US embassy cable - 05RABAT1052

C O N F I D E N T I A L SECTION 01 OF 05 RABAT 001052 
 
SIPDIS 
 
DEPT FOR NEA/MAG 
NSC FOR ABRAMS 
USDOC FOR ITA/MAC DAVID ROTH 
DEPT PASS TO USTR DOUG BELL 
 
E.O. 12958: DECL: 05/17/2025 
TAGS: ECON, EFIS, ETRD, MO, PGOV, PINR, PREL, WS, EINV, PBTS 
SUBJECT: WESTERN SAHARA: ECONOMIC CONSIDERATIONS 
 
REF: A. 2004 RABAT 1875 
     B. RABAT 0658 
 
Classified By: Ambassador Thomas T. Riley, for reasons 1.4 (b) and (d) 
 
1. (C) Summary:  The economy of Western Sahara is based 
almost entirely on fishing for export, which employs 
two-thirds of the local workforce, along with small bits of 
mining, agriculture and tourism.  Existing infrastructure is 
good and cash flow is buoyed by a large military presence, 
tax breaks for businesses, subsidies on fuel, and a 
five-year, $800 million investment package from the 
Government of Morocco (GOM).  Still, the territory faces 
serious economic challenges: unemployment over 20 percent, a 
rapidly expanding urban population, scarce water resources, 
and threatened fishing grounds - source of employment for 70 
percent of the region's workers.  The Western Sahara,s 
much-touted phosphate reserves are relatively unimportant, 
representing less than two percent of national holdings. 
Agriculture for export has been successful in Dakhla but is 
not practical on a large scale due to water scarcity.  Niche 
tourism exists, but the region,s remoteness makes it 
unlikely tourism will ever constitute a significant economic 
base.  There is optimism in the private sector, but a Wild 
West atmosphere pervades, where local connections are 
essential and the question of political leadership 
unresolved.  This cable is based on Econoff's May 9-12 visit. 
 End Summary. 
 
----------------------- 
Economic Infrastructure 
----------------------- 
 
2. (U) Western Sahara (WS) has only two cities of any size: 
Laayoune, 800 miles south of Rabat, and Dakhla, 300 miles 
further.  The region has some good infrastructure.  A paved 
road runs the length of the territory, and ports in both 
Laayoune and Dakhla have been recently renovated.  Both 
cities, airports can handle the largest passenger and cargo 
planes.  Laayoune is connected to the national electric grid, 
which the GOM is expanding down toward Dakhla, expected to 
arrive in just a few months.  Dakhla is currently powered by 
a diesel-burning thermo plant in the city,s industrial zone. 
 
 
3. (SBU) The population of Western Sahara is between 400,000 
and 500,000.  Laayoune, the territory's largest city at 
180,000, has no fresh water source.  A GOM-built 
desalinization plant supplies Laayoune and the surrounding 
areas with water, but high energy use makes desalinization 
costly: average production cost of desalinated water is 
almost $3 per cubic meter, whereas the state-set price of 
water in Morocco proper is 23 cents.  Water is sold to 
Laayoune customers at the national price, and the rest of the 
country subsidizes the difference.  Dakhla, on the other 
hand, sits on an underground aquifer that supplies the city 
and nearby agriculture with water.  No study has been done on 
how much or how many Dakhla,s aquifer can support, and 
estimates by local authorities varied wildly.  Dakhla grew 
from a dusty settlement of 38,000 in 1994 to 90,000 in just 
10 years, and city officials predict this kind of growth will 
continue, putting added pressure on the desert aquifer. 
 
4. (SBU) Dakhla is a city under construction.  Since 2001 
authorities have built a new center square, plowed old 
warehouses for a seaside pedestrian boulevard, and built a 
new port.  A forest of construction cranes works to keep up 
with the influx of GOM investment and jobseeking migrants 
from the north.  The city is crawling with police and 
military, but other than that and the inordinate amount of 
construction going on, seems a normal desert frontier town. 
 
 
------------------------------------------- 
Fishing: the Region,s Economic Sine Qua Non 
------------------------------------------- 
 
5. (U) Fishing is all-important in Western Sahara, employing 
two-thirds of the population.  The area boasts some of the 
richest fishing grounds in the world, but octopus, the most 
profitable species, is threatened and subject to 
government-mandated fishing bans that have expanded each year 
since their inception in 1989.  The ban lasted eight months 
in 2004, and the Ministry declared another halt on May 10, 
estimating just 2-3 months would be necessary but making 
clear they would allow fishing to restart only when stocks 
begin to show signs of recuperation. 
 
