US embassy cable - 04MAPUTO894

UNCLAS SECTION 01 OF 04 MAPUTO 000894 
 
SIPDIS 
STATE FOR AF/S 
PRETORIA FOR JRIPLEY 
JOHANNESBURG FOR RLO, FCS - WCENTER 
USDOC FOR AHILIGAS 
PASS USAID FOR AA/AFR AND AFR/SA 
SENSITIVE 
E.O. 12958: N/A 
TAGS: ECON, EAID, EINV, ETRD, MZ, Monthly Econ Digest 
SUBJECT: JUNE MONTHLY ECONOMIC WRAP-UP: MOZAMBIQUE 
 
REF: A. MAPUTO 00877 B. MAPUTO 00712 C. MAPUTO 00744 
Sensitive But Unclassified - Protect Accordingly 
 
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FOREIGN INVESTMENT 
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(U) The Millennium Challenge Corporation (MCC) visited 
Mozambique and spoke with key GRM officials to introduce the 
MCA program (Ref A). The group stressed the importance of 
formulating proposals that accelerate growth and reduce 
poverty. Calling themselves "development investors", the 
group stated that while proposals must have measurable 
results, there is no timetable or format for proposal 
submission and that it is not likely the MCC will fund 
projects in all sixteen MCA-eligible countries. Currently, 
the GRM has put together a high-level drafting group that 
will submit proposals to the MCC. This group consists of 
ministers from Industry and Commerce, Planning and Finance 
(who currently also serves as the Prime Minister), Health, 
Public Works, and Transportation. A larger, technical 
drafting group to serve under the high-level body has also 
been named. This group consists of national directors of 
several ministries, private sector representation through 
CTA (Confederation of Mozambican Economic Associations), and 
civil society representation through Cruzeiro do Sul. The 
MCC immediately has $1 billion to invest in development 
projects across the sixteen countries. They are expecting to 
receive an additional $1.5 billion to invest in FY05. 
(U) The Arab Bank for Economic Development in Africa (BADEA) 
signed two agreements for a total of $20 million in 
financing for the rehabilitation of roads in the city of 
Maputo and the stretch from Chissano-Chibuto in Gaza 
Province. Longtime partners with the GRM, BADEA guaranteed 
the Ministry of Planning and Finance $10 million directly 
from BADEA and $10 million from a BADEA-contracted partner. 
An unspecified amount of the financing comes in the form of 
a donation. 
(U) On June 1, the 900-kilometer natural gas pipeline that 
runs from Inhambane, Mozambique to Secunda, South Africa, 
was inaugurated. Mozambican President Joaquim Chissano, 
President Mbeki of South Africa, and Mtswati III, King of 
Swaziland attended the formal inauguration along with 
several ambassadors, including the U.S. Ambassador to 
Mozambique. Total investment for pipeline construction and 
installation reached $1.2 million, financed by Mozambican 
and South African entities - the National Hydrocarbon Firm 
(Mozambique) and SASOL (South Africa). The pipeline 
originates in Inhambane and passes through the provinces of 
Gaza and Maputo before reaching Secunda, South Africa. 
Discovery of natural gas in the Pande and Temane fields 
(Inhambane) occurred in 1962 after several studies were 
conducted, but the following years of colonial and civil war 
hampered any investment. Currently, gas is exported to South 
Africa via the pipeline; however, several studies are being 
conducted to see if gas runoff may be used to benefit 
Mozambique. A public-private partnership is providing energy 
via the pipeline to Vilankulos, Inhassoro, and Nova Mambone 
(Inhambane) and Machanga (Sofala). Tourists on the island of 
Bazaruto and Magaruque also benefit from Temane gas 
electricity. 
(U) Following a series of delays, Kenmare Resources of 
Ireland signed an agreement with three European and two 
African financial institutions to obtain $269 million in 
financing to construct a heavy sands production factory in 
the northern province of Nampula. The five financial 
institutions are: European Investment Bank (BEI), German 
Development Bank (KFW), Dutch Development Bank (FMO), 
African Development Bank (ADB), and South African bank, 
ABSA. According to Noticias daily news, Kenmare hopes to 
begin construction within the next four months, although the 
project requires an extra $42 million in financing. The 
financed amount will be paid back over a period of 15 years. 
Sources say that up to 425 people will be employed, only 10% 
of which will be foreign laborers. Up to 619,000 tons of 
ilmenite, 55,000 tons of zircon, and 18,000 tons of rutile 
will be produced annually in the Moma heavy sands project. 
Generally, these resources contribute to the production of 
paint, ceramics, material used in aviation and medical 
surgery. 
(U) Vodacom Mocambique, a subsidiary of Vodacom South Africa 
that provides mobile cellular service, has reached over 
100,000 customers in Mozambique since its inception in the 
market in December 2003. Vodacom Mocambique believes that 
the key to its success lies in the range of products 
offered, including prepaid cellular minutes with no airtime 
window, prepaid roaming to South Africa, and free "Please 
call me" messages. The company is in competition with Mcel, 
the previously sole national cellular phone company, which 
is racing to offer new promotional packages to keep current 
customers. Vodacom is the only firm to offer bundled minutes 
with contract packages so that Mozambican customers can send 
messages to over 600 GSM cellular networks worldwide. 
Vodacom Mocambique began coverage in Maputo, Vilanculos, and 
Matola. It has now expanded to cover Pemba, Beira, Nacala, 
and Nampula and the corridors between Maputo and South 
Africa, Swaziland, Xai-Xai and Beira to Zimbabwe. 
 
