Mozambique - 2007 Investment Climate Statement

UNCLAS SECTION 01 OF 08 MAPUTO 000069

SIPDIS

SIPDIS

AF/S FOR HTREGER
EB/IFD/OIA J. NATHANIEL HATCHER
EB/IFD/OIA AKAMBARA
MCC FOR SGAULL


E.O. 12958: N/A
TAGS: EAGR EAID ECON ELAB EINV ETRD EFIN KTDB USTR
OPIC, PGOV, MZ
SUBJECT: Mozambique - 2007 Investment Climate Statement

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1. The following is Mozambique's 2007 Investment Climate
Statement.

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Openness to Foreign Investment
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2. 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) 313310 or (21) 313375
Fax: (258) (21) 313325
Internet: http://www.mozbusiness.gov.mz or www.cpi.co.mz


3. Mozambique's Law on Investment, No. 3/93, dated June 24,
1993, and its related regulations govern 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 - but those unfamiliar with
Mozambique and the Portuguese language face greater
challenges. Working with a local consulting firm or partner
familiar with the requirements will facilitate the
registration process. CPI assists both local and 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.


4. 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, ranking Mozambique
140 out of 175 nations reviewed. Entrepreneurs can expect
numerous bureaucratic hurdles that must be overcome
sequentially to launch a business. In 2006 the average time
to open a business was 113 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.


5. 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.


6. Government authorities must approve all foreign and
domestic investment. Currently CPI handles the approval
process for both foreign and domestic investors. The final
approval is granted by the following government entities: 1)
The Provincial Governor for domestic investment up to USD
100,000; 2) The Minister of Planning and Development for
domestic investment exceeding USD 100,000 and foreign
investment up to USD 100 million; and 3) The Council of
Ministers for any investment project exceeding USD 100
million and those involving large tracts of land (5,000
hectares for agricultural investment and 10,000 hectares for
livestock and forestry projects).

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Conversion and Transfer Policies
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7. 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.

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Expropriation and Compensation
--------------


8. 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.


9. 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."

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Dispute Settlement
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10. 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. The new Commercial Code
went into effect July 1, 2006.


11. 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.


12. In February 1999 the National Assembly passed
alternative dispute resolution (ADR) legislation, which went
into effect that same year. 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.
Investors who feel they have a dispute covered under the BIT
should contact the US Embassy Economic Section.

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Performance Requirements and Incentives
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13. Mozambique is generally in compliance with WTO Trade-

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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 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). There are also incentives
for companies in industrial free zones (see page 10).


14. 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.


15. 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.

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Right to Private Ownership and Establishment
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16. 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.

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Protection of Property Rights
--------------


17. 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.


18. 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.


19. Over the last two years 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. The task force has successfully acted on IPR
infringement issues, highlighting a successful
private/public partnership.


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Transparency of Regulatory System
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20. 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.


21. 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.


22. The government is aware of the problems and has launched
a donor-funded effort to streamline procedures. The new
Commercial Code that went into effect July 1, 2006, is seen
as a step forward in combating many of these issues.

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Efficient Capital Markets and Portfolio Investment
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23. 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 Novo Banco, offer micro-credit financing
programs to partially fill this need.
The Mozambican Stock Exchange, founded in October 1999, was
started with less than USD 5 million in capitalization.
Today its capitalization is over USD 200 million.

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Political Violence
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24. There were few incidents of localized violence in the
run-up 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 2004 voting.


25. 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.


26. Labor unions are becoming less vocal, and lack 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.

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Corruption
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27. 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

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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.


28. Over the past several 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
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
expanded in size by hiring more lawyers.


29. In 2005 the government passed Decree 22/2005, which
created provincial-level offices to combat corruption.
Offices were opened in Beira and Nampula, and are in
operation. In 2006 documents authorizing the creation of
two additional offices in Inhambane and Zambezia provinces,
respectively, were submitted; offices will be opened once
the Council of Ministers publishes its approval decree.
There are plans to submit requests for an additional four
provincial offices in 2007.


30. 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 NGO, Etica
Mocambique, continues to be 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.


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

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Bilateral Investment Agreements
--------------


32. In December 1998 Mozambique negotiated a Bilateral
Investment Treat (BIT) with the US. The U.S. 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. The Council held its first
meeting in October of 2006. The BIT is in addition to the
OPIC agreement signed by Mozambique in 1999 and ratified in

2000.


33. Mozambique has also signed bilateral investment
agreements with the following nations (in chronological
order by ratification date): Portugual (1998),Mauritius
(1998),South Africa (1998),Zimbabwe (1999),Italy (2000),
Algeria (2000),Egypt (2000),Indonesia (2000),China
(2002),Sweden (2002),Cuba (2002),The Netherlands (2002),
Germany (2002),France (2004),Switzerland (2004),the
United Kingdom (2004) and Finland (2004). Mozambique's
agreement with Belgium, signed in 2006, has not yet been
ratified.


