WESTERN SAHARA: ECONOMIC CONSIDERATIONS

C O N F I D E N T I A L SECTION 01 OF 05 RABAT 001052

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E.O. 12958: DECL: 05/17/2025
TAGS: ECON EFIS ETRD MO PGOV PINR PREL WS EINV PBTS
SUBJECT: WESTERN SAHARA: ECONOMIC CONSIDERATIONS

REF: A. 2004 RABAT 1875

B. RABAT 0658

Classified By: Ambassador Thomas T. Riley, for reasons 1.4 (b) and (d)


1. (C) Summary: The economy of Western Sahara is based
almost entirely on fishing for export, which employs
two-thirds of the local workforce, along with small bits of
mining, agriculture and tourism. Existing infrastructure is
good and cash flow is buoyed by a large military presence,
tax breaks for businesses, subsidies on fuel, and a
five-year, $800 million investment package from the
Government of Morocco (GOM). Still, the territory faces
serious economic challenges: unemployment over 20 percent, a
rapidly expanding urban population, scarce water resources,
and threatened fishing grounds - source of employment for 70
percent of the region's workers. The Western Sahara,s
much-touted phosphate reserves are relatively unimportant,
representing less than two percent of national holdings.
Agriculture for export has been successful in Dakhla but is
not practical on a large scale due to water scarcity. Niche
tourism exists, but the region,s remoteness makes it
unlikely tourism will ever constitute a significant economic
base. There is optimism in the private sector, but a Wild
West atmosphere pervades, where local connections are
essential and the question of political leadership
unresolved. This cable is based on Econoff's May 9-12 visit.
End Summary.

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Economic Infrastructure
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2. (U) Western Sahara (WS) has only two cities of any size:
Laayoune, 800 miles south of Rabat, and Dakhla, 300 miles
further. The region has some good infrastructure. A paved
road runs the length of the territory, and ports in both
Laayoune and Dakhla have been recently renovated. Both
cities, airports can handle the largest passenger and cargo
planes. Laayoune is connected to the national electric grid,
which the GOM is expanding down toward Dakhla, expected to
arrive in just a few months. Dakhla is currently powered by
a diesel-burning thermo plant in the city,s industrial zone.



3. (SBU) The population of Western Sahara is between 400,000
and 500,000. Laayoune, the territory's largest city at
180,000, has no fresh water source. A GOM-built
desalinization plant supplies Laayoune and the surrounding
areas with water, but high energy use makes desalinization
costly: average production cost of desalinated water is
almost $3 per cubic meter, whereas the state-set price of
water in Morocco proper is 23 cents. Water is sold to
Laayoune customers at the national price, and the rest of the
country subsidizes the difference. Dakhla, on the other
hand, sits on an underground aquifer that supplies the city
and nearby agriculture with water. No study has been done on
how much or how many Dakhla,s aquifer can support, and
estimates by local authorities varied wildly. Dakhla grew
from a dusty settlement of 38,000 in 1994 to 90,000 in just
10 years, and city officials predict this kind of growth will
continue, putting added pressure on the desert aquifer.


4. (SBU) Dakhla is a city under construction. Since 2001
authorities have built a new center square, plowed old
warehouses for a seaside pedestrian boulevard, and built a
new port. A forest of construction cranes works to keep up
with the influx of GOM investment and jobseeking migrants
from the north. The city is crawling with police and
military, but other than that and the inordinate amount of
construction going on, seems a normal desert frontier town.


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Fishing: the Region,s Economic Sine Qua Non
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5. (U) Fishing is all-important in Western Sahara, employing
two-thirds of the population. The area boasts some of the
richest fishing grounds in the world, but octopus, the most
profitable species, is threatened and subject to
government-mandated fishing bans that have expanded each year
since their inception in 1989. The ban lasted eight months
in 2004, and the Ministry declared another halt on May 10,
estimating just 2-3 months would be necessary but making
clear they would allow fishing to restart only when stocks
begin to show signs of recuperation.


