UNCLAS SECTION 01 OF 02 MAPUTO 001481

SIPDIS

SENSITIVE

SIPDIS
STATE FOR AF/S - TREGER
STATE FOR EB/IFD/OIA
STATE PASS USTR FOR P.COLEMAN

E.O. 12958: N/A
TAGS: EAGR ETRD EINV MZ
SUBJECT: MOZAMBIQUE: GOVERNMENT REVOKES CONCESSION FOR US
TOBACCO COMPANY, ALARMS LOCAL BUSINESS COMMUNITY


MAPUTO 00001481 001.2 OF 002



1. (U) Summary: The Government of Mozambique's (GRM) recent
decision to revoke a large tobacco concession held by a US
company without transparency, documentation or the steps
required by Mozambican law is causing considerable concern in
Mozambique's business community and could damage Mozambique's
reputation with foreign investors -- particularly if the
original holder of the concession, DIMON, files an insurance
claim, as threatened. Additionally, the GRM,s actions may
violate its Bilateral Investment Treaty with the US, which
came into force in March. End Summary.

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BACKGROUND
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2. (U) DIMON, an American corporation, was involved in the
worldwide cultivation of loose-leaf tobacco. On May 13,
2005, DIMON merged with Standard Commercial Corporation to
form Alliance One International, incorporated in Virginia and
now one of the world's largest loose-leaf tobacco merchants.
The merger of DIMON,s operations in Mozambique is still
ongoing. For this reason, this cable refers to DIMON and not
Alliance One.


3. (U) DIMON,s investment in Mozambique is extensive; it
currently operates in Niassa, Nampula, Zambezia, Manica and
Tete provinces, works with almost 60,000 farmer/producers and
directly employs nearly 2,000 Mozambicans. On May 24, 2001,
the Mozambican Government granted DIMON a ten-year right to
operate a tobacco concession area in Chifunde district in
Tete province, with the option to renew for five years.

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CONCESSION REVOKED
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4. (U) Our understanding of the concession revocation, drawn
from information provided by lawyers for DIMON in Mozambique
and from local business associations in Maputo, is as follows:


5. (U) Prior to the 2005/2006 season, which started in
September, DIMON invested approximately USD five million in
seeds, fertilizers and other inputs delivered to producers in
the Chifunde area. On August 5, 2005, the Minister of
Agriculture, Tomas Frederico Mandlate, issued a decision
revoking DIMON's concessi

on rights in Chifunde district.
Minister Mandlate gave the following reasons: 1) the illegal
entry of "Stancom" (referring to DIMON's merger with Standard
Commercial Corporation, mentioned in para 2) into the
concession area; 2) the massive dismissal of employees; 3)
the stoppage of tobacco trade; and 4) the illegal purchase of
tobacco. Mandlate also cited a decree issued by the Tete
provincial governor against DIMON, along with a request for
intervention by the Chifunde district government. DIMON says
it received no warning prior to the revocation and, despite
repeated requests, still has not received any evidence or
documentation supporting the alleged grounds.


6. (U) On August 15, DIMON filed an appeal of the August 5
decision with the Minister of Agriculture. Under Mozambican
law, this appeal should have maintained the status quo
pending a final decision from the Ministry or a competent
court. Despite this fact, the status quo was not maintained
and on September 15, 2005, the Tete governor issued another
decree officially granting another company, Mozambique
Tobacco, the immediate right to operate the concession.
Mozambique Tobacco is the implementing partner for Universal
Leaf, another an American corporation.


7. (U) However, under pressure from public complaints by the
US-Mozambique Chamber of Commerce and the national business
umbrella association, CTA, on October 11 Agriculture Minister
Mandlate revoked his August 5 decision against DIMON and
remanded the issue back to the Tete governor for further
consideration. As we understand it, the governor of Tete was
supposed to allow a joint fact-finding investigation team, to
include a legal representative of DIMON and one of CTA, to
visit the Chifunde area to investigate the grounds of
revocation. The investigation did not occur as planned;
instead, one government official conducted the investigation

MAPUTO 00001481 002.2 OF 002


and supported the governor's decision against DIMON.


8. (U) DIMON is considering several courses of action in
response to the loss of its concession in Chifunde, including
withdrawing investments from all of its tobacco concessions
in Mozambique, filing an insurance claim with its private
insurer asking for an indemnity of approximately ten million
USD and seeking recourse through international arbitration.
DIMON lawyers suggested also that they are exploring filing
for arbitration under provisions of Article IX of the
Bilateral Investment Treaty.

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COMMENT
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9. (SBU) We have heard allegations that DIMON treated its
employees badly and was strongly disliked by tobacco growers
in the Chifunde area. It is also noteworthy that DIMON has
never approached the Embassy for our assistance over the
dispute. For these reasons, we suspect the GRM's ire against
DIMON may have some merit. However, whether DIMON is in the
right or wrong, it appears that the GRM has acted arbitrarily
by not following the law. This has foreign investors here
worried, particularly that it could mark the beginning of an
anti-business trend by the new Guebuza government. If DIMON
files an insurance claim, as threatened, Mozambique's credit
rating and reputation as an investment destination will
surely suffer.
La Lime