MOZAMBIQUE 2006 INVESTMENT CLIMATE STATEMENT

UNCLAS SECTION 01 OF 07 MAPUTO 000126

SIPDIS

SIPDIS

EB/IFD/OIA FOR J. NATHANIEL HATCHER
AF/S FOR HTREGER AND JMALONEY
JOHANNESBURG FCS FOR RDONOVAN
JOHANNESBURG TDA FOR DSHUSTER
MCC FOR SGAULL
USAID FOR AA/AFR AND AFR/SA

E.O. 12958: N/A
TAGS: EAGR EAID ECON EFIN ELAB ETRD KTDB MZ PGOV
EINV, USTR, OPIC, USAID
SUBJECT: MOZAMBIQUE 2006 INVESTMENT CLIMATE STATEMENT

REF: 05 STATE 202943

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2006 Investment Climate Statement - Mozambique


Openness to Foreign Investment

Mozambique encourages foreign direct investment. CPI, the
government's Investment Promotion Center, seeks to bring
investors to Mozambique and should be a potential investor's
primary contact with the government. CPI is particularly
interested in increasing investment in the central and
northern regions of the country in order to address large
regional development imbalances.

Contact information for the Investment Promotion Center (CPI)
is as follows:

Investment Promotion Center (CPI)
Mahomed Rafique Jusob, Director
Rua da Imprensa, 332 (ground Floor)
Caixa Postal 4635, Maputo
Tel: (258) (21) 31-33-75 or 32-24-57
Fax: (258) (21) 31-33-25
Internet: http://www.mozbusiness.gov.mz or www.cpi.co.mz

Mozambique's Law on Investment, No. 3/93, dated June 24,
1993, governs foreign investment. Additional amendments were
passed over the next two years: Decree No. 14/93 on July 21,
1993 and decree No. 36/95 on August 8, 1995. The law and
amendments generally do not make distinctions based upon
investor origin, nor do they limit foreign ownership or
control of companies. The lengthy registration procedures
can be problematic for any investor - national or foreign.
Working with a local consulting firm or partner familiar with
the requirements will facilitate the registration process.
CPI assists foreign investors in obtaining licenses and
permits. However, in general, large investors receive much
more support from the government in the business registration
process than small and medium-sized
investors, who often must endure lengthy, overly bureaucratic
delays.

The "Doing Business in 2006" (which covers 2005) report by
the World Bank identifies Mozambique as one of the most
difficult countries to start a business. Entrepreneurs can
expect numerous bureaucratic hurdles that must be overcome
sequentially to launch a business. In 2005 the average time
to open a business was 139 days, although some within the
business community feel that the process in reality might be
moving slightly faster. The government, working with donors,
hopes to shorten this period considerably in coming years.
To date Mozambique's privatization program has been
relatively transparent, with open and competitive tendering
procedures in which both foreign and domestic investors have
participated. Most remaining parastatals are in public
utilities, making their privatization more politically
sensitive. While the government has indicated an intention
to take on partners in most of these utility industries,
progress on privatization has been slow.

Government authorities must approve all foreign and domestic
investment. Currently CPI handles the approval process for
foreign investors. The investment approval process is
automatic within 10 days if no objections are voiced by any
of the following: 1) the relevant ministries; 2) the
provincial governor for investments under USD 100,000 or 3)
the Minister of Planning and Finance for investments between
USD 100,000 and USD 100 million. The Council of Ministers
must review investments over USD 100 million and those
involving large tracts of land (5,000 hectares for
agricultural investments, 10,000 hectares for livestock or
forestry projects). The Council has 17 working days to voice
an objection before approval becomes automatic. The
government has not yet used these screening mechanisms to
limit investment or to protect a domestic industry.


Conversion and Transfer Policies

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Foreign exchange retention accounts are permitted for 100
percent of foreign exchange earnings without formal
justification. These may be used to purchase imports.
Investment registration and repatriation procedures must be
followed to repay foreign loans and for the repatriation of
invested capital, profits and dividends. Delays are uncommon
beyond those typical for administrative processing in a
developing country.


