Assessment of the Legal and Regulatory Framework for Foreign Direct Investment Mozambique © 2021 The World Bank Group 1818 H Street NW Washington, DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org All rights reserved. This volume is a product of the staff of the World Bank Group. The World Bank Group refers to the member institutions of the World Bank Group: The World Bank (International Bank for Reconstruction and Development); International Finance Corporation (IFC); and Multilateral Investment Guarantee Agency (MIGA), which are separate and distinct legal entities each organized under its respective Articles of Agreement. We encourage use for educational and non-commercial purposes. The findings, interpretations, and conclusions expressed in this volume do not necessarily reflect the views of the Directors or Executive Directors of the respective institutions of the World Bank Group or the governments they represent. 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All queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2422; e-mail: pubrights@worldbank.org. Photo Credits: Shutterstock.com TABLE OF CONTENTS ACKNOWLEDGEMENTS 2 1. INTRODUCTION 3 2. BACKGROUND TO THIS STUDY 7 Benchmarking Mozambique’s Legal and Regulatory Framework 8 Overview of the Recent Evolution of the Institutional and Regulatory Framework 11 3. BARRIERS TO INVESTMENT ENTRY 15 Legal and Regulatory Barriers 15 Lack of transparency on sectors open or closed to FDI 16 FDI screening 17 Restrictions to own land 17 Work permits for foreign workers 18 Entry visas 18 Local content policies 19 De Facto Barriers 19 Barriers to Facilitate Investment in Mozambique’s Special Economic Zones 21 4. GAPS IN THE INVESTMENT PROTECTION FRAMEWORK 25 Treatment of the Investor 25 Protection against nondiscrimination via the national treatment principle 25 Fair and equitable treatment: An absolute standard of protection 26 Protection of Established Investments 26 Protection against unlawful expropriation 26 Free transfer of funds 28 Access to Investor-State Dispute Settlement 28 5. RECOMMENDATIONS 31 APPENDIX A: LIST OF REVIEWED BITS 33 APPENDIX B: LIST OF LEGAL TEXTS GOVERNING SEZS 34 NOTES 35 REFERENCES 38 ASSESSMENT OF THE LEGAL AND REGULATORY FRAMEWORK FOR FOREIGN DIRECT INVESTMENT |1 ACKNOWLEDGEMENTS This diagnostic report was prepared by Ulla The team also thanks public and private sector Heher and Philippe de Bonneval of the World representatives in Mozambique met during the Bank’s Global Investment Climate Unit in 2020 preparation of this report for their invaluable as a background paper to the main Country Private contributions, and other development partners for Sector Diagnostics (CPSD) published in 2021. their insights to the study. Additionally, a special The introduction builds on the economic trends thanks goes to the Investment and Exports Promotion described in the main report (IFC 2021). The Agency (Agência de Promoção de Investimento authors thank Michelle Souto, Francisco Moraes e Exportações, APIEX, IP), and the National Leitao Campos, and Deborah Porte for excellent Directorate for Private Sector Support (Direcção guidance, insights, and inputs as well as comments Nacional de Apoio ao Desenvolvimento do Sector received from Katia Daude, Lisa Kaestner, Peter Privado, DASP) of the Ministry of Industry and Kusek, Marc Lundell, and Ivan Nimac. Trade of Mozambique (Ministério da Indústria e Comércio, MIC) for the close collaboration and support provided during consultation. | 2 ASSESSMENT OF THE LEGAL AND REGULATORY FRAMEWORK FOR FOREIGN DIRECT INVESTMENT 1. INTRODUCTION Mozambique is a low-income country of 29.6 to commodity price shocks as happened in 2014, million people located in Southeastern Africa. which had significant economic impact and was a Mozambique has a gross domestic product (GDP) critical factor behind the slowdown of foreign direct of approximately $12 billion and a GDP per capita investment (FDI) flows and the postponement of of $417, which is among the lowest in the world. the final investment decision (FID) by extractive Poverty is high at 48.4 percent in 2015, albeit multinationals. lower than the 58.7 percent rate in 2009 (World Bank 2018b). Even under declining poverty rates, At present, it is envisaged that the country will the total number of people living in poverty has experience unprecedented investments in the grown as population growth outpaced GDP growth. next 30 years. The liquefied natural gas (LNG) Mozambique has one of the highest total fertility projects are expected to reach over $60 billion rates in Sub-Saharan Africa, and the population is in investment and have the capacity to generate expected to grow to 50 million people by 2050. revenues of approximately $300 billion for the Given this scenario, the country needs rapid accumulated duration of the projects until 2050. solutions for more and better jobs. While the large oil and gas investments can create opportunities for links to the local economy and Historically, growth has depended on have a remarkable development impact in the megaprojects in extractives, but this model has country, these investments are not expected to not delivered the required number of productive generate enough direct employment opportunities. jobs to meet the needs of a growing population. Thus, effectively using the resources generated by Despite the large investment flows into the country the gas investments and providing further links in megaprojects over the past 20 years, other sectors upstream, downstream, and through consumption remain largely underdeveloped. The economy is will be critical. dominated by the agricultural sector, which employs over 70 percent of the labor force but accounts for Realizing the full potential of these large oil only 25 percent of Mozambique’s GDP. Services and gas investments will require a shift in had a marked growth over this period, representing Mozambique’s development strategy to date. approximately 55 percent of GDP. Manufacturing The likely windfall from natural gas and mineral and extractives split equally the remaining 20 resources presents both an opportunity and a percent. The gains from the country’s natural challenge. Although expectations are high, there is resources have not generated sufficient investment fear of replicating a noninclusive model of economic into human and physical capital needed for long- growth that provides enclave development of term productivity growth. industrial investments while the rest of the economy remains underdeveloped. Economic and social In more recent years, new investments reinforced unrest are evident in some parts of the country the megaproject growth model. The significant and without a concerted effort to create jobs and investments of Vale (over $3 billion) in 2009–11, develop the economy as a whole, the unrest has a Sasol ($2 billion), Rio Tinto,1 CNPC, ENI, Exxon, high potential for escalation. Anadarko/Total, and other multinationals attracted by the important discoveries in the extractive The country’s pace of GDP growth has been sector over the decade 2003–13 offered an initial falling. The average economic growth was 3.3 glimpse of the opportunities that could have further percent between 2016 and 2019, down from an transformed the economy. However, the absence average of 7.9 percent over the preceding 15 years of transformation leaves the country vulnerable and reflecting the impact of lower commodity ASSESSMENT OF THE LEGAL AND REGULATORY FRAMEWORK FOR FOREIGN DIRECT INVESTMENT |3 prices in the decline in FDI (figure 1.1a and 1.1b). extraction of finite resources and related large- Moreover, donor support contracted following the scale infrastructure projects is neither sustainable discovery