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Cablegate: Challenges in the Rwandan Coffee Sector

VZCZCXYZ0013
RR RUEHWEB

DE RUEHLGB #0592/01 1761152
ZNR UUUUU ZZH
R 251152Z JUN 07
FM AMEMBASSY KIGALI
TO RUEHC/SECSTATE WASHDC 4329
RUEHJB/AMEMBASSY BUJUMBURA 0085
RUEHBS/AMEMBASSY BRUSSELS 0131

UNCLAS KIGALI 000592

SIPDIS

SENSITIVE
SIPDIS

DEPARTMENT FOR AF/C
DEPARTMENT PASS USTDA: UISZLER
DEPARTMENT PASS USTR: WJACKSON
DEPARTMENT PASS COMMERCE: RTELCHIN
DEPARTMENT PASS OPIC: BCAMERON

E.O. 12958: N/A
TAGS: ECON PGOV EINV ETRD BTIO RW
SUBJECT: CHALLENGES IN THE RWANDAN COFFEE SECTOR

1. (U) SUMMARY. RwandEx, a coffee export company recently
privatized to a group of Belgian investors who have been
involved in the company since its inception in 1964, is
having an increasingly confrontational relationship with
the GOR. Coupled with the relatively low coffee harvest
season, these disputes shed light on the fact that coffee
is not yet the panacea for Rwandas development challenges.
END SUMMARY.

2. (U) Majority shareholders, Albert Asson and Alain
Vigneron, along with Managing Director, Regis Bare,
recently recounted their troubles with the GOR to the
mission. Prior to the March 2007 privatization, the GOR
held a 51 stake in RwandEx and led the company into equity
positions with other GOR holdings. These poorly managed
parastatals contributed to RwandEx`s approximately USD 1
million burden of back-taxes. The tax arguments were
resolved during the recent visit of the Belgian Minister of
Cooperation with the GOR agreeing to take on their share of
the taxes. Since then, however, RwandEx, which remains
heavily in debt, faces new points of contention with the
Rwanda Revenue Authority (RRA), and the two sides are
currently in court. RwandEx portrays this issue as
indicative of Rwanda`s unfriendliness to foreign investors
and says the Belgian Ambassador has begun serious lobbying
efforts with the GOR on its behalf.

3. (SBU) Since 2005, the GOR has made a concerted effort to
follow a strategic plan of developing a specialty coffee
industry and marketing Rwandan coffee as high-grade and
high-quality. In fact, OCIR Cafe, the national coffee
board, is pushing the country in the direction of producing
100 percent specialty, or fully-washed, coffee. At times,
this laudable overall goal is poorly implemented by local
officials. For example, Tim Shilling, director of USAID`s
SPREAD project, reports that in some areas, local officials
have been confiscating individual farmers` hand pulpers, in
an effort to force the farmers to sell their coffee
cherries to washing stations that produce specialty coffee.
Commonly these farmers pulp the cherries themselves to
produce commercial grade coffee, which sells at a lower
price on the international market. RwandEx`s business,
however, has been built around commercial grade coffee and
is known among growers to provide an alternative to selling
to washing stations. This places RwandEx in direct
confrontation with the GOR plan for the industry. Shilling
confirmed that the GOR has prevented RwandEx from buying
cherries for use in commercial grade coffee, until June in
a further effort to direct all sales to washing stations to
produce specialty coffee -- an action OCIR Cafe has
announced for the past two years.

4. (SBU) The RwandEx Board Members complained that the GOR
has launched a campaign of misinformation and illegal
tactics to push RwandEx out of the country. They report
that Minister of Finance, James Musoni, in a recent RPF
party meeting accused RwandEx of trying to destroy the
country`s specialty coffee industry. They also complain
that the GOR has begun to control RwandEx`s finances with
the Central Bank requiring the company to justify each of
their expenses and putting pressure on commercial banks
from lending to the company. These controls are
particularly threatening to RwandEx, as their accounts are
blocked during each of these inquiries. For example, the
Board Members report that their accounts have been blocked
three times during the last few buying seasons, preventing
them from buying coffee from the growers. This has
resulted in the company losing approximately 200 tons a day
for 30 days at a time. They claim that as soon as their
local competitors reach their capacity, the Central Bank
lifts its ban on RwandEx` financing and enables it purchase
coffee. RwandEx claims that these tactics have resulted in
a loss of up to 18,000 tons of coffee cherries that the
company could process for export.

