Executive Summary
Local content rules are a very relevant matter for both the (Mozambican) national economy and for foreign investors that must comply with it allowing them to focus on the core business of each investment project. It shall be considered and reminded that is supposed that any foreign investment in Mozambique contribute on a positive way to develop Mozambican national economy, adding economic value to it. This added value can be achieved in different ways, namely by means of the creation of employment, development of culture and educational levels of Mozambican citizens or by creation/installation of civil infrastructures such as roads, water and power distribution networks or hospitals. In general terms, Local Content strategy can be understood as the one which aims to promote local value addition and linkages through utilization of domestic resources. In accordance, Local Content Rules ("LCR") aim the balance between the benefits to be earned by the investors and the impact derived from a given investment project in local economy.
The legal framework currently in force in Mozambique foresees LCR applicable to the extractive industries (Mining and Oil & Gas), employment of foreign workforce and public-private partnership ventures, large-scale projects, and business concessions.
However, these LCR have been insufficient to effectively implement local content requirements in the country, mainly due to its ambiguity, since LCR are most often drafted as general guidelines and principles that lead local content concerns to a case-by-case negotiation between the investor and the competent public entity (APIEX, MIREME or INP).
Furthermore, local content obligations undertaken by investors are, very often, not specifically detailed and foreseen in the concession agreements, leaving local content enforcement in the hands of the investor's goodwill.
In fact, the current legal provisions are not clear regarding the definition of the term local content, basic guiding principles, local participation term, local content calculation formula, monitoring and certification procedure, applicability to public tenders and contracts, LCR applicable to subcontractors, local content plans and reports, transfer of technology plans and an penalties regime applicable to non-compliance with the LCR.
Moreover, lack of qualifications and capacities of nationals (individuals and companies) and lack of local goods and services justify, very often, the avoidance of involvement of the local communities in foreign investment projects, mainly related with extractive industries, where very specialized qualifications, goods and services are required.
1. ACRONYMS AND ABBREVIATIONS
APIEX – Investment & Export Promotion Agency of Mozambique
BVM – Bolsa de Valores de Moçambique (Mozambique Stock Exchange)
EMEM – Empresa Moçambicana de Exploração Mineira (Mozambican public company in the Mining sector)
ENH - Empresa Nacional de Hidrocarbonetos, E.P. (Mozambican public company in the O&G sector)
EPCC – Exploration and Production Concession Contracts in the Oil & Gas sector
INP – National Petroleum Institute
LCDL – Local Content Draft Law (public and official version not available)
LCL – Local Content Law
LCR – Local Content Rules
LNG – Liquefied Natural Gas
MPL – Mega Project Law
MZN – Mozambique Metical
OECD - Organization for Economic Co-operation and Development
O&G – Oil & Gas
PPP - Public-Private Partnership
2. LOCAL CONTENT RULES IN FORCE
3. Mega Projects Law (Law 15/2011 of 10th August)
The Mega Projects Law (MPL) sets the legal framework for concession agreements between public and private entities and contains several local content requirements.
The purpose of the MPL is to establish the rules governing the process of contracting, implementation, and monitoring of public-private partnership ventures, large-scale projects, and business concessions. For large-scale projects, it is understood to be investments over 12,5 million MZN (reference value of January 1, 2009).
For each project, specific local content requirements are set, considering the following criteria:
a) the quantity and quality of resources made available by each party and their opportunity cost;
b) the degree of responsibility of each party in making the various phases of the enterprise;
c) the degree of risk, objectively measurable, incurred by each party, associated with the guarantee of return and profitability of the resources invested;
d) the safeguarding of the country's economic competitiveness and a business environment favorable to the attraction of domestic and foreign investments;
e) the need to preserve benefits for present and future generations.
The specific local content rules are divided into two types: financial benefits and socio-economic benefits. Please bear in mind that the concept of benefit is an advantage granted to Mozambique that may reside in several kinds of actions/omissions and privileges.