34. 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
relatively minor trading partner and has modest investments.

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OPIC and Other Investment Insurance Programs
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35. 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

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tourism development on the coast.


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

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Labor
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37. 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 2006 the
government increased the country's minimum wage by 13% in
the industry and services sectors and by 11.5% in the
agriculture sector, making the new minimum wage for industry
and services approximately USD 58 a month and the minimum
wage for agricultural workers approximately USD 40 a month.
These increases were slightly above reported inflation.
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. Approximately 80% of
the labor force works in agriculture, 6% in industry and 13%
in services. Current estimates place nationwide adult
literacy levels at under 50%, with most of the literate
Mozambicans living in urban centers.


38. 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.


39. A revision to the Labor Law was presented to the General
Assembly in 2006. However, the proposal was tabled without
any action, and any Labor Law revision in the near future is
uncertain. The current law is archaic and complicated,
making it essential to obtain reliable legal counsel on
labor code requirements.

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Foreign Trade Zones/ Free Trade Zones
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40. 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. There is no
requirement for free zone companies to be located at
specific sites.

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Foreign Direct Investment Statistics
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41. Historical Data: The government established the
Investment Promotion Center (CPI) in 1985. From January 1,
1990 through December 31, 2006 CPI approved a total of 2,250
projects (both foreign and national) involving over USD 3.76
billion in foreign direct investment. Some of these

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approved projects turned out to be smaller than planned or
not implemented at all, however. Approved projects do not
represent the actual FDI for any given year for this reason.


42. In 2006 the top ten sources of foreign direct investment
were South Africa, Mauritius, the United Kingdom, Ireland,
Portugual, Malawi, the United States, India, Zimbabwe, and
Germany.


43. The following chart displays foreign direct investment
approved by the CPI in Mozambique over the last 16 years.
Most of the investment has been in the south, in and around
the capital city, Maputo.

Year Projects FDI (USD Millions)


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
2006 157 162

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2006 Foreign Direct Investment:
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44. In 2006 CPI approved a total of 157 projects, with a FDI
value of just over USD 162 million. It is estimated that
these approved projects, along with locally sourced direct
investment projects, will create over 19,000 jobs. Of this
amount, U.S. FDI amounted to just over USD 2.6 million (for
three projects). The breakdown of all projects approved in
2006 (foreign and national) by sector is as follows:


Sector Projects FDI (USD Millions)

Industry 34 17.4
Mining/Energy 3 7.4
Agriculture and Agro-Industry 24 20.8
Banking/Insurance 2 2.4
Tourism/Hotels 58 76.6
Transport/Communications 10 6.7
Construction 10 3.4
Aquaculture/Fishing 1 8.2
Other 15 19.4
Total 157 162.3



45. The following chart shows 2006 CPI-approved foreign
direct investment by province, as well as the estimated
number of jobs that will be created by the all approved
projects (foreign and national),when implemented.


Province Projects FDI (USD Mil.)(Jobs)

Maputo 59 99.4 12,103
Gaza 8 3.6 180
Nampula 10 1.2 1,083
Sofala 9 1.3 484
Zambezia 7 3.7 543
Inhambane 39 17.5 1,112
Cabo Delgado 6 7.1 235
Manica 10 2.8 502
Tete 8 15.7 630
Niassa 1 10.0 2,500
Total 157 162.0 19,372


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U.S. Foreign Direct Investment in Mozambique
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46. Several U.S. companies have investments in Mozambique.
In 1996 Seaboard Corporation (Kansas) purchased a state-
owned flour mill 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. Another significant U.S. investor is Colgate-
Palmolive. In addition, in early 2005 U.S. firms Railroad
Development Corporation (RDC) and Edlow Resources (ERL),
together with a local firm, Manica Freight, won majority
shareholder control of the Nacala Corridor Concession Group
and assumed ownership and management of the Nacala port and
railway network. There is an American interest in Indian
Ocean Aquaculture, a shrimp farm project in Cabo Delgado
province.


47. American Metals and Coal International has a 5% holding
in a giant coal concession in Moatize, Tete province, with
95% owned by the Brazilian firm Companhia Vale do Rio Doce.
CVRD recently completed the financial and technical
feasibility studies for the Moatize coal project and related
thermal power plant, and has invested USD 80 million to
date. A final decision whether to proceed with the project
is anticipated in 2007.


48. In 2006 Anadarko Petroleum Company (Anadarko) won a
tender to explore for oil and gas in the Rovuma basin off
Mozambique's northernmost province, Cabo Delgado. Anadarko
signed its concession agreement with Mozambique in December

2006.


49. The U.S. Embassy in Maputo, Mozambique is able to
provide a comprehensive list of U.S. investments in
Mozambique upon request.

Dudley