AUGUST ECONOMIC WRAP-UP: MOZAMBIQUE

UNCLAS SECTION 01 OF 04 MAPUTO 001211

SIPDIS
STATE FOR AF/S - BNEULING, OES - JSTORY, AND EB/TRA
PRETORIA FOR JRIPLEY
FCS - RDONOVAN, JVANRENSBURG
USDOC FOR AHILLIGAS
PASS USAID FOR AA/AFR AND AFR/SA
PASS MCC FOR BRIGGS AND GAULL
SENSITIVE
E.O. 12958: N/A
TAGS: ECON EAID EINV ETRD MZ
SUBJECT: AUGUST ECONOMIC WRAP-UP: MOZAMBIQUE

REF: MAPUTO 1091

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CONTENTS
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Foreign Investment
- Zambezi Bridge Project
- AGOA-related Textile Investment
- Heavy Sands Processing Factory
Trade
- Annual FACIM Trade Fair
Banking and Finance
- GRM Sells BIM shares
Civil Aviation
- New Airline in Mozambique - Air Corridor
Ports, Roads, and Railways
- Nacala Corridor
- Barging on the Zambezi River
- Investment in Moatize Coal Mines
Energy
- Cahora Bassa Dam
Fisheries
- Shrimp Fishing in the Sofala Bank
- OES/NMFS TED Visit
Agriculture
- European Union Involvement


1. (U) The Mozambique monthly economic cable is jointly
produced by the Embassy and USAID.

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FOREIGN INVESTMENT
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2. (U) The Ministry of Public Works announced the
creation of a Zambezi Bridge Project Office, located in
the National Road Administration (ANE),which will
control the building of the Caia Bridge over the river
linking Sofala and Zambezia provinces. The bridge is a
major investment project along the country's north-
south highway. Currently, overland traffic between the
north and south depends on an unreliable ferry service
to cross the Zambezi River. With the USD 80 million
funding for the bridge secured (Swedish, Japanese, and
Italian funding, in the form of grants, with the World
Bank to make up any remaining difference),the GRM is
moving forward with groundwork for construction. The
Zambezi Bridge Project Office will be responsible for
building the bridge, managing support services, and
undertaking projects related to the bridge that will
have an impact on the local communities.


3. (U) Mauritian investors recently purchased the
abandoned premises and machinery of the state-run
textile company, Textil do Pungue, located in the
central province of Sofala. The factory has been
paralyzed for 29 years, and the existing machinery is
obsolete. The group renamed the company "Palmar
Mocambique", announcing that it will invest USD 3
million in an initial phase to rehabilitate the
premises and equip the factory with new machinery. News
sources report that Palmar Mocambique plans to employ
600 workers. The company intends to export garments
(primarily jeans) to the United States under AGOA and
sell garments on the domestic market.


4. (U) Construction will begin on Mozambique's first
heavy sands processing factory in September. The Moma
Heavy Sands project, valued at USD 360 million, is
located in the Nampula Province and managed by Kenmare
Resources of Ireland (reftel).

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TRADE
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5. (U) The annual trade fair in Maputo, FACIM, (Agro-
Commercial and Industrial Fair) began on August 30 and
continues through September 5. FACIM celebrates its
40th year of activities without interruption since
opening in 1965. The event was kicked off by the Prime
Minister, Luisa Diogo. Companies from Portugal,
Germany, Spain, India, Italy, South Africa, Brazil, and
Macau are represented at the fair at specific country
pavilions. Approximately 127 national companies are
also participating. As was the case last year, the fair
will be marked by the absence of participation from
many SADC countries (COMMENT: The reason for this
absence is unknown, but it could be due to the high
cost of participation at USD 70 per square meter, which
makes an indoor pavilion quite expensive. END COMMENT).
In 2005, the FACIM fairgrounds will be demolished and
rebuilt with a USD 6 million investment. The current
compartmentalized and poorly maintained grounds will be
transformed into a single covered pavilion. Due to
construction, FACIM will not take place in 2005.

