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.


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Jackson