Cablegate: Response to Usitc Study On Sub-Saharan Africa:

VZCZCXRO3079
RR RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHTO #0972/01 2841149
ZNR UUUUU ZZH
R 101149Z OCT 08
FM AMEMBASSY MAPUTO
TO RUEHC/SECSTATE WASHDC 9443
INFO RUCNSAD/SOUTHERN AFRICAN DEVELOPMENT COMMUNITY
RUEHLO/AMEMBASSY LONDON 0259
RHEHNSC/NSC WASHDC
RUEAIIA/CIA WASHDC

UNCLAS SECTION 01 OF 04 MAPUTO 000972

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ETRD EAGR ECON EINV MZ
SUBJECT: RESPONSE TO USITC STUDY ON SUB-SAHARAN AFRICA:
MOZAMBIQUE

REF: A. MAPUTO 837
B. STATE 85109

1. (SBU) SUMMARY: This cable responds to Ref B's request to
provide an overview of the current physical infrastructure
conditions of land transport (road and rail), maritime
transport, and electricity in Mozambique to include capacity,
state of repair, and state of technology; an overview of the
current conditions of associated infrastructure service
providers in logistics, port services, and electricity
distribution, including ownership structure and market
conditions; an overview of principal impediments, including
any soft infrastructure conditions, such as customs
procedures; an overview of efforts to improve conditions in
land transport, maritime transport, and electricity
infrastructure via policies, regulations, investment, and/or
regional integration; and an analysis of the effect that the
condition of Mozambique's infrastructure has on export
competitiveness.
END SUMMARY.

2. (SBU) Mozambique's export-driven economic growth,
averaging 8 percent since the end of the civil war in 1992,
continues to be driven by its natural resource wealth, with
Aluminum, Hydropower, and Natural Gas accounting for a
majority of the value of total exports. Natural resource
wealth has spawned a series of mega-projects aimed at
expanding exports. Despite strong growth, Mozambique
continues to be a least developed country of roughly 20
million inhabitants with per capita GDP for 2007 at $350,
with development in the Maputo area far surpassing the rest
of the country. Principal export commodities in 2007
included aluminum, cashews, prawns, cotton, sugar, citrus,
timber, bulk electricity, and natural gas, with exports
totaling $7.7 billion.

3. (SBU) U.S. companies are the leading source of Foreign
Direct Investment (FDI), with investments of over $5 billion
over the last five years. South Africa has invested more
than $300 million since 2003, China has contributed $69
million, and India has contributed $14 million in the same
period. According to the World Bank, FDI accounted for the
equivalent of 42 percent of Mozambique's $8 billion GDP in
2007, and future FDI flows will continue.

4. (SBU) There are several mega projects currently driving
FDI flows. Moatize in Tete Province is believed to be the
largest unexplored coalfield in the world with estimated
reserves of 2.5 billion tons. Temane gas fields near Maputo
are being explored by South African company SASOL, and the
Pande gas fields at Inhambane are already producing.
Hydroelectrica de Cahora Bassa's (HCB) 2,000MW current
capacity is expected to be augmented by a new 1,600MW dam
also on the Zambezi River and an anticipated 1,600MW dam at
Mpanda Kua. The heavy sands project at Moma in Nampula takes
advantage of one of the largest titanium-bearing
heavy-mineral sands deposits in the world. Exploration for
uranium, gold, diamonds, and potentially on and off-shore
petroleum reserves is ongoing.

--------------------------------------------- -
CONDITION OF LAND AND MARITIME INFRASTRUCTURE
--------------------------------------------- -

5. (SBU) Mozambique's land infrastructure includes 3,524
miles of paved roads, and 14,988 miles of unpaved roads which
become impassable during the rainy season. The road network
is managed by an autonomous road agency, the National
Administration of Roads (ANE), which is financed through a
dedicated road fund. There are 1,942 miles of railway, with
major lines connecting South Africa, Zimbabwe, and Malawi to
Mozambique's three largest ports. Railway lines along the
three main East-West corridors are managed by the parastatal
Mozambique Ports and Railways (CFM), which in turn has
delegated management to a consortium of private companies
which are refurbishing the railways after years of neglect
and sabotage during the civil war.

6. (SBU) Mozambique is geographically well placed to act as
a regional shipping hub for southern and central Africa. The
main ports include Maputo, with linkages to regional economic
powerhouse South Africa. 700 miles north, another East-West
corridor links the Port of Beira with Zimbabwe. 1500 miles
north of the capital, the deep water Port of Nacala in
Nampula Province provides potentially significant linkages to
Malawi and Zambia. While most developed infrastructure
corridors run
East-West, there is one main artery (EN1) running North-South

MAPUTO 00000972 002 OF 004

which connects Maputo to Nacala, with road quality
deteriorating the further north traveled. Port expansion is
a high priority for the Government of Mozambique (GRM) which
has issued tenders for over $1 billion in upgrades, to
include modernization of road and rail infrastructures
linkages.