6. (SBU) Despite declining octopus stocks, processing plants 
continue to expand.  Hammoudi Houmaid, a Spanish-speaking 
lifetime Dakhla resident, cleans and freezes octopus for 
export to Europe and Japan.  His company, Dakmar II, trucks 
its product to Agadir, whence it is shipped overseas.  In 
spite of declining stocks, Houmaid is building another floor 
to his plant, which employs 300, where he will cook octopus 
for package and sale directly to supermarket chains in 
Europe. 
 
7. (U) The other main exploited species is the low-value, 
high-volume sardine, which is processed and frozen for 
export.  In Dakhla, small scale "artisinal" fishing employs 
90 percent of area workers.  Dakhla,s port takes in 500,000 
tons of sardines a year for processing at the city,s 
freezing plants, but there is little value-added processing 
done, just basic cleaning and freezing for export to Europe, 
Japan and Egypt.  The port of Laayoune takes in another 
450,000 tons of sardines. 
 
------------------------------------- 
Go Fish: GOM Investment in the Sector 
------------------------------------- 
 
8. (U) Octopus fishing attracted thousands to the WS in the 
1990s.  Fishermen created slum villages and exploited the 
limited natural resource irresponsibly for 10 years, until 
the GOM stepped in to regulate the catch.  The GOM is 
spending $130 million to build seven fishing villages along 
the length of the territory, building halls where fishermen 
will sell their catch to wholesalers, providing micro-loans 
for new boats, and building subsidized housing. 
 
9. (U) Surprisingly, Saharawis have no tradition of working 
on the sea, and seamanship is regarded as undesirable work. 
To counter this tide, the GOM is providing job training in 
fisheries to area residents.  Eight training centers 
nationwide accept 48 students a year into a two-year program 
in navigation, nautical engines, refrigeration mechanics, 
nets and knots, and the biological life cycle of local fish 
species.  The students live on campus and all expenses are 
paid by the state. 
 
------------------- 
Tomatoes for Export 
------------------- 
 
10. (U) WS is fortunate to have a year-round growing season 
and good road access to markets in Europe, but what the 
region possesses in sunshine, it lacks in fresh water. 
Laayoune depends on expensive desalinization, and the 
longevity of Dakhla,s fresh water aquifer is unknown. 
 
11. (SBU) Thus far, the region,s only large-scale 
agricultural project is a 100-hectare covered plot near 
Dakhla employing 500 people and exporting 5,000 tons of 
top-quality tomatoes to Europe and Canada each year. 
Surrounded by bone-dry desert for 1,000 miles in any 
direction, there are no horticultural diseases or pests 
endemic to the area and the farm is certified to export to 
the world's most discerning markets in the United States, 
Canada and Europe.  Produce is taken by refrigerated 
container truck from Dakhla to Madrid - a two and a half day 
overland journey - and from there to European destinations by 
truck or to Canada by sea. 
 
12. (SBU) Despite water constraints, the region has 
advantages for agricultural production: the absence of 
endemic pests, a year-long growing season and a seashore 
microclimate that keeps temperatures within a stable range 
day and night.  Western Sahara,s southern latitude sees 
produce mature 10-15 days before competitors in Agadir 1,000 
miles to the north, giving producers in Dakhla a two-week 
head-start in European markets.  Also, while Morocco suffers 
from regular periodic drought and a dropping water table, 
Dakhla,s aquifer provides a constant year-round source of 
irrigation. 
 
13. (C) But while the weather outside is spectacular, the 
investment climate is a mixed bag.  When the French/Moroccan 
partners signed their $12 million joint venture with the GOM 
in 2002, it was for 300 hectares on the Dakhla peninsula.  In 
2003, with 100 hectares installed, authorities put a halt to 
further expansion, substituting another piece of land 150 km 
away on the mainland.  Authorities told Econoff they halted 
the farm's growth (in violation of the investment contract) 
because of concerns over the aquifer and the farm's proximity 
to the city limits.  Although authorities said the change in 
the contract was mutually agreed to, farm manager Philippe 
Boissier told Econoff it was not.  "You can't forget you are 
in Morocco!" said Boissier, who is French.  Boissier also 
complained that the company was forced to give shares to 
local tribal leaders for buy in, or as he put it, "in order 
to get anything done."  Boissier said cooperation with the 
national authorities in Rabat was good, and that the blockage 
was at the local level.  Boissier, who set up a similar farm 
in Mexico in the late 1990s, compared the investment climate 
in WS very unfavorably to that of Mexico. 
 
