NACALA CORRIDOR PROJECT IN JEOPARDY -- YET AGAIN

C O N F I D E N T I A L SECTION 01 OF 02 MAPUTO 000463

SIPDIS
DEPT FOR AF/S KDAVISON
PLEASE PASS TO OPIC FOR MSHORE
E.O. 12958: DECL: 04/01/2014
TAGS: EINV ETRD PGOV PREL MZ OPIC
SUBJECT: NACALA CORRIDOR PROJECT IN JEOPARDY -- YET AGAIN


Classified By: Econ/Poloff Elizabeth Jaffee for Reasons 1.4 (B) and (D)


1. (C) Summary. The Nacala Port and Rail Corridor project is
yet again in trouble. Two principal outstanding issues
remain: 1) the lack of the government of Malawi (GOM)'s
signature on a Direct Agreement and 2) on-going disagreements
between the project's US-led consortium and the principal
Mozambican government counterpart, Ports and Rails of
Mozambique (CFM),over management and personnel matters. The
project has reached critical stage. Without a Direct
Agreement with Malawi, the project cannot go forward. US
shareholders Rail Road Development Corporation (RDC) and
Edlow Resources Limited, who have been in Maputo for meetings
since March 28, have informed post that the GOM has refused
to sign an Direct Agreement based on previously negotiated
shareholder terms. The proposed changes to the terms of the
Direct Agreement with Malawi would dilute US interests in the
project below the threshold set by OPIC and, even if
negotiated at a lower level, would require extensive legal
revisions to the various agreements already in place. For
CFM's part, it continues to play hard-ball over the number of
CFM employees to be retained. The lack of transparency in the
process has been extremely troubling. RDC and Edlow are
trying to be flexible on many of the issues, but their
patience is running thin. End Summary.


2. (C) Project Background: The Nacala Corridor project dates
from 2000, when a concession agreement was signed between CFM
and the Nacala Corridor Development Company (SDCN),a
consortium comprised of foreign and national investors,
creating an autonomous company, Nacala Corridor Development
(CDN),for the rehabilitation and modernization of the
railroad and port system on a key transport route between
Malawi, Zambia and Mozambique. CDN has a highly complicated
shareholders structure, with SDCN holding 51% of the shares
and CFM holding the remaining 49%. Foreign investors (RDC,
Edlow Resources, Manica Limited) hold 67% of SDCN's shares.
Private national investors reportedly include the Minister of
Transportation, the Secretary General and presidential
candidate of ruling party FRELIMO, and several key members of
Parliament operating through Mozambican registered companies.


3. (C) Malawi Wants Share Of American Interest: On March 31,
RDC and Edlow Resources reps met with Malawi's Minister of
Transportation Stambuli and members of Malawi's Privatization
Commission. A representative of Mozambique's Ministry of
Transportation was also present. The GOM representatives are
in Maputo as part of President Muluzi's state visit.
According to RDC and Edlow, the originally negotiated terms
of the Direct Agreement called for 16% of CDN's shares to be
provided to a Malawian entity out of CFM's 49% interest.
However, during the March 31 meeting, Minister Stambuli
stated that Malawi refused to sign the agreement under the
previously negotiated terms. Instead, Malawi was now
insisting that the US investors sell 33% of its shares in
SDCN to the Malawian private firm Farmers World. Minister
Stambuli told RDC and Edlow that he needed an answer
immediately or the deal was off. RDC and Edlow responded
that they did not have the authority to make such a decision
and, more importantly, such an arrangement could put the
entire project in jeopardy. Specifically, changing the terms
of the Direct Agreement in this manner would bring American
participation below the percentage required by OPIC and, even
if negotiated to a lower number of shares being sold, require
legal revisions and reviews of all existing project
agreements since it would dramatically alter the shareholding
position of the leading (i.e., US) investors. This, in turn,
would require renegotiating the OPIC agreement.