The financial benefits foreseen in the MPL shall be expressly stated in the contract between the State and the contractor. The law foresees an exemplification list consisting of:
a) the participation reserved for sale, via the stock market in favor of economic inclusion in commercial market terms, preferably of Mozambican individuals, in the share capital of the undertaking or the capital of the consortium, whether or not a foreign investment is involved, guaranteed through:
i) the State or another public entity indicated by it, in a percentage of not less than 5% and not more than 20% of the said capital, or;
ii) the implementation by entity of the enterprise, of the same level of participation for its unconditional sale, under the same terms and conditions as provided in sub-paragraph (i).
b) the opportunity for public or private Mozambican legal entities to participate in the share capital of the venture or the capital of the consortium, under the terms that the parties negotiate and agree;
c) the creation of a positive exchange rate effect for the balance of payments, either through the generation of foreign exchange resources or through savings for the country;
d) the generation of tax revenue and positive contribution to the public treasury;
e) the generation and distribution of profits or dividends, as decided by the bodies of the enterprise;
f) the equitable share of extraordinary direct benefits, safeguarding the economic competitiveness of the country and under the terms contractually agreed to be those, namely:
i) reinvestment in national territory;
ii) creation of a reserve for additional investments or to cover extraordinary losses of the enterprise;
iii) financial investments made and maintained in the country.
In addition to those financial benefits, in the contracts comprising concession for the exploration of national resources, the following benefits shall be foreseen in the contracts:
a) payment of an award rate or signature bonus, if and in any way as provided for in the respective tender, to be made upon signature of the contract and a value of not less than 0.5% and not more than 5% of the fair value of the assets contractually assigned by the State or another public partner to the undertaking;
b) payment of the concession or operating transfer fee, on a monthly, quarterly, half-yearly or annual basis, as agreed by the contracting parties, divided into components of:
i) a fixed concession fee of not less than 2% and not more than 5% of the fair value of the assets assigned contractually to the enterprise;
ii) a variable concession fee, levied on the gross income net of indirect taxes relating to the periodic monthly, quarterly, half-yearly or annual invoicing of the operation of the activity which is the object of the venture and whose value shall correspond to:
a. 2% to 5% of the said revenue, in the case of a structuring PPP venture that is a producer and supplier of inputs to other ventures in Mozambique, during the repayment period of loans contracted for the financing of the phase of its implementation;
b. 5% to 10% of the said income, in all other undertakings, as well as in those referred to in the previous subparagraph as soon as the amortization of the loans contracted for the financing of the phase of its implementation is concluded. (This benefit does not apply to the contracts subject to the Mining and Petroleum legislation)
The other kind of benefit is the socio-economic one. Those are also foreseen in the MPL and likewise to the financial benefits shall be expressly stated in the contract between the State and the contractor. These benefits are to be provided by each investor at its own expense, profiting the Mozambican society or/and economy. The benefits are, namely:
a) the creation, rehabilitation or expansion of production or service infrastructure in connection or associated with the enterprise;
b) the provision of jobs and vocational training programs for Mozambican workers;
c) technical-vocational training program and actions and transfer of technology and know-how to the country;
d) increase and maintenance of production, export and supply capacity to domestic market needs;
e) contribution to the business development of small and medium-sized Mozambican enterprises, via business and technological links between the enterprise and such enterprises;
f) carrying out a program of activities or projects of responsibility, development, and social sustainability in the local communities, on the enterprise's own account.
4. Oil & Gas Sector
The Mozambican Petroleum Law (Law 21/2014 of 14th of August) has several local content dispositions, aimed at potentiating economic growth for Mozambican citizens and companies.
Also, the Mega Project Law (Law no. 15/2011 of 10th of August) which sets the legal framework for concession agreements between public and private entities, also has some local content requirements as stated above in point 1.
For ease of reference, we have listed the dispositions pertaining to Local Content, which are currently in force in Mozambique in the Petroleum sector:
a) Promotion of Mozambican entrepreneurship, through the mandatory registration of oil and gas companies, on the Mozambique Stock Market.
b) Oil and gas for Mozambican consumption – the Government of Mozambique shall guarantee that a quota of no less than 25% of the oil and gas produced in Mozambique is dedicated to the Mozambican market.
c) The Government of Mozambique shall ensure that ENH takes the lead in the marketing and sale of petroleum products.
d) When the public interest so requires, holders of oil or gas exploration rights shall give preference to the Mozambican Government in the acquisition of petroleum produced in the concession area.
e) The Government of Mozambique may request petroleum products at negotiable prices, for use in the local industry, whenever deemed necessary for the country´s commercial interest.
f) Oil companies operating in Mozambique shall ensure the employment and technical training of Mozambicans. Oil companies shall also make reasonable efforts to include Mozambican employees in highly qualified jobs, as well as in management positions (in accordance with Decree no. 63/2011, of 7th of December).