----------------------- 
Holsteins in the Desert 
----------------------- 
 
14. (SBU) Animal husbandry seems a strange choice in a region 
with a scant 35 mm of precipitation per year, but since camel 
herding has long formed part of the region's traditional 
labor activities, the sector has been targeted for 
development.  Operators are now raising Holstein cows at a 
dairy cooperative in Laayoune, an unexpected sight in the 
desert.  The cooperative, created with GOM help in 1994, now 
employs 150 people and supplies 40 percent of the local 
market in cow and sheep milk.  Officials are now putting 
together a similar project for camel milk, a highly-prized 
commodity in the Sahara. 
 
-------------------------------- 
Tourism, at the End of the Earth 
-------------------------------- 
 
15. (SBU) One or two thousand mostly European tourists visit 
the Western Sahara each year, principally adventure travelers 
crossing the desert or going to Dakhla for sport fishing, 
windsurfing, and miles of unspoiled beaches.  While the 
region lacks any real cultural draw and is probably too far 
from any large population center to attract mass tourism, 
small scale niche tourism markets exist and the Dakhla area 
is fast turning into a windsurfing mecca.  Authorities also 
hope the "exotic" label will prove a draw and that the 
promise of a camel ride on the beach, a night in a nomad tent 
or simply the chance to set foot in Africa could be enough to 
pull day-trippers over from the Canary Islands.  The Canaries 
attract 12 million tourists a year, and if even one percent 
of those took the 20-minute flight to the African mainland at 
Laayoune for a day or overnight excursion, the 120,000 
tourists a year could transform the region,s tiny economy. 
 
 
--------------------------------------------- ----------- 
A Shift in Focus, and an $800 million Investment Program 
--------------------------------------------- ----------- 
 
16. (C) Moroccan leadership in the Western Sahara is resolute 
about promoting economic growth.  Laayoune regional governor 
(wali) Mohamed Rharrabi said the GOM is turning its attention 
from the "political dimension" toward the economic 
development of the territory.  He said instead of focusing on 
the political leanings of the area's residents, the GOM is 
concentrating on improving people's lives through job 
creation, training and basic infrastructure. 
 
17. (C) Proof of this change in focus lies in the 
government's $800 million, 2004-2008 infrastructure 
investment plan (Ref A).  The money will go toward what 
planners believe are the region's top commercial prospects: 
fishing, housing, agriculture, and tourism.  The plan has 
merits: the region has some of the world's richest fishing 
grounds; Dakhla greenhouses are already exporting top quality 
produce to Europe; and the region has hundreds of miles of 
golden sand beaches with not a soul in sight.  However, each 
of these sectors faces an uphill struggle.  Octopus, by far 
the most profitable species caught in the WS, is in rapid 
decline, with government scientists imposing increasingly 
longer fishing bans each year.  Dakhla,s aquifer may be able 
to support limited agriculture, but Laayoune's desalinated 
water is far too expensive to permit large scale activities. 
And while the region has sunshine and miles of empty beaches, 
it has little more, and is far from just about anywhere. 
 
--------------- 
Made in Morocco 
--------------- 
 
18. (C) Until two years ago, Dakhla-based fisheries were 
transporting their product by truck to Agadir for export by 
sea and by air from there.  Most are now leaving directly 
from Dakhla port.  Econoff visited processing plants where 
hundreds of workers were cleaning, freezing and boxing squid 
and sardines for export to Europe, Japan and Egypt.  The fish 
is caught offshore Western Sahara, cleaned and frozen in a 
Dakhla plant, and shipped through Dakhla port, in boxes 
clearly labeled "Produit du Maroc" - Product of Morocco. 
 