6. (SBU) Despite declining octopus stocks, processing plants
continue to expand. Hammoudi Houmaid, a Spanish-speaking
lifetime Dakhla resident, cleans and freezes octopus for
export to Europe and Japan. His company, Dakmar II, trucks
its product to Agadir, whence it is shipped overseas. In
spite of declining stocks, Houmaid is building another floor
to his plant, which employs 300, where he will cook octopus
for package and sale directly to supermarket chains in
Europe.


7. (U) The other main exploited species is the low-value,
high-volume sardine, which is processed and frozen for
export. In Dakhla, small scale "artisinal" fishing employs
90 percent of area workers. Dakhla,s port takes in 500,000
tons of sardines a year for processing at the city,s
freezing plants, but there is little value-added processing
done, just basic cleaning and freezing for export to Europe,
Japan and Egypt. The port of Laayoune takes in another
450,000 tons of sardines.

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Go Fish: GOM Investment in the Sector
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8. (U) Octopus fishing attracted thousands to the WS in the
1990s. Fishermen created slum villages and exploited the
limited natural resource irresponsibly for 10 years, until
the GOM stepped in to regulate the catch. The GOM is
spending $130 million to build seven fishing villages along
the length of the territory, building halls where fishermen
will sell their catch to wholesalers, providing micro-loans
for new boats, and building subsidized housing.


9. (U) Surprisingly, Saharawis have no tradition of working
on the sea, and seamanship is regarded as undesirable work.
To counter this tide, the GOM is providing job training in
fisheries to area residents. Eight training centers
nationwide accept 48 students a year into a two-year program
in navigation, nautical engines, refrigeration mechanics,
nets and knots, and the biological life cycle of local fish
species. The students live on campus and all expenses are
paid by the state.

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Tomatoes for Export
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10. (U) WS is fortunate to have a year-round growing season
and good road access to markets in Europe, but what the
region possesses in sunshine, it lacks in fresh water.
Laayoune depends on expensive desalinization, and the
longevity of Dakhla,s fresh water aquifer is unknown.


11. (SBU) Thus far, the region,s only large-scale
agricultural project is a 100-hectare covered plot near
Dakhla employing 500 people and exporting 5,000 tons of
top-quality tomatoes to Europe and Canada each year.
Surrounded by bone-dry desert for 1,000 miles in any
direction, there are no horticultural diseases or pests
endemic to the area and the farm is certified to export to
the world's most discerning markets in the United States,
Canada and Europe. Produce is taken by refrigerated
container truck from Dakhla to Madrid - a two and a half day
overland journey - and from there to European destinations by
truck or to Canada by sea.


12. (SBU) Despite water constraints, the region has
advantages for agricultural production: the absence of
endemic pests, a year-long growing season and a seashore
microclimate that keeps temperatures within a stable range
day and night. Western Sahara,s southern latitude sees
produce mature 10-15 days before competitors in Agadir 1,000
miles to the north, giving producers in Dakhla a two-week
head-start in European markets. Also, while Morocco suffers
from regular periodic drought and a dropping water table,
Dakhla,s aquifer provides a constant year-round source of
irrigation.


13. (C) But while the weather outside is spectacular, the
investment climate is a mixed bag. When the French/Moroccan
partners signed their $12 million joint venture with the GOM
in 2002, it was for 300 hectares on the Dakhla peninsula. In
2003, with 100 hectares installed, authorities put a halt to
further expansion, substituting another piece of land 150 km
away on the mainland. Authorities told Econoff they halted
the farm's growth (in violation of the investment contract)
because of concerns over the aquifer and the farm's proximity
to the city limits. Although authorities said the change in
the contract was mutually agreed to, farm manager Philippe
Boissier told Econoff it was not. "You can't forget you are
in Morocco!" said Boissier, who is French. Boissier also
complained that the company was forced to give shares to
local tribal leaders for buy in, or as he put it, "in order
to get anything done." Boissier said cooperation with the
national authorities in Rabat was good, and that the blockage
was at the local level. Boissier, who set up a similar farm
in Mexico in the late 1990s, compared the investment climate
in WS very unfavorably to that of Mexico.

