US embassy cable - 04MAPUTO180

UNCLAS SECTION 01 OF 05 MAPUTO 000180 
 
SIPDIS 
STATE FOR AF/S 
USDOC FOR AHILLIGAS 
JOHANNESBURG FOR LABOR OFFICER - BNUELING, FCS -- 
JVANRENSBURG,WCENTER 
DURBAN FOR FCS - JKUEHNER, LKOHRS 
SENSITIVE 
E.O. 12958: N/A 
TAGS: ECON, EAID, EINV, ETRD, MZ, Monthly Econ Digest, Coastal Security 
SUBJECT: JANUARY MONTHLY ECONOMIC WRAP-UP: MOZAMBIQUE 
 
Sensitive But Unclassified - Protect Accordingly 
 
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FOREIGN INVESTMENT 
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(U) The private consortium managing the port of Maputo, 
Maputo Port Development Company (MPDC), announced the 
completion of initial dredging on port access to the Maputo 
channel. The channel's depth has been restored to 9.4 meters 
and its minimum width to 100 meters. Business contact and 
Port Director of Operations described the dredging as "an 
important milestone" for port development. Larger vessels 
can now navigate the channel by day and night through the 
tidal cycle. Maputo Port is under a 15-year concession 
agreement, which began in April 2003. Of Mozambique's three 
port cities, Maputo and Beira require constant dredging to 
accommodate vessels in the 30,000 to 50,000 ton range, 
whereas Nacala is a natural deepwater port capable of 
handling Cape Class vessels (up to 180,000 tons). Other MPDC 
priorities include: restoration of the port's capacity, 
coupled with the introduction of new tugs and improved 
pilotage equipment, and considerable investment in shore- 
side handling of equipment. (COMMENT: By end-March 2004, 
Mozambique's three ports should be largely under private 
operation, with Maputo and Nacala completely in private 
hands (all terminals, dredging and piloting) and Beira under 
a mixed arrangement, with the port and rail parastatal, CFM, 
remaining responsible for some terminals and most common 
services. The port of Nacala is the only one that has not 
formally been handed over to a private consortium, with 
final agreement reportedly pending agreement by the Malawi 
members of the private consortium to the terms of the OPIC 
supported financial arrangements. The GRM, through CFM, 
still maintains ownership of all ports, however concession 
agreements and the accompanying finance agreements will 
bring needed investment and upgrades to the port system. 
Developing the ports and increasing port capacity is vital 
to continued upgrades along the Maputo, Beira, and Nacala 
development corridors, which account for most of 
Mozambique's transit and regional trade, and which are 
supposed to serve as economic development poles attracting 
new investment in agriculture, mining, and labor-intensive 
industry. END COMMENT). 
(U) Lusa (Portuguese news agency) reports that Vodacom, the 
second cellular phone company to operate in Mozambique, 
invested 456 million euros in Mozambique in 2003, which is 
more than half the total foreign investment approved in- 
country last year. According to Lusa, the GRM approved 673 
million euros of foreign investment in 2003 (Investment 
Promotion Center statistics). Vodacom began operating in 
Mozambique in December 2003 and launched strong campaigns in 
three key southern cities. South Africa's Telekom controls 
Vodacom, and Britain's Vodafone owns 35% of the company's 
shares. 
(U) Coca-Cola Mozambique is under investigation for 
allegedly producing and supplying poor quality products to 
the Mozambican market. Coca-Cola samples have been provided 
to the Ministry of Health for further analysis. The 
investigation is being carried out quietly, and while local 
Coca-Cola executives continue to emphasize the integrity and 
high quality of their product, the GRM stated that the 
laboratory would have the final say in the validity of such 
allegations. 
(SBU) CFM and other business contacts indicate that the GRM 
has submitted the offers of two of the four consortia 
bidding on the Sena railway tender, Rites and Icon (India) 
and Yenwin and CIRC (China), to the World Bank for 
consideration. The GRM is counting on the World Bank to 
provide $85 million in financing for Sena Line 
rehabilitation, yet a formal financing decision will be made 
by the World Bank only after an award is given and the GRM 
formally requests that the Bank finance the deal. Prior to 
independence, the Sena line transported about two thirds of 
Malawi's total rail traffic, coal from Moatize and sugar 
from areas along the Zambeze River. The Malawi traffic now 
goes through Nacala or by truck through Beira or Durban (the 
rail link is closed in Malawi and the concessionaire of the 
Nacala line has no incentive to divert traffic from Nacala 
to Beira); the cane fields have been replanted and are 
producing behind a punitive surtax on sugar imports, and the 
coal mines requires complete reconstruction. (COMMENT: 
During the October 2003 review of the World Bank's Country 
Assistance Strategy for Mozambique, the USED expressed 
reservations over the economic rationale for financing of 
the line except as part of a coal development project, 
arguing that it should be developed, if at all, as a private 
investment linked to the coal mines. Since then, American 
Commercial Lines, International (ACLI) has expressed a 
strong interest in dredging and operating barges on the 
Zambeze River in order to transport coal and possibly sugar 
to the coast. However, ACLI has met with some resistance 
from the GRM and the Zambeze River Valley Authority in 
gaining permission to conduct a river survey to see if this 
option is viable (because it is seen as a threat to donor 
financing of the Sena Line). The Prime Minister described 
rehabilitation of the Sena Line as one of Mozambique's top 
four priorities for 2004. A third option for transport of 
Moatize coal to port is by building a 200 km connection to 
the Nacala line in Malawi and thence to Nacala's deepwater 
port, where Cape Class 150,000 ton vessels can be 
accommodated. The Nacala line could well be the most 
economically favorable. Once the GRM selects a railway 
bidder, the World Bank plans to very quickly submit the 
project for a final Executive decision. While ACLI argues 
that barging is a cheaper alternative to transporting the 
coal , the Sena Line clearly has greater political support 
and, is also, apparently, the preference of Bank technical 
staff. The Mission will elaborate on the project for the 
USED prior to the World Bank Executive Review. END 
COMMENT). 
 
