Nestle claims £3.7m from famine-hit Ethiopia

The multinational coffee corporation, Nestle, is demanding a $6m (£3.7m) payment from the government of the world's poorest state, Ethiopia, as the country struggles to combat its worst famine for nearly 20 years.

The money is compensation for an Ethiopian business which the previous military government nationalised in 1975. It could feed a million people for a month, according to Oxfam.

The cash-strapped Ethiopian government has offered to pay $1.5m to settle the claim, but yesterday Nestle, which bought the firm's German parent company in 1986, was standing by its demand, insisting it was a "matter of principle".

"In the interest of continued flows of foreign direct investment which is critical for developing countries, it is highly desirable that conflicts are resolved according to international law and in a spirit of fairness," a spokesman for the company said.

Nestle's chief executive, Peter Brabeck-Letmathe, acknowledged three years ago that the company had responsibilities beyond its bottom line. "We are going to be asked: what have you done to fight hunger in developing countries?" he said.

Last month Ethiopia's prime minister Meles Zenawi said that 6 million people in his country needed emergency food aid and that the number could rise to 15 million within months.

The famine, brought on by the failure of rains for the third year in a row has been intensified by a collapse in the price of coffee which supports a quarter of the country's population. Nestle, the world's largest coffee processor, made $5.5bn in profits last year.

Aid agencies have reacted furiously to the company's demand.

"At the very least Nestle ought to be accepting the settlement offered by the Ethiopian government," said Sophia Tickell, a policy analyst at Oxfam. "But frankly they should be thinking about how the money could be spent on famine relief and drop the claim altogether."

Ethiopia has the lowest income per head in the world, with the average person surviving on $100 a year. More than a tenth of its children die before their first birthday.

Aid agencies are worried that the crisis could be even worse than the 1984 disaster in which a million people died.

"Drought is threatening many farmers with the prospect of famine," Ms Tickell said. "Nestle, by contrast continues to thrive. The company does not need $6m. It is a highly profitable company which could easily live up to its commitment to 'help fight hunger in developing countries' by writing off this claim."

The World Bank has stepped in to negotiate, but there were few signs yesterday that the company was preparing to back down. "This is a question of principle. The negotiations are ongoing and it would be rash to predict an outcome at the moment," Francois Perroud of Nestle said.

In 1986 Nestle bought a German company, Schweisfurth Group which had a majority share in the Ethiopian Livestock Development Company (Elidco) seized by the Ethiopian government more than 25 years ago. The government sold Elidco to a local firm for $8.7m four years ago.

Although the exact size of Schweisfurth's share in Elidco is uncertain, the Ethiopian government is willing to pay$1.5m - just over half the value of the company at the time of nationalisation including interest. But Nestle is insisting it convert the payment at 1975 exchange rates, adding a further $4.5m to the bill.

"It is perfectly appropriate to try and find a solution to a conflict which has existed since 1975," Mr Perroud said. "We are the owners of a claim against the Ethiopian government."