CATERPILLAR NEGOTIATIONS INCHING ALONG

C O N F I D E N T I A L SECTION 01 OF 03 TRIPOLI 000618

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E.O. 12958: DECL: 8/3/2019
TAGS: ETRD;, ECON;, PGOV;, EPET;, LY
SUBJECT: CATERPILLAR NEGOTIATIONS INCHING ALONG

REF: A) TRIPOLI 289; B) TRIPOLI 274

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CLASSIFIED BY: Gene Cretz, Ambassador, U.S. Embassy Tripoli,
Department of State.
REASON: 1.4 (b),(d)
1. (C) Summary: As of a few months ago, it appeared the
Government of Libya (GOL) was committed to allowing the U.S.
firm Caterpillar's ("CAT") heavy machinery and spare parts to
enter Libya. However, recent talks with the GOL have stalled
due to the mandate that CAT work only with the state-owned
Economic and Social Development Fund for its dealership in
Tripoli. GOL implicitly threatened to reinstate a previous ban
on CAT imports. As a result, CAT is considering pulling out of
Libya altogether, which would jeopardize millions, if not
billions, of dollars of infrastructure projects due to be
completed by September 1 for the 40th Anniversary of Qadhafi's
coup. The situation is illogical from a business standpoint,
but as with most prestigious and potentially lucrative deals in
Libya, the decision-making in the CAT negotiations appears to be
happening at the highest levels of the regime, with Qadhafi
family members (namely, sons Saif and/or Muatassim) standing to
gain from a GOL-owned dealership. (See septel for latest
developments.) End summary.

BACK WHERE WE STARTED

2. (C) As previously reported in Ref A, as of a few months ago,
it appeared the GOL was committed to allowing Caterpillar
("CAT") heavy machinery and spare parts to enter Libya. Until
now, CAT products have been entering the country, but recent
events indicate that a previous ban on CAT imports may be
reinstated. Previously, as a condition of lifting the ban, CAT
had severed all business ties with its Libyan agent (Sahil
Company). CAT was forced to take this step in order to overcome
accusations made by the Secretary of Industry, Economy and Trade
(Ministry of Economy-equivalent) that the CAT dealership was
operating illegally and corruptly, as its Libyan partners were
the sons of current government officials. The Secretary
referenced Article 5 of the General People's Committee Decision
No. 315 of 2008 on Regulations Regarding Commercial Agencies
(distributorships),which prohibit distributors to partner with
government officials. Once CAT severed its ties to the Sahil
Company, the GOL lifted the ban on May 3, and CAT equipment was
once again allowed to flow into Libya. Even though the GOL said
it would not tell CAT who its partner must be, the GOL rejected
CAT's proposed new partner and has mandated that CAT's dealer in
Tripoli be the state-owned Economic and Social Development Fund
(ESDF). CAT agreed to allow the ESDF to hold a 40 percent share
in the dealership, but the ESDF, promptly rejecting CAT's offer,
insisted on 100 percent ownership. CAT representatives traveled
to Tripoli the week of July 12 to meet with GOL officials and
negotiate a settlement before the July 15 deadline imposed by
the GOL. While the July 15 deadline has come and gone without
GOL-imposition of a new ban, negotiations have reached an
impasse, and a ban may be reimposed at any time and without
notice.

PERSPECTIVE OF CAT'S TUNISIAN REPRESENTATIVE: PARENIN

3. (C/NF) On July 12, Mohamed El Fadhel Khalil, the Tunis-based
Managing Director of Parenin Company, CAT's partner in North
Africa, briefed the Ambassador on CAT's efforts to quickly
renegotiate its representation in Libya, particularly in light
of the July 15 deadline. After severing its relationship with
the Libyan company, Sahil, CAT asked the GPC for Industry,
Economy and Trade (GPCIET) for a short-list of possible new
partners. Secretary Mohammed Ali al-Hweij declined to give a
list, saying it would constitute an act of "corruption." CAT
then contacted other Libyan businessmen and negotiated with one
of them to manage the Tripoli dealership and for another to
manage the dealership in Benghazi. The GOL rejected the
proposal, recommending instead that ESDF be the sole owner of
the Tripoli dealership, while a private company could manage the
Benghazi dealership. Khalil noted that while CAT would prefer
to work only with the private sector, it would accept a deal in
which ESDF held a portion of the dealership (up to 40 percent)
but not 100 percent. ESDF rejected CAT's counter-offer.

