NEW LABOR LAWS DISSUADE FOREIGN INVESTORS

C O N F I D E N T I A L SECTION 01 OF 02 MAPUTO 000493

SIPDIS

E.O. 12958: DECL: 04/20/2019
TAGS: ECON EINV ETRD EAID PGOV PREL ELAB MZ
SUBJECT: NEW LABOR LAWS DISSUADE FOREIGN INVESTORS

REF: MAPUTO 381

Classified By: Charge d'Affaires Todd C. Chapman, Reasons 1.4(b+d)


1. (C) SUMMARY: In December 2008, the Government of
Mozambique (GRM) passed into law new regulations establishing
quotas on foreign employees for businesses operating in
Mozambique. Minister of Labor Helena Taipo has begun an
active campaign of enforcement which particularly impacts
foreign companies, including MOZAL, Mozambique's aluminum
smelter and most successful megaproject, and the single
largest contributor to exports. Law 55 is just one in a
series of seemingly xenophobic responses in Mozambique which
suggests an alarming increase in anti-foreigner sentiment
within the GRM (septels),and could result in severely
negative impacts on both foreign investment and foreign
assistance. In the case of USG and other donor assistance to
Mozambique, Law 55 is already significantly hampering our
partners' abilities to implement development projects,
potentially constraining our operations in Mozambique. The
Embassy has engaged in numerous high-level lobbying efforts
to seek a solution. END SUMMARY.

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LABOR LAW 55 CONSTRAINS FOREIGN INVESTMENT
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2. (C) On December 30 2008, the GRM published Law 55
entitled "Regulations Relative to the Mechanisms and
Procedures for Contracting Foreign Citizens," altering Labor
Law 23 of 2007, in order to "respond to new demands related
to the social and economic development of the country,"
according to Prime Minister Luisa Diogo. The jingoistic
addition to the labor law significantly empowers the Ministry
of Labor (MINTRAB) to restrict businesses operating in
Mozambique by placing caps of between 5 and 10 percent on the
number of foreign employees allowed in a given organization,
based on the size of the firm. According to Minister of
Labor Helena Taipo, foreign companies must now comply with
the quota system, except for those involved in mega-projects
with pre-arranged agreements and those that request special
authorization for additional workers.

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MOZAL SUFFERS LABOR MINISTER'S WRATH
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3. (C) In early 2009, Taipo began enforcing Law 55 to the
chagrin of foreign investors in Mozambique, particularly
MOZAL, the country,s aluminum smelter, which accounted for
55 percent of the country's $2.65 billion in 2008 exports,
and 18 percent of 2008,s $3.8 billion in imports. In
February MOZAL announced that it would lay-off 80 workers
(reftel),an announcement which was met by calls from MINTRAB
for a justification. Taipo subsequently proclaimed that she
forbade MOZAL from hiring additional foreign workers. On
March 13, MINTRAB levied fines against MOZAL for "illegal
redundancies," and for "preventing the exercise of trade
union rights," further demanding that MOZAL pay double the
severance package provided to the fired workers.
Subsequently, MINTRAB opened an office within MOZAL in an
effort to scrutinize the company's labor practices more
closely.

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CHARGE CALLS NEW LAW HARMFUL TO INVESTORS AND DONORS
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4. (C) On December 22, the Charge met with Minister of Labor
Taipo to discuss Law 55. Taipo stated that the Charge was
misinformed about Law 55, which would actually create
employment for Mozambicans. The Charge countered that the
law has the opposite effect, dissuading investors. In March
meetings with President Guebuza and Vice Foreign Minister
Banze (reftel),the Charge again raised concerns over the new
restrictiveness of Law 55, explaining that companies as well
as donors investing in Mozambique are now being faced with
unsatisfactory denials of work permits for their foreign
workers and implementing partners. The Charge further
explained that Minister Taipo's involvement in the MOZAL case
already has raised concerns among U.S. investors, noting that
Chiquita decided to headquarter their Mozambican operations
across the border in South Africa in order to avoid labor
regulations and allow for greater hiring and firing freedom.
He pointed out that the Mission's implementing partners in
the health field, some of which had already been raided by
MINTRAB inspectors and required to pay hefty fines, are

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particularly constrained since Mozambique has only 800
resident medical doctors for a country of over 20 million.

