Study on the state-owned enterprise sector of Mozambique and strengthening reporting on state participation by these companies and EITI

The Government of Mozambique has committed itself to implementing the Extractive Industry Transparency Initiative (EITI) in order to increase transparency and responsibility in the management of extractive resources. In June 2009, Mozambique became an implementing country, having been considered compliant in October 2012 and therefore admitted to the Club of EITI member countries. EITI is a global standard that promotes transparency and accountability in the oil, gas and mining sectors. The EITI Standard has introduced new requirements for drafting reports of state-owned enterprises, including: disclosure of financial transfers between the state-owned enterprises and other government entities; and disclosure of income received on behalf of the government and spending on social services, public infrastructure or fuel subsidies.

It is in this perspective that the EITI launched a study to identify elements for SOE disclosure of strengthening the Extractive Sector. This report presents the results of this study, which analyzed data for state participation in the extractive industry and the role of the State Owned Enterprises under the requirements of the context (2.6, 4.2, 4.5 and 6.2) of the Standard EITI in 2019. 

Mozambique has a vast potential and diversity of mineral and hydrocarbon resources, whose knowledge constitutes the key factor to ensure its sustainable management and exploitation, in order to better contribute to the country's development. 

The main basins of Mozambique extend along the coastal plain of central and southern Mozambique, while the Rovuma Basin is located in the north of the country, from the coastal zone to the deep offshore waters. There are currently 10 exploration areas in these two basins, and ENH participates in these activities in partnership with other international operators. 

In relation to mining, at the beginning of the year 2000 several Industrial Free Zones and Special Economic Zones were created in the country, with emphasis on the Moma Industrial Free Zone, where Kenmare's Moma Heavy Sands Project is operating; and the Moatize Industrial Free Zone, where the mega coal mining projects were installed (Companhia do Vale do Rio Doce called Vale de Mozambique and Riversdale Mining, called Riversdale Mozambique). These mega-projects have significant impacts on the Mozambican economy, environment, culture and social field. 

The growth of the extractive industry has pressured the country to review, improve and elaborate regulatory instruments such as laws, resolutions, decrees, ministerial diplomas, policies, strategies and master plans. These instruments aim to accompany the dynamics of the developments of the extractive industry, in order to attract more investments to the sector, to ensure the competitiveness, transparency and protection of the holders of mining concessions and areas for the exploitation of hydrocarbons and, above all, to safeguard the national interest and community benefits. 

In recent years, a legal and regulatory framework for the SOE has been produced, namely Law No. 3/2018, which enshrines the principles and rules applicable to the SOE and the Scope of the Decree No. 10/2019. The new diploma applies to companies or companies in which the State is the sole shareholder or is a majority shareholder. The new rules determine the role of the State as a shareholder, as well as the organization, operation and management of each governing body of the companies concerned. Law no. 2/81, of 30 September, Law no. 17/91, of 3 August and Law no. 6/2012, of 8 February, on the same matter were revoked.

State participation in the oil, gas and mining sector is complex and the rules that govern the sector are not yet accessible from the point of view of interpretation and practical application. This participation is verified through public entities and state-owned companies, and its financial relations with the State, supported by Law No. 3/2018 as well as by Decree No. 10/2019, occur through the payment of dividends and transfers of operating subsidies. 

The legislation on the SOE is recent, which requires greater disclosure, monitoring of the implementation by the relevant entities, namely IGEPE audit and inspection institutions and debate entities to allow the improvement of their understanding and the identification of aspects that need improvement and revision. 

The State as a shareholder and holder of capital, received a total of 2,339.16 million Meticais from its companies as dividends, of which more than 71% comes from CMH, however, EMEM was the only company that did not pay dividends in the period from 2016 to 2020. 

Under Article 11 of Law No. 15/2018, of 20 December, the Government was authorized to issue in 2019, guarantees and sureties amounting to 151.250 million meticais. From the stipulated limit, 136.125 million Meticais were allocated to support the Extractive Industry of the Owned-State Enterprise, namely the participation of the Empresa Nacional de Hidrocarbonetos (ENH) in the LNG project in the consortium led by Total SA (also known as Golfinho - Atum in Area 1) in the Rovuma Block. The remaining 15.125 million meticais were allocated the remaining companies of the State-Owned Enterprise Sector, that are not part Extractive Industry. 