4. (C) Conversation to Continue in Malawi: Edlow Resources
met again with Minister Stambuli on April 1. Stambuli
continued to insist on Malawi's shares coming from SDCN.
Edlow reminded Stambuli of the previously agreed to terms
that the shares would come from CFM and suggested that the
GOM speak to CFM over the terms. Edlow has drafted a
response to the GOM that, while not rejecting the GOM's
proposal, notes that any changes to the shareholding
structure would require both SDCN and OPIC approval. Edlow
representative Russell Neely will be leaving Maputo for
Malawi on April 2 and will contact Embassy Lilongwe regarding
a possible meeting with Minister Stambuli.


4. (C) Concerns of Malawi Government Representing Private
Interests: Further complicating the situation is the role of
a private company, Farmers World, on whose behalf the GOM
appears to be negotiating. According to the RDC and Edlow,
Farmers World had held discussions with the Mozambican
government for the purchase of the 16% equity that was
supposed to be reserved for a Malawian interest. Farmers
World and the Mozambicans could not agree on a price and,
subsequently, it appeared the Mozambican side no longer
intended to sell the 16% interest to any Malawian interest.
The exact relationship between the Malawian government and
Farmers World and why a private company's interests were
being raised on behalf of the GOM is unclear. However, RDC
and Edlow speculate that the GOM is trying to use Farmers
World to somehow increase the government's shares under the
Direct Agreement while allowing Mozambique -- through CFM --
to retain 49% of the shares.


5. (C) Problems Also With the Mozambicans: Though less of an
immediate concern, CFM's complete inflexibility over
personnel and management issues continue to place the project
in jeopardy even with a Direct Agreement with Malawi. The
principal outstanding issues with CFM include the conclusion
of a management agreement and the number of CFM employees to
be retained. RDC, Edlow and Manica described meetings with
CFM on March 29-31 as "difficult" and "tense". CFM has showed
characteristic inflexibility. The problem is one largely of
CFM's own making. At the end of 2003, CFM tripled current
employees' wages thus making retaining more than a limited
number of CFM employees economically impossible. CFM also
changed the regulations on severance to retrenched workers
from the standard 3 months of severance to 6 months. This has
put the consortium in an impossible situation. The consortium
had originally proposed retaining 30 CFM employees, a number
deemed unacceptable by CFM. They have agreed to increase the
number, but the issue of retrenchment must further be
negotiated. The consortium is providing CFM with a new
proposal on personnel and management issues and appears to
have been flexible in terms of personnel numbers.


6. (C) Prime Minister May Be Helpful: During a pull-aside
meeting on March 31 with Prime Minister Diogo at a dinner in
honor President Muluzi, the Ambassador urged resolution of
the two outstanding issues concerning Mozambique to ensure
the project move forward. PM Diogo was not surprised to hear
about CFM's objections to the consortium's proposal on the
number of CFM personnel to be retained, but seemed genuinely
concerned about the CFM's apparent intention not to sell the
16% equity to a Malawian interest. The Prime Minister
undertook to get a better handle on CFM's negotiations
recognizing the national interest in getting the Nacala
Corridor project completed (Note: PM Diogo, in her previous
role of Minister of Planning and Finance, appears to be one
of the few government officials able to reign in CFM's
Director Rui Fonseca)


7. (C) Comment: This is not the first time the Nacala
Corridor project has been close to collapsing. Numerous
delays by the government of Mozambique (GRM) in signing a
Direct Agreement required under OPIC regulations in late 2003
almost jeopardized OPIC financing, without which the deal
cannot go forward. While it is unclear what role national
shareholders and the recent appearance of Farmers World as an
interest in the Malawi agreement are playing in preventing
the finalization of the project, there is no doubt that Rui
Fonseca is actively trying to sabotage the project. There may
be genuine concern about the future of CFM's employees.
However, it is more likely that Fonseca, an ideological
carry-over from Mozambique's socialist past, is most
concerned about the loss of his empire, as the Nacala project
will be the first privatization of a Mozambican railroad. The
only member of the GRM who has appeared willing to confront
Fonseca on the issue is Luisa Diogo. Minister of
Transportation and Communication Salomao is helpful but has a
poor record in overcoming the positions of powerful
parastatal directors he ostensibly supervises.
Unfortunately, the project has highlighted the difficulties
of doing business in Mozambique and the enormous influence
that personality and personnel interests continue to play in
business deals in Mozambique.
LA LIME