7. (SBU) The Port of Maputo, run by 60 percent stakeholder
Dubai Ports World (DPW) is the largest facility by volume in
Mozambique, with an expected volume of 8 million tons of
cargo in 2008, up from 6 million tons in 2007, well below the
pre-civil war high of 15 million tons. Shipping and
logistics group Grindrod has made a substantial investment in
the Maputo port, seeing it as a viable alternative to Durban
with a potential capacity of 40 to 50 million tons per year
in the next 10 years. Grindrod and DPW, both stakeholders in
Portus Indico which in turn is the majority shareholder of
the Maputo Port Development Company, are developing a Maputo
Port Master Plan, which will be made public in early 2009.
Though not finalized, the $300 million expansion plans for
the Port of Maputo will include a ferrochrome terminal, car
terminal, liquid bulk terminal, and coal terminal.

8. (SBU) Thanks to its geographical location and proximity
to South Africa, the port as well as the Maputo Development
Corridor leading through the border at Ressano Garcia to
South Africa's industrial center in Gauteng province,
provides an efficient transportation connection for export of
South African goods. Shipping schedules to the Port of
Maputo are not as frequent as Durban however, meaning that
international cargo is often taken to Durban, and reloaded
there to take advantage of more frequent sailing times. The
rail line along the Maputo corridor has been rehabilitated, a
natural gas line links Temane gas fields with consumers in
South Africa, and a $600 million petroleum pipeline between
the oil terminal at Matola and South Africa is expected to
handle 350,000 barrels per day and should be operational by
2015. The GRM has also announced the approval of plans to
construct an $8 billion oil refinery in the Corrdior, with
anticipated production of 350,000 barrels per day by 2015.

9. (SBU) The Port of Beira and the Beira Corridor, acts as
the principal artery for goods to Zimbabwe. The corridor was
severely damaged by the 17-year civil war and more recently
by Cyclone Eline in 2000. Due to the economic collapse of
Zimbabwe, current rail traffic only includes one freight
train traveling in each direction per day. Roads are in good
condition, allowing for truck transportation of containers
and fuel between Beira and Zimbabwe. The Port of Beira
suffers from lack of maintenance, particularly dredging,
resulting in dangerous navigation for deep-drafted cargo
ships. The reopening of coal mines at Moatize in Tete
province means that the Indian firm Rites and Ircon plans to
complete a spur line connecting the fields to the Beira
Corridor and a new loading facility expected to handle 20
million tons of coal for export. Should Zimbabwe's economy
recover, the Beira corridor would likely see heavy use
related to aid and reconstruction.

10. (SBU) The Port of Nacala in Nampula province is a
world-class natural deep water port with relatively poor road
connections to Malawi and Zambia. In 2009, construction on a
$5 billion 300,000 barrels per day oil refinery will begin,
managed by the largest investor in the project,
U.S.-based Ayr Logistics. Plans are also underway to develop
a Nacala Special Economic Zone (SEZ) which will help the port
attract manufacturing and develop infrastructure linkages
based on anticipated offshore and onshore petroleum findings,
with exploration currently ongoing. U.S.-based Anadarko
Petroleum, which has already invested $500 million, is one of
four partners carrying out seismic studies in the
largely-offshore Rovuma Basin near the Mozambique-Tanzania
border. If significant findings occur, drilling could begin
by 2009, with production to follow between three to five
years after that (by 2014). These four companies will likely
use the smaller port at Pemba for reasons of efficiency in
the exploratory and drilling stages of their work in
Mozambique.

---------------------------------------
CONDITION OF ELECTRICITY INFRASTRUCTURE
---------------------------------------

11. (SBU) Parastatal Electricity of Mozambique (EDM) has
monopoly control over the national grid. While Mozambique
generates significant electricity for export to South Africa,
Swaziland, and Zimbabwe from its largest dam, HCB (with
2,000MW and the potential to generate 14,000MW) on the

MAPUTO 00000972 003 OF 004

Zambezi river in the Province of Tete, transmission remains
problematic due to a lack of transmission lines running to
the country's industrial center in the South. Instead,
transmission lines run west from HCB to the South African
ApoL;XQ9Qbillion on a new
transmission line from Tete Province to Maputo. While
feasibility studies have been completed, funding and a
timeline for project completion have not yet been finalized.
In May 2008, HCB announced plans to build new transmission
lines to the Zambian border, allowing direct sale of
electricity to its neighbor.

--------------------------------------------- -----------
CONDITION OF ASSOCIATED INFRASTRUCTURE SERVICE PROVIDERS
--------------------------------------------- -----------

12. (SBU) Kudumba, a port services company, represents one
of the most significant associated infrastructure service
provider challenges in Mozambique. In 2005, Kudumba won a 20
year concession contract with the GRM to provide border
security via a high-energy x-ray system. In June 2006, the
company began operations at the Port of Maputo, implementing
a practice of 100 percent scanning (except for a few cleared
freight-forwarding companies) of all goods that are imported,
exported, or transited through Mozambique.