of $1.4 billion in previously undisclosed nor likely to facilitate the number of links and public debt, which had dramatic consequences on spillovers needed to create business opportunities the macroeconomic and fiscal outlook. and jobs for an inclusive and competitive economy. Since 2000, Mozambique’s Economic Fitness2 FDI is a critical source of finance in Mozambique, rather declined in complex sectors in favor of supporting the country’s growth through the less complex industries. Mozambique’s economic development of megaprojects in extractives and fitness in 2015 is equivalent to that of Zambia in infrastructure. It remains the largest source of 1995 and Cambodia in 1998. external finance (figure 1.2) and investment activity (figure 1.3). The fact that in percent of GDP, FDI The strong focus on financing FDI through debt is much higher in Mozambique than in any of its instruments likely reflects the specificities of comparators (Ethiopia, Ghana, Kenya, Tanzania, megaprojects and the little confidence investors and Zimbabwe) (figure 1.1b) further reconfirms the have in the country’s investment climate. Over central role it plays in the economy and highlights the past decade, FDI was dominated by intra- this concentration. From 2010 onward, FDI inflows company loans, with the equity portion of FDI into Mozambique represented over 15 percent of all not increasing much and a negligible amount of Sub-Saharan African FDI. reinvestment (figure 1.5). There is a set of reasons that typically explains this picture and that comes Sectoral disaggregation of FDI underscores the into play at different degrees. First, it indicates that need to diversify to expand the set of opportunities new investments are low (that is, new greenfield it creates for the domestic private sector and projects or mergers and acquisitions that result in workforce. Over 70 percent of FDI between 2009 new direct investment relationships). Second, it and 2019 was linked to megaprojects, going into the may reflect that the level of equity disinvestment, extractive sector (25 percent), utilities (16 percent), typically from high dividends paid to parent construction (15 percent), transport and logistics (11 companies, is significant, which tends to be the percent), and manufacturing of fuels and chemicals case in countries with high political risk where (8 percent) (figure 1.4). Such concentration on the parents decide to bank their earnings in countries Figure 1.1a. Total Inward FDI versus Figure 1.1b. Total Inward FDI versus Comparators, Current US$, millions Comparators, % of GDP 45 7,000 40 6,000 35 5,000 30 4,000 25 3,000 20 15 2,000 10 1,000 5 0 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2009 2010 2012 2013 2014 2015 2016 2017 2018 2011 MOZ ETH GHA KEN TZA ZWE MOZ ETH GHA KEN TZA ZWE Source: UNCTAD, FDI/MNE database, www.unctad.org/fdistatistics. Note: ETH = Ethiopia; GHA = Ghana; FDI = foreign direct investment; KEN = Kenya; MOZ = Mozambique; TZA = Tanzania; ZWE = Zimbabwe. | 4 ASSESSMENT OF THE LEGAL AND REGULATORY FRAMEWORK FOR FOREIGN DIRECT INVESTMENT with more certainty. The limits on foreign transfers also indicates that the choice between instruments in Mozambique likely add to this behavior. Third, (debts versus equity) is often driven by the tax earnings at affiliate companies are low, and there is differentials between host and source country. Thus, not much to be reinvested, which is frequently so existing FDI firms may choose to further invest via for extractive companies while setting up projects. debt for tax reasons. To what level this argument is Although the academic body is small, some research valid for Mozambique, needs further investigation. Figure 1.2. FDI versus Other Sources of Figure 1.3. Mozambique’s Foreign versus External Finance, US$, billions Domestic Investment, % of GDP 50 8 7 40 6 30 5 4 20 3 10 2 1 0 0 -10 2013 2014 2008 2009 2012 2015 2017 2018 2010 2011 2016 2014 2015 2012 2013 2018 2011 2009 2010 2017 2016 FDI inflows Remittances ODA received FDI Domestic investment Total investment Source: World Development Indicators. Source: World Development Indicators. Note: FDI = foreign direct investment; Note: FDI = foreign direct investment; ODA = official development assistance. GDP = gross domestic product. Figure 1.4. Mozambique’s Greenfield FDI per Figure 1.5. Mozambique’s Composition of Sector, 2009–19 Inward FDI, US$, millions 8,000 Other Mfg - Fuels 6% 7,000 4% Mfg - Chemicals Extractives 6,000 4% 25% Finance & Real Estate 5,000 5% 4,000 Other manufacturing 3,000 6% 2,000 Agriculture 8% Utilities 1,000 16% 0 2011 2009 2010 2016 2017 2013 2012 2014 2015 2018 Logistics 11% Construction Intracompany loans Equity other than reinvested earnings 15% Reinvested earnings Total Source: Financial Times, fDi Markets. Source: IMF, Balance of Payments. Note: Data is based on the sum of announced Note: FDI = foreign direct investment. Greenfield Capex over the time period. ASSESSMENT OF THE LEGAL AND REGULATORY FRAMEWORK FOR FOREIGN DIRECT INVESTMENT |5 The shocks related to COVID-19 spilled into the this report lays out, one such foundational reform economy through external and internal channels. is to modernize the current investment law and Externally, the most important transmission align it with international commitments to improve channels are (a) disruption in value chains and transparency and reduce risks for investors and trade; (b) falling global prices of commodities the government alike (for example, litigation). such as coal and aluminum; (c) disruption of the Furthermore, mechanisms that help investors trade of industrial inputs; and (d) reduced FDI. navigate regulations and procedures would be Domestically, the crisis is affecting the economy helpful in the current context, especially those to through two main channels: economic disruptions detect investor grievances at an early stage, such as caused by the containment measures and direct an ombudsman. In times of crisis, the investment health impacts from a wider spread of COVID-19 promotion agency of Mozambique (APIEX) (World Bank 2020a). is well-advised to boost aftercare services to established investors to make sure they are retained The deferment of the FID of Area 4’s gas in the country despite the economic shake-up. This investment is a concrete example of FDI effort requires learning about the most pressing establishment postponed. The highly anticipated issues they face and prioritizing those that affect decision for the gas investment led by ExxonMobil employment, supply chains, and enabling services. was delayed for at least one year.3 The other major gas investment in Cabo Delgado, led by TOTAL FDI-related recovery support also includes the in Area 1, was forced to suspend operations for promotion of links with megaprojects. Leveraging seven weeks because of COVID-19 cases found new markets, including linkages to extractive at its construction sites.4 The disruption in global large-scale investments, is an opportunity for value chains has adversely affected commodity the recovery phase but requires upscaling quality markets, with prices declining sharply given the and processes. Two types of linkages are more excess supply, and discourages new investment in promising: upstream linkages for national-level the sector. In addition to reduced foreign financing recovery and consumption linkages for regional flows, the sudden stop in travel hurts the tourism development (IFC 2021). Programs that promote sector, which is highly dependent on foreign supplier development by coupling skills, quality visitors from South Africa, Europe, and the United standards, and access to finance for investing in States. This resulted in a significant loss of income new systems