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BANKING AND FINANCE
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6. (U) According to press reports, the GRM will sell
off a third of its 23 percent stake in the country's
largest bank, the International Bank of Mozambique
(BIM). These shares will be sold to bank managers and
workers. The state's involvement with commercial banks
dates back to 1992, when the Central Bank was stripped
of its commercial functions and state-owned and
operated commercial banks were created. When
commercial banks were privatized in 1996, mismanagement
led to a massive burden of bad loans on and near
collapse of BIM (BCM at that time). The GRM paid for a
part of BCM's recapitalization by issuing high interest
bearing treasury bonds. In 2001, BCM was bought out by
BIM, and the state retained 23% ownership. The planned
sale of a third of the 23% honors the GRM's promise to
transfer shares to the bank employees. The sale
continues the GRM's gradual withdrawal from the
commercial banking sector.

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CIVIL AVIATION
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7. (SBU) A new airline, Air Corridor, began operations
in Mozambique with the airline's first flight from
Nampula to Maputo on August 7th. In a big step, the
operation of a new airline in Mozambique breaks the
monopoly of LAM, the country's national airline. Air
Corridor, belonging to the Gulamo Group, rents one
Boeing 737-200 and employs six Ukrainian pilots. The
airline, based in Nampula, currently flies only
domestic routes, but hopes to branch into routes from
Maputo to Johannesburg, Dubai, Dar es Salaam, and
Nairobi. Air Corridor representatives, including the
Chairman, Momade Aquil Rajahussen, told post that the
company would like to expand its fleet by one or two
more planes within the next six months. Rajahussen
stated that there were few problems starting the
business (COMMENT: If accurate, this is very unusual,
given the difficult business of breaking politically
sensitive monopolies and operating in the challenging
Mozambican business climate. END COMMENT). Grupo Gulamo
is spending USD 2 million in the initial phase of the
airline's operation and intends to spend up to USD 20
million over the next five years. The airline is
financed purely by private equity from members of the
Gulamo Group. Several press reports highlighted recent
incidents involving Air Corridor, including a near miss
with an LAM plane at Maputo International airport and
maintenance failures in the plane's cockpit (cockpit
window). Representatives are accusing the press of
launching false allegations against the airline, yet
both incidents did occur and have caused concern among
the local community. (septel).

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PORTS, ROADS, AND RAILWAYS
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8. (SBU) In a major success for investment, trade, and
infrastructure, the Nacala Corridor Consortium (SDCN)
and the Government of Malawi (GOM) signed a memorandum
of understanding on the ownership of Malawian shares in
the privatization of the Nacala Corridor (port of
Nacala and associated railway line). Under the
agreement, the GOM will obtain 16.75% of the shares in
the concession. Negotiations to privatize the northern
port and rail line have been underway for five years.
OPIC will finance a USD 32 million loan for
rehabilitation of the port (approximately USD 20
million) and the 1800 km railway line that runs into
Malawi (approximately USD 10 million). The major US
shareholders in the venture are Edlow Resources Limited
(ERL) and the Railroad Development Corporation (RDC).


9. SBU (COMMENT: Privatization of the Nacala port and
railway line had been stalled on the Malawian side due
to the unwillingness of the GOM to sign the OPIC direct
agreement for want of more shares in the venture from
SDCN. This issue has now been resolved. Privatization
has been stalled on the Mozambican side due to
unresolved negotiations between SDCN and the port and
railway parastatal, CFM, on a number of outstanding
contract management issues. It is unknown whether these
issues have been resolved, but an inauguration ceremony
is set for October, when SDCN will assume authority and
management of the port and railway line. This is a
positive step forward for a project that will involve
US businesses and raise the commercial capacity of
northern Mozambique and parts of Malawi. END COMMENT).


10. (SBU) American Commercial Lines, International
(ACLI),the American barging firm interested in
exploring ways to create a barge system on the Zambeze
River, will visit Mozambique in the next couple of
months to move forward with a Zambeze River Survey. The
permission to allow this survey was stalled for a year
by the Ministry of Transportation due to the
politically sensitive issue of a barge system possibly
precluding development of the Sena railway line, a
major development initiative supported by the World
Bank. If barging is feasible and economically viable,
ACLI's goal is to transport coal from the Moatize mines
(located in Tete) to the coast, where it could be off-
loaded and exported. For this to happen, potential
transportation players (whether rail or barge) must be
in communication with the concessionaire of the Moatize
coalmines in order to strike a transportation deal.


