U.S. TOBACCO COMPANY DEPARTING MOZAMBIQUE OVER

UNCLAS SECTION 01 OF 02 MAPUTO 000396

SIPDIS

SENSITIVE
SIPDIS

AF/S - HTREGER
EB/IFD/OIA
STATE PASS USTR FOR P.COLEMAN
STATE PASS OPIC

E.O. 12958: N/A
TAGS: EAGR ETRD EINV MZ
SUBJECT: U.S. TOBACCO COMPANY DEPARTING MOZAMBIQUE OVER
COMMERCIAL DISPUTE

REF: 05 MAPUTO 1481

MAPUTO 00000396 001.2 OF 002


Sensitive but Unclassified - Not for Internet Distribution.


1. (SBU) Summary: American loose-leaf tobacco merchant
Alliance One International has decided to discontinue all
operations in Mozambique. The withdrawal comes as the result
of the GRM's decision in August 2005 to seize Alliance One's
most profitable Mozambican concession and grant it to another
company, U.S. tobacco company Universal Leaf. Alliance One
believes the GRM,s actions are in violation of the
concession agreement and Mozambican law, and will likely file
an insurance claim. The GRM's posture in the dispute raises
additional concerns about the Mozambican business
environment. End Summary.

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Pulling Out
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2. (SBU) On March 15 Colin Armstrong (protect),Mozambique
country director for the tobacco firm Alliance One
International, an American company, called on the Ambassador
to inform her that Alliance One would be ceasing operations.
According to Armstrong, Alliance One reluctantly came to the
decision to close its Mozambican operations in response to
the GRM's decree, made in August of 2005, under which it
seized Alliance One's concession in Chifunde district, Tete
province, and awarded it to Alliance One's rival, another
American loose-leaf tobacco company, Universal Leaf (see
reftel for details). Alliance One maintains the cancellation
of the concession violated its concession agreement the GRM
and was in violation of Mozambican law. Armstrong and the
company,s lawyer told the Ambassador they did not believe
that Universal Leaf was directly behind the cancellation of
its concession, however.


3. (SBU) According to Armstrong, Alliance One did not take
this decision lightly. The company spent eight months
attempting to convince central government and provincial
officials to reverse course, including meeting with the
Governor of Tete, the Minister of Agriculture and with close
advisors to President Guebuza. (As noted in reftel, it is
still not clear whether ultimate responsibility for the
action lies with the provincial governor or the Minister of
Agriculture.) On several occasions Alliance One informed
officials that if the Chifunde concession were not returned,
the tobacco company would be forced to exit Mozambique. On
March 20 Alliance One's Managing Director for Africa, Mike
Roberts (protect),in speaking with POLOFF explained that
while Alliance One was leaving Mozambique with a heavy heart,
without the Chifunde concession its operations in Mozambique
simply were not profitable.

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Consequences
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4. (SBU) Alliance One purchased tobacco leaf from 50,000
Mozambican small farmers. Some 15,000 tobacco farmers in the
Chifunde concession will be able to sell to Universal Leaf.
However, with Alliance One's departure the remaining 35,000
farmers - mainly in Niassa and Zambezia provinces - will find
it difficult, if not impossible, according to Armstrong, to
sell their product. Many of Alliance One's 550 direct
employees may be unemployed, as well.


5. (SBU) In a March 22 letter to the SEC, Alliance One
estimated closure of its operations in Mozambique will cost
the company USD 6 million. According to Alliance One's legal
representative here, the company is in the process of filing
an insurance claim against the Mozambican government and is
considering whether to pursue damages under the US-Mozambique
Bilateral Investment Treaty (which only entered into force in
March 2005). He speculated that the insurance claim, at
least, if successful would negatively impact Mozambique's
credit rating.

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MAPUTO 00000396 002.2 OF 002


Comment
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6. (SBU) It is unclear to what extent President Guebuza and
his advisors are aware of the downside for Mozambique's
reputation of the taking of the concession and the departure
of a major U.S. investor. When the Ambassador at one point
informed President Guebuza that Alliance One had requested a
meeting with the Embassy, Guebuza indicated that he was aware
of the issue but said his advisors were telling him that the
company had a problematic record in Tete province, especially
on labor issues. We understand that Agriculture Minister
Mandlate made a last-minute appeal in a letter on March 20
asking Alliance One to stay and negotiate, but the GRM never
pressed further and by then it probably was too late. It is
not clear what impact a possible insurance claim or rating
downgrade would have in Maputo. Nor is it clear whether the
concession seizure was a one-off hiccup or a sign of
increased government willingness to arbitrarily act against
major business investments, or at least not to curb such
actions by provincial officials. In public statements
President Guebuza continues to stress his government's
support for an independent private sector and a transparent
business environment that encourages foreign investment.
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