US embassy cable - 04MAPUTO463

C O N F I D E N T I A L SECTION 01 OF 02 MAPUTO 000463 
 
SIPDIS 
DEPT FOR AF/S KDAVISON 
PLEASE PASS TO OPIC FOR MSHORE 
E.O. 12958: DECL: 04/01/2014 
TAGS: EINV, ETRD, PGOV, PREL, MZ, OPIC, Nacala Corridor 
SUBJECT: NACALA CORRIDOR PROJECT IN JEOPARDY -- YET AGAIN 
 
 
Classified By: Econ/Poloff Elizabeth Jaffee for Reasons 1.4 (B) and (D) 
 
1. (C) Summary. The Nacala Port and Rail Corridor project is 
yet again in trouble. Two principal outstanding issues 
remain: 1) the lack of the government of Malawi (GOM)'s 
signature on a Direct Agreement and 2) on-going disagreements 
between the project's US-led consortium and the principal 
Mozambican government counterpart, Ports and Rails of 
Mozambique (CFM), over management and personnel matters. The 
project has reached critical stage. Without a Direct 
Agreement with Malawi, the project cannot go forward. US 
shareholders Rail Road Development Corporation (RDC) and 
Edlow Resources Limited, who have been in Maputo for meetings 
since March 28, have informed post that the GOM has refused 
to sign an Direct Agreement based on previously negotiated 
shareholder terms. The proposed changes to the terms of the 
Direct Agreement with Malawi would dilute US interests in the 
project below the threshold set by OPIC and, even if 
negotiated at a lower level, would require extensive legal 
revisions to the various agreements already in place. For 
CFM's part, it continues to play hard-ball over the number of 
CFM employees to be retained. The lack of transparency in the 
process has been extremely troubling. RDC and Edlow are 
trying to be flexible on many of the issues, but their 
patience is running thin. End Summary. 
 
2. (C) Project Background: The Nacala Corridor project dates 
from 2000, when a concession agreement was signed between CFM 
and the Nacala Corridor Development Company (SDCN), a 
consortium comprised of foreign and national investors, 
creating an autonomous company, Nacala Corridor Development 
(CDN), for the rehabilitation and modernization of the 
railroad and port system on a key transport route between 
Malawi, Zambia and Mozambique. CDN has a highly complicated 
shareholders structure, with SDCN holding 51% of the shares 
and CFM holding the remaining 49%. Foreign investors (RDC, 
Edlow Resources, Manica Limited) hold 67% of SDCN's shares. 
Private national investors reportedly include the Minister of 
Transportation, the Secretary General and presidential 
candidate of ruling party FRELIMO, and several key members of 
Parliament operating through Mozambican registered companies. 
 
3. (C) Malawi Wants Share Of American Interest: On March 31, 
RDC and Edlow Resources reps met with Malawi's Minister of 
Transportation Stambuli and members of Malawi's Privatization 
Commission. A representative of Mozambique's Ministry of 
Transportation was also present. The GOM representatives are 
in Maputo as part of President Muluzi's state visit. 
According to RDC and Edlow, the originally negotiated terms 
of the Direct Agreement called for 16% of CDN's shares to be 
provided to a Malawian entity out of CFM's 49% interest. 
However, during the March 31 meeting, Minister Stambuli 
stated that Malawi refused to sign the agreement under the 
previously negotiated terms. Instead, Malawi was now 
insisting that the US investors sell 33% of its shares in 
SDCN to the Malawian private firm Farmers World. Minister 
Stambuli told RDC and Edlow that he needed an answer 
immediately or the deal was off. RDC and Edlow responded 
that they did not have the authority to make such a decision 
and, more importantly, such an arrangement could put the 
entire project in jeopardy. Specifically, changing the terms 
of the Direct Agreement in this manner would bring American 
participation below the percentage required by OPIC and, even 
if negotiated to a lower number of shares being sold, require 
legal revisions and reviews of all existing project 
agreements since it would dramatically alter the shareholding 
position of the leading (i.e., US) investors. This, in turn, 
would require renegotiating the OPIC agreement. 
 