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Holsteins in the Desert
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14. (SBU) Animal husbandry seems a strange choice in a region
with a scant 35 mm of precipitation per year, but since camel
herding has long formed part of the region's traditional
labor activities, the sector has been targeted for
development. Operators are now raising Holstein cows at a
dairy cooperative in Laayoune, an unexpected sight in the
desert. The cooperative, created with GOM help in 1994, now
employs 150 people and supplies 40 percent of the local
market in cow and sheep milk. Officials are now putting
together a similar project for camel milk, a highly-prized
commodity in the Sahara.

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Tourism, at the End of the Earth
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15. (SBU) One or two thousand mostly European tourists visit
the Western Sahara each year, principally adventure travelers
crossing the desert or going to Dakhla for sport fishing,
windsurfing, and miles of unspoiled beaches. While the
region lacks any real cultural draw and is probably too far
from any large population center to attract mass tourism,
small scale niche tourism markets exist and the Dakhla area
is fast turning into a windsurfing mecca. Authorities also
hope the "exotic" label will prove a draw and that the
promise of a camel ride on the beach, a night in a nomad tent
or simply the chance to set foot in Africa could be enough to
pull day-trippers over from the Canary Islands. The Canaries
attract 12 million tourists a year, and if even one percent
of those took the 20-minute flight to the African mainland at
Laayoune for a day or overnight excursion, the 120,000
tourists a year could transform the region,s tiny economy.


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A Shift in Focus, and an $800 million Investment Program
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16. (C) Moroccan leadership in the Western Sahara is resolute
about promoting economic growth. Laayoune regional governor
(wali) Mohamed Rharrabi said the GOM is turning its attention
from the "political dimension" toward the economic
development of the territory. He said instead of focusing on
the political leanings of the area's residents, the GOM is
concentrating on improving people's lives through job
creation, training and basic infrastructure.


17. (C) Proof of this change in focus lies in the
government's $800 million, 2004-2008 infrastructure
investment plan (Ref A). The money will go toward what
planners believe are the region's top commercial prospects:
fishing, housing, agriculture, and tourism. The plan has
merits: the region has some of the world's richest fishing
grounds; Dakhla greenhouses are already exporting top quality
produce to Europe; and the region has hundreds of miles of
golden sand beaches with not a soul in sight. However, each
of these sectors faces an uphill struggle. Octopus, by far
the most profitable species caught in the WS, is in rapid
decline, with government scientists imposing increasingly
longer fishing bans each year. Dakhla,s aquifer may be able
to support limited agriculture, but Laayoune's desalinated
water is far too expensive to permit large scale activities.
And while the region has sunshine and miles of empty beaches,
it has little more, and is far from just about anywhere.

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Made in Morocco
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18. (C) Until two years ago, Dakhla-based fisheries were
transporting their product by truck to Agadir for export by
sea and by air from there. Most are now leaving directly
from Dakhla port. Econoff visited processing plants where
hundreds of workers were cleaning, freezing and boxing squid
and sardines for export to Europe, Japan and Egypt. The fish
is caught offshore Western Sahara, cleaned and frozen in a
Dakhla plant, and shipped through Dakhla port, in boxes
clearly labeled "Produit du Maroc" - Product of Morocco.

