Published in furtherafrica.com
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 requirements1 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)2.
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.3
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).
2. Guiding Principles
A clear definition of guiding principles is crucial to lead the interpretation of LCR in force. Although some of these guiding principles already exist in the current legal framework – for example, the guideline expressed in paragraph a) and b) -, the remaining were not included in the existing legal framework, being recommendable their inclusion.
LCDL identifies, as guiding principles:
a) Preference for goods and services that are produced featuring Mozambican production factors (which are defined as the elements of the productive process, namely: capital, raw material, equipment and workforce);
b) Promotion of participation of Mozambican citizens and companies, in the supply of goods and services;
c) Investment in the capacitation of Mozambican citizens and companies;
d) Promotion of strategic partnerships between Mozambican and foreign companies;
e) Transparency in the contracting process of goods and services;
f) Development of the Mozambican economy, through the transfer of technology and knowledge.
3. Local Content Term Definition
LCR currently in force have no definition of the term Local Content. Local content could be defined, as it is by the LCDL, as “the portion of local production factors which were used in producing goods or providing services, as well as the participation of Mozambican citizens in the share capital of companies”.
In line with this definition, LCDL proposes the definition of Local Content Goods, i.e., goods with a minimum of 10% of Local Content (this percentage is determined through a formula, mentioned below); for each sector, dynamic minimum percentages may be set within a time frame of 7 to 10 years.
The definition of this term has been widely discussed in parliament. There are proposals to amend to this section in order to eliminate this 10% minimum percentage; instead, it is proposed that the percentage of Local Content for each sector (or even for each concession agreement) is set by the Mozambican Government on a case-by-case basis. This would allow for the Mozambican Government to adjust the value of Local Content to each particular case, considering several factors related to the specific sector, such as: level of development of the Mozambican industry (in that sector); current status of the Mozambican and international economy; local logistics of the sector, etc.
Local Content Services are defined by the LCDL as services provided by Mozambican citizens, or legal entities incorporated under Mozambican Law, that operate in Mozambican territory.
As mentioned before, Brazil chose to use a territory criteria rather than nationality criteria, to boost the economic circulation of goods and services in Brazil; thus, there are proposals to amend this portion of the Law in order to eliminate the nationality criteria by only mentioning “companies that operate in Mozambique”.
4. Local Participation
Although Local Participation provisions (as below defined) already exists, effective participation from the private sector is not foreseen by the LCR in force.4
Apart from the mandatory registration of O&G companies on the BVM5 and general guidelines for giving opportunities.
Local Participation must be defined, as it is by the LCDL, which suggests defining it as “the subscription, up to 15%, of the share capital of:
a) Enterprises, through companies, to be created, between foreign and Mozambican citizens or legal entities, in accordance with Mozambican Law;
b) Joint Ventures, to be created between Mozambican citizens or legal entities and the companies contracted by the concessionaires.”
The minimum percentage of Local Participation must not be transferable to foreign individuals or companies.
The proposed amendments to the LCDL mention the elimination of this minimum percentage (15%) of Local Content. The alternative would be to have a requirement for the subscription by Mozambican citizens or companies of the share capital of companies operating in Mozambique, that intend to take part in concession agreements.
In relation to this point, and as already mentioned before, the Brazilians have chosen to use a territory criteria, since the nationality criteria could potentially create a difficult obstacle to overcome for foreign investor, who might direct their investments to other countries that seem more attractive that do not have such requirements. By taking the nationality criteria, Mozambique may attract foreign investments from all over the world, creating jobs and boosting the economy.
5. Local Content Calculation Formula
Differently from other jurisdictions6, the current legal framework does not foresee a method to accurately measure and verify local content products (goods, services and works), crucial to analyze any development of local content in the country and to monitor/sanction it.
Considering this legal gap, to calculate Local Content, the LCDL sets the following formula: % LC = (1- CI/PV) x 100.
Being:
- LC is the Local Content Value
- PV is the Production Value
- CI is the value of imported elements (example: imported raw materials and foreign workers wages).
For each sector, dynamic minimum percentages may be set within a time frame of 7 to 10 years.
For several sectors, this formula may not work and may not be this simple; as such, specific methods and calculations may be required for certain sectors.
