COTTON: CHAD'S SECOND EXPORT SECTOR IN TROUBLE

UNCLAS SECTION 01 OF 02 NDJAMENA 000437

SIPDIS
SENSITIVE

STATE FOR AF/C, S/USSES
NSC FOR GAVIN
LONDON FOR POL - LORD
PARIS FOR POL - BAIN AND KANEDA
ADDIS ABABA ALSO FOR AU

E.O. 12958: N/A
TAGS: PREL PGOV PREF ECON ETRD CD
SUBJECT: COTTON: CHAD'S SECOND EXPORT SECTOR IN TROUBLE

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SUMMARY
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1. (U) CotonTchad, the GOC's largest parastatal and second
largest exporter (after the oil sector),is in danger of
bankruptcy. Complicated arrangements with growers require
complex financial deals, which are challenging for a company
that is poorly managed and plagued by corruption. In recent
years, CotonTchad has been caught in a vicious cycle caused
by reduced production which in turn causes reduced income and
ability to finance out-year production. CotonTchad's decline
puts in jeopardy the livelihoods of many individuals who work
for the company, contracts with it, or depend on a worker
associated with the firm for sustenance. END SUMMARY.

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COTTON: A MAJOR EMPLOYER
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2. (SBU) CotonTchad, headquartered in Chad's southern city
of Moundou, is the country's largest parastatal and the
second largest exporter, by revenue, after the oil sector.
The firm is the sole cotton processing company in the nation,
owned 75 percent by the GOC, 18 percent by the French textile
company Dagris, and 7 percent by the local banking sector.
The company produces cotton fiber for export and presses
cottonseed oil for domestic consumption; it is not involved
in any textile production.


3. (SBU) Poor management, rising prices for inputs, and
challenges in the supply chain have all led CotonTchad down a
precarious financial path. The failure of the firm would
have major effects given the company's significant role in
the national economy. CotonTchad is the third largest
government employer, topped only by the public administration
sector and the Chadian National Army. The cotton company
employs over 3,000 permanent and temporary workers, in
addition to the thousands of growers and cooperatives with
whom it contracts. Company officials estimate that close to
one million Chadians (counting families of workers) depend on
the company's income; this is eight percent of the nation's
population. IMF officials estimate that CotonTchad's
revenues make up 20 to 25 percent of Chad's GDP. The
National Institute for Economic and Demographic Statistics
(INSEED) places the total value of Chad's cotton-fiber
exports at 56.4 million USD for the three-year 2006-2009
period.

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A POORLY MANAGED PARASTATAL
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4. (SBU) Some of the company financial troubles stem from
its complicated arrangements with contracted village
cooperatives. CotonTchad must secure two loans to finance
its production each year. One loan enables the company to
purchase fertilizer, which it then gives to producers on
credit. A second loan provides cash with which the company
purchases raw cottonseed at harvest time. A committee
comprised of company officials and cotton producers sets
CotonTchad's annual purchase prices for the harvested cotton.


5. (SBU) The firm's complex strategy of financing, fertilizer
acquisition and distribution to farmers requires careful
planning. Arrangements do not always align with Chad's
short, rainy season-dependent growing period. A delay at any
step in the process means that farmers cannot take full
advantage of the use of fertilizer, which in turn jeopardizes
production. Declining yields have created a vicious cycle:
the company's production of cotton fiber for export has gone
down, thus reducing revenue and the ability to finance
out-year production at current levels.


6. (SBU) According to the African Bank for Development, 2009
was CotonTchad's worst year. The company's 2009 production
was 30,000 tons, which earned 35.4 million USD, compared to
historical averages over 100,000 tons and average earnings
over 146 million USD. Although the GOC established a program
to reform the cotton sector in 1999, there has been little to
show for the effort. A functioning organization complete
with Coordinator, which is known as the Cotton Sector Reform

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Project, aims to privatize the company, enhance growers'
efficiency, and promote strong production. Still, CotonTchad
has requested a government bailout of 120 million USD for
restructuring, which runs counter to a GOC goal under its IMF
Staff-Monitored Program to reduce government support to the
cotton company. CotonTchad is also facing public assertions
that its leadership is corrupt. Two directors were arrested
in September for improper sales of cotton fiber, and the
company's head has been suspended by the Ministry of Morality
for misappropriation of funds.

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COMMENT
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7. (SBU) CotonTchad's accelerating decline puts in jeopardy
the welfare of large numbers of Chadians who depend on the
company for income. There does not seem to be any serious
government effort to address the company's poor management
situation or precarious financial structure, despite the
President's recent claims that more effort and development
must be focused on the cotton and agricultural sector.
Further, the Cotton Sector Reform Project has yet to begin
the necessary economic and financial audit necessary for any
privatization effort. END COMMENT.


8. (U) Minimize considered.
BREMNER