US embassy cable - 04MAPUTO340

UNCLAS SECTION 01 OF 03 MAPUTO 000340 
 
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 
SUBJECT: FEBRUARY MONTHLY ECONOMIC WRAP-UP: 
MOZAMBIQUE (CORRECTED COPY) 
 
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FOREIGN INVESTMENT 
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1. (U) In a meeting with Mozambique country director and marketing 
manager for South Africa's Vodacom, Econ/Poloffs learned that the 
firm has already captured 12-13% of the national cell phone market. 
Vodacom began operating in Mozambique in December 2003 and 
launched strong campaigns in three key southern cities. Their only 
competitor is mCel, the nationally owned cell phone provider, which 
enjoyed control over the market prior to Vodacom's entry. Vodacom 
uses primarily Motorola telecom equipment, hence, there is a US trade 
interest in Vodacom's success. 
 
2. (U) Considered a Mozambican mega-project, the SASOL pipeline, 
built to transport natural gas from the province of Inhambane to South 
Africa, embarked on its first gas transfer to South Africa in February. 
The natural gas project was launched in May 2003 and total investment 
by SASOL is valued at 1.3 billion dollars. The South African firm, 
SASOL, has rights to explore the gas reserves for the next 25 years. 
News sources indicate that the project could generate up to a billion 
dollars in revenue for Mozambique during this time. SASOL has a 
Community Development Fund that will invest in the construction 
of secondary schools in the Inhambane province, modeled on MOZAL's 
Community Trust. 
 
3. (U) Local news sources report that the Portuguese Government has 
agreed, in principle, to sell some or all of its shares in 
Hidroelectrica Cahora Bassa (HCB). The visit of Portuguese Prime 
Minister Durao Barroso in late May will reportedly include discussion 
and resolution of this long-simmering Portuguese-Mozambican issue. 
Currently, the firm is 82% owned by the Portuguese Government, with 
the remaining portion belonging to the Government of Mozambique (GRM). 
The announcement of a willingness to negotiate a sale came at a 
meeting in Lisbon of the Permanent Joint Commission (PJC), including 
Mozambique, Portugal, and South Africa. The primary intent of this 
meeting was to discuss Cahora Bassa electricity tariffs. Speaking 
with Cahora Bassa contacts in Maputo, HCB also held negotiations in 
Johannesburg this month to discuss sale of HCB shares to South 
African partners. Neither of these negotiations - over tariffs and 
ownership - has yet come to a conclusion. 
 
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MACROECONOMICS 
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4. (U) The GRM negotiated its external debt cancellation with 
non-Paris Club members in February. China signed the cancellation 
of 90 percent of commercial debt owed to it by Mozambique (total 
debt was equivalent to USD 7 million). According to the Central 
Bank (Banco de Mocambique - BM), the GRM rescheduled its Kuwait 
Fund debt, and technical negotiations are under way with India 
to cancel GRM debt of USD 4 million. 
 
5. (U) The USG's work on trade liberalization in Mozambique bore 
fruit in late February, as Mozambique become the first country 
to be admitted to the Integrated Framework for Trade-Related 
Technical Assistance for Least Developed Countries (the "IF") 
since late 2001. As a condition of entry, the IF Working Group 
stipulated that USAID would amend its 2002 Trade Mainstreaming 
Report with a fuller analysis of the links between trade and 
poverty in the country. At the request of the Minister of 
Industry and Commerce, USAID/Mozambique and EGAT are working 
together to complete the work by July 2004. In September, USAID 
will sponsor the required "National Validation Workshop" which 
will lead directly to the incorporation, or mainstreaming, of 
trade into Mozambique's growth and poverty reduction strategy. 
The IF, because it is comprehensive in its sweep (including, for 
example, roads, telecommunications and customs, red tape 
faced by exporters) provides a framework for addressing the 
myriad problems that hamper overall competitiveness. 
 
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INDUSTRY 
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6. (SBU) On a visit to Mozambique's largest mega-project, the 
MOZAL aluminum smelter, the Ambassador and accompanying 
Econ/Poloffs met with the General Director, production managers, 
and manager of the MOZAL Community Development Trust (MCDT). 
MOZAL is the largest revenue - producing venture in Mozambique. 
The Mozambican-registered company is a primary aluminum-producing 
smelter and a share venture managed by BHP Billiton of Australia 
(47% and the smelter operator), Mitsubishi Corporation of 
Japan (25%), the Industrial Development Corporation of South 
Africa (IDC, 24%) and the Government of Mozambique (4%). When 
operations began in 2000, Mozambican exports doubled in size, 
providing for US$400 million in foreign exchange earnings per 
year and adding more than 7% to the Mozambican GDP. Phase II of 
MOZAL opened in October 2003, doubling the firm's production 
capacity to 506,000 tons (aluminum ingots). When asked why 
BHP Billiton chose to operate in Mozambique, Director General 
Peter Wilshaw gave three reasons: availability of cheap, abundant 
power (due to the South African electricity grid), easy access 
to a harbor (to bring in raw materials and export finished 
products), and access to a cheap labor force. MOZAL has operated 
well in the Mozambican environment because the GRM created a 
special council to work with MOZAL. MOZAL was able to register 
its business in only two weeks, as opposed to the cited 153 days 
(World Bank figure) that generally plagues registration of small 
and medium-sized enterprises. MOZAL operates in an industrial free 
zone, receiving certain fiscal incentives from the GRM including 
specific duty/tax exemptions, taxation on revenue vice the corporate 
tax, and allowance of a labor force that is up to 15% expatriate 
staff. Mr. Wilshaw noted that the GRM has been a great support to 
MOZAL, contributing to the success of Phase I and II for production. 
MOZAL employees mentioned there is "talk" of a Phase III and the 
compound has room for expansion. This expansion could go forward 
in the next few years, creating even more of an industrial giant. 
(COMMENT: The GRM has taken extra steps to support MOZAL and former 
Prime Minister Mocumbi once stated, "if MOZAL fails, Mozambique 
fails". MOZAL's business is hugely important to the success of the 
Mozambican economy. The firm's operations drive major economic 
indicators such as GDP and country trade statistics. Not only is 
MOZAL important economically for Mozambique, but also demonstrates 
an example of corporate social responsibility. The firm developed 
a Community Trust that invests money in HIV/AIDS campaigns, health 
centers, school and classroom development, road safety campaigns, 
and social activities to improve the community surrounding the MOZAL 
compound. If all businesses, regardless of size, were treated 
similarly by GRM, the Mozambican economy would be a much more 
favorable environment for foreign and national investment. END 
COMMENT). 
 