In addition, the time frame of 7 to 10 years seems too extensive; it today’s world, technology and economy are changing and evolving every day, it is impossible to establish specific percentages on a time frame so wide.
6. Monitoring and Certification
7. Monitoring
The current legal framework does not foresee any mechanism to monitor LCR in the country and to certify local content products (goods and services).
The monitoring and management of the LCDL will be carried out by a public entity to be created by the Council of Ministers.
This public entity would likewise be responsible for keeping a data base on the Certified Mozambican suppliers and promote opportunities for Local Content suppliers.
The amendments made to this Law propose to establish a broader scope to this point, in order to allow the Mozambican Government to transfer the monitoring of the LCDL to other public entities in accordance with the specifics of each sector (specially in sectors that require high levels of technical knowledge).
The appointment of different public institutions for different economic sectors, would be beneficial since each sectors has technical issues which may be difficult to tackle by a single non-specific entity.
8. Certification
Goods and services of local content are subject to certification, to be issued by a public entity (that is yet to be created). The natural persons or companies will be deemed as “Local suppliers” by presenting the correspondent certificate.
The public entity mentioned above is also responsible for establishing the percentage of Local Content, in accordance with the criteria and procedures to be set by the Mozambican Government.
The certification procedure, in order to be reliable and accurate, has to be made for each product or service individually. It is not recommended (considering also the Brazilian case) a global classification such as “National Supplier”, since the procedures for producing different products may be different (and may change periodically).
The Brazilian experience is that it is more practical to have private entities executing the certification, because of the high volume of certifications needed (specially considering the economic growth this Laws intends to achieve). Thus, the Government would be responsible for monitoring these private certifying entities, and not each and every product or service.
9. Public Tenders
The current legal framework must continue to ensure that the supply of goods and services is made by public tender. In general, this already happens under the legal provisions currently applicable in Mozambique in relation to the extractive industries
Direct negotiation may be exceptionally allowed, if the specific goods or services require the use of technology, specialized workforce, patents or other special requirements, duly supported, that are not available in Mozambican territory.
10. Contracts
Apart from the LCR applicable to tenders, legal provisions currently in force do not ensure that the private sector complies with LCR.
To do so, LCDL proposes that all enterprises that operate in Mozambique, when hiring services or purchasing goods, must be required to observe the law LCDL.
The goods or services to be purchased shall present the specific technical requirements required for the purchasing entity, whilst presenting the correspondent Local Content Certificate. The purchasing entity shall give preference to those goods or services with the highest local production factors.
In the event the goods or services to be purchased cannot be supplied by a single candidate, suppliers may form associations to provide such goods or services, provided that the requirements set by the purchasing entity are met (this association may be carried out by any means foreseen in the Mozambican Commercial Code).
During the procedure for evaluation of proposals to the supply of goods and services, each proposal shall be assessed in relation to its compliance with the LCDL, along with other evaluation criteria.
When proposals are 10% similar, the proposal with the highest percentage of Local Content shall be selected.
All the proposals for the supply of goods and services are required to contain the following information:
a) The origin of the goods or services, along with the Local Content Certificate;
b) The number of Mozambican and foreign employees in Mozambique;
c) The minimum number of Mozambican citizens the supplier proposes to employ.
If the supplier is a foreign entity, the proposal shall additionally contain the following information:
a) Measures to transfer technology, knowledge and skills to Mozambicans;
b) Partnership with local suppliers;
c) Measures to develop and capacitate local suppliers within the partnership.
In line with the above mentioned, there are proposed amendments to limit the application of this Law to concession agreements. In our view, if all the companies operating in Mozambique are required to observe the LCDL requirements, this may create obstacles to foreign investment, which does not contribute to the purpose of the Law.
The proposed amendments mention the application of this Law to concession agreements with a minimum global amount of supplies of USD 5,000,000.00; this is because the requirements set forth by this Law may be overcome by big companies and big enterprises, but it may create unfair obstacles to small and medium companies. For example, if a company intends to buy a pack of rice, with the current wording of the LCDL it would be required to request all the above information from the supplier, prior to the transaction. It does not seem practical or reasonable. As such, by establishing a minimum limit to apply these requirements, small businesses (or small transactions) would be protected.
11. Subcontractors
In line with widening LCR application universe, implementation of LCR to subcontracting practices avoid its circumvention by the economic agents.
