US embassy cable - 04MAPUTO1091

UNCLAS SECTION 01 OF 03 MAPUTO 001091 
 
SIPDIS 
STATE FOR AF/S 
PRETORIA FOR JRIPLEY 
JOHANNESBURG FOR RLO, FCS - RDONOVAN, JVANRENSBURG 
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: JULY MONTHLY ECONOMIC WRAP-UP: MOZAMBIQUE 
 
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FOREIGN INVESTMENT 
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1. (U) Vodacom, the South African mobile phone operator that 
began operations in Mozambique in December 2003, now estimates 
that it has 100,000 subscribers in Mozambique. Mcel, the national 
operator, estimates that is has 500,000 subscribers. There is 
clear market growth in this sector and the number of total 
subscribers is expected to rise to 1 million over the next five 
years (Vodacom estimate). Vodacom mobile phone coverage now 
extends to all provincial capitals, except Quelimane, which is 
scheduled for coverage in August 2004. The South African firm is 
ahead of schedule for installation and has launched a 
particularly strong marketing campaign. A Vodacom source 
announced that only 10-20% of their subscribers have come over 
from Mcel, yet it bodes well for both firms that mobile phone 
service is in demand. In Africa, Vodacom operates in Lesotho, 
South Africa, Tanzania, the Democratic Republic of the Congo, and 
now Mozambique. The cost of Vodacom service is lowest in 
Mozambique. Vodacom has focused its marketing campaign on 
attracting individuals and has not attracted many corporate 
clients yet. Ninety-six percent of Vodacom's clients are pre-paid 
subscribers. Vodacom estimates that it will "break even" in 
another 12-14 months. Their Mozambique investment totals $200 
million. 
 
2. (U) The Corridor Heavy Sands Project (Australia) will spend 
$500 million in the first phase of development for the initial 
production of some 400,000 tons of titanium dioxide slag per 
year. The project is based on immense deposits of titanium 
dioxide minerals located near the town of Chibuto in the Gaza 
Province. The deposits were discovered in late 1997, and 
represent the world's largest known economic resource of titanium 
dioxide and associated minerals. Corridor Sands will establish 
an integrated heavy mineral sands mining, mineral processing, and 
beneficiation operation that will include the mine and an 
associated two-stage mineral processing plant. The minerals are 
ilmenite, rutile, leucoxene, and zircon. Corridor Sands Limited 
(CSL) has the exclusive right to develop the deposit and the 
Industrial Corporation of South Africa holds an option to acquire 
10% of CSL. For CSL to reach its planned full production level of 
one million tons of titanium dioxide slag per year, the project 
will require a total capital investment of approximately $800 
million. Infrastructure construction will begin in 2006 and the 
first production is anticipated for 2008. As a mega-project, CSL 
operates in an industrial free zone. Mega-projects such as MOZAL 
aluminum smelter and the SASOL natural gas pipeline fuel the 
economic growth of Mozambique by an estimated 1-2% per year. With 
two mineral processing mega-projects in the pipeline (Moma Heavy 
Sands and Corridor Sands), Mozambique's economic growth will be 
further fueled by this significant investment. Mozambique's GDP 
growth has remained one of the highest in Africa over the 1992- 
2003 period, averaging 8% growth per year. 
 
3. (U) Universal Leaf Tobacco (Mozambican subsidiary known as 
Mozambique Leaf Tobacco or MLT) continues construction on the 
country's first tobacco processing plant in the province of Tete. 
A local news source indicates that construction, which began in 
July 2003, is moving along at a good pace and should be completed 
within the predicted 15 months, allowing for plant inauguration 
before the end of 2004. The $45 million undertaking (one of the 
largest in the last several decades in Tete) is projected to 
bring substantial development to the Tete Province, creating more 
than 2,000 jobs. Universal Leaf Tobacco is one of the biggest 
producers, processors, and exporters of tobacco in the world. 
They operate in South Africa, Zimbabwe, Zambia, Malawi, Tanzania, 
Ghana, and now, Mozambique. 
 
4. (U) The GRM laid the first stone in building a pipeline to 
supply natural gas to the city of Matola. The building of the 
100km branch line linking the gas fields of Inhambane to Matola 
was awarded to the newly formed Matola Gas Company (MGC) and 
construction should be completed by June 2005. When the job is 
completed and gas starts flowing to Matola, where much of the 
country's industry is located (including the MOZAL aluminum 
smelter), the cost of Mozambican fuel imports could be cut by 
about $80 million/year (local news source). The MOZAL smelter 
will be the pipeline's biggest customer, however, the gas will 
supply smaller industries and the general public. 
 
