FOREIGN INVESTORS IN RWANDA: PERFORM OR GET OUT

C O N F I D E N T I A L KIGALI 000754

SIPDIS

SIPDIS

DEPARTMENT PASS AF/C, EB/IFD/OIA:MTRACTON
DEPARTMENT PASS USTR WJACKSON AND DBAHAR
DEPARTMENT PASS COMMERCE RTELCHIN, TBARLOW, AKHANNAOW
DEPARTMENT PASS BCAMERON

E.O. 12958: DECL: 05/11/2017
TAGS: BEXP BTIO ECON EFIN EINV ETRD PGOV RW
SUBJECT: FOREIGN INVESTORS IN RWANDA: PERFORM OR GET OUT

Classified By: Ambassador Michael R. Arietti, reason 1.4 (B/D)


1. (SBU) SUMMARY. Accepting an offer they claim they could
not refuse, the largest American investors in Rwanda sold
their telecommunications company to the Government of Rwanda
(GOR) on August 1. This represents the fourth time in the
past year that the GOR has either nationalized a private
company, forced investors out, or broken a management
contract with the justification that the investors were not
performing adequately. While the GOR may well serve its
country by demanding results from foreign investors, it must
also prove that it respects the contracts it signs or risk
souring its image. END SUMMARY.


2. (U) August 1 marked the final chapter in a very public
and stormy relationship between U.S. telecommunications firm
Terracom and the GOR that spanned the local media, the New
York Times, Business 2.0, President Kagame's Office, and US
Congressional hearings. Terracom descended from having a
direct line to President Kagame to being vilified on the
front pages of the local press. The GOR officially
repurchased Terracom, and the American CEO and his deputy
subsequently resigned.


3. (C) In a meeting with econoff, departing Terracom CEO,
Chris Lundh, complained that the GOR had been extremely
heavy-handed throughout the entire process. He stated he was
deeply frustrated that the other board members agreed to sell
the company under such conditions and by such irregular
valuation procedures. According to Lundh, entire sections of
the original share purchase agreement (SPA) were completely
ignored as Terracom was not allowed to seek arbitrage or
appeal to the international chamber of commerce.


4. (C) Lundh stated that the Director General of the Rwanda
Utility Regulatory Authority (RURA),Colonel Mudenge (Note:
brother-in-law to Army Chief of Staff Major General James
Kabarebe),threatened to 'send in the troops to seize the
company' if Lundh did not comply with the GOR plan to remove
the telecommunications business from Terracom control. The
company was under constant threat of having its operating
license removed, and Lundh described all GOR-Terracom
meetings over the past eight months as both hostile and
one-sided. To compound the pressure, during the last two
weeks of the negotiations, Terracom,s bank accounts were
frozen by the Ministry of Finance. This prevented it from
paying vendors and employee salaries. What started as a
request several months ago on behalf of the GOR to
renegotiate the original SPA that privatized the national
telecommunications company (RwandaTel) turned into a demand
that Terracom sell the company back to the GOR. Lundh
complained that in his 20 years of business experience in
Africa, spanning the Democratic Republic of Congo to West
Africa, the GOR's conduct was the most blatantly
unprofessional and heavy-handed that he had ever experienced.


5. (C) The final valuation of the company, which fluctuated
in two weeks time from USD 2.3 million to negative USD 8.7
million, and finally ended at USD 11.9 million, was arrived
upon by a private consultant from the Ministry of Finance,
Peter Rutaremara (FYI: Terracom initially bought RwandaTel
from the GOR for USD 20 million in 2003, although it only
paid USD 5 million in cash at the time. End FYI.). The
net-asset valuation model Rutaremara used was highly
irregular for a telecommunications company, ignoring revenue
streams, valuations per subscribers, and earnings potentials.
Nonetheless, the GOR refused Terracom's request to contract
a reputable international firm to conduct the audit and
propose a value for the company, which Lundh and other
Terracom directors believed to be closer to USD 40 million.
Moreover, the final valuation of the company did not include
figures from 2007, which was particularly unfavorable to
Terracom which posted net profits as of June 2007.


6. (C) Lundh explained that Board members John Dick and Greg
Wyler, the initial CEO of Terracom, were eager to reach an
amicable solution to the months-long dispute. Dick, who
holds a Rwandan diplomatic passport and is the Honorary
Counsel in the Isle of Jersey for Rwanda, has several
remaining interests in Rwanda and was more interested in
preserving his perceived special status with the GOR than in
recovering his financial investment, according to Lundh. In
conversations with Ambassador, Dick has also been much more
positive in describing his interactions with Rwandan
officials.