Expropriation and Compensation

Private property was nationalized throughout Mozambique in
1975 following independence from Portuguese colonial rule.
After Mozambique's turn away from socialism in the 1980s,
citizens had a period of time to reclaim residential
property. The government retained commercial property, but
later sold it off as part of its privatization efforts. All
but a handful of religious properties that were nationalized
have been returned; negotiations are ongoing for the
remaining few. It is worth noting, however, that there is no
private ownership of land in Mozambique; all land is owned by
the state.

While there have been no significant cases of nationalization
since the adoption of the 1990 Constitution, Mozambican law
holds that "(w)hen deemed absolutely necessary for weighty
reasons of national interest or public heath and order, the
nationalization or expropriation of goods and rights shall
(result in the owner being) entitled to just and equitable
compensation."


Dispute Settlement

In December 2005 the National Assembly approved major
revisions to the commercial code - the result of a
collaborative effort starting in 1998 between the Mozambican
government, the private sector and donors. The previous
commercial code was from the colonial period, with clauses
dating back to the 19th century, and did not provide an
effective basis for modern commerce or resolution of
commercial disputes. The revised code is generally viewed as
a very positive development.

To date the judicial system has been largely ineffective in
resolving commercial disputes. Instead most disputes among
Mozambican parties are either settled privately or not at
all. The business community is still so small that a
commercial dispute or accusation of illegal activity can
seriously damage one's reputation.

In February 1999 the National Assembly passed alternative
dispute resolution (ADR) legislation. The Center for
Commercial Arbitration, Conciliation and Mediation (CACM),
which is supported by USAID, offers commercial arbitration.
CACM has two locations - one in Maputo and a second in the
northern city of Nampula. CACM does not, however, deal
directly with labor issues. For disputes between
international and domestic companies, the law closely follows
UNCITRAL, the United Nations Commission of International
Trade Law. For domestic arbitration, the law is formulated
to cover a wide range of potential disputes, including
non-commercial issues. Mozambique acceded in mid-1998 to the
New York Convention on the Recognition and Enforcement of
Foreign Arbitral Awards. For disputes between American and
Mozambican companies where a violation of the nations,
Bilateral Investment Treaty (BIT) is alleged, recourse via
international ADR under the BIT may also be available.


Performance Requirements and Incentives

Mozambique is generally in compliance with WTO Trade-Related
Investment Measures (TRIM) obligations. A variety of tax
incentives exist to encourage direct foreign investment,
which vary according to the region of the country and the
nature of the investment but often include a 50 to 80 percent

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reduction in taxes. Customs exemptions are possible for the
importation of capital equipment and raw materials. To
qualify, a minimum investment of USD 50,000 and pre-approval
from CPI are required. The government grants special fiscal,
labor and immigration arrangements to companies operating in
designated Rapid Development Zones. Rapid Development Zones
include the whole of Niassa Province, Nacala District, Ilha
de Mocambique, Ibo Island and the Zambezi river valley.
Investments in these zones are exempt from import duties on
certain goods, from real property transfer tax and are
granted an investment tax credit equal to 20% of the total
investment (with a right to carry forward for five years).

Specific performance requirements are built into mining
concessions and management contracts, and sometimes into the
sale contracts of privatized entities. Investments involving
partnerships with the government usually include milestones
that must be met for the investor's project to continue.

Note: The process of obtaining a visa and related work
permits in Mozambique is lengthy and overly bureaucratic.
The Ministry of Labor must approve the employment of
foreigners. The Ministry of Interior's immigration
department issues a DIRE (a work permit/identification card)
once the Ministry approves the application. Assistance
through a local lawyer, consulting firm or an individual
familiar with the process will facilitate obtaining necessary
work permits.


Right to Private Ownership and Establishment

The legal system recognizes and protects property rights to
building and movable property. Private ownership of land,
however, is not allowed in Mozambique. Instead the
government grants land-use concessions for periods of up to
50 years, with options to renew. The government at times has
granted overlapping land concessions. Essentially, land-use
concessions serve as proxies for land titles; however, they
are not allowed to be used as collateral. Land surveys are
being carried out throughout the country to enable
individuals to register their land concessions. This process
is moving slowly and will not provide any real legal
protection to investors for some time to come. The
Mozambican banking community uses property other than land,
such as cars and private houses, as collateral.


