TOURISM MINISTER LEAVES "DOOR AJAR" ON COLONY

UNCLAS RABAT 000334 SIPDIS SENSITIVE STATE FOR EEB/CBA, NEA, NEA/MAG AND EEB/IFD/OMA STATE PLS PASS OPIC E.O. 12958: N/A TAGS: EINV ECON EFIN MO SUBJECT: TOURISM MINISTER LEAVES "DOOR AJAR" ON COLONY CAPITAL CANCELLATION ¶1. (U) This cable contains company proprietary information. Please protect accordingly. ¶2. (SBU) Summary: Moroccan Minister of Tourism Mohammed Boussaid told Charge on April 17 that U.S. investor Colony Capital's "failure" to fulfill the terms of its amended convention to develop the Taghazout Station, a flagship project in the country's "Plan Azur" tourism strategy, led to his April 8 decision to terminate the agreement. He indicated that the decision was not an easy one, but that he had no choice after Colony ceased construction at the beginning of February as a result of its inability to obtain 440 million MAD (around USD 52 million) in local bank financing. "The company let me down personally," he said, in taking that action after earlier assuring him of its commitment to the project. While he confirmed that he will explain his decision to the press in an April 21 news conference, he left the door open for Colony to return to the project, if it can bring a "new solution" to the table. End Summary. ¶3. (SBU) Following three recent conversations with Colony Capital executives, NEA A/S Feltman,s discussions with Foreign Minister Taieb Fassi Fihri in Washington, and the Charge,s conversations with Fassi Fihri and Minister-Delegate for Economic and General Affairs Nizar Baraka, Charge met with the Minister of Tourism and Crafts. The company had indicated that it had been taken by surprise by the minister's April 8 letter cancelling Colony,s contract. In an April 9 response, Colony reviewed its efforts to secure local bank financing and requested a grace period from the Minister to permit that process to continue. Given Colony's standing as one of the largest American investors in Morocco, and the potential negative signal the dispute would send to other investors, Charge urged that more time be granted, to permit exploration of other options. (Note: Colony owns Accor Hotels, including the many Sofitel, Novotel, Ibis and Mercure properties in Morocco. End Note.) ¶4. (SBU) Boussaid responded that his hand had been forced by repeated delays in the project, and pointed to the fact that after two years of work, "not one square meter of cement has been laid." (Note: Company officials note that actually some foundation work is in place. End Note.) That, he said, had resulted in pressure on the Ministry, given the project's high profile within the overall Plan Azur, and given the benefits the Government had extended to the company, including the land (which had been cleared of previous occupants),perimeter upgrades, and electricity lines. He noted that he had sought to help the company for 18 months, and in the face of its difficulties had agreed to scale back the project in a revised convention in December 2008. "I asked them what they could do," he said, and when they indicated they could only build the hotels, golf course, and residences (on roughly half of the project's original 1,200 acres),he agreed to revise the convention. ¶5. (SBU) Boussaid indicated that he was confident after this agreement, and a subsequent visit by the CEO of Colony Capital, that the project would proceed. However, within ten days of a late January groundbreaking, construction work stopped and has not resumed since. Boussaid conceded that he understood that financing issues with local banks remained outstanding but stressed that Colony was selected for the project not just for its development expertise, but for its ability to access capital markets. He faulted the company for failing to explain its actions, noting that he only learned about it from the press. Subsequently, the Ministry was told by Colony's local representatives that it did not intend to invest an additional dollar of equity without a bank financing agreement. The company's decision to pull the plug on construction and not come forward with a solution, such as bridge equity financing, Boussaid argued, "told me that it was no longer committed to the project." Colony, he argued, could easily have invested additional equity to continue construction, while it sought the bank financing. We understand that Colony has invested USD 125 million to date. ¶6. (SBU) Boussaid contested our suggestion that cancellation of the contract would negatively impact foreign investors' perceptions of Morocco. It was the investor who did not respect his agreement, he said. "Morocco," he continued, "has nothing to apologize for," and has acted within its rights, while itself "respecting 100 percent of what it committed to do." Boussaid described the December modification of the convention as Morocco's good faith effort to find a solution to move the project forward and the company's "last chance." He noted that he felt "personally betrayed" by Colony's failure to proceed thereafter, and predicted that if the case went to arbitration, Morocco would be in a very strong position. ¶7. (SBU) In closing, Boussaid emphasized that while his decision to cancel the convention stands, "the door is ajar" for Colony Capital, if it can propose a solution to move the project forward. (Note: The company has told us that in addition to seeking bank financing here, it is open to taking on a local Moroccan partner to share in development. End Note.) Boussaid does not anticipate that such a solution will emerge quickly, however, and was adamant that for now the convention cancellation will stand: he and the government cannot countenance further delays in the troubled project without acting. He said that there is no investor waiting in the wings to take over the project, and speculated that "perhaps we won't do this one," given the difficulties it has encountered over the years. Morocco, he said, has been disappointed twice on this project, and it "must be sure" before it would allow a third try. ¶8. (SBU) For Colony,s part, the company has painted a picture of obstacles it has had to overcome since the inception of the project. Colony executives highlighted that they had waited over a year for the Minister to study and amend the original agreement. Now, Colony must face a Catch 22 situation in which Moroccan banks do not want to talk about a USD 52 million loan due to all of the negative press about the project, while Colony cannot envision moving forward without a local partner or bank financing. ¶9. (SBU) Comment: We had been warned to expect a litany of charges against Colony Capital, but the Minister took a very different tack, expressing high personal regard for both the company and its president, but a sense of profound disappointment that it had not met its commitments. He skirted around the fact that the ministry's lengthy review of the revision of the convention left Colony seeking bank financing in a very different (and difficult) international climate, a source of frustration to the company, which has told us it views Morocco as a very difficult country to do business in. His non-confrontational approach and willingness to entertain alternative solutions are hopeful signs, and we will continue to encourage an amicable settlement. We conveyed the gist of the Minister's position to the company in an April 17 conference call, and it is mobilizing to determine what it can put together to address his demands. ¶10. (SBU) More generally, the difficulties at Taghazout are emblematic of difficulties that have beset all five of the "Plan Azur" resorts to varying degrees. Only one is on the horizon for completion, Saidia in northern Morocco. In the other three stations, most original foreign developers have bowed out and been replaced by Moroccan entities, except that a wholly owned Colony subsidiary is still developing Mazagan. In the face of these difficulties, and particularly given the international economic climate, Morocco is likely to have to scale back and recalibrate its ambitions in the sector more generally. End Comment. ***************************************** Visit Embassy Rabat's Classified Website; http://www.intelink.sgov.gov/wiki/Portal:Moro cco ***************************************** Jackson