11. (U) The GRM indicated that out of ten interested
parties, four firms have been short-listed to compete
for the Moatize coal concession: Companhia de Vale do
Rio Doce (CVRD) of Brazil, Anglo-American of South
Africa, BHP-Billiton of Australia, and Rio Tinto of the
UK. The estimated coal reserves in the Moatize basin
are between two and three billion tons. With this
amount, coal could become a major export for
Mozambique. In advance of a November proposal
submission deadline, a CVRD delegation, which included
the CVRD Chairman and the Chairman of the Brazilian
National Economic and Social Development Bank, visited
Mozambique and met with President Chissano to express
CVRD's interest in competing for the concession. The
other three firms viewed the high-level treatment that
CVRD received as unfair and preferential, yet the GRM
claims that each of the four firms has an equal chance
of winning the concession bid.

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ENERGY
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12. (U) The Governments of Mozambique and Portugal will
reopen negotiations on ownership of Hidroelectrica
Cahora Bassa (HCB),the firm operating the Cahora Bassa
Dam. Negotiations were temporarily put on hold due to
the resignation of Portuguese PM Durao Barroso to
assume the Presidency of the EC (COMMENT: Before the
departure of Barroso, the second round of negotiations
had been scheduled for August 2004 in Maputo. END
COMMENT). Under the current arrangement, 82% of the
shares in HCB are held by Portugal and 18% by
Mozambique. Mozambique would like to assume majority
ownership of HCB, with the government of South Africa -
the primary market for the electricity - as a potential
minority shareholder (a 51/49 arrangement,
respectively). Portugal is interested in selling its
shares, yet there is unsettled business regarding a
large debt owed to the Portuguese Treasury by the GRM.
The debt derives from dam maintenance and post civil-
war reconstruction. The parties do not agree on the
exact amount of debt owed, and the Government of
Portugal is unlikely to sell its shares in HCB without
a solution to the debt payoff. Press reports indicate
that the GRM is looking for a financial partner to help
them pay off this multi-million dollar debt, but as of
yet no partner has been identified.

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FISHERIES
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13. (SBU) The GRM is exploring new ways to manage and
control the capture of surface-level shrimp, a USD 120
million industry for Mozambique in 2003. Historically
an important export for Mozambique, shrimp export
revenues accounted for 84% of total commercial fishing
export revenue (USD 80 million) earned in 2003. Leading
a workshop on the management of shrimp fishing in the
Sofala Bank, Vice-Minister of Fisheries, Alfredo
Massinga, described the need to reinforce the control
of shrimp capture by providing greater fisheries
enforcement. Massinga also stressed the importance of
recognizing the resource as part of a larger ecosystem
that must be properly managed and protected. (COMMENT:
With an extremely weak capacity to implement any type
of maritime enforcement, Mozambique's fisheries are
being over-exploited due to heavy illegal fishing by
predominately Asian operators. The GRM is exploring
ways to improve its enforcement capabilities. The
solution may be in privatizing maritime enforcement or
receiving help from donor countries in the form of
patrol boats and/or training. END COMMENT).


14. (U) In mid-August, a team from the DOS (OES Bureau)
and the National Marine Fisheries Service (NMFS)
arrived in Mozambique to teach local Ministry of
Fisheries officials, port inspectors, and fishermen how
to install, use, and monitor turtle excluder devices
(TEDs) on shrimping nets. At the request of the GRM,
the team spent several days at the ports of Maputo and
Beira teaching techniques of TED installation and
implementation. The team's intention was to prepare
fishermen, officials, and inspectors for implementation
of the TEDs law that the GRM will enforce beginning
January 1, 2005. According to the law, all industrial
and semi-industrial shrimping fleets must install and
trawl with TEDs after this date, a move to protect sea
turtles and allow fishermen to export their catch to
the United States. If Mozambican fishermen are properly
observing this new regulation when US officials return
for a certification visit (possibly in May 2005 or when
the GRM feels that it is ready for an inspection),
Mozambique may be TED-certified, allowing fishermen to
export its world-class prawns to the United States.

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AGRICULTURE
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15. (U) Over a period of two years, the European Union
(EU) will provide a 48 million euro (approximately USD
54 million) grant to strengthen various agricultural
projects and improve food security in Mozambique,
according to the Pinto Teixeira, the local EC head of
delegation. Teixeira and the Minister of Agriculture,
Helder Muteia, signed an agreement for 9.5 million
euros, two million of which will be spent on
strengthening the National Cashew Institute (INCAJU),
the Mozambique Cotton Institute (IAM),and the Office
of Commercial Agriculture Promotion. The remaining 7.5
million euros will be spent on food security projects
in Niassa, Nampula, Zambezia, and Inhambane.?
LA LIME