---------------------------------------- 
Phosphates: Raison d'Etre, or a WS Myth? 
---------------------------------------- 
 
19. (C) Moroccan state-owned phosphates company OCP runs 
mines in Western Sahara at Bou Craa, 100 km inland from 
Laayoune.  The Bou Craa deposits are economically 
insignificant for the GOM, representing less than two percent 
of proven national reserves, but may be relevant from a 
political and social (employment) perspective.  The ore is 
hauled on a 98 km-long conveyor belt - the longest in the 
world - over harsh desert terrain to the sea port of Laayoune 
for export directly to the United States and other countries. 
 The terrain and the deposits, distance from sea ports make 
the WS mines largely unprofitable, but they employ 1,900 
people in an employment-hungry region and provide other 
social benefits to the area (septel). 
 
----------------------------------- 
Can WS's Subsidized Lifestyle Last? 
----------------------------------- 
 
20. (C) In Western Sahara, businesses do not pay registration 
fees or taxes on their income.  Curiously, this tax exemption 
has been given in practice since the 1980s, but has never 
been formally legislated.  Laayoune Regional Investment 
Center (CRI) director Hassana Maoulainine publicly boasted 
about the benefits of tax-free status for businesses, but 
privately told Econoff he believes the regime is not 
sustainable.  Maoulainine said the tax breaks have led to the 
creation of phantom enterprises to avoid paying taxes on 
income generated outside the region, leaving local 
municipalities starved for tax revenue. 
 
21. (C) In addition to losing tax revenue, the state heavily 
subsidizes basic goods to keep WS's financial ship afloat. 
Gasoline is sold for half price.  Water from Laayoune's 
desalinization plant is sold at one-tenth the cost of 
production.  Subsidies also exist for basic necessities like 
sugar, wheat and cooking oil.  These benefits, in addition to 
the GOM's $800 million infrastructure program (Ref A) serve 
as powerful incentives that have brought thousands of 
job-seekers to the territory in recent years, pushing the 
region's already high unemployment rate above 20 percent. 
 
------------------------------------- 
"Economics Will Trump Politics in WS" 
------------------------------------- 
 
22. (C) But despite the uphill struggles, there is surprising 
optimism among private sector operators in the region. 
Derham Derham, a Dakhla native and part owner of the 100 
hectare tomato farm, is certain that economic growth is the 
answer to the political impasse in Western Sahara.  Derham 
believes that as the region gets richer and jobs become more 
plentiful people will be less concerned about which political 
administration they fall under: "Economics will trump 
politics and work us out of this problem in the Sahara," he 
said. 
 
23. (C) Indeed, an $800 million investment by the Government 
of Morocco in a territory with the population of Wichita, 
Kansas has to be one of the larger per capita aid programs in 
history.  And although unemployment is high, the specter of 
20 percent joblessness is easier to fix in a region of 
300,000 than in an economy of 30 million.  Fishing plant 
owner Mohamed Zebdi, who is doubling the size of his 
550-employee sardine plant this year, thinks Dakhla,s high 
unemployment rate is short-lived.  "With five or six more 
projects like mine," he said, "Dakhla,s unemployment problem 
is gone. You do the math." 
 
24. (C) Comment:  WS is a land far from everything but 
politics, and the struggle over the disputed territory is 
never distant from business owners, minds.  Most operators 
Econoff spoke with expressed complete confidence in the 
region's political stability and the security of their 
investments, even though authorities do not always operate 
with full respect for due process and contract enforcement. 
Keeping the economic playing field level in WS seems to be a 
more difficult and nuanced task than in Morocco proper, as 
deep-rooted local interests and a culture of tribalism make 
objective economic decision-making difficult.  Spanish 
operators from the Canary Islands told Econoff they operate 
in a system where local connections and extra-contractual 
quid-pro-quo rule the day, and powerful local interests have 
operated for decades outside normal economic and legal 
structures. 
 
25. (C) Comment continued:  In the region's lifeblood fishing 
sector, the most profitable species has been overfished and 
catch periods are limited.  Phosphate reserves are exploited 
as a social safety net, not a commercial venture.  With 
scarce resources, rapid urban growth and high unemployment, 
WS may be an economic basket case in 10 years.  Political 
detente and an opening to outside competition may bring 
authorities into line, but for the time being a sort of Wild 
West mentality pervades, where connections are everything and 
a local partner a necessity for foreign investors.  Certainly 
the tax breaks, the fuel subsidies, and the $800 million 
investment package will help.  But aside from its rich 
fishing grounds and notwithstanding a possible offshore oil 
discovery (Ref B), the territory is unlikely ever to be much 
of an economic boon for the state. 
RILEY