The Mozambican economy
Mozambique’s economy grew at a rate of 3.2% in the first half of 2018 – an increase of 20 basis points compared to the same period of last year, which is well below the average of 7.0% a year between 2005 and 2014. This is mainly due to the suspension of direct aid from cooperation partners, low levels of foreign direct investment and the global fall in the price of commodities and raw materials which has negatively affected the Mozambican economy and, in particular, the extractive industry.
Growth of the gross domestic product (GDP) of Mozambique is expected to remain weak for the remainder of 2018 and on 2019, but a significant and robust economic growth is expected to start in the coming years, mainly driven by export-focused industries, such as exploration of large natural gas deposits. In particular, the Coral South FLNG Project, which relates to a discovery located in water more than 2000 metres deep and approximately 80 kilometres offshore of the Palma bay in the northern province of Cabo Delgado, foresees the drilling and completion of 6 subsea wells and the construction and installation of a technologically advanced state-of-the-art floating LNG facility, the capacity of which will be around 3.4 MTPA.
It was reported that the construction of the hull of the FLNG facility began in September 2018, with LNG production expected to start by 2022.
China is one of Mozambique’s largest trading partners and is also one of the largest financiers and builders of public infrastructures in Mozambique. It has also been involved in the LNG Rovuma Basin Project through the China National Petroleum Corporation group, which has reportedly already invested more than USD5 billion in the consortium of the Area 4 block in the Rovuma basin led by the Italian multinational Eni, where China National Petroleum Corporation group has an indirect stake of 20%.
South Africa, Portugal, India and Japan are also important trading partners and have been increasing their investments.
Despite significant investment opportunities in various sectors, the trend in recent years has been the influx of foreign investment mainly in the areas of public infrastructure, natural resources and energy, particularly in relation to the construction and rehabilitation of bridges, roads and airports, power generation and transmission facilities - mainly through public-private partnerships - and the development of Mozambique's extensive coal, graphite, heavy sand, gemstones and natural gas resources.
With regard to power generation projects, there has been renewed interest in the exploration of new and renewables sources of energy, particularly hydro, solar and wind. In June 2018, the first stone was launched for the construction of a 40 MW solar plant in Mocuba, in Zambézia Province, a project involving Scatec Solar, KLP Norfund Investments and state-owned company Electricidade de Moçambique (EDM).
Foreign Investment in Mozambique
The Government of Mozambique encourages foreign investment and Mozambique offers significant investment opportunities in various sectors such as agriculture, fishing and aquaculture, extractive industries, tourism, public infrastructure, natural resources and energy. Investment, including foreign investment, is subject to specific legislation.
The Investment Law, its regulation and the Tax Benefits Code lay down the legal framework applicable to foreign and national investments.
Private foreign and national investments are granted a set of benefits, which include, among others, deductions from the taxable amount in the scope of corporate income tax and exemptions from custom duties on imports. The minimum eligible value of direct foreign investment for the purposes of the benefits referred to above is USD100,000.
Direct foreign investment is considered to be any form of foreign capital contribution for which a pecuniary value can be ascertained, coming from abroad and intended for the realisation of an investment project in Mozambique, through a registered entity operating in Mozambique.
The direct foreign investment can take one of the following forms: i) freely convertible currency; ii) equipment and relevant spare parts, materials and other imported goods; and iii) the granting, in specific cases and under the terms agreed upon and approved by the authorities, of concession rights to use patented technologies or registered trademarks, for which remuneration is limited to the participation in the distribution of profits resulting from the activities in which such technologies or trademarks have been or shall be used.
Investment projects approved under the legislation applicable to investment in Mozambique are eligible for the following benefits, based on their location and/or activity:
i) guarantee of protection of ownership rights;
ii) guarantee of the transfer of funds (profits or dividends, royalties, amortisations and interest from loans and foreign capital invested and re-exportable abroad); and
iii) grant of tax benefits.
The Investment Law, its regulation and the Tax Benefits Code apply to investments of an economic nature carried out in Mozambique which intend to benefit from the guarantees and incentives set above, including those investments carried out in industrial free zones and in special economic zones, regardless of the nationality and the nature of the investor. Notwithstanding, this legislation shall not apply to investments made or to be made in the areas of prospecting, research and production of petroleum and gas and in mineral resources extraction industries, which are governed by sector-specific legislation.
Dispute Resolution and Bilateral Investment Treaties
Mozambique is a signatory to the Washington Convention of March 1965 relating to the Settlement of Investment Disputes. Under the Investment Law, the State agrees to submit disputes with foreign investors to arbitration.
The Investment Law contemplates the following possible arbitration mechanisms:
• Arbitration through the International Centre for the Settlement of Investment Disputes ("ICSID") under the Washington Convention of March 1965 relating to the Settlement of Investment Disputes (the "ICSID Convention");
• ICSID arbitration under the ICSID Additional Facility Rules to the extent that the investor is a national of a state that is not a signatory to the ICSID Convention; and
• International Chamber of Commerce Arbitration in Paris.
Foreign investors should also take into consideration the protection provided by way of Bilateral Investment Treaties when structuring their investments. To date, Mozambique has entered into Bilateral Investment Treaties with the following countries: Algeria, Belgium, China, Cuba, Denmark, Egypt, Finland, France, Germany, India, Indonesia, Italy, Mauritius, the Netherlands, Portugal, South Africa, Spain, Sweden, Switzerland, the United Kingdom, the United States, Vietnam and Zimbabwe.
In addition, it has Treaties to avoid Double Taxation in place with the following countries: Botswana, India, Italy, Macau, Mauritius, Portugal, South Africa, the UAE and Vietnam.