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TOURISM 
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(U) The Ministry of Tourism has pre-selected four tourism 
operators to work in Limpopo National Park, located in the 
southern province of Gaza. The Ministry will award a 
contract shortly so tourism operation may begin before 2005. 
In addition to launching tourism in the park, other 
activities will commence simultaneously to resettle peasant 
farmers living in the Shinguedzi river basin, an area 
currently reserved for park operations. Approximately 2,000 
wild animals have been introduced into the park from South 
Africa as part of the restocking plan. Minister of Tourism, 
Fernando Sumbana, would like to create routes so that 
tourists may start visiting the area, bringing in money to 
further develop the park's infrastructure, assure park 
sustainability, and benefit the surrounding communities. 
 
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PORTS, ROADS, AND RAILWAYS 
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(SBU) Two representatives from the World Bank (WB) Transport 
Group, Washington, DC paid a visit to Embassy officers. WB 
representatives are on a two-week visit to Maputo to carry 
out a review of negotiations between the GRM (Ministry of 
Transportation) and Indian company Rites and Ircon, the 
chosen developer of the Sena Railway Line. The WB will 
provide Rites and Ircon a $100 million soft loan to 
reconstruct the Sena Line. Loan approval is estimated to 
take place in August. According to the WB, the main 
justification for rehabilitating the 600 km Sena Line is to 
restore a railway line that used to carry up to about 2 
million tons of goods during its past operation, at an 
average cost of about $200,000 per km (total cost of nearly 
$120 million). The expected economic rate of return is 18%, 
as presented in an economic report by ECORYS, but it is 
believed to be commercially viable only as a public-private 
partnership where IDA funds ($104.5 million) are on-lent to 
the private sector (25 year concession) at a concessionary 
rate and the private sector is investing $35 million 
(including the rolling stock and investments in the 
Machipanda/Zimbabwe Line). Additionally, the WB made clear 
that the concession for the Moatize coalmines, the ultimate 
target for export, is completely separate from the rail 
concession. Barge transport would be considered as a 
technically viable alternative for the transport of coal 
when, and if, it does materialize from the Moatize coalmines 
if successfully concessioned (not expected for another eight 
years or so), and where tonnage would be expected to be in 
the order of 6-10 million/year. Quoting WB sources, "The 
existence of the Sena Line would therefore not preclude 
consideration of the barge transport as an alternative, 
which could well present a competitive alternative to be 
considered by the private sector." According to the WB, 
Minister of Transportation Salomao, has extended an 
invitation to the U.S. firm seeking investment in Zambeze 
River barging, ACLI, to conduct a Zambeze River Survey. This 
effort was ignored and most likely blocked in the past, due 
to the fear that barging would derail plans for 
reconstruction of the Sena Line (REF B). 
 