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MACROECONOMICS 
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(SBU) According to the Global Competitiveness Report 2003- 
2004, Mozambique ranked 93/102 on Growth Competitiveness and 
87/95 on Business Competitiveness for 2003. The Report is 
produced by the World Economic Forum annually and attempts 
to measure a country's "competitiveness" relative to other 
countries by quantifying key economic growth determinants 
such as technology achievement, quality of institutions, and 
macroeconomic stability requirements. (COMMENT: Such 
rankings reflect the GRM's lack of initiative to reform 
certain core investment-inhibiting laws and regulations, 
such as the commercial code, labor law, and business 
registration process. Current investors are frustrated with 
the lack of commercial and labor flexibility that exists, 
and the unfriendly investment environment turns away many 
potential investors that decide to invest elsewhere in the 
region. The GRM's slow reform of crucial policies place it 
significantly behind the rest of the region in terms of 
attracting foreign investment. For instance, Botswana, South 
Africa, Mauritius, Namibia, Tanzania, Malawi, Kenya and 
Zambia all rank above Mozambique in both the growth and 
business competitiveness categories for 2003. END COMMENT). 
(U) Opening up the 28th session of the Central Bank's (Banco 
de Mocambique or BM) Consultative Council, the bank's 
governor stated the goals and challenges that lie ahead for 
Mozambique's financial sector in 2004: financial 
stabilization and adoption of international accounting and 
auditing standards and procedures. The governor insisted 
that his banking institution would provide a framework that 
encourages the extension of financial services to rural 
communities. BM will become more involved in the licensing, 
contracting, and registration of private external debt, 
improving the national system of payments. For the last 
three years, BM has undergone management restructuring and 
information technology improvements. According to the 
governor, "Maintenance of national currency stabilization 
confronts growing difficulties in economies like ours 
(Mozambique's), where financial markets are less developed 
and institutions fragile. Because of this, it is essential 
that monetary policy instruments are continually revised and 
perfected." Mozambique registered 7% GDP growth in 2003 and 
an average inflation rate of nearly 14%. 
 