7. (SBU) Terracom management Dick, Wyler, Lundh, and Deputy
Peter Bartik -- all have admitted, in numerous conversations,
mistakes on Terracom,s behalf and acknowledged that Terracom
had not met several goals it agreed to as part of the 2003
SPA. However, they all also have agreed that their treatment
at the hands of the GOR reflects more than a reaction to any
particular mistake. Wyler, who began receiving public
criticism in mid-2006 of his management of Terracom, had been
repeatedly targeted in the local press and was pressured to
step down from his CEO position by the GOR. In fact, even a
year after his replacement and Lundh,s leadership began, the
GOR continued to cite Wyler,s mistakes including his
attempt, in early 2006, to sell Terracom shares to business
magnate Miko Rwayitare of CellTell as one of the main reasons
for the nationalization of the company. The Ministers of
Finance and Infrastructure on separate occasions complained
to Ambassador Arietti about Terracom,s unfulfilled promises
of bringing in large amounts of outside investment, providing
internet access to schools around the country, and providing
cheap internet and cell phone services.


8. (C) Terracom management also blamed the GOR for its
unfulfilled promises. Lundh claimed that current receivables
(uncollected bills) from the GOR total USD 6 million, and
that RURA never responded to Terracom,s requests to require
the main telecommunications company in Rwanda (MTN) to halt
its monopolistic practices of restricting access to its
networks which prevented Terracom's true entry into the
market. On one hand, Lundh accused the Rwandan Patriotic
Front (RPF) of squeezing Terracom out of the market in an
attempt to prevent competition with MTN, in which the RPF
indirectly has 40 percent ownership. On the other hand, he
accused the GOR of looking to make money by buying Terracom
at a discount and then re-privatizing the now-profitable
company at a premium. (COMMENT: GOR officials have rejected
any suggestion that RPF investment in MTN has been an issue,
noting that the GOR continues to want a strong alternative
telecommunications company in the country as competition to
MTN and plans to re-privatize the company as quickly as
possible).


9. (SBU) Lundh underscored that Terracom,s departure from
Rwanda was unfortunate not only because its presence in the
country helped mitigate the hesitations other potential
American businesses have about investing in Rwanda, but also
because it brought a sense of professionalism and American
management expertise to Rwanda. The company refused to pay
bribes, bumped employee salaries by 18-40 percent since
taking over RwandaTel, and helped generate positive press on
the investment potential of Rwanda.


10. (SBU) Final terms required the GOR to pay 30 percent of
the USD 11.9 million immediately, which it did, and to
provide a letter of credit with Citibank in the U.S. for the
remaining 70 percent. Other obligations will be subtracted
from this amount, but Lundh remains confident they will
eventually receive the full USD 11.9 million. The Chief
Technical Officer, Patrick Kariningufu, is the acting CEO
with some representatives from the GOR also running the
company.


11. (C) In an August 10 meeting with Ambassador, Minister of
State for Infrastructure Albert Butare stated that the GOR
had already released a tender for the company. Butare
claimed that more than six companies have expressed interest
in bidding on the company. Lundh claimed that the
Libyan-Africa Group (LAG) met with Minister Butare in early
May 2007 to explore investing in Terracom, upon the
invitation of Lundh. Since then, Libyan Charge, Dr. Muhamad
Al-Ahmer, commented several times to econoff that LAG plans
to run the company, implying that a deal had already been
struck with the GOR. Lundh also reported that Emerging
Markets Telecommunications, an American-Canadian outfit, is
looking at acquiring telecommunications companies in Burundi
and Rwanda and has contacted Lundh to advise them on the
process. MaraCom, an Israeli-British firm and R-Com
Consortium from South Africa, were the other bidders on
RwandaTel in 2003, and are likely to bid on the privatization
again.


12. (SBU) COMMENT. While it is positive to see the GOR become
more vigilant and discerning regarding foreign investors,
recent instances of re-nationalizing previously privatized
companies, canceling contracts, and forcing out foreign
investors that are not performing to the GOR's satisfaction
-- such as German Lahemeyer at Electrogaz, South African
Southern Sun with the now-Serena managed hotels, Dane
Associates with the methane extraction and conversion on Lake
Kivu, and now Terracom -- are attracting attention. The GOR
serves its country well by demanding results from its
investors and holding them accountable for promises made.
For example, President Kagame has been quoted in the local
paper welcoming foreign investment, but vowing to "kick them
out" if they do not perform. Nonetheless, the GOR must also
prove that it respects the contracts it signs with these
investors. None of the ejected companies have been able to
seek international arbitrage, and each of them has left with
an extremely negative impression of the Rwandan business
climate. While the GOR appears to have merit in each
individual case, Rwanda needs to be careful that it does not
create a negative image for future investors. END COMMENT.

ARIETTI