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