MALAWI'S PASSENGER RAIL SERVICE TO RESTART

UNCLAS SECTION 01 OF 02 LILONGWE 000094

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E.O. 12958: N/A
TAGS: ELTN ECON EFIN MI
SUBJECT: MALAWI'S PASSENGER RAIL SERVICE TO RESTART

REF: 2005 LILONGWE 850

LILONGWE 00000094 001.2 OF 002


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SUMMARY
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1. (SBU) The American operator of Malawi's railway agreed on
terms to restart its passenger service, which had been closed
for four months. The closure had brought sharp criticism
from the GOM and possibly endangered the much larger cargo
concession, a crucial link in the Nacala Corridor. While the
agreement is a step forward, the concessionaire still has
some way to go in building a good relationship with the
government and its customers. End summary.


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CLOSURE BROUGHT SHARP CRITICISM
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2. (U) After a break in service from September 2005, Malawi's
privatized railway will re-open its passenger service on
February 1. With any luck, the resumption of service will
end a crescendo of government-sponsored criticism in the
press, faulting the railway for contributing to Malawi's
economic woes and citing the railway as an example of the
evils of privatization. As reported at the time of closure
(reftel),the American-owned Central East African Railways
(CEAR) had operated the service for nine months past the
expiration of the previous agreement while negotiations with
the GOM dragged on. The passenger service is a single, short
line from south of Blantyre to Balaka, but it is a critically
important service in the communities it serves.


3. (SBU) The two sides had been close on nearly all points of
a proposed renewal, including a three-fold increase in the
subsidy paid to the railway. What finally closed the deal
was a decision by parent company Railroad Development
Corporation to restructure CEAR's management, replacing the
Pittsburgh-based CEO with management based in Mozambique.
While the specifics of the new arrangement have yet to be
communicated, this was enough to get Minister of Transport
Henry Mussa to agree to the deal.


4. (SBU) Given the unhappiness of the GOM toward the American
concessionaires, it is unlikely that all will be sweetness
and light from this day forward. The transport ministry has
accused CEAR of not spending enough of its $30 million OPIC
loan on the Malawian side of the Nacala Corridor and of
expatriating Malawian assets to fix the line in Mozambique,
to name only two of many sources of friction. (The loan,
actually made to the larger consortium operating the entire
line and the port in Mozambique, is for renovation of the
line and the port.) But now CEAR seems focused on improving
the patchy operation of the railway, and this may mark a
turning point in a troubled relationship.


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COAL IN THEM HILLS--AN ULTERIOR MOTIVE?
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5. (SBU) Up until the end, Mussa had tried to broaden the
negotiation to include the concession as a whole, as well as
the proposal by a consortium of nominally Malawian businesses
to buy a 16.7 percent equity stake in SDCN (the share was
reserved for Malawian ownership at the time of SDCN's
formation). Mussa's advocacy for the consortium probably
extends to his criticism of CEAR within GOM circles, which is
apparently meant to bolster the consortium's bid to
participate in management decisions once it has an equity
share. This share has suddenly become far more interesting
with the expressed interest of Brazilian coal mining company
CVRD in moving 10-14 million tons of coal per year from
Moatize in northwestern Mozambique through Malawi to Nacala.
With a ten-fold increase in traffic over the Nacala line,
such a deal would make SDCN more valuable and probably offer
any shareholders a chance to sell out in the near future.

LILONGWE 00000094 002.2 OF 002




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COMMENT: INITIAL SUCCESS, BUT SOME WAYS TO GO
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6. (SBU) COMMENT: Embassy has been active in getting the
parties back to the negotiating table to work out their
differences, on the theory that the larger relationship was
in danger of a complete break, which in turn would imperil
the Nacala Corridor. While this negotiation seems finally to
have succeeded, there is a long way to go before CEAR and the
Malawian government are happy with each other. Certainly
CEAR is more likely to succeed with active management in the
region. If the company can deliver cargo reliably, it may
slowly rebuild its credibility with its customers and the
government.
GILMOUR