The Government of Mozambique has the right to receive up to 5% of the natural and condensed gas produced and sold to be paid to the Government by the concessionaire, by way of payment in kind of the Petroleum Production Tax, which amount of gas is called “royalty”. Currently, the royalty paid in-kind natural gas received by the Government corresponds to the Petroleum Production Tax paid by Sasol Petroleum Temane (SPT). For the Petroleum Production Contract (CPP), related to the Pande and Temane fields, it corresponds to 5% of the gas produced and sold, and can be paid in kind or in cash. 

According to the information provided by MIREME the total volume of natural gas royalty paid in kind allocated to the Government in the period amounted to 24,564,298.66 GJ, and the total gas condensate royalty paid in cash was 1,753,716.65 USD. Of the total gas paid in kind, 68% was allocated to Matola Gas Company, SA and the rest to Kuvaninga and Empresa Nacional de Hidrocarbonetos - ENH. 

As for the selection of buying companies of gas, the government is granting allocation to customers, and through this allocation, ENH plays its role is to manage business operations (including the price of gas, transport rates and its assumptions, technical aspects such as the gas specification and quantities to be taken on a daily, monthly and annually). This selection process follows the criteria recommended in the Gas Allocation Policy contained in the Natural Gas Master Plan. 

The Law that establishes the principles and rules applicable to the State-Owned Enterprise Sector (Law no. 3/2018, of 19 June) and the corresponding regulation (Decree no 10/2019, of 26 February), make no mention the requirement for state-owned companies to make expenditures on behalf of the government. In the analysis of the Financial Statements of the SOE companies in the extractive industry, there was no evidence of the occurrence of quasi‑fiscal expenditures.

• IGEPE must ensure the full extent of the State's direct and indirect participation in the extractive sector and define rules that oblige SOE to provide information on sovereign guaranteed financing (with emphasis on the interest rate and payment schedule), order to allow the analysis of the conditions to which the State is submitted to guarantee participation extractive projects. )
• Legislation on the SOE is recent, which requires greater disclosure, monitoring of implementation by the relevant entities, namely IGEPE and inspection entities, and debate to allow the improvement of its understanding and the identification of aspects that need improvement and revision.
• Improve the process of disclosing the audited financial statements of the SOE companies in the extractive industry, mainly on the companies' websites, which may allow the society in general to learn about the benefits of the State's participation in the extractive industry through the SOE companies, including where the state is minority shareholders.
• In relation to the allocation of royalty gas, the State must define and implement rules and / or criteria for the selection of gas purchasing companies, publicize sales contracts, as well as payment methods, with a view to maximizing the gains from payments in and greater transparency in the process.
• Contribute to improving the understanding of requirement 6 of social and economic expenditures in general, and 6.2 of quasi-fiscal expenditures in particular, through the definition of rules that clarify whether or not such expenditures are permitted.
• In order for ITIEM to improve understanding, there will need to be capacity building sessions for the MSG.
• Continuing the struggle for full transparency in natural resource negotiation processes, awarding concessions, contract terms, transfers, payments, use of payments, the relationship between extractive explorations and other economic and social activities, environmental impacts, impacts in people's lives, systems and resource valuation, etc.
• Establishment of a working system to discuss, evaluate and adopt the recommendations of the EITI report and other related evaluations, as well as monitor their implementation.
• Review of systems for providing detailed information about the operations of public companies in the mining and hydrocarbons sector and the State.
• Reviewing the compliance of appropriate laws and regulations and ensuring their full application.
• Review of government participation in the extractive sector.
• Clarify or simplify equity participation and consider participation in profitable companies.
• Model revision / assumptions (ENH debt and its participation), given the dynamics of change in the global energy market.
• Revision of the laws to avoid conflicts of interest such as what happened with INAMI, which is a regulator and shareholder in the same company EMEM in the mining area.