Cablegate: Khanh Hoa Province: Delayed Development

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




E.O. 12958: N/A

REF: HCMC 1270


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.


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


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.


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

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

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.


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