SCENE-SETTER FOR VISIT OF STAFFDEL MCLEAN TO

UNCLAS SECTION 01 OF 03 MAPUTO 000007

SIPDIS
STATE FOR H DPARKS, AF/S TREGER, AF/EX HEFFERMAN,
EB/IFD/ODF, AND EB/TRA,
USAID FOR AFR/SA DMENDELSON AND LPA/CL - SWILLIAMS
USDOC FOR RTELCHIN
MCC FOR SGAULL, TBRIGGS
SENSITIVE
E.O. 12958: N/A
TAGS: PREL KHIV KMCA ECON ETRD MZ MCC
SUBJECT: SCENE-SETTER FOR VISIT OF STAFFDEL MCLEAN TO
MOZAMBIQUE

REF: A. Maputo 1645 NOTAL

B. Maputo 1001 NOTAL

C. Maputo 1183 NOTAL
Sensitive but Unclassified Handle Accordingly. Not for
Internet Distribution.


1. (SBU) Introduction and Summary: Your visit to Mozambique
will provide an opportunity to gain a better understanding
of the U.S. contribution in the fight against HIV/AIDS and
Mozambique's Millennium Challenge Account (MCA) concept
paper. You are arriving just after presidential and
legislative elections. President Joaquim Chissano will be
succeeded within several weeks by President-elect Armando
Guebuza, who is also from the FRELIMO party. We expect
Guebuza will re-shuffle the cabinet and appoint new
governors. This means that some of the individuals you
will encounter or hear about might not be in office for
long. This message provides background on the elections,
trade and investment, HIV/AIDS, poverty reduction, and
other topics. End Introduction and Summary.

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MOZAMBIQUE AND DEMOCRACY
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2. (SBU) Mozambique is rightly considered a post-conflict
success story. Since the signing of the 1992 Rome Peace
Accords, which ended sixteen years of civil war, Mozambique
has made significant progress on stabilization and
democratic development. FRELIMO has been the ruling party
in Mozambique since independence. FRELIMO's former military
opponent, RENAMO, has been the main opposition party. In
November 2003 Mozambique held municipal elections, which
resulted in a major win for the ruling party, FRELIMO, and
were generally regarded as free and fair. In December
2004, Mozambique held its third multi-party presidential
and legislative elections since independence. Armando
Guebuza, the FRELIMO candidate, won the presidency by a
wide margin, and FRELIMO candidates won most of the seats
in the National Assembly. Although the elections were
marred by irregularities, they were not significant enough
to affect the outcome of the presidential election. (ref
A). Guebuza will replace Joaquim Chissano, who has ruled
Mozambique since 1986, early in the new year.


3. (SBU) During November 2003 municipal elections, FRELIMO
won all but four of the country's 33 races for mayor.
RENAMO's four mayoral wins and five city council wins gave
it, for the first time, a governing role at any level. All
of the RENAMO wins were in the central and northern
provinces, and included the important port cities of Beira
and Nacala.


4. (SBU) FRELIMO will return to Parliament with a strong
majority 160 out of 250 seats -- up from its current 133
and just seven short of the two-thirds majority needed to
amend the constitution. A coalition of RENAMO and several
small parties won the 90 remaining seats (Comment: As of
January 3, it is unclear whether RENAMO or its allied
parties will seat representatives in Parliament. RENAMO,
particularly, has denounced the elections as unfair and has
vowed not to participate in Parliament. It made the same
boycott threat in 1999 but changed its mind after several
weeks and joined Parliament. End comment.) The voter
participation rate was only around 45 percent. Several
local, regional, and international observer groups,
including the Carter Center, monitored the elections. The
Presidency of the European Union said that the elections
were carried out in a "generally successful and peaceful"
manner, and "broadly conducted along the lines of
internationally established standards". The EU publicly
stated that irregularities should be investigated and
resolved in accordance with the law. The Carter Center
made similar comments.

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A WORD ON PRESIDENT-ELECT GUEBUZA
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5. (SBU) Although Guebuza reportedly is more nationalistic
and less flexible than is Chissano, he has indicated
recently that he is likely to continue current government
policies. During his trip to the United States in July,
where he attended the Democratic National Convention and
met with U.S. officials, Guebuza repeatedly said he favored
maintaining a strong Mozambique-U.S. relationship and
stressed that he would honor commitments with donor
communities and international financial institutions
(IFIs). A businessman himself, as a result of his party
and government positions, Guebuza has a good understanding
of business and economic concerns and has close ties to the
private sector community. Guebuza has, on occasion, called
for the "Mozambicanization" of businesses (Ref B),which
has sparked some concern among foreign investors both
existing and potential. Guebuza acknowledges the extensive
US commitment to helping Mozambique overcome the challenges
of poverty and HIV/AIDS. He comes across as serious and
intelligent.

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THE STATE OF ECONOMIC AFFAIRS
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6. (U) Recovering from a devastating civil war,
Mozambique's macroeconomic reforms and success in
attracting large investment projects have given the country
an average GDP growth rate of eight percent from 1992-2004,
the highest in Africa over this time period. This growth
is from a very low base; per capita GNP for 2004 is
projected at around USD 290. Foreign direct investment,
exports, and revenue collections all have seen notable
increases, and the government continues to privatize state
firms, albeit at a slower pace than in the late 1990's.