and technology should be pursued. for workers and businesses in affected industries as In the process, firms can upgrade and serve new well as loss of revenue for the state. international customers and markets. Providing broader private sector development support to Given the impact the COVID-19 crisis has had firms in those regions affected by megaprojects can on FDI in Mozambique, the government should promote productivity and strengthen the recovery focus on putting the foundations for investment of the economy. competitiveness in place to support a resilient recovery. From an investment climate perspective, This report serves as a background paper governments should review their FDI policy and to the Country Private Sector Diagnostic of promotion strategies, strengthen their countries’ Mozambique (IFC 2021). At the end of the overall business environment, and promote robust paper, the report assesses the legal and regulatory competition to reallocate resources toward sectors framework for FDI with a view to formulate and firms that will drive long-term employment and actionable recommendations for consideration by economic transformation (World Bank 2020b). As the government. | 6 ASSESSMENT OF THE LEGAL AND REGULATORY FRAMEWORK FOR FOREIGN DIRECT INVESTMENT 2. BACKGROUND TO THIS STUDY Attracting FDI, because of its recognized Political stability and a business-friendly benefits, is a policy goal of most countries today. regulatory environment are most important in The benefits of FDI extend well beyond attracting investors’ decision making. Absence of political needed capital. Foreign investment also confers stability and security and the lack of an enabling technical know-how, managerial and organizational legal and regulatory environment—whether actual skills, and access to foreign markets. Furthermore, or perceived—deter investors by tilting their risk- FDI has significant potential to transform economies return calculations. According to a global investor through innovation, enhanced productivity, and the survey, these two factors are the most important creation of better-paying and more stable jobs in country characteristics affecting the investment host countries in sectors that attract FDI as well decision and rank higher than economic indicators as in the supportive industries (Arnold, Javorcik, such as market size, skills, land, or infrastructure and Mattoo 2011; Bijsterbosch and Kolasa 2009; (World Bank 2018).7 Country risk is difficult to Echandi, Krajcovicova, and Qiang 2015; Rizvi manage and thus ranks consistently high on the list and Nishat 2009; World Economic Forum 2013). of concerns of foreign investors. Capturing the full, positive spillovers of FDI is a long-term process and requires regulatory certainty Governments can play a significant role in and predictability to enable strategic business de-risking investment through transparent planning and decisions. and predictable governance and investment protection guarantees. First and foremost, investors In recent times, industrial policy has become rate the transparency and predictability of public increasingly intertwined with FDI policy. agency conduct and the ease of doing business as Industrial development strategies include a number important determinants of their locational decisions. of investment policy tools, most notably incentives This is not surprising since inefficient bureaucracies, and performance requirements, special economic opaque regulations, and complex procedures zones (SEZs), investment promotion and facilitation, result in high transaction costs that undermine an and investment screening mechanisms. In most investment’s profitability. Globally, 81 percent of countries, SEZs continue to grow and diversify. investors rate legal protections and 51 percent rate The transition from pure export processing zones bilateral investment treaties (BITs) as important or to those increasingly focused on value addition critically important in their investment decisions and linkages with industrial clusters has supported (figure 2.1) (World Bank 2018a). Predictability and economic development and global value chains efficiency are essential ingredients of a sound and (GVCs) integration in some countries, although the sustained interaction between foreign investors and risk of enclaves remains high (UNCTAD 2018). host governments, comprising both regulations per se and their implementation. Academic evidence Improving the investment climate is a policy confirms that when investors incur fixed and priority for Mozambique. Per recent action plans,5 irreversible setup costs, uncertainty about the the government recognizes the dampening effect local conditions—especially policy uncertainty— that barriers to investment have had on domestic will have a dampening effect on new investment economic development. Attracting new investment, (Bernanke 1983, Bloom 2009, Dixit 1989). Looking easing entry and operation, and improving specifically at developing countries, studies find transparency as a means to reduce corruption and that low institutional quality is a major deterrent risk, including through the strengthening of the for foreign capital flows (Alfaro, Kalemli-Ozcan, Investment Law,6 are all stated policy objectives. and Volosovych 2008). Similarly, components of ASSESSMENT OF THE LEGAL AND REGULATORY FRAMEWORK FOR FOREIGN DIRECT INVESTMENT |7 Figure 2.1. Investors Seek Predictable, Transparent, and Efficient Conduct of Public Agencies Percentage of respondents Importance of investment climate factors Transparency and predictability in 37 45 15 3 the conduct of public agencies Investment protection guarantees 45 36 14 4 provided in the country’s laws Ease of obtaining government approvals to start 36 41 18 5 a business and to own all equity in the company Investment incentives such as tax holidays 21 35 32 10 Having a preferential trade agreement 14 40 32 11 Having a bilateral investment treaty 15 36 33 13 Critically important Important Somewhat important Not at all important Don’t know Source: World Bank, Global Investment Competitiveness Survey 2017/2018, 2018. institutional quality, such as corruption (Wei 2000); fact that the performance of Mozambique on many government transparency (Gelos and Wei 2005); of the key global indicators is worsening compared predictability of laws, regulations, and policies to previous years reflects that it is losing ground (Daude and Stein 2007); and the protection of against its competitors in the region. This situation property rights (Papaioannou 2009) have dampening underscores a general perception of a business effects on FDI inflows. A country’s attractiveness environment that is complex, inconsistent, and for FDI can suffer in the long term from a bad track rigid. The lack of clarity and transparency as well record of government conduct that disincentivizes as the unpredictability and discretionary conduct viable investments from materializing, even when of the public sector creates confusion for investors investors are offered the most generous incentive and hurts the competitiveness of the Mozambican packages. market. Indeed, only Zimbabwe, which is among the peer group used throughout this report, falls into Benchmarking Mozambique’s Legal the same category. Host country risk discourages not only new FDI inflows but also the amount of and Regulatory Framework reinvested earnings (World Bank 2019c, 15–16). Mozambique’s investment climate is considered risky, with low rankings in Protection of direct investment in Mozambique is established international indexes affecting the below average. Political risks are wide ranging, but attractiveness of Mozambique for FDI (table those most frequently reported to affect FDI are (a) 2.1). In the established risk indexes (including the unpredictable and arbitrary actions, (b) the absence PSR Group’s International Country Risk Guide of regulatory transparency, (c) delays in obtaining [ICRG]8 and the Economist Intelligence Unit’s necessary permits and approvals to start or operate a [EIU] Country Risk Model9), which are frequently business, (d) transfer and convertibility restrictions, consulted by foreign investors, Mozambique (e) breach of contracts, and (f) expropriation (World ranks among the riskiest countries in the world Bank 2018a). At 176th of 190, Mozambique is the to do business.10 The World Economic Forum’s lowest-ranking country among all peer countries Global Competitiveness Ranking in 2019 ranks on the “Starting a Business” indicator in the World Mozambique 137th out of 141 countries (World Bank’s Doing Business ranking (World Bank 2020). Economic Forum 2019), and the country is ranked This indicator measures the number of procedures, 138 out of 190 economies on the World Bank’s time, cost, and paid-in minimum capital requirement 2020 Doing Business (World Bank 2020c). The needed for a limited liability company to start and | 8 ASSESSMENT OF THE LEGAL AND REGULATORY FRAMEWORK FOR FOREIGN DIRECT INVESTMENT Table 2.1. Mozambique’s Investment Climate Is Considered Risky According to Global Indexes Doing Peer country Credendoa ICRGb EIUc WEFd Businesse Score Score Rank Score Rank Rank (7=most risk) (100=least risk) (Total=131) (100=most risk) (Total=141) (Total=190) Ethiopia 6 61.5 118 65 126 159 Ghana 5 68.3 96 55 111 118 Kenya 6 64.3 109 61 95 56 Mozambique 7 57.8 126 74 137 138 South Africa 4 67.5 54 41 60 84 Tanzania 5 65.8 68 46 117 141 Zambia 6 61.8 116 64 120 85 Zimbabwe 7 50.5 127 80 127 140 Source: World Bank table compiled from global indexes (2019, 2020). a. Credendo, Mozambique profile, https://www.credendo.com/country-risk/mozambique. b. ICRG, https://www.prsgroup.com/explore-our-products/international-country-risk-guide/. c = EIU 2020. d = World Economic Forum 2019, http://www3.weforum.org/docs/WEF_TheGlobalCompetitivenessReport2019.pdf. e = World Bank 2020. formally operate. Contract enforcement provides a and only 5 points behind Tanzania. The rule of law, similar picture. Mozambique ranks 168th, one rank which captures the perception of the extent to which above Zimbabwe, but with a considerable gap with public agents have confidence in and abide by the all other peer countries. rules of society—and in particular, the quality of contract enforcement—is the worst indicator for International stakeholders lack trust in the Mozambique; there the country ranks ahead of only transparency and quality of government Zimbabwe again. conduct and the rule of law in Mozambique. The World Bank Group Worldwide Governance Strong political leadership and results- Indicators (WGIs) measure the perception of the orientation are required to address the lack private sector on the quality of the implemented of transparency and to implement deep regulations and the confidence in those laws being structural reforms. The risk dimensions outlined enforced. Accordingly, the WGIs indicate how in this section are not new. A review of previous risky Mozambique is perceived within the African investment climate reform plans (CTA and ACIS region (figure 2.2). The three relevant indicators 2013) concludes that reforms undertaken have not are government effectiveness, regulatory quality, resulted in substantive changes for most businesses and rule of law. In government effectiveness, which because they consistently lack implementing captures the perception of the quality of public legislation. Moreover, the pace of reform has services, the quality of the civil service, and the increasingly stagnated, despite the efforts of degree of its independence from political pressures, stakeholders and significant investments by donors Mozambique ranks behind all peers but Zimbabwe. and government. Thus, the main pressure points In regulatory quality, which assesses the ability of today remain the same, including reducing the time the government to formulate and implement sound to obtain licenses, implementing less convoluted policies and regulations that permit and promote fiscal rules, facilitating transactions, improving private sector development, Mozambique fares consultations with the private sector, and increasing better and is ahead of both Ethiopia and Zimbabwe the transparency of lawmaking. ASSESSMENT OF THE LEGAL AND REGULATORY FRAMEWORK FOR FOREIGN DIRECT INVESTMENT |9 Figure 2.2. Worldwide Governance Indicators Indicator Country Year Percentile rank (0 to 100) Government Ethiopia 2018 effectiveness Ghana 2018 Kenya 2018 Mozambique 2018 South Africa 2018 Tanzania 2018 Zambia 2018 Zimbabwe 2018 Regulatory quality Ethiopia 2018 Ghana 2018 Kenya 2018 Mozambique 2018 South Africa 2018 Tanzania 2018 Zambia 2018 Zimbabwe 2018 Rule of law Ethiopia 2018 Ghana 2018 Kenya 2018 Mozambique 2018 South Africa 2018 Tanzania 2018 Zambia 2018 Zimbabwe 2018 0 20 40 60 80 100 Source: World Governance Indicators 2018. An aligned, well-coordinated, and effective economic momentum and growth present a unique investment framework is key to a country´s opportunity to implement reforms that will also aspirations to successfully attract investments. help to diversify the economy in the long run and Achieving such an endeavor entails a clear vision, to receive investments into productive sectors other commitment, and action-oriented leadership to than extractives. Attracting this type of FDI is more convert a set of government agencies into an connected with a strong investment climate because articulate, high-performing, institutional cluster investors are more open to choosing Mozambique capable of designing and implementing an agenda and more concerned about competitiveness criteria. to properly leverage international trade and FDI for economic development. Overview of the Recent Evolution The new government of Mozambique has a of the Institutional and Regulatory great opportunity to use the impetus around Framework the recent gas investments to pursue a serious reform agenda. Mozambique currently receives The regulation defining the framework for substantial attention from the international investor investment policy has remained largely community because of the developments around unchanged even though the institutional the new gas fields in the north of the country, framework and market conditions have not. which are estimated to provide a direct boost to The legislation that anchors this framework is GDP growth and will also increase investment Law 3/93 from 1993, referred to as the Investment in auxiliary services, including finance, legal Law. It defines and covers both domestic and services, and construction (EIU 2020). The wider foreign investors. It is under this legislation that the guarantees for all investors are implemented. | 10 ASSESSMENT OF THE LEGAL AND REGULATORY FRAMEWORK FOR FOREIGN DIRECT INVESTMENT Remarkably, the framework governing fact that there are neither regular meetings between investments in extractives, the economic sector APIEX and MIC, nor is the investment promotion that has received the largest investment inflow agency empowered to perform effective and (figure 1.4), is largely independent from the efficient investment facilitation across the different general framework for investments.11 Extractives phases of an investment project. The existence of have their own sectoral laws and regulations under multiple players increases the risk of different rules the auspices of the Ministry of Mineral Resources being implemented and different priorities being set and Energy (MIREME).12 These leave an important from