Cablegate: Divergent Development Paths in Three "Deep South" Provinces

DE RUEHHM #1088/01 3581137
O P 231137Z DEC 08




E.O. 12958: N/A

REF: HCMC 1075

HO CHI MIN 00001088 001.2 OF 004

1. (U) Summary. Vietnam's "deep south" provinces of Ca Mau, Bac
Lieu and Soc Trang are among the roughest business environments
in the southern provinces of Vietnam. Both private and
state-owned enterprises say they are struggling with poor
infrastructure, weak consumer demand and inadequate access to
capital, especially during this global economic downturn. Until
recently, one bright spot had been aquaculture, where the "deep
south" provinces have leveraged environmental conditions and
cheap labor to become a global player in fish and seafood trade.
During our recent visit, officials raised concerns over
aquaculture trade issues because industry concentration makes
the "deep south" particularly vulnerable to declining
aquaculture export markets. Since this region is also among the
World's most vulnerable to climate change, provincial leaders
applauded broadening bilateral cooperation with the United
States on the environment (e.g., the recently opened Delta
Research and Global Observation Network institute -- DRAGON).
End summary.

2. (SBU) EconOff visited Ca Mau, Bac Lieu and Soc Trang
provinces in late November to talk with provincial leaders, U.S.
investors, state-owned enterprises and companies trading with
the United States. Each province is poor, with per capita
incomes ranging from 625 dollars per year in Soc Trang to 673
dollars per year in Bac Lieu, well below the national average of
835 dollars per year. According to provincial officials,
incomes are rising as the pangasius ("catfish") and seafood
processing industry grows. In the region, agriculture and
aqua-culture dominate the economy while industry and services
are poorly developed. Interestingly, these provinces have
adopted different attitudes toward economic reform, as
demonstrated in the USAID-funded Vietnam Provincial
Competitiveness Index (VPCI), the annual business survey ranking
each of Vietnam's provinces from one to 64. The leadership in
each province was keenly aware of their rank in this year's VPCI
survey, but none more-so than Ca Mau.

Ca Mau: Building From a Low Base
3. (SBU) EconOff met with the provincial People's Committees
(PPC) and the Departments of Planning and Investment (DPI);
Industry and Trade (DOI); External Relations (ERO); Agriculture
(DOA) in each province. Officials in Ca Mau told EconOff they
are focusing now on improving transparency and government
accountability in order to attract foreign investment.
[Comment: This is clearly a provincial, even national priority.
In an extraordinary move this September, Central Party
Committee member Nguyen Tuan Khanh (then Deputy Head of the
powerful Communist Party Central Organizing Committee) was
appointed Ca Mau Party Secretary to clean up the province,
replacing notoriously corrupt former Party Secretary Nguyen
Thanh Binh. End comment.] Through efforts to streamline
bureaucracy and improve infrastructure, Ca Mau province has
risen steadily from being of Vietnam's worst performing
provinces at number 57 in 2006, to number 29 in 2007 to number
18 in the just-released 2008 survey. In fact, in 2008 Ca Mau's
ranking increased more than that of any other province in
Vietnam over 2007.

4. (SBU) Ca Mau does has some advantages -- land for development
is readily available because the soil is not suitable for
commercial rice cultivation, DPI said, and the province has a
one-stop shop for investors to handle license applications. PCC
representatives said the focus on creating a better business
climate is starting to yield results -- Ca Mau now has five FDI
projects worth 10 million dollars.

5. (SBU) The occupancy rate at the one American-invested hotel
in Ca Mau city has climbed over the last year, up from 20
percent to 40 percent, the investor said, adding that he
believes this is due to Ca Mau's improved investment
environment. The U.S. investor point out that while
infrastructure is a challenge for the Mekong Delta as a whole,
Ca Mau does have daily flights to and from Ho Chi Minh City
(HCMC), giving it a distinct advantage over its neighboring
provinces. New roads under construction using Central
Government funds have enable construction of other projects, for
example the Malaysia-Vietnam joint venture Ca Mau I power and
fertilizer plant, a DPI official stated.

