MOROCCAN GOVERNMENT DEFENDS ITS TOBACCO POLICY

UNCLAS RABAT 002169

SIPDIS

SENSITIVE
SIPDIS

DEPT PLEASE PASS USTR FOR DOUG BELL

E.O. 12958: N/A
TAGS: ECON ETRD PGOV MO
SUBJECT: MOROCCAN GOVERNMENT DEFENDS ITS TOBACCO POLICY

REF: STATE 163312


1. (SBU) Summary: Econ Counselor met on November 15 with
Abdelaziz Talbi, Morocco's Director of Public Enterprises and
Privatization, to review the GOM's decision to extend
Morocco's monopoly on the wholesale distribution of tobacco
from December 31, 2007 to December 31, 2010. Reiterating the
USG concerns contained in the diplomatic note of October 2
(reftel),he requested clarification of the societal and
economic concerns that the GOM argues necessitate the
extension, particularly in light of the privatization of the
national tobacco distribution company, the Regie des Tabacs.
Talbi said that while the Regie is now a private company, it
retains important responsibilities to help the tobacco sector
adapt to increasing global competition and changing consumer
tastes. The extension, he said, was necessary to allow it to
carry out those tasks. He outlined earlier liberalizing
measures for the sector, including ending the monopoly on the
import, export, and manufacturing of tobacco, and noted that
even as it extended the monopoly, the GOM had also eliminated
a requirement that cigarettes manufactured in Morocco have 20
percent local content. End Summary.


2. (SBU) Talbi's justification of the GOM's decision to
extend the tobacco monopoly drew largely on material he had
earlier furnished to USTR through Morocco's Ministry of
Foreign Affairs, in response to a request for information on
the decision. He explained that the tobacco sector in
Morocco, which encompasses over a thousand farms on some 800
hectares, employs over 7,000 people in some of the poorest
parts of the country. The sector, he said, is in desperate
straits, largely as a result of the shift in consumer tastes
here from "brown" tobacco, which is grown locally, to "blond"
tobacco. Producers are on the "verge of complete failure,"
he said, and are giving up tobacco and turning to illicit
products like cannnabis.

3, (SBU) In order to maintain tobacco's viability and "save
this activity," the GOM concluded a convention with the Regie
des Tabacs, by which the Regie will provide technical
assistance to maintain and increase production of tobacco and
help farmers shift from "brown" tobacco to a more popular
oriental tobacco (tabac d'orient),which is now largely grown
in Greece. Morocco's climate is favorable for that variety,
he said, as is the fact that it is labor rather than capital
intensive. The imminent end of EU subsidies to Greek
producers, Talbi said, offers Morocco an important market
opening, He predicted that ultimately up to 6,800 hectares
(an eight-fold increase) might be dedicated to its
cultivation, with the potential for up to 100,000 jobs.


4. (SBU) Talbi dismissed media suggestions that the monopoly
extension was a quid pro quo for the Regie de Tabac's recent
agreement to buy the remaining 20 percent of the company that
had remained in state hands after its 2003 privatization.
The initial 2003 deal selling the Regie to the Spanish/French
company Altadis offered the purchaser an option on the
remaining shares, he said, which could be exercised at the
original purchase price. He also dismissed complaints from
brokers in Casablanca who argued that the shares should have
been placed on the Casablanca Stock Exchange. He estimated
that the amount the government received for the shares from
Altadis was likely double what they would have fetched on the
exchange, given the control premium that Altadis was willing
to pay.


5. (SBU) Talbi also argued that despite the prolongation of
the monopoly on wholesale distribution of tobacco, other
liberalizing moves have been taken in recent years, with the
elimination of the state monopoly on the export and import of
raw tobacco (in 2003 and 2005 respectively) and the
elimination of the monopoly on the manufacturing and export
of manufactured tobacco (also from 2005). He argued that
the government's decision in 2006 to eliminate the
requirement that cigarettes produced in Morocco have 20
percent local tobacco contact was further evidence of its
liberalizing intentions. Nonetheless, he said, the
precarious state of the tobacco sector and the need to enlist
Altadis' assistance had required extentionof the tobacco
monopoly.


6. (SBU) Talbi askedspecifically if the USG has received
complaints about the measure from the U.S. private sector.
Hesaid that he had received Philip Morris in early Nvember
and that they were "very content" with ovrall GOM policy in
the sector. Currently, he noed, Philip Morris brands
represent 8 percent of cigarette sales in Morocco. He
suggested that thecompany is even thinking of manufacturing
cigaretes in Morocco, if it can receive preferential tarff
rates on tobacco imported from Europe.

7. (SBU) Comment: Talbi and his counterparts at the MFA are
well aware of USG concerns about the monopoly extension, and
we made clear that further discussion is likely the context
of our review of the agreement's first year. While
government projections of potential cultivation of tabac
d'orient may appear optimistic, as recently as the early
1990's Morocco did devote almost 6,000 hectares to tobacco
cultivation. End Comment.
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Riley