Protection of Property Rights

The inefficient nature of the Mozambican judicial system
makes protection of property rights extremely problematic.
Pirated copies of audio, videotapes, DVDs and other goods are
sold in Mozambique. Intellectual property right infringement
is not a significant problem for US companies, however, due
to the small size of the local market.

The National Assembly passed a copyright and related rights
bill in 2000. This bill, combined with the 1999 Industrial
Property Act, brought Mozambique into compliance with the WTO
agreement on the Trade Related Aspects of Intellectual
Property Rights (TRIPS). The law guarantees the security and
legal protection of industrial property rights, copyrights
and other related rights.

Recently private sector organizations have been working
together with various government entities on an IPR
task-force team in an effort to combat intellectual property
right infringement and related public safety issues.


Transparency of Regulatory System

Investors face a myriad of requirements for permits,
approvals and clearances, all of which take a significant
amount of time and effort to obtain. The difficulty of
navigating the system creates space for corruption, and
bribes are often requested or offered to facilitate
transactions.

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Regulations in the areas of labor, health and safety and the
environment are routinely not enforced, or are enforced
randomly to generate revenue from fines. In addition, civil
servants have at times threatened to enforce antiquated
regulations that remain on the books to obtain favors or
bribes.

The government is aware of the problems and has launched a
donor-funded effort to streamline procedures. In December
2005 the National Assembly finally approved a revised
commercial code. The new commercial code is seen as a step
forward in combating many of these issues.


Efficient Capital Markets and Portfolio Investment

Mozambique has a small capital market of eleven commercial
banks, of which four dominate the market. The banks compete
for important clients and deposits. Access to credit for the
private sector remains difficult and expensive - interest
rates for loans generally fall between 17 and 22 percent per
year. Access to capital in the rural areas is constrained by
the fact that land leases cannot serve as collateral.
Various entities, such as the Aga Khan Foundation and
NovoBanco, offer micro-credit financing programs to partially
fill this need. The tiny stock exchange, founded in October
1999, lists one company (a brewery, Cervejas de Mocambique)
and five government bonds.


Political Violence

There were few incidents of localized violence prior to the
2004 general elections. In May 2004 many opposition parties
and the ruling FRELIMO party subscribed to an electoral code
of conduct, which was generally upheld during the campaign
and the elections. However supporters of the opposition
party RENAMO complained of intimidation and arbitrary arrests
during the December 1-2 voting.

Political violence erupted in September 2005 in Mocimboa da
Praia, a small coastal town in the far north, over the
special election there to replace the former mayor, who died
in office. At least 8 persons were killed and nearly 50
injured in clashes between FRELIMO and RENAMO supporters.
However the flare-up apparently was an isolated event; it did
not provoke demonstrations or violence elsewhere.

Labor unions are becoming less vocal, and still do not have
the financial and institutional capacity to be very
effective. Protests rarely turn violent. As in many capital
cities, crime is problematic in Maputo, where carjackings,
muggings and breaking/entry into homes are commonplace.
While such acts have been on the rise over the past few
years, they have not reached the same proportions as in
neighboring South Africa.


Corruption

Corruption is a serious problem in Mozambique. Bribe-seeking
activity by officials is common. Senior officials often have
conflicts of interest between their public roles and their
private business interests. Bribery is considered a criminal
offense in Mozambique, and political declarations have been
repeatedly issued denouncing corrupt practices and promising
actions against the guilty. Despite this, such actions have
been extremely slow in coming. Investigations rarely result
in convictions, unless the accused has relatively minor
influence, and senior officials are seldom, if ever,
investigated. The media is relatively unafraid to report on
corruption allegations, however.