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AVIATION 
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(SBU) Executives from Delta Airlines recently visited Maputo 
to discuss Delta's interest in establishing a codeshare on 
South African Airways' Maputo-Johannesburg flights. Delta 
already has an alliance with South African Airways to 
provide a broad network of airline service between the 
United States and Africa. The codeshare would allow Delta to 
sell and promote Mozambique as a destination to its US 
customers and would target Maputo passengers whose origin or 
destination is the United States. All commercial air 
traffic between the United States and Mozambique goes via 
Portugal or South Africa. 
 
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AGRICULTURE 
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(U) Tenga, Ltd., the South African macadamia nut producers, 
planted their first 10 hectares of macadamia trees (4,000 
trees) in the Niassa Province in December 2003. The 
macadamia investment in Mozambique is a first for the 
industry, and US investors in California are involved in the 
Mozambique Tenga investment. The Governor of the Niassa 
Province inaugurated the tree-planting ceremony and local 
community business and religious leaders attended, blessing 
the crops and acknowledging the launch of a new product for 
Mozambique. Tenga has significant experience planting and 
processing macadamias in South Africa, and recently became 
involved in operations in Mozambique. To date, they have 
successfully obtained land and local buy-in, constructed 
roads, obtained vehicles, and planted the first crop. The 
first trees will mature in 5 years. In the meantime, Tenga 
will continue to improve infrastructure around the farm, 
build a nursery, develop an irrigation system for crops, and 
look for local producers willing to partner in macadamia 
production. US investors plan to visit Mozambique and the 
macadamia plantation in June 2004. 
(U) Indian Ocean Aquaculture, a recent group operating in 
Pemba with US involvement, grows and exports aquacultured 
shrimp to the world market. The firm is looking to export 
its first shipment of shrimp to the US in June, and is 
currently exploring FDA regulations for this transaction. 
(U) Sugar smuggling from Zimbabwe to Mozambique continues to 
be a big problem along the border, according to Mozambican 
customs officials in Manica Province. The same sources 
indicate that several commodities are smuggled from Zimbabwe 
into Mozambique, but sugar is the most highly smuggled 
product because it can be acquired in Zimbabwe at a very low 
price ($0.13/kg) and sold in Mozambique at $0.60/kg. 
Mozambique has instituted controls at the border through the 
"Frontier Guard", but this institution lacks personnel and 
material. Border demarcation markings and barbed-wire fence 
along the border have been torn down in several places, 
allowing for smuggling to flourish. Fueling the problem is 
Zimbabwe's current financial crisis, in which the highly 
devalued Zim dollar makes currency trading easy and buying 
products in Zimbabwe (like sugar) very cheap. Mozambican 
sugar producers are very concerned about this illegal 
activity, as $300 million has been spent to revitalize the 
sugar plantations and factories in Mozambique and cheap 
Zimbabwean sugar is flooding the domestic market. In 2000- 
2001, the problem was graver, as smugglers set up informal 
warehouses at the border and ferried contraband sugar 
across. In recent years, the GRM has had some success in 
reducing sugar smuggling, but, they say, more must be done. 
According to the daily news source, Noticias, four 
Mozambican sugar mills are now open and expected to produce 
270,000 tons of sugar this year, a significant increase on 
2003 production. The press estimates that in 2006, when more 
factories are up and running, total sugar production will 
reach 325,000 tons/year. (COMMENT: Mozambican sugar is 
highly protected, benefiting from a 100% to 200% surcharge, 
which falls mainly on the food processing industry and the 
poor. While the industry argues that eventually production 
costs will be competitive with the lowest cost producers in 
the world, they are currently not a low-cost producer in an 
industry where prices (except on quota purchases) are in any 
case below the lowest production cost. The heavy protection 
of the sugar industry has also placed enormous pressure on 
Mozambique's customs agency; engendering both an increase in 
corruption, with widespread reports of customs agents 
directly involved in the illegal trade, and draconian 
enforcement measures. END COMMENT). 
(U) Soy production will increase in Mozambique this year, 
due to a Norwegian program to buy up to 40,000 tons per year 
of Mozambican (non-GM) soy, as well as Brazilian investment 
in the soy industry. The GRM extended a partnership 
invitation to foreign firms and will benefit from the 
Brazilians' experience and knowledge in this sector. The 
Ministry of Agriculture and Rural Development announced that 
a 400-hectare experimental soy farm would be opened in 
February in the province of Sofala. 
(U) According to the Ministry of Industry and Commerce, the 
agricultural sector in Nampula Province is diversifying and 
growing. In 2003, the province grew and exported 9,000 tons 
of sesame seeds to Japan (CARE, the global humanitarian 
organization and NGO, is the main force in promoting sesame 
seed culture in Nampula). The GRM also projected increased 
exports from Nampula to South Africa of other agricultural 
products, such as banana, honey, cassava, peanuts, beans, 
and ginger. 
(U) Tobacco production is seen by the GRM as a success story 
for the FY03-04 agricultural campaign. This year, 37,330 
tons of tobacco were produced, representing an increase of 
63.5% from FY02. The Ministry of Agriculture and Rural 
Development stated that this product is having better-than- 
expected results due a flood of small farmers (and to a 
lesser extent laborers on larger farms) entering into 
tobacco production. The number of producers rose from an 
estimate 30,000 in 1997/1998 to 110,000 in 2003. 
 