To do so, LCDL proposes that Mozambican citizens or companies that intend to subcontract other entities to provide for goods or services, shall present a request with the following information:
a) The specific goods or services to be subcontracted;
b) The name of the person or entity to be subcontracted;
c) The reason to support subcontracting.
The subcontractor shall also be a certified supplier and is subject to the provision of the LCDL and its regulation.
The obligations established by this portion of the Law may be deemed as redundant, since the certification procedure, in principle, shall take in account the subcontractors of each company. Furthermore, this requirement for a submission of a request for each subcontractor may create a high volume of requests, which may be difficult to address.
12. Contractual Reserve
A contractual reserve forcing the acquisition of local products (goods and services) is adequate to ensure that local products have preference over foreign ones, when such products are available in the country at market prices.
To achieve this, LCDL proposes that enterprises shall reserve contracts for specific goods or services to be acquired in Mozambican territory. These goods and services will be listed in an Annex to the LCDL.
LCDL suggests, however, amendments to this topic in order to limit the application to concessionaires and concession agreements.
13. Import of goods and services
To complement the contractual reserve, a public entity should monitor the import of foreign goods and services in order to ensure that such goods and services are not in the national market.
LCDL proposes that, when goods or services required by the purchasing entity are not available in Mozambican territory, such goods or services may be purchased in foreign territory, provided that previous authorization is granted by the public entity mentioned in point 4, above.
To request the authorization mentioned above, the purchasing entity shall submit a form and present the following information:
a) The nature of the goods or services;
b) The reasons by which the goods and services are required, and their purpose;
c) The quality, quantity and timeline to delivery, as expected by the purchasing entity;
d) The market price of similar goods and services;
e) Any other relevant information.
This information must be kept for 4 years and made available to the relevant authorities for the purposes of monitoring compliance with the LCDL.
It is relevant to note that the amendments proposed to the LCDL clearly state that this last measure does not seem reasonable, as it may create practical barriers to all imports for any companies. The proposal would be to apply these requirements solely to goods or services that are covered by contractual reserve (point 8) and concession agreements.
The current wording, which establishes a requirement for an authorization for each import, may create practical and unreasonable barriers for any imports. As such, it would be more reasonable to have such requirements only for goods or services which are covered by the reserve mentioned in point 8, above, and by concession agreements.
14. Local Content Plan
The current legal framework does not ensure that businesses in Mozambique have a clear Local Content plan for the inclusion of the local goods, services and work.
To tackle these issues, LCDL proposes that companies operating in Mozambique must elaborate, on an annual basis, a Local Content Plan, with the actions and strategies to be developed in the following year. Furthermore, contracting enterprises shall also elaborate a Long-Term Plan for a period of 5 years.
The Local Content Plan shall contain information on, without limitation:
a) goods and services expected to be purchased;
b) Hiring of local workforce;
c) Training, capacitation and transfer of knowledge and skills to Mozambican employees;
d) Actions / programs to develop local suppliers.
The enterprises shall present the Local Content Plan to the relevant authorities (mentioned in point 4, above) for the purposes of monitoring compliance with the LCDL.
Enterprises shall also promote training and capacitation of Mozambican citizens and companies that supply goods and services in their Local Content Plan, indicating the objectives and timeline and other relevant information.
In line with the suggestions above mentioned, this requirement for a Local Content Plan should only be applicable to parties of a concession agreement.
15. Reports
Monitoring the implementation of LCR and Local Content Plans may require regular reports from the entities and individuals subject to LCR, obligation that is not in force in the current LCR framework.
Having this in mind, the enterprises shall submit, on an annual basis, to the public authority mentioned in point 4, above, a report with a detailed evaluation of the performance, actions and strategies defined in the Local Content Plan, the percentage of compliance and the results obtained.
16. Transfer of Technology Plan
The current legal framework does not ensure that foreign businesses in Mozambique transfer technology and known-how to the Mozambican manufacturing and working processes.
Having this issue in mind, LCDL proposes that foreign natural persons or companies shall elaborate a plan for transfer of technology, experience, technical knowledge and skills to the Mozambican natural persons or companies to which they are associated with. The enterprises shall reasonably support this transfer of knowledge.
In line with the suggestions above mentioned, this requirement for a Local Content Plan should only be applicable to parties of a concession agreement. The obligations created under this topic may be relatively simple to comply with by big companies but may be unreasonable burdensome for small or medium companies.