4. (C/NF) ESDF's interest in the CAT dealership remains unclear.
Khalil said CAT's annual sales in 2008 (prior to the import
ban) amounted to 38 million USD. He suspects that the ESDF
incorrectly believes CAT's sales figures to be much higher, on
the order of 300 million USD. Khalil said that CAT had heard
the deal was of 'great interest' to Muammar al-Qadhafi's sons,
specifically Saif al-Islam and Muatassim al-Qadhafi. Khalil
asked the Ambassador to raise the CAT issue with the Qadafhi

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sons, particularly with Muatassim in his capacity as a
government official. [Note: Saif is widely known to be involved
in the ESDF, which falls under his purview as a driving force
behind economic reform in Libya. In the past (Ref A),other
influential figures have been rumored to be interested in the
CAT deal (namely, Qadhafi's son Saadi al-Qadhafi and Khaled
al-Hmeidi, son of Free Officer and senior regime figure
al-Khweidi al-Hmeidi). End note.] Khalil said CAT's
competitors, such as the Koreans, Chinese, British, etc., are
allowed to sell their products in Libya with few problems.
However, in his view, they do not provide the same level of
customer service as CAT provides. He was not aware of any other
cases of the ESDF owning a 100 percent stake in a similar
dealership. [Note: In a separate conversation with the
Volkswagen dealer in Tripoli - a private, Libyan-owned company -
Econoff learned that the ESDF moved about a year and a half ago
to take 30 percent of the shares of private automobile
dealerships operating in Libya, for the ostensible purpose of
redistributing those shares to poor Libyan families. The
companies refused and have not been approached again. However,
the Libyan Stock Exchange is moving forward in implementing a
program in which poor Libyan families will receive stocks in
ESDF-owned companies as part of a government program to widen
ownership in government companies (Ref B). End note.]

CAT MEETS WITH ECONOMY AND TRADE OFFICIALS...

5. (C) During a July 13 meeting with Andrew Sheridan, of CAT's
Middle East regional office, and Acting Senior Commercial
Officer Nate Mason, GPCIET Secretary Mohammed Ali al-Hweij
explained that partners from Tunisia, Malta, Egypt or Saudi
Arabia were unacceptable in any potential CAT dealership even as
managers or agents but that "European and American" partners
were acceptable. He also said CAT could work with ESDF on the
Tripoli dealership and partner with other Libyan entities on the
Benghazi portion. [Note: CAT has told us this would likely be a
non-starter as the company expects the Benghazi dealership to
outperform an ESDF-connected Tripoli dealership, simply based on
projected sales; if this happened, the GOL would most likely
shut down the Benghazi operation. End note.] Hweij claimed
that the ESDF is a private sector company, "100 percent"
unrelated to the GOL, and that CAT could negotiate with ESDF
like it would with any other private firm. [Note: The ESDF
answers directly to the General People's Committee which is the
Libyan equivalent of the prime minister's cabinet and is clearly
a government entity. End note.]

...AND GETS STONE-WALLED BY THE ECONOMIC AND SOCIAL DEVELOPMENT
FUND

6. (C) On July 14, Sheridan met with Hamed Hoderi, Head of ESDF.
Hoderi reiterated ESDF's insistence on 100 percent ownership of
the CAT dealership without negotiation. According to Hoderi, the
European "partners" mentioned by Hweij would be limited to
management functions with no ownership rights. Hoderi indicated
that the GOL and ESDF planned to use the CAT deal as a template
for all other heavy equipment and auto dealerships. Hoderi
repeatedly pressed CAT for a quick decision, which Sheridan
understood to be an implied threat to reinstate the ban on CAT
imports.

THROWING THE RAILROAD PROJECT INTO THE MIX

7. (C) If a ban is reinstated, CAT stands to lose as much as 40
million USD. CAT has negotiated a 30 million USD deal with
Russian Railways Company to provide equipment for their railroad
construction project along the coast from Sirte to Benghazi, a
deal that hinges on a guarantee that CAT equipment is allowed to
enter the country. CAT is also expecting orders totaling 7-8
million USD to enter Libya over the next few months. On July
20, Sheridan reported that the GPCIET official Dia Hammouda,
told him the only way to guarantee this would be to conclude the
deal with ESDF - another indication of the GOL's reinstatement
of the import ban. Barring a compromise by ESDF to allow for a
true partnership, CAT expects to have to exit the Libyan market,
at which point CAT expects the GOL to reinstate the import ban.
CAT is now planning to change its strategy from negotiating a
solution to one of damage control in response to a potential
import ban.

8. (C) Comment: At this juncture, it appears that CAT will pull
out of Libya altogether, and the GOL is likely to reimpose its

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previous ban on CAT imports. While the USG may not be able to
influence the outcome of CAT's negotiations on a dealership, we
can make the GOL aware of the multitude of problems that would
result from the imposition of discriminatory market access
barriers. Moreover, a decision to ban CAT equipment will go
against GOL interests - many construction companies (of various
nationalities) are depending on CAT equipment to complete
infrastructure projects on time, particularly in the lead up to
pageantry planned for the 40th Anniversary of Qadhafi's coup
September 1. However, as we have seen in this most recent
series of meetings in Tripoli, the decisions affecting CAT's
future are clearly being made several levels above the Secretary
of Industry, Economy and Trade, perhaps by the Qadhafi sons.
The GOL's treatment of CAT demonstrates why a TIFA is badly
needed to defend the rights and interests of the private sector
in Libya. End comment.
CRETZ