Cablegate: Vietnam: Fy-2004 Food Aid Request

This record is a partial extract of the original cable. The full text of the original cable is not available.

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

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