Mozambique will experience major economic development and growth as a result of the natural gas finds in the north of the country, Webber Wentzel’s senior partner Christo Els told a Webber Wentzel/Linklaters client seminar in Sandton on 19 November 2019.
Concession areas 1 and 4 off the Mozambican coast will deliver three liquefied natural gas (LNG) projects with a value in excess of USD60 billion over the next 30 years. These discoveries create both direct and indirect opportunities in the gas sector and supporting industries. These ancillary opportunities which exist in, amongst others, the construction, agriculture, professional services, retail, hospitality and real estate sectors which are open to South African companies.
The opportunity in Mozambique is three to four times the current nominal GDP of around USD16 billion. Committed investment is in the range of USD60 billion or more, which is going to be transformative for the Mozambique economy and people if businesses use the correct partners.
Similarly, Angola is also opening up for business again, Els said.
“Sticking to your square mile” is not the right choice for South African businesses, Francisco Ferraz de Carvalho, a partner at Linklaters and head of the Lusophone Africa group, said. Doing business in Angola and Mozambique can be challenging. There are concerns about corruption and physical security. But with the right advisers and partners, these issues can be managed.
Over the past 40 years, Webber Wentzel and Linklaters have advised on some of the most ground-breaking and landmark projects, matters and deals across the African continent, including in Angola and Mozambique. Linklaters, the only one of the five “magic circle” firms with an office in Lisbon, enhances Webber Wentzel’s ability to deliver in Angola and Mozambique, where it has worked with top local firms including ABCC in Mozambique and MG Advogados in Angola.
Alessandra Pardini, Webber Wentzel partner, said Mozambique’s nominal GDP is about USD16 billion, similar to that of Qatar 50 years ago when the Gulf state discovered gas (and oil). Qatar’s GDP in 2018 was USD192 billion. This indicated the potential for significant long-term growth in the Mozambican economy.
De Carvalho said there are four key dates in Mozambique’s LNG development.
2006: Mozambique awarded the Rovuma basin exploration concession to the Anadarko and Eni consortium.
2011: the amount of offshore gas in offshore areas 1 and 4 was estimated at about 180 trillion cubic feet (tcf).
2014: the first LNG project reached financial close and special legislation for the Rovuma Basin projects was approved by the government, covering technical issues, financing and forex, arbitration, insurance, procurement and employment.
June 2019: about USD22 billion of investment was committed to area 1, to deliver first gas around 2024. Another USD8 billion will be invested in the Coral project to deliver first gas in 2022.
Opportunities for South Africa (SA)
Paul Eardley -Taylor, head of oil and gas for Standard Bank, said Mozambique’s gas deposits had the potential to produce three million barrels of oil equivalent (bblboe) a day, which would make it Africa’s largest hydrocarbon producer. That creates a new economic reality for neighbouring SA.
He said there are four main areas of opportunity for South African companies. One is capital goods exports. Another is opportunities arising from the USD4-5 billion set aside for local content by ExxonMobil and Total. Another is infrastructure development, for example, Mozambique is likely to need a bridge to Tanzania. The fourth is the Matola floating storage regasification unit (FSRU), a planned project to import LNG to southern Mozambique from the north, which has a potential partner in Richards Bay.
Eardley-Taylor said the most important aspect of Mozambique’s gas finds for SA will be psychological, as SA’s energy options until now have been only domestic. Growth of LNG in Mozambican and neighbouring countries will offer opportunities to participate and trade in energy.
Paris Marques of Marques Advisory said in the planning phase for the LNG projects, many non-South African companies have been involved while South African companies have been non-committal. Yet the amount of investment set aside for local content will entail onshore infrastructure and agricultural development to supply new cities in the north. South African companies should be looking for local Mozambican partners who are not politicians to help exploit these opportunities.
Eardley-Taylor said an example of an opportunity at a micro-level was that about 60,000 chickens would be needed to produce about two million eggs a month to feed workers on the LNG projects. Almost two-thirds of the benefits of these projects would be felt by the non-oil and gas sectors.
Marques said the large consortia are already appointed to deliver these projects and if South African companies do not aggressively carve out a place, these consortia will go first to their traditional suppliers and supply chains.
Eardley-Taylor said the key to obtaining work on the LNG projects was to have a local presence. Marques added that the National Institute of Petroleum is also an important player, with a local desk that embraces companies with the right approach to doing business in Mozambique.
Company law: Francisco Avillez, managing partner of ABCC, said setting up a company in Mozambique is not as simple as in SA and it is necessary to use Portuguese. The corporate tax rate is 32%. Companies must apply for the necessary licences for the sector in which they will operate, and some sectors require 51% local ownership, eg state projects. Some properties can only be acquired by locals or local companies incorporated in Mozambique that are 51% held by locals.
Repatriation of profits: Ian Potgieter, business development manager of independent power producer Globeleq, which is building a 420MW gas-fired power project using gas from the Pande-Temane basin, said the project is dollar denominated but proceeds are paid in metical. Globeleq made its decision on this project three years ago, when the currency had depreciated, but it took a long-term view on convertibility of the metical. It does not expect any shortage of dollars in the future and the concession agreement with the government also provides some repatriation protection.