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LABOR 
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(SBU) The Prime Minister signed a new decree (regulation) 
covering the use of expatriate labor into effect this month 
that failed to meet private sector expectations for much 
greater leeway in the hiring of foreign workers. Although 
the decree made some improvements (e.g. short-term contracts 
of up to 180 days are considerably easier), the new decree 
keeps restrictive labor policies in place, hampering foreign 
investment in the opinion of private sector representatives 
and donor groups. After eighteen months of negotiation and 
weekly meetings with private sector employers, the Ministry 
of Labor reneged on its promise to allow for up to 10% of a 
firm's workforce to be contracted internationally, and 
continues to require approval of each position on a job-by- 
job basis. The private sector issued a press release 
stating their position on the decree. At the same time, the 
Development Partners Group (DPG, consisting of the heads of 
mission of all major donors to Mozambique) is preparing a 
letter to the Prime Minister to express regret and concern 
over the legislation, highlighting the importance of 
attracting foreign investment via labor and commercial 
legislation reform. The GRM will begin the process of 
revising its labor law in 2004, and the DPG has signaled its 
concern that forward progress must be made in liberalizing 
procedures if Mozambique is to attract employment-generating 
investment. 
 
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Oil and Gas 
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(U) This month, the GRM announced a decrease in the price of 
unleaded fuel in order to encourage consumption. For the 
past few months, gas prices in Mozambique have been on the 
rise, leading to numerous consumer complaints and lowered 
usage. The GRM reduced the fuel oil price by 8.9%, leaded 
gas by 4%, and unleaded gas by 8.8%. 
 
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WATER 
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(U) March 17-19th, Mozambique will host the Water Africa 
2004 Sub-Sahara Exhibition in Maputo. This exhibition will 
showcase South African, British, Zimbabwean, Italian, and 
American companies' products and services in the water, 
mining, and, construction sectors. Approximately twenty- 
eight US firms (all involved in the water sector) have 
provided company materials and brochures to be presented at 
the Exhibition. Material will be displayed at a US booth and 
USDOC will send a representative from Durban FCS to assist 
in responding to participants' questions. The representative 
will also maintain a list of local interested parties and 
forward contact information to participating US firms. 
(COMMENT: This show is a great opportunity for US firms to 
showcase their equipment and services in the Mozambican and 
African markets. Ace Event Management, a British events- 
planning firm, is managing the Exhibition and offered 
complimentary space for all US firms wanting to participate. 
Embassy Maputo is working with USDOC and, in particular, 
Durban FCS, to encourage companies to participate. END 
COMMENT). 
LA LIME