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PM CALLS LABOR LAW "BEST POSSIBLE, BUT NOT IDEAL"
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5. (C) The business community challenged Prime Minister
Luisa Diogo on March 23 about Law 55 following a speech she
gave on the economic crisis. Business leaders, including the
USAID-funded Confederation of Mozambican Chambers of Commerce
(CTA) President Salimo Abdulla pointed to the paucity of
skilled labor in Mozambique and questioned Diogo about the
viability of Law 55. Abdulla pointed-out that the GRM should
be facilitating the entry of foreign workers rather than
waiting for Mozambicans to be trained. Diogo responded that
while Law 55 is not ideal, it is an example of the best
possible solution, representing a balance between the
competing demands of unions and the business community.
Diogo also confirmed that the GRM was extremely sensitive to
foreign assistance. CTA held a meeting on April 3 to
publicly discuss Law 55, which was covered by the Press and
attended by some 70 human resource and legal experts in
Maputo. Those in attendance agreed that the law was contrary
to the GRM's efforts to attract foreign investment.

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POST SEEKING SOLUTIONS FOR INVESTORS AND PARTNERS
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6. (C) Mission Maputo is reviewing all possible remedies to
the constraints defined by Law 55. Understanding the GRM's
sensitivity to donor flows, the Charge sent a letter to
Foreign Minister Oldemiro Baloi on April 14 outlining the
negative impact which the labor quotas were having on our
ability to implement assistance programs, placing some in
jeopardy of being disrupted. The Mission's legal experts
are also reviewing the possibility of using our 1998
Bilateral Investment Treaty (BIT),which states under Article
VII that neither party can apply numerical restrictions to
the other party's nationals who remain in its territory to
establish, develop, administer, or advise on the operation of
an investment so long as there is commitment of a substantial
amount of capital or other resources. The BIT was ratified
by the GRM in 2005 and should remain legally binding.


7. (C) At Guebuza,s weekly Council of Minister,s meeting
on April 14, a participant in the meeting told the Charge
about a never-before witnessed direct confrontation among
Ministers in Guebuza's presence. The Minister of Tourism,
Youth and Sports Fernando Sumbana pointed his finger at
Minister Taipo and stated that she was ruining the country by
chasing away the investors which the rest of the Ministers
had so diligently sought to attract. This prompted an
energetic exchange, with most Ministers reportedly being in
agreement, and Minister Taipo sitting silently. The
political ramificantions of such a confrontation are not yet
known.

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COMMENT: LAW 55 TO NEGATIVELY IMPACT ECONO GROWTH
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8. (C) Law 55 appears to be an effort by the GRM to appease
trade unions and Mozambican citizens at the expense of
foreign investment and assistance. That MINTRAB would make
an example of MOZAL, its largest exporter, and a company in
which the GRM holds a 4 percent stake, is surprisingly
short-sighted, and points towards a deep distrust of
foreigners by some within the Guebuza administration despite
the significant long-term contributions of the donor
community and foreign investors alike. In this election
year, some in the FRELIMO party appear interested in
appearing "tough on foreigners" in an effort to garner votes
from the largely poor and unskilled domestic constituencies
who seem increasingly concerned that they have been largely
left out of Mozambique's recent economic growth. Revealing
her ideological orientation, Minister Taipo asked one
European Ambassador recently "Why should Mozambique be asked
to help developed countries solve their growing unemployment
problems by giving them jobs here?" The enforcement of Law 55
by Minister Taipo is likely to drive away foreign investors,
while at the same time making donor assistance more
challenging, which will have a negative impact on the
country's FDI-led growth, particularly given the current
economic crisis.
Amani