CATERPILLAR NEGOTIATIONS INCHING ALONG

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



NOFORN

SIPDIS



STATE FOR NEA/MAG; STATE PLEASE PASS TO USTR PAUL BURKHEAD; COMMERCE FOR ITA NATE MASON; COMMERCE FOR THE ADVOCACY CENTER; ENERG



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



TRIPOLI 00000618 001.2 OF 003





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



TRIPOLI 00000618 002.2 OF 003





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



TRIPOLI 00000618 003.2 OF 003





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