17. Sanctions
The current legal framework does not foresee effective mechanisms to held accountable firms that do not comply with Mozambican LCR. In fact, and regarding legal provisions concerning local employment, the legal regime allows hiring foreign workforce without complying with the quotas regime, by paying more administrative costs than the ones applicable hiring foreigners within the quotas regime, giving foreign firms the incentive to pay instead of hiring local work.
This is crucial to ensure monitoring of LCR in the country. LCDL proposes that any violation of the rules of the LCDL may be sanctioned by the application of fines or suspension of the supplier, from the database mentioned in point 4.i), for a period of 2 years.
Subcontractors are jointly liable for the lack of compliance with the LCDL.
18. CONCLUSION, FINAL NOTES AND RECOMMEDATIONS
As mentioned, the existing LCR framework is insufficient to promote local content and involve local individuals and companies in the extractive industries, currently being undertaken by foreign investors in the country.
Among other factors above implied, this is obvious when we see the political need of discussing and approving a detailed legal framework in line with the LCDL, to prevent extractive industries’ concessionaires from operating in the country solely with their worldwide suppliers network without any/the minimum involvement possible from local communities and/or transfer of technology, know-how and skills.
LCR in force are ambiguous, foreseeing general rules and principles that, in most cases, fail not only in defining local content and related obligations, but also in implementing mechanisms for measuring, monitoring and certifying it. Indeed, there are no quantitative or qualitative requirements for measuring local content neither a sanctioning regime to enforce it.
Furthermore, local content case-by-case negotiation approach may lead to differences in the involvement of local communities in comparable projects when such approach is not combined with strict local content guidelines and principles.
Given all the above, we understand that strengthening LCR in Mozambique will necessarily imply to approve legal provisions comprising, at least, the following:
1. A definition of Local Content objectives in line with the Mozambican political interests of economy growth and local goods, services and work inclusion;
2. A definition of Strict Local Content principles guidelines, in line with the legal provisions in force;
3. A definition of the terms Local Content, Local Content Goods and Local Content Services, based on a territory criteria rather than in a nationality criteria;
4. A definition of Local Participation that ensures the subscription of share capital by locals, namely in the private sector;
5. A formula to accurately measure local content products (goods, services and work);
6. Mechanisms to monitor and certify local content products (goods, services and work);
7. Mechanisms to ensure that companies operating in Mozambican hiring supply of goods and service give preference to local products;
8. Application of LCR to subcontracting practices;
9. An obligation to reserve some contracts to locals, through the identification of goods and services that can be supplied locally at market prices, with no need to turn to foreign markets;
10. Mechanisms to monitor imports of goods and services, through an authorization granted by a public entity that must evaluate if the goods and services are not in the local market at similar conditions;
11. Mechanisms to implement local content annual plans for the inclusion of local goods, services and work;
12. Obligation of companies operating in Mozambique to draft, periodically, local content reports in line with the local content annual plans;
13. Mechanisms to implement local transfer of technology, know-how and skills plans;
14. A sanctioning regime to enforce LCR, namely, through fines schemes.
The above recommendations are in line with the political discussions surrounding the approval of LCDL and are mostly based in comparative law studies (mainly with the Brazilian law), given the lack of technical studies in Mozambique regarding local content in the country.
Although many other measures to tackle local content issues could be appointed, these are the only measures with direct relation with Mozambique and, therefore, the measures that we have focused on in the present report.
Notwithstanding all the above, is also our opinion that shall be considered/balanced the huge relevance and impact of the high context costs and requirements to foreign investment that may jeopardize the foreign investment’ attraction policies and measures that have been followed in the last few years by Mozambique – one shall consider the eventual loss of elasticity between the investment costs and the expected gains to be earned.
19. BIBLIOGRAPHY
Legislation
• Employment Law – Law no. 23/2007, of August 1st
• Hiring of Foreign Employees Procedures – Decree no. 37/2016, of August 31st
• Foreign Citizens Regulations – Decree no. 108/2014, of December 31st
• Mega Projects Law – Law no. 15/2011, of August 10th
• Mozambican Petroleum Law – Law no. 21/2014, of August 14th
• Regulation of the Mozambican Petroleum Law – Law no. 21/2014, of August 18th, with the amendments of the Decree no. 48/2018 and Decree 34/2019.
