A SPOONFUL OF CHINESE SUGAR SOURS U.S. INVESTORS

C O N F I D E N T I A L SECTION 01 OF 03 BAMAKO 000104

SIPDIS

DEPARTMENT PLEASE PASS AID/AFR

E.O. 12958: DECL: 02/13/2019
TAGS: ECON EIND ETRD EINT EAGR ML
SUBJECT: A SPOONFUL OF CHINESE SUGAR SOURS U.S. INVESTORS
IN MALI

REF: BAMAKO 00051

Classified By: Economic Officer Manoela Borges, Embassy Bamako,
for reasons 1.4. (b) and (d).

1.(C) Summary: During a February 2 meeting with the
Embassy, representatives of the Schaffer Global Group, a U.S.
based project development firm, enumerated repeated failings
by the Malian government to honor an investment agreement
with Schaffer and its South African technical partner, Ilovo,
to establish a sugar cane plantation and refinery near the
Malian town of Markala. Since the project's inception in
1999, Schaffer has received nearly USD 2 million in USG
funding from the U.S. Trade and Development Agency (USTDA)
and USAID. In an attempt to undermine the Schaffer
consortium's investment, a preexisting Chinese-owned sugar
refinery in Markala has pressured the Malian government to
renege on official agreements with Schaffer and reallocate
prime sugar cane land already ceded to Schaffer to the
Chinese sugar refinery for its own alleged expansion plans.
Schaffer representatives insisted that no such expansion was
planned and that this was purely an attempt by the Chinese
company to retain its monopoly over Mali's sugar market.
Schaffer representatives warned that Ilovo would pull out of
the project if the issue is not settled within the next few
weeks, effectively killing the project. We have, in
conjunction with the South African Embassy, frequently raised
concerns with senior most Malian government officials over
the various delays that have prevented Schaffer's sugar
project from moving forward. We will continue to demarche
senior Malian officials over the need to live up to official
commitments to foreign investors. However, with Ilovo's
deadline rapidly approaching, we fear that Mali may choose
the easiest way out: running out the clock on ten years and
several million dollars worth of investment by both Schaffer
and the USG. End Summary.

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The Schaffer-Ilovo Sugar Project
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2.(U) In 1999 the U.S. Trade and Development Agency (USTDA)
funded a feasibility study for a sugar refinery project at
the request of the Malian Ministry of Industry, Commerce and
Transport. USTDA provided the Louisiana-based Schaffer and
Associates with USD 250,000 and the Malian government USD
200,000 to conduct this study. After Schaffer completed the
study in 2001, Schaffer was selected as a consultant by the
Malian government to seek funding for the implementation of
the project to be located in Markala just north of the town
of Segou. In 2003, USAID contributed USD 892,000 and
Schaffer USD 600,000 to undertake sugar cane variety trials.
For these trials, Mali contributed a 74 hectare (ha) plot of
land in the Office du Niger, which is the agricultural
management and irrigation authority for Mali's main rice
growing zone. USAID contributed another USD 500,000 in 2005
to complete initial field trials, analyze irrigation
practices and potential sugar cane varieties.

3.(U) Schaffer subsequently secured a technical partner, the
South African company Ilovo, which is a subsidiary of British
Amalgamated Foods, and created, in 2003, the Malian company
Societe Sucriere de Markala (SOSUMAR). SOSUMAR is 70 percent
owned by Ilovo, 22 percent by private Malian investors, and 4
percent each by Schaffer and the Malian government. The
refinery project was envisaged in two stages. During the
first 10 year phase of the project, SOSUMAR would produce
200,000 metric tons of pure plantation white sugar per year
over 15,000 ha at a cost of roughly USD 400 million. This
sugar would meet international standards and could be
exported to other markets in west Africa. Production would
double during the second phase, to 400,000 metric tons per
year, creating an economy of a scale large enough as to
satisfy the domestic market and transform Mali into a sugar
exporter. The project is expected to create about 7,000
full-time jobs and more than 3,000 seasonal jobs. Schaffer
and Ilovo are now in the process of creating a second
company, CaneCo, to manage the actual cultivation of sugar
cane. CaneCo will be 90 percent owned by the Malian
government and 10 percent owned by SOSUMAR.

4.(U) Funding for the projects' privately financed industrial
component, valued at USD 200 million, is significantly
committed and awaiting loan institutions, including the
African Development Bank (ADB),Kuwaiti Funds, the Islamic
Development Bank, OPEC, the West African Development Bank
(BOAD) and others pledging to cover the long term loans for

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sugar cane operations. Schaffer and Ilovo are working with
Mali and the ADB - mandated by the Malian government as the
project's lead lender - to secure USD 200 million in funding
for the project's agricultural component.

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Chinese Sugar Not So Sweet
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5.(U) The Schaffer sugar project's proximity to a Chinese
owned sugar refinery, SUKALA, has been a challenge from the
start. As Mali's only domestic sugar producer and refiner,
SUKALA has enjoyed unrivaled market share in Mali since it
started operations in 1968. Originally wholly owned by the
Malian government, in 1996 Mali decided to part of its
Chinese debt accumulated during the factory's construction
for SUKALA shares. As a result, China acquired a 60 percent
share of SUKALA, leaving 40 percent for the Malian
government. Over 40 years, SUKALA has yielded approximately
USD 10 million in profits. Since SUKALA produces poorly
refined sugar that does not meet international standards and
is not particularly well liked by Malian consumers,
preferential import treatment by the Malian government has
helped SUKALA stay afloat. Currently, for every one part
SUKALA sugar purchased, an importer may import from abroad up
to three times that amount in pure white sugar duty-free.

