VZCZCXRO3348
PP RUEHBC RUEHDE RUEHDH RUEHKUK RUEHROV
DE RUEHTRO #0618/01 2151414
ZNY CCCCC ZZH
P R 031414Z AUG 09
FM AMEMBASSY TRIPOLI
TO RUEHC/SECSTATE WASHDC PRIORITY 5095
INFO RUEHTRO/AMEMBASSY TRIPOLI 5635
RUEHEE/ARAB LEAGUE COLLECTIVE
RUEHLO/AMEMBASSY LONDON 1094
RUEHFR/AMEMBASSY PARIS 0769
RUEHVT/AMEMBASSY VALLETTA 0424
RUEHRO/AMEMBASSY ROME 0539
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RHEHAAA/NSC WASHINGTON DC

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

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 xxxxxxxxxxxx (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. xxxxxxxxxxxx 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. xxxxxxxxxxxx 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