has 
the only program in Vietnam designed for men who have sex with men 
(MSM). 
 
12.  (SBU) Higher education also appeared underfunded.  Dr. Lien, 
Rector of the University of Fisheries, remarked that the local 
authorities have not provided sufficient support to the 
university, thereby limiting its ability to attract qualified 
faculty.  Chairman Phi indicated that the province hopes to 
transform the Teacher Training College into a university and some 
vocational schools into colleges, but did not provide a time line. 
 
13. (SBU) Comment: Despite potential, Khanh Hoa appears to be 
hindered by a strong state/crony capitalism approach and the 
authorities' reliance on state-owned enterprises.  Officials' 
hopes for the Van Phong Bay project as the next great cash cow for 
the region seem misplaced.  Success stories such as Hyundai- 
Vinashin and Rapexco have had passive cooperation but no active 
government involvement.  Furthermore, key areas in health and 
education are underfunded.  In contrast, up the coast in Danang, 
the authorities have stressed public infrastructure investment to 
attract investors to take advantage of similar resources (Reftel). 
In Khanh Hoa, authorities seem to believe that they can lure 
investors into building the infrastructure as a means of 
developing the local economy. 
 
 
WINNICK