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ENERGY 
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(U) Stating that Mozambique must expand access to energy to 
encourage development, Nazario Meguigy, director of the 
Project Technical Implementation Unit (UTIP), reopened 
debate on construction of the Mphanda Nkhuwa Dam. According 
to local news sources, Meguigy warned that Mozambique runs 
the risk of losing large industrial projects if it does not 
accelerate negotiations for dam and power plant 
construction, which began in August of last year. Mphanda 
Nkhuwa would be located on the Zambeze River, southeast of 
the country's largest energy-producing dam, Cahora Bassa. 
Because the majority of energy generated from Cahora Bassa 
is soaked up by South Africa, it does not provide 
significant development opportunities for Mozambique. 
Meguigy supports development of a second dam because it 
would create infrastructure, employment, stimulate economic 
growth, and raise the standard of living for Mozambicans in 
the surrounding area. Up until this point, the UTIP has only 
solicited large construction firms and financial 
institutions that may be interested to invest. At the same 
time, reopening this debate has incited many 
environmentalists to argue against dam construction, saying 
that dams worsen the quality of life for surrounding 
citizens rather than improving them. 
 
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AGRICULTURE 
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(U) The Luabo sugar mill, located in Zambezia, may soon be 
rehabilitated if the GRM and Mauritius successfully conclude 
negotiations. Rehabilitation of Luabo is estimated to cost 
between $60-80 million and will produce sugar, rice, and 
raise cattle (as part of the Luabo complex). Currently, 
there are four sugar factories operating in Mozambique, 
employing over 17,000 workers. Launched in May, the 2004 
agricultural campaign is expected to produce around 253,000 
tons of sugar, representing a 20% increase in production 
from last year. 
(U) The current agricultural campaign is estimated to 
produce over two million tons of staple crops in 2004, a 
target set by the National Agricultural Development Program, 
PROAGRI. Production of grain and vegetables is up by ten 
percent and root crops up by five percent in 2004. Vice- 
Minister of Agriculture, Joao Carrilho, stated that 
marketing of agricultural products must be improved, 
implying greater access to micro-credit and existence of 
banking institutions in rural areas. In Mozambique, 
approximately 30 micro-credit institutions (all in urban 
areas) serve 52,000 customers and lend the equivalent of $8 
million. One of the Ministry's challenges, according to the 
vice minister, is to attract savings held in rural areas 
where farmers keep their money at home due to the lack of 
rural financial institutions. Regarding this issue, Deputy 
Governor of the Bank of Mozambique, Ernesto Gove, promised 
that rural savings and finance will gain new momentum with 
the implementation of a new law, recently approved by the 
Parliament, which calls for extension of micro-credit to 
rural areas. 
(U) The National Prices and Wages Commission published the 
new price for raw cotton under the 2004 agricultural 
campaign on June 2. Companies must pay producers a minimum 
of 5,000 meticais (US$0.20)/kilo for first-class cotton. 
This amount is a 30% increase in the price from the previous 
year. The decision was made by the Commission in order to 
resolve a deadlock in negotiations between peasant producers 
and buying companies that took place in Nampula, the 
country's largest cotton-growing region, in recent months. 
The recent recovery of world cotton prices has significantly 
helped the situation of local producers. 
 
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LABOR 
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(SBU) The Minister of Labor, Mario Lampiao Sevene, is 
individually calling in donors (including the USG) to 
present his plan and timetable for revision of the labor 
law, expected in 2005. In a recent meeting with the U.S. 
Ambassador to Mozambique, Sevene made clear intentions for 
the Ministry of Labor to head labor law revision, as opposed 
to the Technical Law Revision Unit (UTREL), which is 
generally the lead on drafting technical legal matters (REF 
C). For many private sector groups and donors who call for 
greater labor law liberalization, it is worrisome that the 
Ministry will seek to lead this revision, as many see a 
greater chance for overhaul and liberalization to be 
achieved under UTREL as opposed to the Ministry. 
HANKINS