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Cablegate: Procurement Regulation Approved with Preferential

VZCZCXRO3671
RR RUEHDU RUEHJO RUEHMR
DE RUEHTO #1646/01 3561117
ZNR UUUUU ZZH
R 221117Z DEC 05
FM AMEMBASSY MAPUTO
TO RUEHC/SECSTATE WASHDC 4758
INFO RUCNSAD/SOUTHERN AFRICAN DEVELOPMENT COMMUNITY
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHC/DEPT OF LABOR WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 02 MAPUTO 001646

SIPDIS

SIPDIS

STATE FOR AF/S:HTREGER,JMALONEY AND EB/IFD/OIA:SMILLER
STATE PASS USTR FOR PCOLEMAN
JOHANNESBURG FSC FOR RDONOVAN
JOHANNESBURG TDA FOR DSHUSTER
USDOC FOR RTELCHIN
MCC FOR SGAULL
USAID FOR AA/AFR AND AFR/SA

E.O. 12958: N/A
TAGS: ECON EAID EINV ETRD MZ
SUBJECT: PROCUREMENT REGULATION APPROVED WITH PREFERENTIAL
TREATMENT FOR MOZAMBICAN FIRMS

REF: MAPUTO 159

MAPUTO 00001646 001.2 OF 002


1. (U) Summary. On December 13, the Council of Ministers
approved a long-awaited procurement regulation, which is the
result of work since 2002 by GRM officials, the donor
community and the private sector. The approved language
embodies compromises between many conflicting interests and
is viewed by other donors as a significant advance. However,
preferential treatment for majority-Mozambican-owned
companies may cost the GRM both financially and through
reduced quality. GRM officials counter that the preferences
are limited and are needed to help domestic businesses. End
Summary.

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2. (U) The new procurement regulation approved on December 13
by the Council of Ministers represents several years of
discussion and debate between various ministries, donors and
the private sector. Most significantly, it is also the first
unified procurement law at the federal level that will apply
across the board to all Ministries and government
procurement. Prior to this regulation, procurement in
Mozambique was Ministry and donor specific, with the
hodgepodge of old procurement-related laws often not followed
or inapplicable.

3. (U) During the discussion process, the main area of debate
and concern to donor nations regarded language in Article 24
allowing the contracting entity to restrict bidding on
certain contracts to national (Mozambican) competitors and to
give preferences to national competitors on all contracts.
Early drafts had limited all government-financed contracts to
Mozambican-owned bidders, raising worries amongst the donor
community and prompting several months of discussion. Such a
scheme would have not only potentially exposed the GRM to
increased costs and decreased quality, but would have
severely prejudiced foreign-owned companies. As a result of
this discussion, the restriction to national bidders was
changed so that it applied only to contracts valued below
certain thresholds.

4. (U) The approved language of Article 24, section 2, sets
the threshold below which the contracting entity may restrict
bidding to national competitors at approximately 210,000 USD
for public works or 105,000 USD for provision of goods or
services (5.25 billion meticais and 2.625 billion meticais,
respectively). These thresholds are 50 percent higher than
the ones that were in the draft regulation as of early
December, and post had heard that there was significant
pressure to increase them to help domestic businesses. In
addition, Article 24, sections 3(a) and 4 allow the
contracting entity to establish margins of preference for
national competitors of 10% for public works contacts and 15%
for contracts for goods or services. Article 24 also
contains domestic content language.

5. (U) Emboffs had met with Finance Ministry officials on
December 9, before the final version of the regulation was
approved, to discuss our concerns. The officials
acknowledged that the regulation favored Mozambican companies
over foreign ones, even those long established in Mozambique.
They said this was an effort to help Mozambican businesses,
which had yet to fully recover from the devastating civil
war. They argued the regulation also included aspects that
welcomed foreign bidders. As evidence, the officials pointed
out that the regulation allowed bids to be submitted in
languages other than Portuguese. They did not directly
address the issue of whether the regulation was consistent
with the Bilateral Investment Treaty that entered into force
in March (reftel), but they noted that it allowed different
procedures as required under a treaty or other agreement
between Mozambique and another government or institution.

6. (SBU) Comment: It is unclear whether the political
intent behind the preferential treatment language -- to
promote domestic businesses -- will reap benefits greater
than its costs. There are still concerns that the clause
will increase costs and limit participation, thereby
potentially limiting the quality of public works, goods and
services provided to the government. Furthermore, by basing
preferences solely on nationality of ownership, as opposed to

MAPUTO 00001646 002.2 OF 002


more neutral criteria such as place of incorporation or
length of time registered in Mozambique, the preferential
treatment clauses do little to foster continued foreign
investment or improve the overall business climate. That
said, the broader donor community is generally pleased with
the end result, particularly in light of the starting point,
and views the approved regulation as an improvement over the
previous situation and an example of successful dialogue.
End Comment.
Dudley

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