De Carvalho said one way to provide protection would be to index the price to hard currency, even though it is paid in metical. Another risk to consider was potential shortage of hard currency in Mozambique when wishing to convert the metical, but such a shortage seemed unlikely. A third possible risk was that the government might not allow repatriation of profits. This was also considered unlikely.
A company with foreign shareholders must be registered in Mozambique and will then be allowed to pay dividends. Avillez added that a Mozambican-registered company would also be allowed to repatriate the proceeds if it sells its Mozambican operations.
Construction contracts: De Carvalho said construction contracts have to be governed by Mozambican law, which works well. However, construction and supply agreements can be separated, so that construction would be governed by Mozambican law and supply by foreign law. Potgieter added that construction work must be undertaken by a locally-registered company, which boosts local employment.
Arbitration: Pardini said Mozambique is a signatory to the New York Convention, which deals with arbitration.
Land ownership: Avillez said all land is state-owned in Mozambique and leased out with a maximum 50-year tenure, which is renewable. However, urban and rural land are treated differently. If infrastructure is built on urban land, both the house and land are owned privately in perpetuity.
Public-private partnerships: De Carvalho said in Mozambique the applicable PPP law is called the mega-projects law and it is well tested. Since 2011 various projects such as the Nacala Corridor were developed under this law, which also applies to concession agreements.
Potgieter said the Globeleq power station is a PPP with EDM, the Mozambican utility company, which will be the off taker for the next 30-50 years. Globeleq also has Mozambican partners who contribute to the business. He said the relationships worked well, with regular, direct communication between EDM and Globeleq.
Hugo Azevedo, investment director of Arise, said Angola has massive natural resources, but the collapse of the oil price in 2014 exposed the lack of economic diversity. The new leadership in place since last year is addressing corruption and is opening the economy to foreign investors and the IMF. If the regime continues on this path, with political support, and attracts the right kind of investors, there is potential for an economic turnaround, Azevedo said.
Diogo Plantier Santos, Linklaters counsel, said Angola’s government has released a list of 195 companies to be privatised, ranging from finance to agribusiness and tourism and even parts of state-owned oil company Sonangol. It will be by way of IPOs and public tenders.
There is a four-year implementation programme, but this may be too ambitious since companies will need to be restructured and financial statements will have to be reviewed. The first company to be privatised will be insurer ENSA, which will be a test case.
Sectoral opportunities in Angola
Azevedo said there is opportunity for investors across most sectors, other than beer and soft drinks which are well supplied. Banking, construction, telecommunications, agriculture, oil and diamonds are all promising. There is little competition and companies that offer good service will have an advantage.
Christian Nguegan, the head of Honda Motor Southern Africa’s export division, said there is a real need to mechanise Angola’s economy, particularly agriculture, and a shortage of hotels for potential foreign investors visiting the country.
Leniza Sampaio, a partner at MG Advogados, identified opportunities in education, transport, tourism, telecommunications and construction as well as providing services at ports and airports.
Key considerations for investors
Partnerships: Nguegan said Honda’s experience in Africa over the past 50 years was that what works in Asia will not necessarily work in Africa. In Africa, a more flexible product offering is needed the choice of a partner/distributor is critical.
Long-term commitment: Azevedo said doing business in Angola requires in-depth knowledge of the law and how it functions as well as building relationships and understanding customers. It is not a country where quick profits will be made.
Legal framework: Santos said a new investment law was approved in 2018. There are no minimum investment requirements, and except for a few sectors, no requirements for local partnerships. It is easy to register a business online, which is the first step to secure entitlement to tax benefits and enable profits to be repatriated.
Sampaio said Angola’s corporate tax rate is 30%. The country recently introduced VAT and there is also income tax on employee earnings. There are special rules for companies on property taxes. Angola has double-taxation agreements with Portugal, the United Arab Emirates and Brazil. Angola has signed the New York Convention, which will make a difference in enforcing arbitral awards. Any jurisdiction can be chosen for contracts or arbitration.
Credit: Nguegan said Honda provides long-term repayment terms to its distributors through letters of credit dated 90-180 days. These are usually provided by Portuguese or Middle Eastern banks, not Angolan. Azevedo said some SA banks offer credit to Angola banks but even a 90-day letter of credit takes a little longer than expected.
Skills: Sampaio says skills must be imported, which raises the costs of doing business and inhibits development of local skills. Registered companies must show a training plan and integrate local skills in their operations.
Corruption: Sampaio said the new leadership is tackling corruption. A Corporate Governance Association has been established, with members from various professions, to focus on nurturing good corporate governance in the public and private sectors.
Land ownership: Sampaio said all land in Angola belongs to the state and is leased on maximum tenure of 60 years. Leases are renewable.
Public-private partnerships (PPPs): Azevedo said there is a huge opportunity in infrastructure, particularly toll roads and airports, but Angola’s public and private sectors need to learn to work together. Government details its planned public investment programme in the annual budget.
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