Bac Lieu: Falling into the Ocean

HO CHI MIN 00001088 002.2 OF 004

6. (SBU) Bac Lieu province provided a marked contrast. Eleven
years ago the province asked the central government to split Bac
Lieu off from the province then called Minh Hai because the
budget and state investment were being spent disproportionately
in Ca Mau City. Since then, Bac Lieu enjoyed a flurry of
central government funded investment in the province's
infrastructure (as well as one of the "nicest" People's
Committee and Party Headquarters complexes in the Mekong Delta).
In recent years though, Bac Lieu province is slowly settling to
the bottom, as measured by the VPCI. The province has fallen
from number 58 in 2006 to number 60 in 2007 to number 62 in
2008. In contrast to Ca Mau's 600 million dollars in seafood
exports, Bac Lieu expects less than 300 million dollars in total

7. (SBU) As if reading from a script, each provincial official
we talked with thought increasing seafood exports, modernizing
agriculture and vague "eco-tourism" projects were the building
blocks of their province's economic future. The lack of skilled
workers and poor infrastructure (most exports go by boat to
HCMC) must be overcome if the province is to attract investment,
provincial officials agreed. The southern provinces are also at
risk from climate change, they added, and will suffer from
saline encroachment and disruptive weather patterns including

8. (SBU) One of Bac Lieu's oldest FDI projects is a
U.S.-invested shrimp farm, licensed in 1994 when solid
relationships with local officials were a determining factor in
a ventures success. A lot has changed in 15 years, the manager
said. Now the rapidly rising cost of inputs, the threat of
trade remedies and evolving food safety regulations are the
biggest challenges this investment faces, according to the
director. Management there said the low cost of labor and the
company owner's Bac Lieu roots were the reason he continues to
build on his initial 10 million dollar investment.

Soc Trang: Middle of the Road
9. (SBU) Soc Trang province chose a third way. Led by steady
People's Committee Chairman (and local Viet Cong revolutionary
prior to 1975) Huynh Thanh Hiep since July 2003, Soc Trang's
VPCI ranking bobbed up from number 19 in 2006 to number 11 in
2007 before dipping back down to 29 in 2008. In 2007 in
particular, the PPC chief of staff told EconOff, the province's
ranking improved because the province focused on streamlining
official procedures and created a one-stop shop for licensing.
Transparency is another crucial effort, he said, adding the PPC
is trying to change the mindset from "responding before the
deadline" to responding "as soon as possible" to applications.

10. (SBU) Still, just two FDI projects are located in Soc Trang,
a Taiwanese food aquaculture company and a U.S.-invested jewelry
factory licensed in 2007. According to the provincial DPI,
PetroVietnam was also recently licensed to build a 650 mw
coal-fired power plant in Soc Trang.

11. (SBU) Land is widely available for industrial parks and
investors, PPC chief of staff told EconOff, and in fact the
province is plans to build seven new industrial parks once the
PPC has decided on zoning. DPI added that relocating landowners
has been an issue for Soc Trang for two reasons: price and
method. In the past, price was the biggest issues where land
owners would agree to a price then seek additional compensation
later. Outside of investment parks the land is largely owned by
farmer who can negotiate compensation to sell their land use
rights (LUR). To help improve transparency, the Soc Trang PPC
has directed that Department of Natural Resources and
Environment (DoNRE) officials "be held responsible" for land
issues relating to investment.

Provinces Divesting From SOEs, but Central SOEs Remain
--------------------------------------------- ---------
12. (SBU) Leaders in each of these three provinces told Econoff
that they had privatized most if not all of their provincial
state-owned enterprises (SOEs). Still, the largest investment
underway in the "deep south" is the natural gas/fertilizer plant
at Ca Mau, a partnership between centrally state-owned
enterprise PetroVietnam and a Malaysian company. Unfortunately,
while our contacts in the province said they were eager to meet
to talk about the projects and demonstrate progress, they later

HO CHI MIN 00001088 003.2 OF 004

called to cancel, saying that headquarters in Hanoi would not
grant permission. People's Committee Chief of Staff told
EconOff Ca Mau I "is a Central Government project located in the
province, we don't have any knowledge of its current status or
influence over its operations."

