Important regulatory developments – the Mozambican Coal Sector – September 2013

The coal industry in Mozambique plays a major and growing role in the economic and social development of the country. The immense reserves of coal and the active commencement of its exploitation will undoubtedly make Mozambique one of the key coal producers and exporters in the world.

Rio Tinto, Vale, Jindhale, ENRC and other internationally renowned companies hold mining titles and have commenced operations.

However, the under-developed infrastructure and inefficiencies in the transportation and export facilities and management are obstacles still to be overcome. In a positive development, somemining companies combined efforts in the rehabilitation and management of key infrastructure and the development of new ones. An example is the Vale railway project that crosses Malawi and reaches Nacala Bay in northern  Mozambique, where a new dedicated coal terminal is to be built.

In Mozambique, projects involving the exploration or exploitation of coal, a natural resource subject to public ownership, and the development and management of infrastructures such as railways and harbours, require the granting of a special title, the signing of mining contracts or entering into a public-private partnership (the case of public infrastructures) with the relevant government entities.

Jorge Graça, Lawyer and Managing Partner of Couto, Graça & Associados, made a presentation on “Key Regulatory Development Affecting Mozambique’s Coal Sector” (click the link to view this presentation) at the Conference Mozambique Coal, on the 15th of July, 2013, held in Maputo, Mozambique.

Jorge shares with readers his experiences of key legislative and regulatory changes impacting mining concessions. In particular, he covers the following:

• implications of recent legislative changes – Mega-Projects Law and Mining Law (Law 15/2011 of 10th of August and Law 14/2011 of 26th of June);
• key regulatory changes affecting foreign investors in Mozambique Coal; and
• tendencies shown in the legislative and regulatory evolution.

1. Regarding the implications of the Mega-Projects Law (MPL), passed in August 2011, Jorge highlights some important points to bear in mind:

Interpretations rules

• The MPL is a so-called cross-sectors or horizontal law. In other words it rules on any sectors and activities that fall under its scope and provisions. Therefore, the provisions of the MPL on business concession and on mega–projects are generally applicable to the relevant mining sector’s activities. However, the Mining Law (ML) is the Act that governs mining activities (excluding non-solid minerals). This is a sectorial or specific law. Generally, the ML provisions prevail over the MPL provisions unless the MPL states that a certain provision prevails over a sector’s legislative provision.

• The MPL complements the ML on matters it has not ruled on, or has ruled on but left gaps, and such matters fall under the scope of the provisions of the MPL.

Specific links between MPL and ML

• Scope

Exploration and/or exploitation of natural resources, including coal reserves or any other resources or goods that are deemed to be part of the national assets.

• Business Concession and Mega-Projects

Business Concession (BC) is a legal concept. It is defined as a contract or any form of entitlement granted by the Government of Mozambique to an entity to undertake the exploration and/or exploitation of natural resources such as coal reserves or any other  national assets.

An investor may receive concessions for a development on the scale of a mega – project. Under the MPL, from 1st January 2009 undertakings that, with a value exceeding 12.500.000.000, 00 Mts (approx. US$500m) are treated as mega-projects. This is likely to be the case with certain exploration and mining concession titles. Mega-projects are governed by the MPL and its general regulations.

Mining titles requiring less investment than mega-projects fall outside the mega-project category. They are, however, also governed by the MPL’s provisions on business concession, provided that a contract with the Government of Mozambique is signed by the relevant project entity. Besides being governed by the relevant MPL’s provisions, to such small or medium scale investment projects specific separate regulations will also apply (these still  need to be passed).

It should be noted that the business concession concept, as defined in e the MPL, does not include contractual arrangements or any other forms of entitlement which fall under the Public Private Partnership concept, to which relevant specific provisions of the MPL are  applicable.

1. Regarding regulatory changes affecting foreign investors in mining sector, some key things must be taken into account by mining investors and their advisors: 

Fair share of benefits between the mining title holder and the state, the country and the community

A first in this type of legislation is that the MPL includes criteria around the concept of the fair sharing of benefits regarding business concessions and mega–project undertakings. Such benefits must be agreed in relevant contracts, taking into account the financial and economic viability of the project and the financial model for the undertaking or project.

The aim is that the assessment of the benefits and their sharing must safeguard the viability and sustainability of the project, and the rights and interests of the financiers, the State, the national economy and the society at large.