4. (C) Conversation to Continue in Malawi: Edlow Resources 
met again with Minister Stambuli on April 1. Stambuli 
continued to insist on Malawi's shares coming from SDCN. 
Edlow reminded Stambuli of the previously agreed to terms 
that the shares would come from CFM and suggested that the 
GOM speak to CFM over the terms. Edlow has drafted a 
response to the GOM that, while not rejecting the GOM's 
proposal, notes that any changes to the shareholding 
structure would require both SDCN and OPIC approval. Edlow 
representative Russell Neely will be leaving Maputo for 
Malawi on April 2 and will contact Embassy Lilongwe regarding 
a possible meeting with Minister Stambuli. 
 
4. (C) Concerns of Malawi Government Representing Private 
Interests: Further complicating the situation is the role of 
a private company, Farmers World, on whose behalf the GOM 
appears to be negotiating. According to the RDC and Edlow, 
Farmers World had held discussions with the Mozambican 
government for the purchase of the 16% equity that was 
supposed to be reserved for a Malawian interest. Farmers 
World and the Mozambicans could not agree on a price and, 
subsequently, it appeared the Mozambican side no longer 
intended to sell the 16% interest to any Malawian interest. 
The exact relationship between the Malawian government and 
Farmers World and why a private company's interests were 
being raised on behalf of the GOM is unclear. However, RDC 
and Edlow speculate that the GOM is trying to use Farmers 
World to somehow increase the government's shares under the 
Direct Agreement while allowing Mozambique -- through CFM -- 
to retain 49% of the shares. 
 
5. (C) Problems Also With the Mozambicans: Though less of an 
immediate concern, CFM's complete inflexibility over 
personnel and management issues continue to place the project 
in jeopardy even with a Direct Agreement with Malawi. The 
principal outstanding issues with CFM include the conclusion 
of a management agreement and the number of CFM employees to 
be retained. RDC, Edlow and Manica described meetings with 
CFM on March 29-31 as "difficult" and "tense". CFM has showed 
characteristic inflexibility. The problem is one largely of 
CFM's own making. At the end of 2003, CFM tripled current 
employees' wages thus making retaining more than a limited 
number of CFM employees economically impossible. CFM also 
changed the regulations on severance to retrenched workers 
from the standard 3 months of severance to 6 months. This has 
put the consortium in an impossible situation. The consortium 
had originally proposed retaining 30 CFM employees, a number 
deemed unacceptable by CFM. They have agreed to increase the 
number, but the issue of retrenchment must further be 
negotiated. The consortium is providing CFM with a new 
proposal on personnel and management issues and appears to 
have been flexible in terms of personnel numbers. 
 
6. (C) Prime Minister May Be Helpful: During a pull-aside 
meeting on March 31 with Prime Minister Diogo at a dinner in 
honor President Muluzi, the Ambassador urged resolution of 
the two outstanding issues concerning Mozambique to ensure 
the project move forward. PM Diogo was not surprised to hear 
about CFM's objections to the consortium's proposal on the 
number of CFM personnel to be retained, but seemed genuinely 
concerned about the CFM's apparent intention not to sell the 
16% equity to a Malawian interest. The Prime Minister 
undertook to get a better handle on CFM's negotiations 
recognizing the national interest in getting the Nacala 
Corridor project completed (Note: PM Diogo, in her previous 
role of Minister of Planning and Finance, appears to be one 
of the few government officials able to reign in CFM's 
Director Rui Fonseca) 
 
7. (C) Comment: This is not the first time the Nacala 
Corridor project has been close to collapsing. Numerous 
delays by the government of Mozambique (GRM) in signing a 
Direct Agreement required under OPIC regulations in late 2003 
almost jeopardized OPIC financing, without which the deal 
cannot go forward. While it is unclear what role national 
shareholders and the recent appearance of Farmers World as an 
interest in the Malawi agreement are playing in preventing 
the finalization of the project, there is no doubt that Rui 
Fonseca is actively trying to sabotage the project. There may 
be genuine concern about the future of CFM's employees. 
However, it is more likely that Fonseca, an ideological 
carry-over from Mozambique's socialist past, is most 
concerned about the loss of his empire, as the Nacala project 
will be the first privatization of a Mozambican railroad. The 
only member of the GRM who has appeared willing to confront 
Fonseca on the issue is Luisa Diogo. Minister of 
Transportation and Communication Salomao is helpful but has a 
poor record in overcoming the positions of powerful 
parastatal directors he ostensibly supervises. 
Unfortunately, the project has highlighted the difficulties 
of doing business in Mozambique and the enormous influence 
that personality and personnel interests continue to play in 
business deals in Mozambique. 
LA LIME