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### Viewing cable 03HOCHIMINHCITY1020, VIETNAM'S FIRST OPEN ECONOMIC ZONE - NO NUDE BEACHES YET

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
03HOCHIMINHCITY1020 | 2003-10-21 11:33 | 2011-08-25 00:00 | UNCLASSIFIED | Consulate Ho Chi Minh City

`

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

` `

    UNCLAS SECTION 01 OF 03 HO CHI MINH CITY 001020

    SIPDIS

    ¶E. O. 12958: N/A
    TAGS: ECON EAIR VM ETRD
    SUBJECT: VIETNAM'S FIRST OPEN ECONOMIC ZONE - NO NUDE BEACHES YET

    Summary
    -------
    ¶1.  In another example of the GVN channeling resources to the
    relatively poor central coast of the country, Vietnam's first
    "Open Economic Zone" has opened for business.  More a vision than
    a reality, the zone is different from the many industrial parks
    and export processing zones scattered throughout the country in
    its size, scope and incentives for investors.  It is also
    established and funded in part by the central government.  Phase
    one of the project encompasses more than 150 square km, and it
    includes a free port, an airport, and plans for an industrial
    zone, residential, and tourism areas.  So far, however, it is
    mostly sand.  Chu Lai's possible saving grace is its airport.
    FedEx has indicated interest in the facility, which was built to
    accommodate B-52 bombers.  Company officials state that it has
    almost an ideal location near major air routes as well as
    excellent weather conditions virtually every day of the year.  For
    FedEx to consider this site as a regional hub, however, Vietnam
    would need to make significant reforms to customs regulations and
    procedures as well as allow 100% foreign ownership of their
    operation here. Fed Ex officials in HCMC did call the just-
    initialed bilateral Air Agreement "good news."  Meanwhile, a
    successful Chu Lai OEZ could become an impetus for further reform
    and regional development, but sadly seems just as likely to end up
    another unrealized dream.  End summary.

    A vision for the future, but sand right now
    -------------------------------------------
    ¶2.  The Chu Lai Open Economic Zone is now open for business.
    Visitors who make their way out to the rather remote site, located
    about 2 hours south of Danang by car at the southern edge of Quang
    Nam Province, will have to use their imaginations to envision the
    extraordinary infrastructure development that has yet to occur.
    The site is enormous.  Phase one takes up an area of about 150
    square kilometers.  Plans also call for a second, larger phase to
    begin development in 2015.  According to these plans, the zone
    would run along virtually the entire coastline of the province,
    from the historic town of Hoi An in the north to the site of the
    Dung Quat oil refinery project in neighboring Quang Ngai Province
    in the south.   The OEZ as it is today, however, runs only as far
    north as Tam Ky, the provincial capital, and is mostly sand.  DPO
    and Econoff traveled to Chu Lai this summer and found virtually no
    infrastructure yet in place.

    ¶3.  Chu Lai Open Economic Zone is Vietnam's first OEZ.  According
    to local officials, it will offer the most liberal regulatory
    environment and incentives for investment and business activities
    in the country.  The OEZ is different from the many industrial
    parks and export-processing zones scattered throughout Vietnam in
    its scope, size, and amount of incentives offered to investors.
    The centerpiece of the zone will be a free-trade zone with a free
    port.  Foreign vessels and crews will be allowed entry to the port
    and free-trade zone and will not need go through customs and
    immigration procedures.  Goods moving in and out of the free trade
    zone are not subject to tariffs or value added tax.  The OEZ will
    also have an industrial park, residential zones and tourism areas.

    ¶4.  Throughout the OEZ, investors will get the best tax breaks in
    the country.  Enterprises operating in the OEZ will be exempt from
    corporate income tax for the first eight years after the
    enterprise has become profitable, then taxes will be applied at
    50% of the standard rate for the next seven years.  Individuals
    employed in the zone, both locals and foreigners, will also pay
    personal income tax at reduced rates.  Land and infrastructure
    costs will be offered at concessionary rates.  In addition, land
    leases will run for 70 years, the longest in Vietnam.  Foreigners
    will be able to acquire property for residential as well as for
    industrial/commercial purposes.  Officials state foreigners and
    Vietnamese investing and trading in the zone will receive the same
    treatment.

