US embassy cable - 05HOCHIMINHCITY667

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