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MACROECONOMICS 
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5. (U) In the recently published OECD "African Economic Outlook" 
Report, a fairly positive picture is painted of the Mozambican 
economy. According to the report, Mozambique's trade deficit was 
reduced to 15% of GDP in 2003 (from 16% in 2002) and is set to 
fall to 8.6% in 2004 and 7.7% in 2005. The trade deficit 
reduction is largely due to the massive increase in exportation 
of aluminum ingots, produced by the MOZAL aluminum smelter that 
just inaugurated Phase II of operations (December 2003). Also 
helping to even the trade balance is the higher price of 
electricity that Eskom (South Africa) must pay for Cahora Bassa 
power. Mozambique, Portugal, and South Africa signed an agreement 
in early 2004 to raise these tariffs. The start of export of 
natural gas down the SASOL-built and operated gas pipeline from 
Inhambane to Secunda, South Africa, also helps boost the trade 
balance. Fiscal revenues improved in 2003, reaching nearly 13% of 
GDP, compared with 12.5% in 2002 and 11.8% in 2001. The report 
attributes this to new, modernized taxes on personal incomes and 
profits, as well as measures to limit tax exemptions for 
investors. Inflation stood at 12.7% in 2003, driven by the rise 
in price of imported oil and the strengthening of the South 
African Rand. The report notes strong growth in the production of 
food and cash crops, particularly of sugar, thanks to heavy 
foreign (Mauritian and South African) investment rehabilitating 
the sugar mills. The report makes clear that obstacles remain for 
investors wishing to do business in Mozambique. Shortage of 
domestic capital, high borrowing costs, excessive bureaucracy, 
and inadequate infrastructure are some of the challenges that 
remain. 
 
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TOURISM 
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6. (SBU) The Carr Foundation will invest an estimated $1 million 
per year for the next several years into development and 
rehabilitation of Gorongosa National Park in the Sofala Province. 
This park was decimated in the civil war and very little wildlife 
remains (an estimated 200 elephant, four zebra, and other 
species). The Carr Foundation traveled to Mozambique in March 
2004 to survey different areas for tourism investment. The 
Foundation chose to invest in Gorongosa because of its location 
on the Beira corridor and relatively good park access. The 
Foundation will support the park in a 40-year financial 
commitment that involves community development, conservation, and 
economic sustainability through ecotourism. In the future, 
tenders for tourism operators to work in the park will be 
released. Although Gorongosa's ecosystem is still in place, 
animals must be transferred from other parks (Marromeu, Niassa 
Reserve, possibly Zimbabwe and South Africa) to start small-scale 
tourism. Currently, only around 1,000 tourists visit the park 
each year and each one spends as little as $5 on average during 
their visit. Everything must be brought into the park, including 
food, water, and fuel. 
 
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PORTS, ROADS, AND RAILWAYS 
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7. (U) CFM, the transportation parastatal, signed an agreement 
with Cornelder (Holland) for a 25-year concession to develop and 
privatize the port of Quelimane in Zambezia Province. Fourteen 
million dollars in financing will be provided by KFW, a German 
bank, allowing for port rehabilitation and modernization. 
Cornelder is a long-time partner of CFM, as it signed a similar 
agreement in 1998 to privatize container terminals at the port of 
Beira, one of the country's most critical ports. The port of 
Quelimane is less important and sees significantly less traffic 
than the three biggest ports of Maputo, Beira, and Nacala. 
Revitalization of the port will benefit Zambezia Province that 
exports primarily tea, seafood, and timber. 
 
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ENERGY 
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8. (U) EDM, the national electricity company, will invest $700 
million in the next 15 years to carry out electricity projects 
throughout the country. With this level of investment, EDM 
estimates that nearly one million customers will be connected to 
the national electricity network (currently only 200,000 are 
connected to the network). To make this happen, EDM must invest 
$50-60 million per year until the year 2020. Presented at a 
national workshop, the Electricity Strategy for Mozambique from 
2005-2020 (financed by the African Development Bank), identifies 
ways to strengthen the quality of electricity provided and 
targets areas that are in need of electrification. To date, the 
two most northern provinces of Cabo Delgado and Niassa have the 
least amount of coverage. The plan discusses the need to 
electrify Northern Niassa and more of Inhambane Province. 
Additionally, it encourages strengthening of coverage in Maputo 
and Beira. EDM is the only electricity provider in Mozambique. 
The extremely low purchasing power of Mozambicans makes 
investment in electrification unprofitable, making it difficult 
to attract private investors. For this reason, the GRM will 
likely remain the fundamental investor in electricity expansion 
and refortification. 
 
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LABOR 
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9. (U) On July 21, the GRM launched a Labor Law Revision Seminar, 
funded by UNDP, on the terms of reference and suggested changes 
for the new labor law. This is a continuation of seminars that 
has been taking place across the country (Beira, Nampula, and 
Xai-Xai) to encourage dialogue on labor law reform. The law is to 
be passed in 2005. The Seminar hosted participants from the 
private sector, the government, the unions, and donor groups. 
LA LIME