one agency to another. gap since they do not mention guarantees or protections. Because of the BITs that Mozambique Combining APIEX’s mandate to promote has signed, this framework does not lift protection investment with other regulatory and guarantees for investors in this sector but rather administrative functions may dilute its role and increases arbitration risk for the government. image. An Investment Promotion Agency’s (IPA) This parallel investment framework also creates main function is to provide services to foreign challenges regarding transparency and clarity as investors, including marketing, information, well as the coordination between government assistance, and advocacy, across the investment entities. project cycle to encourage investment in the country. Regulatory functions differ in nature from Mozambique has recently set up the Agency for the promotional function because they require Promotion of Investment and Exports (APIEX), the agency to play the role of an enforcer of but implementing regulations were not updated compliance with regulation as opposed to that of at the same time, so the institutional reform is the investor’s main advocate within government. stuck halfway. The country’s recent institutional Moreover, these functions require a different set framework can be divided into two periods. Before of skills and capabilities, and the administrative 2016, Mozambique had two main agencies focused burden may usurp significant resources dedicated on investment attraction: the Investment Promotion to promotion. If regulatory functions are present in Center (CPI) and the Office for the Accelerated an IPA’s mandate, care should be taken to ensure Economic Development Zones (GAZEDA). In the autonomy and separation of these units, their 2016, the Council of Ministers merged these two staff, and activities—for instance, by being held agencies with the Export Promotion Agency (IPEX) in independent general directorates that report to to form one single entity under the Ministry of the chief executive officer and the board on their Industry and Commerce (MIC), APIEX.13 APIEX respective functions. Operationally, these sub- is responsible for the promotion and approval of entities should have separate budgets, authorizing new investment projects but also houses export environments, and staff (Heilbron and Whyte promotion and the SEZ regulator and developer 2019). functions.14 Another area that lacks coordination is the An opaque regime also reflects a lack of division one-stop shop (in Mozambique, the Balcão of labor and coordination between the different de Atendimento Único; BAU). One-stop shops government agencies. APIEX has reporting lines (OSSs) typically aim to simplify administrative to both the MIC and the Ministry of Economy and procedures for investors by providing a central Finance (MEF). Its lead ministry, MIC, is not the point of communication for all approvals, licenses, primary ministry mandated to deal with investment and permissions. The effectiveness and efficiency issues and as such does not control the regulation and of the OSS serve as a reference point to the investor procedures for granting incentives to investors— for the quality of public services overall. The OSS one of APIEX’s main promotion tools. In fact, MEF network currently in place in Mozambique is not a formulates the investment policy and incentive “single window” but rather a “one-roof” solution, regimes, negotiates international investment housing representatives from a number of public agreements (IIAs), and controls APIEX’s budget. agencies. Additionally, the BAU does not house The opacity of the system is exacerbated by the all the relevant agencies an investor needs. While ASSESSMENT OF THE LEGAL AND REGULATORY FRAMEWORK FOR FOREIGN DIRECT INVESTMENT | 11 the launch of the e-BAU (an integrated platform A well-functioning and empowered ombudsman for service delivery that aims to connect the OSS is also needed to facilitate investment. Investors in the provinces and other institutions relevant for have raised their concerns over long time lags for investors) is welcome, it is only used for certain procedures paired with a lack of service attitude, types of business licenses, thus not reducing time, conditions which frequently create grievances cost, and complexity of the business establishment among the investor community. To strengthen process much (World Bank 2019a). If effectively investor aftercare and avoid losing investment implemented, it would be a very relevant instrument due to grievances, a strong ombudsman office is for investors. It is critical that the OSS links to suggested. ministries and agencies so that firms may apply, process, and file documents more easily and receive While it is understood that the investment policy updates electronically. It is also recommended that in Mozambique must consider the political the OSS remains independent from APIEX and that economy in the country, the current setup falls MIC improves the BAU and keeps close working short of best practice and needs a clear division of relations with APIEX. The reason is that OSSs labor. Both the strategy for FDI promotion and the have operational needs that differ from promotional regulatory framework, which translates policy into needs and could cause significant conflicts of legally binding documents, have to be placed in the interest if the two functions were combined current context in Mozambique. Being an economy (box 2.1) (Heilbron and Whyte 2019). that is highly dependent on natural resources brings additional challenges for ensuring that all members Box 2.1. Aspects of the BAU Operational Needs To improve implementation, the strategy and operational model of the Balcão de Atendimento Único (BAU) needs to be clarified, such as the following aspects (World Bank 2017): n Strategy to ensure a whole-of-government approach n Clarity on required changes in the legislative and regulatory framework to make it work n Agreement on the modality of service provision (that is, will the one-stop shop simply collocate the service providers or fully integrate service provision in a single window?) n Agreement on a sustainable financial model (that is, free access versus subsidized services versus cost recovery) n Shared understanding of what routine procedures can be automated and what type of backend integration and data exchange this model requires between entities n Definition of the monitoring and evaluation framework, including key performance indicators and understanding of what success looks like and how feedback will be collected Source: World Bank 2017 | 12 ASSESSMENT OF THE LEGAL AND REGULATORY FRAMEWORK FOR FOREIGN DIRECT INVESTMENT of society benefit from these mega projects while properly executed—that is, regulator and promoter at the same time avoiding having the strength of of FDI, exports, and SEZs in the case of APIEX. one sector hampering the development of others. However, the recent changes in the institutional The following sections assess the current set-up have established mixed roles and mandates investment barriers and gaps in Mozambique’s without their being fully implemented. This not protection framework. With the exceptions of only creates significant conflicts of interest but also performance requirements and guarantees granted contributes to confusion for both the investor and through BITs, these issues predominantly apply to the bureaucracy. Furthermore, in such a setting investors outside the extractive sector. it is more difficult to ensure that all functions are ASSESSMENT OF THE LEGAL AND REGULATORY FRAMEWORK FOR FOREIGN DIRECT INVESTMENT | 13 | 14 ASSESSMENT OF THE LEGAL AND REGULATORY FRAMEWORK FOR FOREIGN DIRECT INVESTMENT 