13. (SBU) This compulsory scanning has added significantly
and unnecessarily to the cost of doing business in and
through Mozambique, with costs range from $20 to $100,
depending on the size of the container scanned. On a recent
visit to the Port of Maputo, PolOff saw South African 5-ton
solid blocks of granite destined for export to the EU that
were subject to mandatory scanning. The business community
continues to complain that the Kudumba scanner is more of a
revenue generator than a border security program, pointing
out that the company is 35 percent owned by SPI, a holding
company for the ruling FRELIMO party. While currently
operating in Maputo andPI]A2W-QQQ-----------------------

14. (SBU) Principal impediments to export competitiveness
include a lack of usable infrastructure; weak human capital
due to poor levels of education; an unwelcoming business
environment; rent-seeking behavior by the business-political
elite; corruption at all levels of government; and antiquated
labor and land ownership laws. Mozambique's history of
colonization followed by a turbulent independence movement
and years of Marxist rule during a violent civil war in which
infrastructure was a target of guerrilla groups means that
Mozambique started in 1992 from a very lowbase, not only in
terms of physical infrastructure, but also soft
infrastructure. For example, poor education means illiteracy
rates reach 60 percent, there are roughly 600 qualified
doctors for a country of 20 million, and the health system
cannot effectively address high prevalence rates for HIV and
other treatable diseases, presenting a major impediment to
work force continuity.

15. (SBU) Mozambique's labor laws, a vestige of the
country's Marxist-Leninist past, also present problems for
foreign investors. Protection of worker rights is central to
the law, with inflexible hiring and firing rules, further
compounded by a lack of technically qualified third-country
nationals. As a result of restrictive labor laws and weak a
weak education system, foreign investors find if very
difficult to either find qualified Mozambicans, or legally
hire qualified third-country nationals. Many provisions in
the labor law make for an uninviting environment for
investment. As a result, under current labor laws, foreign
investment is best suited for low skill extractive and
agricultural industries.

16. (SBU) The concept of private land ownership does not
exist in Mozambique. In December 2006, the Government of
Mozambique (GRM) modified property laws allowing for
renewable 100 year leases, minimizing restrictions on
transferability of land tenure titles. In rural areas, the
government grants 50-year concessions for land use. Lack of
land ownership causes significant problems for credit
markets, which often require high percentage
collateralization of loans. These land ownership

MAPUTO 00000972 004 OF 004

prohibitions are a challenge to potential investment in the
agricultural sector, with an estimated 89 million acres of
arable land, of which only 10 percent is being used.
Mozambique's 60 major rivers mean that over 8 million acres
of land is available as potentially irrigated land. The
Zambezi valley is expected to see significant Chinese
investment in irrigated farm land for rice production.

---------------------------------
EFFORTS TO IMPROVE INFRASTRUCTURE
---------------------------------

17. (SBU) The World Bank's International Development
Association (IDA) has financed infrastructure projects in the
three main East-West transport corridors, as well as
secondary roads, rehabilitating over 4,000 miles of road
infrastructure at a cost of $965 million between 1992 and
2003, resulting in a 50 percent reduction in road travel
times on average.

18. (SBU) While many donors have focused on infrastructure
enhancement projects, the Millennium Challenge Corporation
(MCC) has signed a compact to provide $507 million over five
years, focused on water and sanitation, road, land tenure,
and farmer income support projects in less-developed northern
Mozambique. Water and Sanitation projects of $204 million
will increase access to safe drinking water and reduce the
spread of water-borne diseases in Zambezia, Nampula, and Cabo
Delgado provinces, with a projected impact of assisting
nearly 2 million Mozambicans by 2015. The road
transportation project, valued at $176 million, will expand
connectivity across the northern region, in part
rehabilitating 491 kilometers of EN1, effecting 2.3 million
Mozambicans. The $39.1 million land tenure project will
further rationalize land tenure policy and provide better
land-related information systems and services, benefiting 1.9
million Mozambicans by 2015.

--------------------------------------------- --------------
ANALYSIS: INFRASTRUCTURE'S EFFECT ON EXPORT COMPETITIVENESS
--------------------------------------------- --------------

19. (SBU) Physical infrastructure and soft infrastructure
deficiencies both significantly hamper export-driven economic
growth in this geographically well-situated, resource-rich
country. Significant investments are in the pipeline to
develop Mozambique's land and maritime transportation network
as well as its electricity infrastructure. The most
challenging aspect of infrastructure development will be
improvements to soft infrastructure issues that have more to
do with political will than regulatory changes.

20. (SBU) Post expects that regulatory changes that result
in improvement of the business climate will continue at a
slow pace due to the current regime's historically socialist
perspectives (particularly on land and labor issues), though
the Guebuza administration's significant business interests
mean that it is in their interest to continue to improve the
country's export competitiveness. FDI flows will continue to
increase, particularly to mega-projects, not necessarily
because of the quality of infrastructure or ease of doing
business, but because of Mozambique's natural resource
wealth, including its large tracts of arable land.
Mozambique is still some years away from moving up the value
chain towards intensive manufacturing due to a lack of
infrastructure and a dearth of skilled workers, though tariff
liberalization in the SADC region could mean that South
African firms may find it competitive to move their
manufacturing operations to Mozambique, where labor costs are
significantly lower.
Amani

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