6.(U) These import regulations and SUKALA's status as the
only sugar refinery in Mali means that the Chinese company
has a guaranteed market for its product and is anxious about
losing this profitable arrangement should SOSUMAR's
operations get underway. Chinese attempts to "compensate"
for SOSUMAR's envisioned activities have forced Schaffer and
Ilovo to seriously alter their business plan at several
points during the design phase.

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Schaffer Takes its Lumps
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7.(C) SUKALA has repeatedly pressured the Malian government
to revisit its land agreement with Schaffer, hoping that Mali
will reallocate SOSUMAR land back to SUKALA. Such a move
would effectively torpedo the project as current production
models require all of the land already allocated. In late
2008 Schaffer informed the Embassy that Mali's newly named
Minister of Economy, Industry and Commerce, Ahmadou Abdoulaye
Diallo, had informed Schaffer of his intention to do exactly
this by reallocating hectares already officially given
SOSUMAR back to SUKALA. A few days later, however, Minister
Diallo reversed this decision, claiming that he had not been
aware that the Malian government had already officially given
the land in question to Schaffer. It now appears that
Minister Diallo has reversed his reversal.

8.(C) During a February 2 meeting with the Ambassador,
Schaffer Global Group CEO Geralyn Contini, Schaffer Global
Group Managing Director Mima Nedelcovych, and other
representatives described the latest hurdles they have
encountered. Schaffer officials enumerated repeated failings
by the Malian government to honor an investment agreement
with Schaffer and its South African technical partner, Ilovo.
Schaffer representatives said SOSUMAR's operations have been
effectively stymied by efforts by the adjacent Chinese
refinery SUKALA to persuade Malian officials to revisit
already settled land allocations. Under the pretense of
planning its own expansion, SUKALA has pressured the Minister
of Economy to allocate a 35,000 ha tract of land, known as
Zone A, to SUKALA. Schaffer representatives insisted the
Chinese had no such expansion planned and were simply
interested in sabotaging the SOSUMAR operation so as not to
lose its dominance over Mali's sugar market. Schaffer CEO
Contini said this was a common tactic employed by Chinese
companies in Africa and that she had witnessed similar
maneuverings by Chinese operations in other East and West
African markets. The Schaffer representatives described
Chinese importers in Mali as a "mafia", since the producers,
importers, and distributors are an insular group of three to
four Chinese businessmen.

9.(C) In an attempt to allay Chinese fears that the SOSUMAR
refinery would herald the end of Chinese operations, SOSUMAR
had previously drafted a market sharing agreement that would
guarantee a quota on the local market proportional to
production. Any excess production would be traded either in
foreign markets or through an exchange in Mali. This would
effectively guarantee a market for all Chinese sugar

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production. SUKALA would still be affected, however, as the
introduction of plentiful, high quality sugar produced by
SOSUMAR would naturally drive prices down. Schaffer said
they were told during meetings with the Minister of Economy
that SUKALA had rejected numerous offers for alternative
tracts of land. The Minister also intimated he was under
pressure from Prime Minister Sidibe to support a "two-project
plan" but that, if it came to it, his own preference was to
lose SUKALA rather than SOSUMAR. According to Schaffer's
local representative and SOSUMAR Director Harouna Niang,
during a January meeting with Schaffer the Minister of
Economy went through several iterations of land allocation to
try to please both SOSUMAR and SUKALA. The Minister promised
Niang he would present the proposal designed during this most
recent meeting for the Prime Minister's approval and attempt
to defend it as the Malian government's best option.

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Electricity Problems
--------------

10.(U) Schaffer Global Group Managing Director Nedelcovych
stated that the land allocation issue obscured other
fundamental problems in getting SOSUMAR's operations off the
ground. Principally, the questions of electricity and water
supply were still unresolved. Mali's electricity company,
Energy of Mali (EDM),currently has a 15 kilo Volt (kV) line
from Alatona, which would be used to power SOSUMAR's
operations. But SOSUMAR's needs are 33kV. Ilovo would make
the up-front USD 2 million investment necessary to increase
power supply with reimbursement from the GOM. However, an
agreement with the GOM regarding whether this would be
denominated in USD or CFA has not been reached; the GOM wants
the investment denominated in CFA and Ilovo does not want to
assume the foreign exchange risk.

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Comment: Chinese Influence Trumps U.S. Investors, Again
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11.(C) Unfortunately, Schaffer's experience is part of a
broader pattern of Chinese influence over the GOM in cases
where Chinese investment interests are threatened (Reftel).
On its own, this influence represents a considerable
deterrent to foreign investment in Mali. Schaffer
representatives told the Embassy that their primary financial
partner, Ilovo, was on the brink of pulling out of the
project if a solution could not be reached by the end of
February. Such a decision by Ilovo would effectively kill
the Schaffer sugar project ten years after it was initiated.

12.(C) Over the past four years we have, on Schaffer's
behalf, frequently raised concerns about various impediments
to the sugar project with many senior Malian officials. This
includes President Amadou Toumani Toure, Prime Minister
Modibo Sidibe, Foreign Minister Moctar Ouane, former Minister
of Finance and Economy Abu-Bakar Traore, and former Minister
of Commerce, Trade and Investment Ousmane Thiam. Many of
these demarches were delivered jointly in conjunction with
the South African Ambassador to Mali. We will continue to
press the Malian government to both honor its commitments to
Schaffer and consider the ramifications for foreign investors
should the Schaffer project fall through. Unfortunately, the
Malian government is not known for either swift or decisive
action and Mali could regard an end of February deadline as a
opportunity to simply run out the clock on Schaffer. Chinese
President Hu Jintao's Feb 12-13 visit to Mali to inaugurate
Bamako's third bridge over the Niger - billed as the largest
Chinese development project in west Africa - will likely not
accelerate the Malian government's interest in clarifying
Schaffer's land dilemma.
MILOVANOVIC