3. BARRIERS TO INVESTMENT ENTRY Investment entry barriers are restrictions restricted for foreign investment. Mozambique’s governing the admission and establishment of Investment Law and its regulations generally FDI that, through regulation procedures (de do not distinguish between investor origin nor jure) and practices (de facto), impose additional limit foreign ownership or control of companies. burdens on foreign investors during the entry The Investment Law mentions the existence of a process (box 3.1). The impacts of de jure or de document that will list the sectors that are closed or facto barriers are often intertwined. restricted to investment.16 However, the law does not list the sectors nor does the decree implementing Regardless of their nature, entry barriers may the Investment Law.17 As a result, foreign investors deter investment. While the costs and issues of are left wondering which sectors they may invest entry restrictions will vary a lot, they tend to have the in. While various information from APIEX and following features in common: (a) discourage FDI other investment intermediaries highlight certain and reduce the volume of inflows, (b) incur costs restrictions, they are not consistent—for example, to the potential investor (compliance costs) and between the information available in English and the host government (through direct administrative Portuguese. APIEX’s website states that FDI costs and indirect costs as a result of reputational restrictions only apply in three areas: (a) real risks and FDI foregone),15 and (c) may constitute estate that was previously nationalized, (b) public a form of discrimination between domestic and works (construction), and (c) travel agencies.18 Yet foreign investors. Taken together, all these costs its brochure introducing the legal and regulatory can be significant and likely exceed the benefits that framework of Mozambique in Portuguese also the host economy thinks it is deriving from having cites private security as being closed to investors certain restrictions in place. (APIEX 2017, 23). Legal and Regulatory Barriers Information on foreign ownership restrictions is mostly covered in sectoral regulations or BITs, which makes their identification difficult and Lack of transparency on sectors open or cumbersome. While this report did not involve a closed to FDI review of sectoral legislation, it appears that a few Mozambique has an open FDI regime, but more restrictions exist, including in media and the legislation is unclear on what sectors are entertainment and in game hunting concessions.19 Box 3.1. Entry Barriers n Legal barriers are a result of an intentional policy decision by the government and are usually prescribed in economy-wide laws, regulations, or policies and encompass a range of measures that intentionally discriminate against foreign investors, as opposed to domestic investors. Examples include restrictions on foreign investment, limits on the amount of equity an investor can hold, and so on. Legal barriers also encompass procedural barriers that come to bear as a result of red tape and additional regulation affecting a specific aspect of the establishment process. They arise as the foreign investor completes administrative requirements to apply, enter, and start operations in a country. n De facto barriers are a sign of weak governance in the country. They reflect the operational barriers to entry, such as a lack of transparency and uncertainty. ASSESSMENT OF THE LEGAL AND REGULATORY FRAMEWORK FOR FOREIGN DIRECT INVESTMENT | 15 Moreover, the government of Mozambique has maximum transparency by eliminating possibilities a list of sectors that are restricted to foreign of exercising discretion over determining which investment as an annex to certain BITs, such as the investment projects will be prohibited or subjected one signed with Japan in 2014 and ratified in the to restrictions. If a sector or subsector is not on same year. The schedule listing restricted sectors the list, it is automatically deemed open for FDI. also states the corresponding domestic regulations Negative lists are attached to the law as an annex or and includes (a) commercial maritime transport, (b) as subsidiary legislation. The advantage of having private camping sites, (c) gambling, (d) fisheries, the sectors and activities listed in a document of and (e) insurance, in addition to those economic “inferior” legal value, such as regulations issued activities already mentioned. under the law, is to simplify the process of revising the list over time should government policy change. As part of the economic priorities that Since the number of restrictions also serves as a Mozambique sets for its development it should proxy for how welcoming a country is to foreign define and communicate which sectors of the investment, the list should be as short as possible economy are open, restricted, or closed to for countries actively seeking FDI. FDI. For Mozambique to establish confidence in the country as an attractive investment location, inconsistencies in laws and regulations, partly FDI screening a result of inadequate coordination within All foreign investors in Mozambique must government, are an issue. For example, even undergo a cumbersome screening procedure where the Investment Law allows certain actions, that is not clearly defined. Per the Investment Law, other laws issued by different ministries may have screening is for all investors that want to benefit countervailing restrictions. This unpredictability from incentives and the guarantees offered by the often leaves investors wondering if something is law to protect an investment against political risks. allowed or not. Inadequate information about laws As demonstrated, the protection aspect for investors and regulations and difficult access to them further is of fundamental importance. By making screening accentuates the problem. a condition for access to guarantees, this screening requirement in practice becomes obligatory to all It is advised to develop a negative list that clearly foreign investors.20 Furthermore, the Investment states what sectors are fully or partially closed Law states that investment will be screened by the to foreign investment. There are two methods to Council of Ministers but does not go into detail develop such a list. Countries can either draft a about the procedure, rendering the process less positive list or a negative list. While the country transparent and deterring for investors. The decree reserves a right to have certain sectors closed to implementing the Investment Law also provides foreign investments, such restrictions should be some rules as it pertains to screening investment, but specific and should preferably be enumerated very it states that APIEX serves as the single window for clearly. In a positive list, the government attempts screening and collecting all necessary information to enumerate all the sectors or subsectors in which (business plan, size of the investment, identification foreign investors may invest. This approach is of investors, and so on). In fact, according to the less transparent and more uncertain because the same decree, APIEX is responsible for screening status of a sector or activity not on the list remains investments between $23 million and $200 somewhat unclear, and there is a higher risk of million.21 Any investments smaller will be screened omitting a sector or activity, particularly emerging by the Municipal Council and those larger by the activities that did not exist in the past. The more Council of Ministers.22 Additionally, the respective advisable approach is the use of a negative list, government bodies do not have to explain why a under which the