Understanding: Mozambique local content in the extractive industry

Approximate reading time: 5 minutes

by Shipeni Tovela

In an unprecedented initiative, Anadarko Mozambique Area 1 (AMA 1), in partnership with the Ministry of Mining and Energy Resources of Mozambique, held on August 10, 2018, in the city of Pemba, in Cabo Delgado, the “Seminar of Local Opportunities”, with the main objective of informing Mozambican companies about business opportunities within the framework of the implementation of the Liquefied Natural Gas (LNG) project in Mozambique.

It’s good to see that not only the Government has committed itself to guarantee that the big enterprises of the extractive industry create business opportunities/generate income for the nationals, but also that the concessionaires are focused on materializing this plan for the national interest.

We intend to present some reflection points on the issue of local content, at a time when a legal instrument is being prepared to discipline the subject, and therefore the debate is timely.

In fact, the extractive industries have the potential to accelerate the economic growth in the countries where they are established through, for example, the creation of jobs for nationals, the promotion of local processing industries and supplier companies for local products and services, as well as other benefits.

At the global level, the tendency of countries with a tradition in the extractive industry or those that are emerging in this sector has been to adopt local content requirements in their legislation that ensure the sustainable use of natural resources, to develop a diversified industry that generates wealth beyond the time when these resources are exhausted. In this context, there has been a movement towards the design of adequate instruments aimed at the local reinvestment of the wealth generated by the exploitation of these resources.

First of all, it is important to remember that some principles of local content can be found in the Law nº 15/2011, of August 10 (commonly called the “Law of Megaprojects”, currently in the process of being revised), which recites among others, the need to establish business associations between PPPs, Large Dimension Projects and Business Concessions, and micro, small and medium business.

In the mining legislation, the Article 19 of the Mining Law Regulation (approved by Decree 31/2015 of December, 31) establishes local content requirements, which are summarized in the following:

  • Preference for “Mozambican” products and services: holders and contractors must give preference to local goods and services (Mozambican), provided they are available in the time and quality required, and if their price, including taxes, doesn’t exceed 10% (ten percent) of the prices of the imported goods available.
  • Preference for Mozambican natural and legal persons: this principle establishes that concessionaires, in the acquisition of goods and services, must guarantee that foreign natural and legal persons are associated with Mozambican natural and legal persons, in terms that will be agreed upon by the parties.
  • As a general rule, the procurement of goods and services in the mining sector must be executed through public bidding.
  • However, there are some references that must be followed regarding the minimum thresholds from which hiring must be preceded by a proposal: this minimum threshold is 15,000,000 MT (fifteen million meticais), which corresponds to approximately 900,000.00 USD (nine hundred thousand US dollars).

In the oil legislation, Article 55 of the Oil Operations Regulation (approved by Decree No. 34/2015, of December 31), establishes the requirements related to local content, which are summarized in the following:

  • Preference for “Mozambican” products and services: holders and contractors must give preference to local goods and services (Mozambican), provided they are available in the time and quality required, and if their price, including taxes, doesn’t exceed 10% (ten percent) of the prices of the imported goods available.
  • Preference for Mozambican natural and legal persons: this principle establishes that concessionaires, in the acquisition of goods and services, must guarantee that foreign natural and legal persons are associated with Mozambican natural and legal persons. This obligation is intended to create opportunities for the gradual transfer of operational capacity and to enhance the country’s development
  • Acquisition of goods and services through auctions: this principle establishes that, as a general rule, the acquisition of goods and services, in accordance with Oil Operations, must be carried out through public tenders. In the specific case of the General Regime, this limit is set at 40,000,000.00 MZN (forty million meticais), which corresponds to approximately USD 660,000.00 (sixty-six thousand USD).

We hope, however, that the Local Content Law will respond more closely to the most pressing questions regarding local content in the mining and hydrocarbons industry, which didn’t fit under the mining and oil laws mentioned above.

Therefore, even without access to the most recent version of the proposed Local Content Law, we believe that the legislator should pay special attention to, among others, the inclusion of provisions aimed at sizing the opportunities for the local market so that these rules can in fact generate impact on the local economy and aren’t just programmatic norms. For example, the limited capacity of the local business community should be taken into account, insofar as it is obliged, whenever possible, to split contracts into subcontracts to avoid local suppliers from being automatically excluded due, for example, to the inability to provide guarantees that, taking into account the contract in a global way, they couldn’t support. We also understand that the law should give special treatment to the issue of the certification of goods and services, to avoid that, at the end of the day, the majority of the small and medium-sized companies be excluded from the business.

Finally, we reiterate that the reinforcement of the local content requirements, through adequate regulations, has been seen as an important catalyst for economic growth. We are pleased to note that Mozambican oil and mining legislation, in its process of evolution, follows this trend although in a still rather timid way. However, we recognize that in the process of designing local content requirements, caution is necessary to adopt rules that are economically efficient and produce positive impacts in the local economy, instead of simply promoting formal compliance with the law without major consequences. This commitment to local development must, in addition to the States, be assumed by the extractive industry itself, because the acceptance of it by the local communities passes through them to demonstrate their contribution to the development of the countries that host them.

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