5. Mining Sector
The mining sector is regulated by the Mining Law (Law no. 20/2014 of 18th of August) and the Mining Law Regulation (Decree no. 31/2015 of 31st of December). Both these diplomas mention some local content dispositions, as follow:
a) The acquisition of goods and services in the minimum amount of 15,000,000 MT (which roughly corresponds to 900,000.00 USD), must be executed through public tender.
b) Titleholders and contractors must give preference to Mozambican goods and services whenever available in the required time and quality, and when its price, taxes included, is no more than 10% higher to the prices of the imported goods available.
c) Foreign natural or legal persons who provide products and services to mining companies shall associate with natural or legal Mozambican persons, in terms to be agreed by the parties.
d) Mining companies operating in Mozambique shall ensure the employment and technical training of Mozambicans. Mining companies shall also make reasonable efforts to include Mozambican employees in highly qualified jobs, as well as in management positions (in accordance with Decree 63/2011, of 7th of December).
e) For small scale and artisanal mining, only Mozambican citizens or Mozambican companies can bear a Mining Certificate.
Please note that the Mega Project Law, mentioned in Section 1. above, is also applicable to the Mining Sector.
6. Employment Law
The Employment Law (Law no. 23/2007, of August 1st) is the legislation that regulates employment contracts in Mozambique. This legislation has some local content requirements for all the companies operating under the Mozambican Law.
a) The employers shall create conditions for the inclusion of qualified Mozambican workers in positions with more technical complexity and management positions.
b) The Mozambican State may even reserve some functions and activities for national citizens, namely for public interest reasons.
c) A company shall be authorized by the Labor Ministry in order to hire a foreign employee. Nevertheless, if the quotas are met, the mere notification is sufficient. The quotas are:
i) 5% of the total workforce for Big Companies (more than 100 workers);
ii) 8% of the total workforce for Medium Companies (between 10 and 100 workers);
iii) 10% of the total workforce for Small Companies (less than 10 workers).
These quotas may differ when exists a specific contract between the State and the Company in the terms of the MPL.
It is not allowed for the foreigners that entered the country to work in the country if they bear a diplomatic, courtesy, official, tourism, visitor, business, or student visa.
It is only allowed to hire a foreign worker when this has the appropriate academic or professional competences and if there are not any national citizens with those qualifications available.
7. Local Content Rules Weaknesses – The Local Content Draft Law
The above described LCR framework has been insufficient to effectively implement local content requirements in the country, mainly due to its ambiguity, since LCR are most often drafted as general guidelines and principles that often lead local content concerns to a case-by-case negotiation between the investor and the competent public entity (APIEX, MIREME or INP).
Furthermore, local content obligations undertaken by investors are, very often, not specifically detailed and foreseen in the concession agreements, leaving local content enforcement in the hands of the investor's goodwill.
Moreover, lack of qualifications and capacities of nationals (individuals and companies) and lack of local goods and services justify, very often, the avoidance of involvement of the local communities in foreign investment projects, mainly related with extractive industries, where very specialized qualifications, goods and services are required.
Given this, we describe below specific measures and procedures that can tackle existing LCR weaknesses currently under political discussion, in line with the LCDL.
1. Local Content Draft Law Objectives
Mozambican economy has been growing considerably in the last years, particularly the mining industry. As such, and to promote Mozambican economic agents, the Mozambican Parliament intends to foster the production and use of Mozambican goods and services with the consequent growth and evolution of Mozambican companies and the improvement of the population`s living conditions.
The LCDL must establish rules pertaining to the supply of goods and services, produced or provided by Mozambican companies (or with their involvement), to companies that operate in Mozambican territory.
In comparison, Brazil have chosen to use the territory criteria, instead of nationality, since it better serves the main purpose of the Mozambique local content law, which is to stimulate economic growth in Mozambique (whether that is made through Mozambican companies or foreign companies operating in Mozambique). The application of nationality criteria could potentially lead to foreign investor being discouraged to invest in Mozambique and redirect their investment to other countries; this would result in a loss of economic value for Mozambique.
There are also proposed amendments to the LCDL that aim to limit its application to concession agreements, or even concession agreements in specific sectors (such as hydrocarbons and mining sectors) which traditionally attract bigger investments. If this Law is to be applicable to all economic sectors, it may create an unfair burden to other sectors (which have lower investments).
Continue reading "Understanding: Local Content in Mozambique – A Legal Perspective"
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