7. (U) Maintaining this high rate of growth hinges on
several major foreign investment projects (aluminium,
natural gas),continued economic reform, and the growth of
the agriculture, transportation, and tourism sectors.
The inflation rate for 2004 was around 11 percent, in line
with the levels of recent years.


8. (SBU) The Mozambican business climate needs improvement.
Generally sound macroeconomic policies and high-level
commitment to attracting business mask a bureaucracy that
remains at times unresponsive to the needs of corporations,
especially small-to-medium-sized enterprises. Obtaining
permits takes time, corruption is problematic, and the
legal system is antiquated and cumbersome. Although
revisions are being considered, the labor law remains
extremely inflexible and an impediment to foreign
investment. Land title is granted in the form of leases;
private ownership of land is not allowed. Donors are
working extensively with the GRM to modernize and improve
the commercial code, labor law, business registration
process, tax system, and land ownership policy. Although
reform is moving in the right direction, it will take
several years before significant impediments to investment
are removed. Mozambique's road network is quite limited
and in poor condition along many stretches, although major
repair work is underway.

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COMMERCIAL OPPORTUNITIES AND MEGA-PROJECTS
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9. (U) Mozambique offers substantial investment and
commercial opportunities in energy generation (hydropower,
coal, and gas),transportation (road construction, rail and
port services, airport construction, and air transport),
resource extraction (natural gas, minerals, timber, and
fishing),aquaculture, agriculture/horticulture (cereals,
cashews, cotton, sugar, vegetables, flowers, and citrus;
light industry),and tourism. In December 2004, the
Government of Mozambique ratified the U.S.-Mozambique
Bilateral Investment Treaty (BIT) that was signed in 1998
and ratified by the U.S. in 2001.


10. (U) Several mega-projects, funded by outside investors,
are important contributors to Mozambique's rapid economic
growth. These enterprises include the MOZAL aluminum
smelter (an Australian investment),the newly inaugurated
SASOL gas pipeline (South Africa),and soon-to-be
operational mining and heavy sands projects in Gaza and
Nampula Provinces (Australia and Ireland). The GRM works
closely with large investors by creating government-
investor task forces to address concerns about working in
the Mozambican business environment. The GRM is very
responsive to these investors and has created several
"special economic zones" and "export processing zones,"
some located in poor and under-developed areas.
Mozambique's mega-projects account for 2-3 percentage
points of the country's GDP growth and a much larger share
of its export growth.

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THE FIGHT AGAINST HIV/AIDS
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11. (U) HIV/AIDS: Mozambique is at a critical stage in its
efforts to stem the HIV/AIDS epidemic. In Southern Africa,
Mozambique presents both the greatest challenges and
possibly the greatest opportunity to become the next
Uganda-like success in turning around the HIV/AIDS threat.
We have made considerable efforts to ensure that the
Emergency Plan For AIDS Relief is seen as a collaborative
approach to addressing the epidemic by working closely with
the government, other donors, and domestic and
international NGOs. Mozambique is the only country to be
both a focus country under the Emergency Plan for AIDS
Relief and eligible to receive FY04 and FY05 MCA funding.
(NOTE: We will send via email a more detailed briefing on
U.S. activities to combat HIV/AIDS in Mozambique. END
NOTE.)

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MCA IN MOZAMBIQUE
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12. (SBU) Mozambican government officials, civil society
leaders, and private sector groups are generally aware of
the MCA and Mozambique's FY04 and FY05 eligibility for the
program. MCC representatives have visited Mozambique on
three occasions since Mozambique was selected as part of
the first group of 16 eligible countries in May 2004, with
MCC CEO Applegarth visiting in October. Mozambique
submitted a concept paper to the MCC in late September that
is focused on the private sector and the northern region.
The government entrusted the CTA, a confederation of
business associations and also the private sector
representative on Mozambique's MCA Technical Group, with
the responsibility for drafting Mozambique's concept paper.
Although the CTA and the Mozambique-US Chamber of Commerce
have circulated the concept paper widely both in public
meetings around the country and on the internet, the
government has not yet officially released it. There has
been some press coverage, particularly around the MCC
visits, but as yet no in-depth presentation and analysis of
the concept paper by the media. The MCC provided feedback
on Mozambique's concept paper in late November, and a
dialogue has been developing since then with responses to
the initial feedback now being produced.


13. (U) In brief, the Mozambique concept is expected to
"promote business, investment, and employment". The
program will reduce poverty and spur growth by lowering
costs and risks of doing business in Mozambique while
improving the competitiveness of the private sector. The
four priority areas are:
- policy reform to improve the trade and business
environment,
- business development assistance to increase trade and
competitiveness of firms,
- infrastructure improvements to facilitate trade and
reduce transaction costs, and,
-select education, health, and sanitation initiatives to
improve social conditions in Northern Mozambique.
The concept paper states that the program has the potential
to create 5,000 direct jobs, 1.7% incremental GDP growth,
and a reduction in poverty from 54 percent to 45 percent
after 10 years. The budget for the proposed program is USD
148 million.
DUDLEY