13. (SBU) Ca Mau province has just three SOEs, DoIT officials
told us, working on water supply, forestry development and
environmental protection. However, also present is Petrolimex,
a central government-owned SOE trading and retailing fuel.
Petrolimex officials told EconOff that it has proven extremely
difficult for the central SOE to compete with local companies or
grow to 20 percent market share in Ca Mau. Echoing a common
concern voiced by foreign investor, the SOE complained the
provincial master plan limits retail outlets (e.g., gas
stations) in number and location and "somehow our local
competitors Ca Mau Materials Company and Bac Lieu Provincial
Trading Company have already locked up the good locations."

14. (SBU) Bac Lieu DPI and PPC officials said that with the
exception of the provincial lottery and water treatment
companies, all provincial SOEs have been equitised. The former
SOEs pay taxes (and dividends to the government as a
shareholder), but the PPC Chief of Staff said the province no
longer supervises these enterprises. The director of the
lottery SOE said that the company is nevertheless at arm's
length from the government aside from regulation by the Ministry
of Finance, just paying into the provincial budget as it has
since the company's creation 1981.

15. (SBU) Equitised SOE companies, especially small- and
medium-sized enterprises, have become some of Soc Trang's best
performers, according to the provincial People's Committee. For
example, fish feed producer SauTau became more efficient and
localized decision-making, PPC representatives added.

Adjusting to the U.S. Economic Downturn
16. (SBU) Industry leaders in the Delta know that exporters need
to diversify their market profile and production. U.S.
antidumping action brought against Vietnamese catfish exporters
in 2002 seriously harmed the Delta's economy because too much
labor and investment was concentrated into too few industries, a
Ca Mau seafood processor explained. At that time 50 percent of
Vietnam's "catfish" (pangasius) exports went to the United
States, he added. Most confirmed that at this time, the prices
companies can charge for fish and shrimp exports are being
pushed down. One shrimp processor said demand from his existing
clients had fallen by 50 percent since this summer, though he
was expanding to new customers at lower prices like Costco,
Wal-Mart and Sam's Club to make up the difference. Several
seafood companies said their current customers are trying to
renegotiate payment terms at lower prices, or want to pay on
sale rather than upon receipt of consignment.

17. (SBU) Each set of provincial leadership noted that
inflation, tight monetary policy and high interest rates have
hurt companies in their provinces. Vietnam's monetary policy
also concerns seafood companies, though May 2008 seems to have
been the worst period because of the high inflation and high
interest rates, said a shrimp exporter. His Ca Mau factories
have improved technologies and procedures so that while salaries
climbed 25 percent in keeping with inflation, July 2008
productivity was up 100 percent of July 2007. Most exporters
have watched warily as the foreign exchange rates of
competitors' currencies (Thailand, India and Indonesia)
depreciated relative to the dollar, making Vietnam's exports
relatively more expensive.

18. (SBU) Perhaps because they are amongst the poorest of
Vietnam's southern provinces, Ca Mau, Bac Lieu and Soc Trang
demonstrate the role of leadership in fostering economic reform.
These provinces are generally trying to open their provincial
economies, but when it comes to SOEs at least, clearly some
tensions remain between provincial and central government.
Nevertheless, provinces know they rely on the central government
to carry the torch on the big issues: climate change and U.S.
trade policy have a profound impact on these provinces, in
particular because the U.S. is a major export market for the
aquaculture industries that have helped pull many southern

HO CHI MIN 00001088 004.2 OF 004

workers up out of poverty. To end on a brighter note, while
outlandishly expensive, we found U.S. table grapes on sale in
the Bac Lieu market. End comment.

19. (U) This cable was coordinated with Embassy Hanoi.

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