US embassy cable - 05MAPUTO1449

UNCLAS MAPUTO 001449 
 
SIPDIS 
 
SIPDIS 
AF/S - TREGER, EB/ESC/ENR, 
PRETORIA FOR ENERGY OFFICER 
 
E.O. 12958: N/A 
TAGS: ENRG, EINV, PO, MZ 
SUBJECT: PORTUGAL TO TRANSFER CAHORA BASSA DAM TO MOZAMBIQUE 
 
REF: WYSHAM-HARRINGTON PHONE CALL NOVEMBER 3 
 
1. On November 2 representatives of the Mozambican and 
Portuguese governments signed in Lisbon a memorandum of 
understanding (MOU) providing for the transfer of control 
over Cahora Bassa, the large hydroelectric dam on the Zambezi 
river in west central Mozambique, from Portuguese to 
Mozambican hands in the near future.  The MOU, signed by 
Portuguese Finance Minister Texeira dos Santos and Mozambican 
Energy Minister Namburete and announced by visiting 
Mozambican President Guebuza and Portuguese Prime Minister 
Socrates, is seen in Mozambique as a milestone for the 
country's sovereignty as well as an advance in relations with 
Portugal. 
 
2. The Portuguese government finished construction of the 
2,075 mW dam in 1974, one year before Mozambique's 
independence.  After 1975 Portugal continued to operate the 
dam and remained the majority share holder.  The dam's main 
customer has been South African electricity utility Eskom, 
and under a 2004 agreement the price the dam holding company 
(HCB) receives for its exports to Eskom will rise from 5 
cents/kwh to 10 cents/kwh in 2006 and 16 cents/kwh in 2007. 
Electricity from HCB also is exported to Zimbabwe, which in 
recent years has accumulated payment arrears.  Portuguese 
control over Cahora Bassa has long been a sore point in 
Maputo's relations with Lisbon.  For years the sticking point 
in negotiations was HCB's debt to the Portuguese treasury. 
This debt had rised to some usd 2.3 billion because of HCB's 
failure to make scheduled payments for years while the dam 
was idle during Mozambique's civil war.  Portugal insisted on 
resolution of the debt before it would turn over control of 
the dam, and Mozambique lacked the capacity to assume the 
debt. 
 
3. Under the MOU, the GRM's ownership stake in HCB will rise 
from 18 percent to 85 percent and Portugal's will fall from 
82 percent to 15 percent.  HCB will pay the Portuguese 
government USD 250 million in two equal payments in January 
and October 2006 and will settle the remainder of its debt to 
Portugal by paying usd 700 million within a year of the final 
agreement.  It thus appears that Mozambique will take on an 
additional usd 400 million in obligations to Portugal (85 
percent of usd 950 million minus 18 percent of usd 2.3 
billion) in return for the 67 percent of HCB it will acquire. 
 
 
4. Both sides, apparently, hope that a final agreement can be 
signed by the end of this year.  However many of the details 
of the transfer remain for negotiation, we understand. 
Subsequent meetings are scheduled for November 21-22 and 
December 16-17, according to the press. 
 
5. Comment:  The Mozambican media is hailing the MOU as a 
major diplomatic coup by President Guebuza, and celebrating 
the signing as a big boost to national pride.  "Its Ours!" 
shouts today's issue of independent weekly Savana, with the 
headline splashed across a large photo of the dam on its 
cover.  Cahora Bassa has tremendous economic, as well as 
symbolic, importance here.  Exports from Cahora Bassa 
constitute a major income earner for this poor country, 
bringing in more than USD 100 million annually, an amount 
that will likely rise with the higher price of sales to 
Eskom.  There is a growing appetite for power in South Africa 
and the region.  With the dam under Mozambican control, and 
therefore under a more simplified management/payment 
structure, we anticipate renewed interest in expanding Cahora 
Bassa's output (a second power station, on the north side of 
the dam) and consideration of constructing other cascades 
further downstream.  But first an agreement must be signed. 
And, for that matter, it is not yet clear how Mozambique will 
obtain the funds needed to pay its new obligations. 
La Lime