5. (SBU) The managing directors of several commercial
banks, however, have a different take on the conflict.
COGEBANK reports that RwandEx has an unpaid loan for USD 1
million; Banque de Kigali (BK) reports a loan of USD 3
million; and Banque Populaire reports USD 1 million.
Bonaventure Niyibizi, managing director of COGEBANK,
defends the Central Bank`s supervision of RwandEx`s
finances explaining that the exporter should not have
access to future financing until it can service its
existing debt. He says that RwandEx sold 12,000 tons of
coffee last year, but has not been able to service any of
its debt with BK. Paul Stewart, country director for
TechnoServe, an NGO helping with financing, strategy, and
capacity building in Rwandas coffee industry, confirms
that RwandEx is in dire financial straits and that farmer
cooperatives, in addition to commercial banks, have lost
confidence in dealing with the company.

6. (SBU) RwandEx claims that while their traditional
business has been commercial grade coffee, they financed
five washing stations last year and are eager to move more
deeply into the specialty coffee market. They warn, as do
most experienced coffee experts in the country, that the
GORs goal for 2008 to produce 100 specialty coffee is
flawed and unrealistic. USAIDs coffee project reports
that in 2006, one-third of the specialty coffee production
in Rwanda went unsold (Note: the coffee was eventually sold
as commercial grade coffee as opposed to specialty coffee)
because of its poor quality, and that all the washing
stations are currently operating at an unsustainably low
30% of capacity.

7. (SBU) Compounding the challenge for the owners of the
washing stations is the fact that after decades of
neglecting coffee production, the volume of coffee cherries
in the country is low this season, leading to higher
competition for the cherries. This bodes well for the
farmers who used to fetch 50RwF per kilo and now command
100RwF per kilo. But it also means that many of the
country`s 120 washing stations will inevitably go out of
business. Thirteen have already pulled out of the current
harvest season due to an inability to finance operations.

8. Many explanations are reported for the current
predictions of a smaller 2007 coffee harvest, from old
coffee trees to lack of fertilizer used by the farmers to
the cyclical nature of production of the coffee plant.
Nonetheless, all experts in the sector warn of a
significant drop in coffee revenues for 2007 and financial
stress on new coffee processors and exporters (Note: last
year`s harvest was 26,000 tons and this year`s production
is expected to be as low as 14,000 tons according to
TechnoServe). RwandEx fears that they will be turned into
the scapegoat for Rwanda`s undelivered expectations in the
coffee industry and that the GOR seeks to force them to
pump more money into the country from their inaccurately
perceived deep pockets abroad.

8. (SBU) COMMENT. While RwandEx does not appear to be
adapting well to the newly liberalized and competitive
coffee industry, where they are no longer the sole coffee
exporter with monopolistic power, they also are suffering
the effects of challenging an explicitly stated GOR
strategy. As opposed to providing incentives to farmers
and exporters to shift to specialty coffee production, the
GOR penalizes farmers and exporters for continuing in the
commercial grade coffee business. For example, TechnoServe
reports that in addition to confiscating hand pulpers, the
GOR has introduced fines and other punitive acts for
farmers and exporters continuing in the commercial grade
coffee business. RwandEx and TechnoServe also report
unilateral and sudden regulations, such as prohibiting the
use of mechanical dryers that affect all exporters, most
acutely RwandEx, which had recently purchased these
machines from the GOR during the privatization. This
heavy-handed approach to development seems to be the cause
of RwandEx`s woes more than any claimed GOR strategy to
remove foreign investors. It is true that since RwandEx`s
privatization, the company has suffered non-consultative
regulations impacting their bottom line such as prohibiting
the use of mechanical dryers, which RwandEx recently
purchased directly from the GOR, but these unilateral and
sudden regulations negatively affect all exporters, not
specifically RwandEx. Nonetheless, RwandEx has been pushed
further into insolvency by these recent decisions. Unless
RwandEx is able to restructure its massive debt, which
currently appears unlikely, the company directors claim
that they will have no choice but to pull out of the
market.

9. (U) COMMENT CONTINUED. Rwandex`s troubles also indicate
challenges in the coffee sector that are often ignored in
the media and by some donors. USAID has made great strides
in establishing a specialty coffee industry in Rwanda, but

there are underlying institutional challenges that must be
addressed -- low fertilizer use, over-proliferation of
washing stations, poor tree maintenance, low availability
of credit, etc. Before specialty coffee can be a
sustainable success and expand coffee income well beyond
present levels for farmers and for the GOR, these
challenges need to be addressed in a consultative and
inclusive manner. END COMMENT.

ARIETTI

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