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. -------------- LABOR LAW 55 CONSTRAINS FOREIGN INVESTMENT -------------- ¶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. -------------- MOZAL SUFFERS LABOR MINISTER'S WRATH -------------- ¶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. -------------- -------------- CHARGE CALLS NEW LAW HARMFUL TO INVESTORS AND DONORS -------------- -------------- ¶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 MAPUTO 00000493 002 OF 002 particularly constrained since Mozambique has only 800 resident medical doctors for a country of over 20 million. -------------- -------------- PM CALLS LABOR LAW "BEST POSSIBLE, BUT NOT IDEAL" -------------- -------------- ¶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. -------------- -------------- POST SEEKING SOLUTIONS FOR INVESTORS AND PARTNERS -------------- -------------- ¶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. -------------- -------------- COMMENT: LAW 55 TO NEGATIVELY IMPACT ECONO GROWTH -------------- -------------- ¶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