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Phosphates: Raison d'Etre, or a WS Myth?
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19. (C) Moroccan state-owned phosphates company OCP runs
mines in Western Sahara at Bou Craa, 100 km inland from
Laayoune. The Bou Craa deposits are economically
insignificant for the GOM, representing less than two percent
of proven national reserves, but may be relevant from a
political and social (employment) perspective. The ore is
hauled on a 98 km-long conveyor belt - the longest in the
world - over harsh desert terrain to the sea port of Laayoune
for export directly to the United States and other countries.
The terrain and the deposits, distance from sea ports make
the WS mines largely unprofitable, but they employ 1,900
people in an employment-hungry region and provide other
social benefits to the area (septel).

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Can WS's Subsidized Lifestyle Last?
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20. (C) In Western Sahara, businesses do not pay registration
fees or taxes on their income. Curiously, this tax exemption
has been given in practice since the 1980s, but has never
been formally legislated. Laayoune Regional Investment
Center (CRI) director Hassana Maoulainine publicly boasted
about the benefits of tax-free status for businesses, but
privately told Econoff he believes the regime is not
sustainable. Maoulainine said the tax breaks have led to the
creation of phantom enterprises to avoid paying taxes on
income generated outside the region, leaving local
municipalities starved for tax revenue.


21. (C) In addition to losing tax revenue, the state heavily
subsidizes basic goods to keep WS's financial ship afloat.
Gasoline is sold for half price. Water from Laayoune's
desalinization plant is sold at one-tenth the cost of
production. Subsidies also exist for basic necessities like
sugar, wheat and cooking oil. These benefits, in addition to
the GOM's $800 million infrastructure program (Ref A) serve
as powerful incentives that have brought thousands of
job-seekers to the territory in recent years, pushing the
region's already high unemployment rate above 20 percent.

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"Economics Will Trump Politics in WS"
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22. (C) But despite the uphill struggles, there is surprising
optimism among private sector operators in the region.
Derham Derham, a Dakhla native and part owner of the 100
hectare tomato farm, is certain that economic growth is the
answer to the political impasse in Western Sahara. Derham
believes that as the region gets richer and jobs become more
plentiful people will be less concerned about which political
administration they fall under: "Economics will trump
politics and work us out of this problem in the Sahara," he
said.


23. (C) Indeed, an $800 million investment by the Government
of Morocco in a territory with the population of Wichita,
Kansas has to be one of the larger per capita aid programs in
history. And although unemployment is high, the specter of
20 percent joblessness is easier to fix in a region of
300,000 than in an economy of 30 million. Fishing plant
owner Mohamed Zebdi, who is doubling the size of his
550-employee sardine plant this year, thinks Dakhla,s high
unemployment rate is short-lived. "With five or six more
projects like mine," he said, "Dakhla,s unemployment problem
is gone. You do the math."


24. (C) Comment: WS is a land far from everything but
politics, and the struggle over the disputed territory is
never distant from business owners, minds. Most operators
Econoff spoke with expressed complete confidence in the
region's political stability and the security of their
investments, even though authorities do not always operate
with full respect for due process and contract enforcement.
Keeping the economic playing field level in WS seems to be a
more difficult and nuanced task than in Morocco proper, as
deep-rooted local interests and a culture of tribalism make
objective economic decision-making difficult. Spanish
operators from the Canary Islands told Econoff they operate
in a system where local connections and extra-contractual
quid-pro-quo rule the day, and powerful local interests have
operated for decades outside normal economic and legal
structures.


25. (C) Comment continued: In the region's lifeblood fishing
sector, the most profitable species has been overfished and
catch periods are limited. Phosphate reserves are exploited
as a social safety net, not a commercial venture. With
scarce resources, rapid urban growth and high unemployment,
WS may be an economic basket case in 10 years. Political
detente and an opening to outside competition may bring
authorities into line, but for the time being a sort of Wild
West mentality pervades, where connections are everything and
a local partner a necessity for foreign investors. Certainly
the tax breaks, the fuel subsidies, and the $800 million
investment package will help. But aside from its rich
fishing grounds and notwithstanding a possible offshore oil
discovery (Ref B),the territory is unlikely ever to be much
of an economic boon for the state.
RILEY