    The port is small - so far
    --------------------------
    ¶5. For now, the port is small and still under construction.  It
    can currently receive a 7,000 DWT vessel and expansion plans call
    for it to receive 10,000DWT ships next year.  It could potentially
    be expanded to receive 30,000DWT ships at some point in the
    future.  The length of the waterway is 4 km from buoy zero to the
    first wharf.  The protected waterway leading up to the seaport has
    a channel 8-15 meters deep by 200 meters wide.  Port officials
    state that the channel could be dredged up to 300 meters wide and
    12-16 meters deep.  The ship turning bay is 8 square km wide and
    the waiting bay is 7 square km.  There are two wharves, one of
    which is currently being used by a Vietnam - Japanese joint
    venture to break down ships.  This port is comparable in size to
    other small ports that dot the Vietnam coast.

    Good weather at the airport
    ---------------------------
    ¶6.  One real plus for the OEZ may be its airport.  Currently
    operated by the military, it is scheduled to become a facility
    that will come under the joint jurisdiction of military and
    civilian authorities.  The facility covers 2300 ha and is planned
    to expand to 4,000 ha in the future.  Local officials claim that
    the airport is in good condition and note that it was built to
    accommodate B-52 bombers.  FedEx representatives who have had
    access to the airport, however, state that it would have to be
    considered basically a green field site and would need to be
    substantially rebuilt.  (Post note:  The local press reports that
    the Vietnam Civil Aviation Administration is investing US$6
    million to upgrade the airport.  In the first phase, $4 million
    will be spent to build terminals and transport systems and install
    flight control equipment.)  FedEx does point out, however, that
    the airport has an ideal location.  Not only is it located on key
    regional air routes, Chu Lai has ideal weather for an airport and
    would face relatively few weather-related closings and delays.

    ¶7.  FedEx has expressed interest in considering the site as an
    alternative to its current Southeast Asia hub in Subic Bay in the
    Philippines.  For it to pursue its interest, however, FedEx has
    stated that it would need substantial reforms in Vietnamese
    customs regulations and procedures. In addition FedEx would seek
    100% foreign ownership of its enterprise here.  Even though local
    press has occasionally reported FedEx's interest in the site,
    there is so far little movement on any of these agenda items.
    FedEx has pointed out that making these changes would probably be
    worth the effort for Vietnam, since landing fees for just one
    large cargo plane currently run about US$20,000.  Fed Ex in
    Vietnam did however call the bilateral Air Services Agreement
    initialed in Hanoi on October 9 "good news."  (Note:  This
    agreement will give all-cargo carriers like FedEx the ability to
    operate from Vietnam with flexible routing rights and no limit on
    frequencies.  End note.)

    Support from the Top
    --------------------
    ¶8.  The Chu Lai Open Economic Zone was approved by the Politburo
    in 1999 and finally approved by the Prime Minister this summer.
    According to Quang Nam officials, the project was able get
    approval because of significant political support in Hanoi.  Mr.
    Le Xuan Trinh formally initiated the project in 1996.  A native of
    Quang Nam, he headed the Office of Government from 1988 - 1996 and
    then that year moved to head the Management Board of Vietnam
    Industrial Parks and Export Processing Zones.  He retired in 2001.
    The Party Secretary of Quang Nam, Mr. Vu Ngoc Hoang, was also a
    strong backer.  His political influence was boosted considerably
    by the fact that his uncle was Vo Chi Cong, the former President
    of Vietnam.  Other strong backers were Deputy PM Nguyen Tan Dung,
    who headed the steering committee for planning the OEZ, and Mr.
    Troung Tan Sang, Head of the Central Commission on Economic
    Affairs.