government lists all sectors or certain investment was approved or rejected, nor subsectors that are closed or restricted (allowing does the law provide for an independent appeal only minority foreign ownership, requiring special procedure, all of which increase risk. Once granted, authorization from foreign investors, and so forth). the investment approval for this specific investment This system is preferable because it provides in Mozambique does not expire, and according | 16 ASSESSMENT OF THE LEGAL AND REGULATORY FRAMEWORK FOR FOREIGN DIRECT INVESTMENT to APIEX, costs are around 0.1 percent of the administration of licensing regime; and (d) the investment value but capped at a maximum of validity of the license is unlimited. Countries are $50,000. As the primary legal instrument regulating moving away from an economywide FDI screening FDI in Mozambique, the Investment Law should be and are having more success in attracting FDI much clearer on how the process for screening will flows.23 take place. Moreover, the legislations relevant to screening in Mozambique contradict each other and For Mozambique, it is advisable to move away create a convoluted bureaucracy for the investor. from general toward activity-specific screening. Comprehensive screening mechanisms are a In general, comprehensive screening of significant burden for the investor, especially in a investments is a considerable entry barrier, country that does not enjoy much trust in the public often raising costs and investors’ uncertainty. service. Even if well designed and administered, Screening means that a foreign investor or project it unnecessarily increases the cost for both the sponsor has to submit an application comprising administration and the investor, and its initial multiple documents (financial projects, expected objectives can usually also be covered through inputs and outputs, employment plans, feasibility more forthcoming regulations that send a business- study, and so on) and the reviewing body or friendly signal to current and future investors. committee decides whether the project will be admitted or not. Uncertainty is further increased Restrictions to own land when it is difficult to access information on the requirements and procedures, when the related Many African countries do not extend land laws and regulations lack clarity, and when the ownership to investors. For historic and political host country has an absent or ineffective appeal reasons, all land belongs to the state. However, mechanism. Economywide screening is a strong countries such as Madagascar and Tanzania grant deterrent for FDI for two reasons. long-term leases allowing for the operation of certain economic activities in a certain location.24 n Increases the time and cost it takes to enter the The ease of obtaining the right to lease land is thus country. Onerous documentary requirements the competitive factor for investors when making coupled with a lack of objectivity in the process investment decisions. Mozambique offers land use may further complicate this already expensive rights, or Direito de Uso e Aproveitamento da Terra process. The documentation needed for the (DUAT), for up to 50 years in urban areas and 99 screening process may sometimes require years in rural areas. The DUAT can be renewed investors to hire a consulting or law firm, or once by written request of the investor.25 both, and spend additional resources to prove the adequacy of an investment project. This may The current regulation on the right to lease land be especially challenging for small- to medium- presents legal challenges for foreign investors sized investors with limited resources. in Mozambique. Treatment differs between how domestic and foreign investors can access the n Has little predictability for the investor. With no land. Although Law 19/1997 grants foreigners the objective criteria to screen investments entering right to use land,26 it discriminates against foreign the country, the process is often discretionary, investors and imposes more conditions than it does bureaucratic, and unpredictable. for domestic investors. First, a foreigner, whether a physical person or company, can lease land only if Therefore, international best practices in they have been living in Mozambique for at least five screening have several common traits: (a) years, which increases the barrier for FDI because they regulate business activities rather than the many investors cannot just enter the country and actor and are focused on activities that may have apply once an opportunity arises.27 Second, the significant health, safety, environmental, or same law states that the preliminary authorization security implications; (b) the licensing conditions of the DUAT granted to foreign investors will be are designed to decrease the associated risks; valid for up to two years compared to five years (c) the costs of licensing are set to cover costs of for domestic investors. This discrimination violates ASSESSMENT OF THE LEGAL AND REGULATORY FRAMEWORK FOR FOREIGN DIRECT INVESTMENT | 17 the National Treatment guarantee and is thus not Decree states that investment projects above in compliance with Mozambique’s international $210,000 approximately and investment projects commitments. Besides the legal provisions, it can above 10,000 hectares can file for exceptions from take investors up to a year to get a definitive DUAT. the quotas. However, the regulation is silent on the Since the application for the use of land can only process and extent of that exception. Consultations begin after an investment project has been screened with the private sector29 confirm that many and approved by the relevant authority, obtaining companies are requiring such exemptions and a DUAT is an extra step for investors when usually also have them granted, which indicates that establishing a business in Mozambique. the current quota regime is not based on economic reality or evidence. Moreover, investors request Work permits for foreign workers a simplification of the process to receive work permits, in particular related to documentation Investments that rely on efficiency and compete requirements.30 The problem is that the current internationally are sensitive to difficulties in system leaves it to the Ministry of Labor to make hiring foreign skilled labor. The regulation on the a determination case-by-case, which in turn movement of third-country persons is an important increases discretionary power while raising costs aspect of the operation of foreign investments. and uncertainty for investors.31 While governments naturally try to increase job opportunities for nationals (especially true in a Consider a labor quota regime based on economic post-conflict context as in Mozambique where there need. To address the deficiencies in the current is a need to avoid social unrest), a balance between regulation, Mozambique is advisable to introduce enforcing strict economywide quotas and filling quotas that allow for more flexibility. This can either gaps in the supply of skilled labor must be struck. take the form of adapting hard caps for different Otherwise, such quotas quickly become a deterrent sectors, including a regular review of those caps, or for FDI as they decrease the competitiveness of requiring companies filing for exceptions to prove the investment project. This applies even more to economic need that cannot be filled in the local investment in new sectors that would be needed for labor market. A more flexible regime would offer the diversification of the economy but for which a some control to the government but also facilitate trained local workforce is not yet available. the private sector’s ability to operate competitively and would