Over the past three years the United States has been one of
the lead donor countries in providing assistance to the
government to fight corruption. With US resources, the
government set up an Anti-Corruption Unit in the Office of
the Attorney General (renamed in 2005 the Central Office for

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the Combat of Corruption). This body is charged with
investigating and prosecuting corruption-related crimes. As
one result of its reorganization in 2005, the office is
expanding in size by hiring more lawyers.

The National Assembly passed an anti-corruption bill in 2004
that updated previous antiquated legislation. Civil society
has become more vocal on corruption-related issues, with some
support from the US government. One US-supported NGO, Etica
Mocambique, is active in pressuring the government to act
against corrupt practices. Etica runs a civic education
campaign to help citizens identify and protect themselves
against corrupt officials or activities. Among other
achievements, Etica established several corruption reporting
centers that give citizens free legal advice, and offer a
mechanism for discreetly reporting corruption-related crimes
to the Attorney General's office.

Mozambique is a signatory to the Untied Nations Convention
Against Corruption.


Bilateral Investment Agreements

In December 1998 Mozambique negotiated a Bilateral Investment
Treat (BIT) with the US. The US. Senate ratified the treaty
in November 2000, followed by the Mozambican Council of
Ministers in December 2004. The US-Mozambique BIT came into
effect on March 3, 2005. In June 2005 the US and Mozambique
signed a Trade and Investment Framework Agreement (TIFA) that
established a Trade and Investment Council to discuss
bilateral and multilateral trade and investment issues.

Mozambique has also signed bilateral investment agreements
with South Africa, Portugal, Zimbabwe, Mauritius, France,
Italy, China, Egypt, Indonesia, Algeria, Switzerland,
Germany, the Netherlands, Sweden, Denmark, the UK and Cuba.

South Africa is Mozambique's biggest trading partner and the
largest source of foreign investment. Since 1995 Mozambique
has engaged in regular discussions with South Africa to
harmonize trade regulations and facilitate cross-border trade
and investment. Other countries with significant investment
in Mozambique include the United Kingdom, India and Portugal.
The United States is a minor trading partner and has modest
investments.


OPIC and Other Investment Insurance Programs

The Overseas Private Investment Corporation (OPIC) has
provided financing to two ongoing projects in Mozambique -
private investment in and management of transportation
services along the Nacala corridor (port and railway) and
tourism development on the coast.

Mozambique is a member of the Multilateral Investment
Guarantee Agency (MIGA),part of the World Bank Group.


Labor

The estimated work force is approximately nine million, out
of a total population of 19 million. However only
approximately 500,000 are formally employed. In 2005 the
government increased the country's minimum wage by 15%,
making the new minimum wage for industry and services
approximately USD 53 a month and the minimum wage for
agricultural workers approximately USD 38 a month. This
minimum wage applies only to those working in the formal
sector; those working in the informal sector earn
significantly less. Many people work several jobs to make
ends meet, and often grow corn and vegetables on a small plot
of land for personal consumption. An estimated 81% of the
labor force works in agriculture, 6% in industry and 13% in
services.

Nationwide literacy levels are estimated at 45% (2005 World
Bank figure),with urban centers accounting for the majority

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of literate adults.

Labor unions created during the socialist years of the 1970s
and 1980s remain weak and are disengaging themselves from the
ruling party, FRELIMO. Total membership among Mozambique's
fourteen unions is close to 200,000 persons. Labor unions
are exerting pressure on the government to maintain extremely
pro-worker provisions in new labor legislation currently
under negotiation, although they are showing flexibility on
major issues. The minimum wage, decided every year, remains
a major concern for the unions. Potential investors should
be aware that severance payments and other benefits could be
costly. A new labor law is expected to pass in 2006. It is
likely to significantly reduce the cost of hiring and firing
workers and to generally make the formal labor market more
flexible. It is essential to obtain reliable legal counsel
on labor code requirements.