    ¶9.  The idea for such an OEZ had clearly been around for some time
    in Vietnam.  When Econoff was introduced to an elderly economist
    "who originally proposed the idea of an open economic zone,"
    Econoff asked when he first raised the idea.  A wry smile crossed
    the old mans face and with a measure of satisfaction he replied
    "1954."

    Helping out the Central Coast
    -----------------------------
    ¶10.  This project, like many others, is designed to give a boost
    to the development prospects of the central coast.  With a per
    capita GDP of USD$230, Quang Nam Province is poor.  Even though
    the province boasts two UNESCO-designated world heritage sites and
    120 kilometers of coastline, it has little which resembles the
    more prosperous Ho Chi Minh City area.  It is located just south
    of Danang, and split from that province in 1999.  According GVN
    measures, 20% of its population of 1.4 million lives below the
    poverty line and more than 30% of children under the age of 5 are
    malnourished.  Last year the province exported about US$36.6
    million worth of goods, most of which was very low value added
    goods and commodities - agricultural goods and seafood, clothing
    and footwear, and sand.  Because of the relative poverty of this
    region, the central government has tried to commit resources to
    help aid development.   The Dung Quat oil refinery project, for
    example, is located just south of Chu Lai.

    Is this Shenzhen?
    -----------------
    ¶11.  Although Chu Lai has already attracted some investment, it is
    still early days.  It will be hard pressed to successfully sell to
    the world a tourism zone located virtually in the front yard of an
    industrial park and near an oil refinery.  And without
    infrastructure, regardless of the price, attracting business will
    be rough going.  Companies will find it difficult to attract
    expatriate management and technical staff.   When DPO and Econoff
    visited the site, local officials were insistent that the project
    would succeed because "the Prime Minister has given his support."
    The support they need, however, is support from businesses willing
    to make sizable long-term investments.  They also need to deal
    with what one Chu Lai official dubbed their biggest challenge -
    "the capacity of local officials."  One speaker at a seminar
    introducing Chu Lai in HCMC suggested that the model for the
    project was Shenzhen, China, the wildly successful open economic
    area that Deng Xiaoping established along the border with Hong
    Kong.   If only Chu Lai shared a border with Hong Kong.

    ¶12.  With that said, however, some investors have shown interest.
    According to local officials, a Taiwanese and a French firm are
    pursuing a tourism project.  A number of Korean firms have also
    looked into the site.  Two consulting firms in HCMC have also
    informed Econoff that they have talked with Korean clients
    interested in possibly building in Chu Lai because they have taken
    note of the low cost land and tax breaks.

    ¶13.  Some potential investors have expressed interest in learning
    just how open Chu Lai will be for different businesses.  The Party
    Secretary of the Province, who looks something like a rumpled

    SIPDIS
    professor, stood up at the seminar in Ho Chi Minh City publicizing
    the establishment of the zone and stated that "all business
    activity not specifically prohibited by Vietnamese law would be
    permitted in Chu Lai."   That brought several serious questions
    about the possibility of opening banking and other financial
    services firms as well as casinos in the zone.  One member of the
    audience drew the most attention when he asked if nude beaches
    would be permitted.  The party secretary smiled, and replied that
    because of the current cultural environment in Vietnam, such a
    suggestion would be best deferred for review at some time in the
    future.  The room erupted in laughter.

    Comment
    -------
    ¶14.  The future of the Chu Lai Open Economic Zone is no laughing
    matter, however.  The central government is committing real
    resources into what will either be a large white elephant or a
    potential laboratory for further economic opening and an engine
    for regional growth.  It will take more than good humor and
    central government support to attract the level of investment
    needed for this place to take off.  Even with its low cost labor
    and land, many other locations will still likely be more
    attractive for most investors.  Its best hope is probably
    developing the airport, but first Vietnam will have to get its
    customs act together and make other major reforms.

    YAMAUCHI

`