It should be noted that mining contracts, not only the mining title as was previously mainly the case, have started to play an increasingly central role in mining exploration and exploitation activities. Such contracts have become the key instrument that governs the relationship between the granting entity, the Government represented by the Minister of Mineral Resources, and the mining contracted party. There are mandatory standard clauses for the mining contracts provided for in the Mega-Project Law and the Mining Law.

Renewal of existing mining contracts and new mining contracts

The MPL applies to mining contracts signed from its enforcement date (10 August 2011).  However, renewals of existing mining contracts are subject to the MPL applicable provisions, depending on the renewal clause terms.

Project entity

The MPL requires that mega-projects are implemented by a particular type of company in Mozambique – the “Sociedade anónima” (public limited company / joint stock company).

Financial benefits for the country

Certain financial benefits accrue to Mozambique flowing out of such contracts and projects. For instance, the financial benefits the State or Mozambicans is entitled to in terms of the MPL are:

• a bonus of between 0,5% and 5% and a concession fee of 2% to 5% of the fair value of the mining activities (material or non-material, including camp, buildings, equipment, mining titles, share capital, or contractual share participation);

Mozambican participation in the share capital of the relevant entity to a level of between 5% and 20% to be reserved for sale via the stock market, preferably to individual citizens. The stock may be kept in trust by the state or the project implementing entity, without conditions for sale in phases up to 5 years from the exploitation commencement date;

• a participation opportunity for private or public legal entities, to be agreed in the contract;
• a free carry equity of up to 5% of the share capital, at any phase of the undertaking, for the granting of the rights of exploitation of the relevant natural resource; and
• the relevant project entity is required to generate profits and extraordinary benefits. A minimum percentage of profits is regarded to be distributed as dividends following the annual income statement approved by the project entity. If the project entity achieves extraordinary profits, it should also increase the amount of dividends payable to the shareholders. Also, such an entity must create a specific fund or reserve of capital aiming to ensure the financial sustainability of the project.  If the project entity generates profits, a proportion must also be allocated to support social corporate responsibility programs.

As a general minimum requirement, the annual value of the financial benefits accruing to the country shall not be lower than 35% of the annual income statement profit of the project, which is stated in the annual income statement of the project entity. That percentage includes the corporate income tax (32%).

1. Jorge Graca is of the view that the legislative developments for the mining sector in Mozambique in relation to mega-projects, and the changes that are expected to occur during the next one to two years, based on existing drafts reviewing mining and tax laws,  point to the following key legislative tendencies:

• to continue sustaining legal support to contractual stability and the acknowledgement and protection of acquired rights. Changes in law do not compulsorily affect such rights and will not be retroactive. Changes to contracts must be mutually agreed;
• to provide for a wider use of contractual mechanisms and public tender procedures in the granting of exploration and exploitation rights over natural resources. Exceptions to the public tender rule will be in the public interest, as specified in the relevant laws and regulations;
• to establish a more demanding standard form and content for mining contracts in general;
• to harmonize the rules and regulations specific to the mining sector with the Mega–Projects Law;
• to enhance local content in exploiting natural resources resulting in a combined national and foreign investment in mining;
• to provide for the involvement of the state in mining strategic businesses. This may occur through the participation of government agencies in private entity undertakings or through companies incorporated by the state itself to which mining rights are granted. These companies would then establish mine operation service contracts with other companies;
• to establish a wider co-operation between the private and public sectors in the exploration and exploitation of natural resources;
• to expand the taxation net capturing capital gains generated on the basis of national natural resources;
• to offer a wider range of tax benefits for investment in mining activities;
• to implement a fair share criteria in the sharing of the financial benefits generated by business concessions and mega-projects, creating local investment and participation rights through the Mozambique stock market;
• to develop the capital market in Mozambique, particularly through the enhancement of the Mozambique Stock Exchange;
• a change to the definition of minimum and maximum percentages of deduction on certain taxes allowing the Council of Ministers some room for negotiation, instead of being restricted to a fixed tax benefit as is the present case;
  • to broaden the existing legal and regulatory framework applicable to mining sector activities, as well as make it more comprehensive so as to now more extensively include environment and social responsibilities; and
  • to enhance the institutional strength and structure of relevant government administrative entities providing for more specialist roles for  policy, regulatory and commercial activities.

Jorge Graca may be contacted at jgraca@cga.co.mz and readers are also referred to LEX Africa’sdownloadable Business Guide.