EXXONMOBIL STIFLED BY EXCESSIVE GOT REGULATION,

C O N F I D E N T I A L SECTION 01 OF 02 TUNIS 002970 SIPDIS NOFORN SIPDIS STATE FOR NEA/MAG (HARRIS) AND EB/CBA (WINSTEAD AND BEHRENS) STATE PASS USTR (BELL),USPTO (ADLIN AND ADAMS),USAID (MCCLOUD) USDOC FOR ITA/MAC/ONE (NATHAN MASON),ADVOCACY CTR (JAMES), AND CLDP (TEJTEL) CASABLANCA FOR FCS (ORTIZ) LONDON AND PARIS FOR NEA WATCHER E.O. 12958: DECL: 12/27/2016 TAGS: EINV EPET ETRD BEXP TS SUBJECT: EXXONMOBIL STIFLED BY EXCESSIVE GOT REGULATION, MAY GIVE UP ON TUNISIA Classified By: Classified by CDA David Ballard for Reasons 1.4b and d. ¶1. (C) Summary: In a December 20 meeting with EconOff, ExxonMobil Tunisia Director General Arnaud Blouin lamented the difficulty of doing business in Tunisia and questioned whether ExxonMobil has a future in Tunisia. Blouin presented a laundry list of complaints ranging from Central Bank currency transfer regulations to restrictions on franchises, all of which have kept ExxonMobil Tunisia in the red since ¶2003. In light of the slow pace of reform and GOT inaction, Blouin pondered whether ExxonMobil Tunisia would join the nearly 20 other African countries where ExxonMobil has divested its holdings. End Summary. ¶2. (C) In a December 20 meeting with EconOff, ExxonMobil Tunisia Chairman Arnaud Blouin provided an overview of the company's current lackluster performance in Tunisia and expressed frustration with the excessive GOT regulation that prevented the company from returning to profitability. Blouin, a French national, confided that ExxonMobil Tunisia has not been profitable since 2003. In Tunisia, declining fuel demand combined with the highly regulated price structure keeps margins low and prevents fuel sales from being profitable for ExxonMobil. Currently, oil must be purchased from the state-owned refinery near Bizerte at a fixed price, transport costs are fixed, and the price at the pump is also set by the GOT. In addition, for security purposes, ExxonMobil is required by the GOT to maintain a two month stock of fuel, excess inventory which serves as yet an another impediment to profitability. Blouin also noted that while ExxonMobil Tunisia has not appeared profitable to its corporate headquarters, in Tunisia, the company's books show a small profit. The Central Bank restricts payment for labor performed elsewhere, preventing ExxonMobil Tunisia from paying corporate charges for services, such as accounting or other back office operations, provided by ExxonMobil's Houston headquarters. Due to this restriction ExxonMobil Tunisia can only pay dividends, which keeps it in the red according to the corporate balance sheets. Blouin lamented that this accounting problem may jeopardize the company's future in Tunisia as corporate shareholders view successive years of negative performance. ¶3. (C) Due to the limited profitability of fuel sales worldwide, ExxonMobil has developed a successful chain of gas station convenience stores, which operate under the moniker "On the Run." In 2004, seeking an opportunity to return to profitability, ExxonMobil Tunisia proposed making a 30 million USD investment in eight "On the Run" convenience stores. While at first the Ministry of Commerce was eager to support the project, the enthusiasm cooled once the Ministry realized that the investment would run counter to the GOT's restriction on franchising operations. Although ExxonMobil Tunisia's study projected that 500 workers would be directly employed by this investment, the Ministry of Commerce has thus far refused to grant the necessary permission. Blouin noted, however, that the Ministry of Commerce proposed finding a Tunisian partner to take a 51 percent share, after which the project could proceed. ¶4. (C) Blouin expressed frustration not just with the regulations themselves, but with the GOT decision-making process in general. Blouin recounted meeting with numerous GOT officials, none of whom could take the final decision or even point him towards the person with the ultimate authority to take action on any of ExxonMobil's concerns. Not surprisingly, ExxonMobil has received no response from the GOT on these proposals. While Blouin surmised that at this point no response is better than a negative response, after more than two years of meetings Exxon believes it is no closer to receiving the necessary permissions. ¶5. (C) Comment: ExxonMobil's complaints echo those of many TUNIS 00002970 002 OF 002 investors and illustrate the difficulty of doing business in Tunisia. Price controls, foreign ownership restrictions, restrictions on franchising, and Central Bank currency controls all inhibit private enterprise and prevent companies such as ExxonMobil from operating effectively. Despite encouraging GOT statements about liberalization and reform, Tunisia has been slow to lift the excessive regulation that creates these types of barriers to private investment. Moreover, arbitrary application of restrictions on franchising continues to frustrate American businesses, who have been loathe to accept the requisite partnership with a well-connected Tunisian in order to receive GOT permission. The slow pace of economic reform represents a deliberate choice on the part of the GOT; however, Tunisia will pay the price for the failure to quickly address the concerns of the foreign business community if companies such as ExxonMobil are unable to justify their continued presence in the country. ¶6. (C) Comment (cont'd): Yet, frustration with the GOT extends beyond just the excessive burden of regulations. GOT decision-making processes continue to be shrouded in mystery, with little insight into how decisions are made or who makes them. This lack of transparency exists not only in the Ministry of Commerce, but is mirrored throughout every level of the government. While a serious threat to leave Tunisia could be enough to force GOT acquiescence to ExxonMobil demands, history demonstrates that at times the GOT will act against its overall economic self-interest. Examples such as the firm refusal to allow McDonald's entry unless it accepted a partnership with the GOT's preferred Tunisian businessman or the failure to prevent the departure of a short-lived Pizza Hut franchise are not encouraging to US businesses. The lack of transparency surrounding these decisions makes it difficult, if not impossible, to extrapolate the ultimate decision of this government. End Comment. BALLARD