• Special legal and contractual regime governing the Liquefied Natural Gas Project in Areas 1 and 4 in the Rovuma Basin – Decree no. 2/2014, of December 2nd
• Expat Hiring Regime in the Oil & Gas and Mining Sectors – Decree no. 63/2011, of December 7th
• Law No. 11/2009, of March 11th – Foreign Exchange Law
• Mining Law – Law no. 20/2014, of August 18th
• Mining Law Regulation – Decree no. 31/2015, of December 31st
• Mining Employment Regulations – Decree no. 13/2015, of July 3rd
• Expat Hiring Regime in the Oil & Gas and Mining Sectors – Decree no. 63/2011, of December 7th
• Draft Law no. XXX/2018 (currently in discussion in Parliament)
Official Government Websites
• INP website – http://www.inp.gov.mz/
• MIREME website – https://www.mireme.gov.mz/
• APIEX website – http://invest.apiex.gov.mz/invest/our-assistance/apiex/
20. DISCLAIMER
The advice expressed herein is based on the facts and assumptions provided, which we assume as complete and accurate. A misstatement or omission of any fact or a change or amendment in any of the facts and assumptions we relied upon may require a modification of all or a part of this Report.
Our Report is based upon the law and administrative and judicial interpretations thereof as of the date of this Report, all of which are subject to change. The advice expressed herein is not binding on the tax authorities or courts and, as such, we do not assure these entities will not take a position contrary to the advice expressed herein.
Should there be a change in the facts, assumptions, laws or law interpretation, this Report would necessarily have to be re-evaluated in light of such changes.
We do not have any responsibility to update this Report for any such changes after the date of its issuance.
This Report is solely addressed to The Southern Africa Resource Watch, for its own benefit, and may not be relied upon by anyone other than this one.
***
We hope the information above is useful at this stage. Please do not hesitate to contact us should you have any further queries or if any additional assistance is necessary with regard to this or to any other subject.
1 Deemed as “policies imposed by governments that require firms to use domestically-manufactured goods or domestically-supplied services in order to operate in an economy”, i.e., “‘localisation’ policies that favour domestic industry over foreign competition, requiring companies and the government to use domestically-produced goods or services as inputs” (OECD, 2019, Local Content Requirements, Trade Policy Brief, available in https://issuu.com/oecd.publishing/docs/local_content_requirements).
2 As an example, specific local content measures concerning local workforce and trainings, supply of goods and services and procedures related with Oil & Gas projects may be consulted, case-by-case, in INP website (http://www.inp.gov.mz/en/Conteudo-Local). Although this information is not available regarding investment projects in the Mining sector, the case-by-case negotiations on local content involvement still applies, given the ambiguity and lack of clarity of the current LCR framework.
3 V.g., in EPCC contracts (available in http://www.inp.gov.mz/index.php/en/Policies-Legal-Framework/Exploration-and-Production-Contractsll;”>).
4 Please see above, regarding public Local Participation, the minimum share reserved to public entities in PPPs, larges projects and business concessions and (p. 6).
5 Exception made to Concessionaires in Areas 1 & 4 in Bacia do Rovuma, which have a special exemption in case they are registered in other country stock exchange.
6 For example, South Africa, which has an guidance document for the calculation of local content issued by the Department Trade and Industry, available in https://www.sabs.co.za/Local-Content/docs/Local_Content_guideline.pdf.
Article by Duarte Marques da Cruz
Duarte Marques da Cruz Duarte Marques da Cruz is partner of the Portuguese law firm MC&A, specialised in international business advisory, with a special focus in Lusophone markets. With extensive experience in the Energy sector (Renewables and Oil & Gas) and in International Taxation, he has supported international companies in major upstream, midstream transactions and projects, including in implementing, exploration and development programs. Duarte has also supported international clients in other areas of practice, namely, Mining, Transport & Logistics, Regulatory Compliance and Mergers & Acquisitions in Mozambique, Angola and Portugal. Through this Simplification Project, Angola shows to investors and economic players that intends to maintain its bet on the internal and external investment; on other hand, it is important to note that this simplification procedure is only at its beginning and is expected a wider range of facilitation in multiple public administration proceedings and regarding more sectors of the economy.