Foreign-Trade Zones/Free Ports

The government issued Decree No. 61/99 on September 21, 1999,
establishing industrial free zones (export processing zones).
The decree set up an Industrial Free Zone Council, which
approves companies as industrial free zone enterprises,
thereby providing them customs and tax exemptions and
benefits. There are two essential requirements for
Industrial Free Zone status: job creation for Mozambican
nationals and the exportation of at least 85% of annual
production. Industrial Free Zone developers enjoy an
exemption from customs duties, VAT and tax on the importation
of construction materials, machinery, equipment, accessories,
accompanying spare parts and other goods destined for the
establishment and operation of the Industrial Free Zone. The
processing of cashew nuts, fish and prawns are not acceptable
industrial free zone activities. Free zone concessions are
granted for a renewable period of 50 years. Mozambique's
large export-oriented investment projects of recent years,
such as MOZAL and SASOL, operate as industrial free zones.


Foreign Direct Investment Statistics

Historical Data: The government established the Investment
Promotion Center (CPI) in 1985. From January 1, 1990 through
December 31, 2005 CPI approved a total of approximately 2100
projects involving over USD 3.6 billion in foreign direct
investment. Some of these approved projects turned out to
be smaller than planned or not implemented at all, for this
reason, approved projects do not represent the actual FDI for
any given year.

South Africa, Portugal, the United Kingdom, Japan and Ireland
have been the top investors in Mozambique. In 2005, however,
the top five investors were South Africa, the United Kingdom,
Zimbabwe, Portugal and Sweden.

The following chart displays foreign direct investment
approved by the CPI in Mozambique over the last 15 years.
Most of the investment has been in the south, in and around
the capital city, Maputo.

Year Number of Projects FDI $ mil
1990 31 20
1991 25 21
1992 27 77
1993 29 46
1994 123 136
1995 166 60
1996 270 97
1997 184 558
1998 209 207
1999 235 101
2000 179 230
2001 129 528
2002 128 559
2003 112 122
2004 105 122
2005 139 165

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2005 Foreign Direct Investment:

In 2005 CPI approved a total of 139 projects with a FDI value
of USD 165 million. It is estimated that these approved
projects will create over 15,000 jobs. Of this amount, US.
FDI amounted to USD 1.6 million (for two projects). The
breakdown by sector was as follows:

Sector Number of Projects FDI $ Mill.

Industry 36 16.5
Mining/Energy 2 3.8
Agriculture &
Agro-Industry 25 41.4
Banking/
Insurance 1 1.9
Tourism/Hotels 38 84
Transport/Comm. 7 4.9
Construction 7 4
Aquaculture/
Fishing 3 0.6
Other 20 7.5
Total 139 164.5


The following chart shows 2005 CPI-approved foreign direct
investment by province, as well as the estimated number of
jobs that will be created by the approved projects (if
implemented).


Province Number of Projects FDI $ Mill. Jobs
(est.)

Maputo 50 78.6 7,465
Gaza 9 42.2 1,119
Nampula 15 0.4 1,080
Sofala 14 13.2 1,813
Zambezia 6 2.3 521
Inhambane 20 10.8 984
Cabo Delgado 5 4.0 230
Manica 10 5.6 1,110
Tete 6 2.5 220
Niassa 4 5.0 503
Total 139 164.5 15,045


US. Foreign Direct Investment In Mozambique:

Several US. companies have investments in Mozambique. In
1996 Seaboard Corporation (Kansas) purchased a state-owned
flourmill in Beira through the country's privatization of the
state firm, Mobeira. The South African Bottling Company
(SABCO),which is partly owned by Coca-Cola, owns Coca-Cola
bottling plants in Maputo, Chimoio, and Nampula that provide
national coverage. Another significant US investor is
Colgate-Palmolive. In addition, in early 2005, US firms
Railroad Development Corporation (RDC) and Edlow Resources
(ERL),majority shareholders in the Nacala Corridor
Concession Group, assumed ownership and management of the
Nacala port and railway network. Other US investments are
represented in the following ventures: Tenga Ltd., a
macadamia nut plantation in Niassa province, and Indian Ocean
Aquaculture (IOA),a shrimp aquaculture project in Cabo
Delgado. The US Embassy in Maputo, Mozambique is able to
provide a list of US investments in Mozambique upon request.
La Lime