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AGRICULTURE 
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7. (U) Zimbabwean farmers settling in the Manica Province have 
galvanized the province's agricultural sector through the 
introduction of new products and an upgrade of existing products 
and infrastructure (including irrigation systems and equipment). 
Most recently, the farmers introduced baby corn production in 
Mozambique. The first export of this product was sent to the UK. 
The province is also exporting vegetables and flowers to the 
European market. Local economic news sources report that, due to 
the Zimbabwean agricultural influence, Manica now has 33 agro 
industry companies working, employing approximately 4,000 workers. 
 
8. (U) The Ministry of Agriculture and Rural Development (MADER) 
launched a soybean pilot project on February 26 in Sofala Province. 
Financed by a Brazilian group that recently visited Mozambique, USD 
10 million was invested in cultivating 10 hectares of the soybean 
product. If the project is successful, soybean production is likely 
to expand in November 2004 to other provinces in the central and 
northern regions, including Manica, Tete, Zambezia, Nampula, Cabo 
Delgado, and Niassa. According to the Minister of Agriculture, Helder 
Muteia, "the national territory has excellent conditions to produce 
this agricultural product". 
 
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LABOR 
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9. (U) In March, a tripartite commission comprised of unions, 
private sector groups, and the GRM will begin to discuss the 
minimum wage. Currently, the group is preparing for the first 
round of negotiations. In 2003 the minimum wage was settled at 
982,000.00 meticais/year (USD $43/month), which represented a 21 
percent increase from the previous year. Minimum wage is adjusted 
yearly according to a formula that includes the inflation rate, 
GDP growth and a negotiated variable. Many companies, particularly 
in the agricultural, agribusiness sectors, as well as SMEs have 
indicated that any increase above inflation (13%) will lead to job 
losses and business failures. 
 
10. (U) Following a successful Consultative Group (CG) meeting in 
Paris (Oct 2003) during which donor pledges exceeded Mozambique's 
stated needs by $100 million, the country's donor coordination body - 
the Donor Partners Group - agreed to form a Private Sector Working 
Group (PSWG). The PSWG is charged with coordinating the donors' 
response to a variety of constraints to private sector growth, many 
of which were highlighted during the CG. USAID chairs the working 
group and presented a letter on the group's behalf to the Prime 
Minister requesting that GRM counterparts be identified to enhance 
the effectiveness of the group. The first major issue being 
addressed by the PSWG is Mozambique's labor law, specifically a 
recent decree (December 2003) that does not reflect a number of 
improvements to labor policies agreed to by the private sector and 
the Ministry of Labor through a long process of negotiation that 
USAID facilitated. The PSWG has produced a non-paper on the labor 
law issues that details the main issues with the December decree, 
and also underscores the potential payoff in terms of private 
investment if all of the key reforms are adopted. 
 
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FINANCE 
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11. (SBU) Selected Ambassadors of the G-14 General Budget Support 
Donor countries called on the Prime Minister/ Minister of Planning 
and Finance to discuss weaknesses in the GRM's procurement system. 
In encouraging Ms. Diogo to bring the procurement legislation and 
practice up to international standards, the group promised 
continuing support in an effort recognized to require some further 
work and time. They came, however, to point out an immediate concern. 
A directive from the Ministry of Planning and Finance that was issued 
in 1996 and is still in force authorizes the payment to the Treasury 
(50%), the Tender Commission(s) (35%), and related staff (15%) of 
the commissions derived from the tendering process. 
The Ambassadors pointed out that this appears to their home offices 
as official corruption, and suggested that the directive be revoked 
as soon as possible. The PM said that there were lots of problems 
with the "outdated" procurement system but such reform was complex 
and needed both a measured and structured approach. The PM's clear 
preference is to deal with issues like this in the context of the 
reform process overall. However, she said that Government was also 
looking for "quick wins". She talked about the background to the 
directive, which was issued when she was Deputy Minister. The aim 
was to control corruption, by providing incentives to those involved 
in tendering not to accept bribes from individual bidders. She 
agreed that she would look carefully at the '96 directive with a 
view to revoking it sooner. She clearly recognized that 
this matter was a great concern to some partners and her pledge to 
deal with it is encouraging. 
 
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WATER 
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12. (U) March 17-19th, Mozambique will host the Water Africa 2004 
Sub-Sahara Exhibition in Maputo at the Chissano Center. This 
exhibition will showcase South African, British, Zimbabwean, 
Italian, and American companies' products and services in the 
water, mining, and, construction sectors. To date, twenty-two US 
firms operating in the water sector have sent their material to 
participate in the international forum. Firms hail from Hawaii to 
Wyoming and Louisiana, providing manufactured solar power water 
pumping equipment to water and sewer industry geographic information 
systems. The US booth at the exhibition is a joint USDOC-USDOS effort 
that will showcase the firms' material and coordinate communication 
between interested clients and firms. 
La Lime