increase opportunities for the domestic Mozambique has quotas on foreign workers workforce to acquire skills over time. across all sectors.28 In line with the Labor Decree (Decree 37/2016), the quota depends on the size Entry visas of the business. Companies with more than 100 employees can hire 5 percent foreign personnel; The impact of a poor visa regime hurts the for companies between 11 and 100 employees it tourism sector—one of the six priority sectors is 8 percent, and for companies with fewer than for FDI promotion in Mozambique. The burden 11 employees it is 10 percent. The issue with a of obtaining visas has an impact beyond the strict quota is that this does not always reflect the inconvenience of individual travelers. It extends to ever-changing demands of the market. Should a the image of the destination because it is frequently company operating in Mozambique wish to expand the first impression that a traveler or prospective and diversify its operation in the country, it might investor gains of a country. Thus, delays, high costs, have to bring experts from abroad to set up new and unfriendliness in the process damage their operations and train its workforce. If the quota is perception and reduce the likelihood that travelers already reached, that same company may not be return and entrepreneurs invest. able to bring in the required experts and therefore might have to rethink its strategy of expansion. The Mozambican government offers visas for foreign nationals willing to invest. In 2017, a The legislation allows a few exceptions for the new regulation to obtain investment visas reduced quotas. In practice, business needs exceptions the minimum investment amount required from regularly to mobilize sufficient labor. The Labor $50 million to $500,000. From the moment an | 18 ASSESSMENT OF THE LEGAL AND REGULATORY FRAMEWORK FOR FOREIGN DIRECT INVESTMENT investment is approved, an investor who is a a partnership approach between business and the representative or member of the board of a certain public sector. The World Bank Group generally company can file for this visa. recommends making LCRs part of a broader discussion on the domestic economic development Local content policies strategy to understand if and how LCRs may be a suitable instrument to increase domestic value While local content requirements (LCR) addition and jobs. are usually introduced for legitimate policy objectives, they often turn out harmful. Local Mozambique enforces LCRs in the extractive content is a type of performance requirement sectors. The country, via Decree 20/2004 (mining) that the United Nations Conference on Trade and and Decree 21/2004 (oil and gas), has developed Development (UNCTAD) defines as “stipulations, local content policies that mandate the investor to imposed on investors, requiring them to meet certain enter into a joint venture with the state (where the specified goals with respect to their operations state will own between 5 and 20 percent of shares) in the host country” (UNCTAD 2003, 2). Local and to give preference for local goods services content aims to ensure a presence for local products and domestic workers. Natural resource–seeking and services, a specific level of local jobs, training investors tend to be somewhat less sensitive to programs, or obligation to form a joint venture to such policies, not least given the lack of alternative enter the country (Nikièma 2014, 2). Frequently investment locations. influenced by experience with natural resource– seeking investment, governments imposing LCRs Implementing an economywide local content often envision them as a policy response to two law may stiffen the growth of sectors relying on fundamental challenges: (a) ensuring the efficient competitiveness and can duplicate obligations use and equitable distribution of the benefits of FDI already existing in sectorial laws. In light of and (b) improving the typically low technological the recent gas discoveries and increased investor capacity of the domestic private sector. However, interest, the government has been developing a LCRs not only fail to address these underlying horizontal local content bill setting stricter targets issues but may, in fact, exacerbate the problem. for all economic activities. Beyond the political Even where LCRs achieve short-term political signal it sends, such policy is unnecessary at best objectives, they often undermine long-term or may seriously damage business at worst. It competitiveness.32 duplicates much of the sectoral regulation and the local content framework applied to large-scale Different approaches to designing and investment projects as regulated by the Law on implementing LCRs influence their prohibitive ‘’Projectos de Grande Dimensão,’’ or large-scale impact on FDI. Prescriptive quotas constrain the projects.33 foreign investor and raise the price of production, especially if a domestic alternative of similar De Facto Barriers quality is not available. Nevertheless, restricting quotas for only a specific sector provides more For FDI and mid-to-large firms in Mozambique, openness than an economywide option. Other corruption, informality, and political instability LCRs urge the investor to give “priority” to local are the key barriers to doing business. The goods and services. Foreign investors might agree World Bank Group’s Enterprise Survey was run in on certain indicative numbers on a case-by-case Mozambique in 2018 and measures key aspects of basis that forms part of the investment contract and the business environment along 10 broad areas34 often is connected to the granting of incentives. When results between domestic and foreign Thus, it leaves more negotiation room between the ownership are disaggregated, the issues that rank foreign investor and the host country, making it less disproportionally high for FDI are (a) the number of a deterrent to FDI attraction. Host countries may of meetings from tax officials (80.6 percent in also encourage local content by promoting links Mozambique compared to the 74.3 percent regional to and training of the local workforce following average), (b) the days to obtain a construction permit ASSESSMENT OF THE LEGAL AND REGULATORY FRAMEWORK FOR FOREIGN DIRECT INVESTMENT | 19 (40 days compared to 29 for domestic investors), to interpret the new regulations, including their and (c) days to obtain an electrical connection compliance requirements. The unclear regulatory (50 for FDI versus 8 for domestic investors). The framework creates a large scope for discretionary indicator that counts the days to clear exports interpretation by officials. Investors feel that or imports through customs was higher than the decisions do not always follow clear criteria regional average for both domestic and international but are driven by subjective considerations, and investors. What this survey clearly shows is that de they complain about unclear and unpredictable facto barriers exist and negatively impact investors compliance standards. More often than not, they in the country. depend on their personal network to get things done with government. The lack of transparency fosters abuses of power and corruption. According to Transparency Acceding to the Hague Apostille Convention International’s 2019 Corruption Perception Index, may improve trust and simplify the certification Mozambique ranks 146 out of 180 countries, with process. A foreign business establishing an only Zimbabwe ranking lower among its regional investment in Mozambique needs to present a peers. It is encouraging, however, to note that number of documents to evidence the identity of Mozambique improved by 12 places over its rank the investor as well as the scope and purpose of the in the 2018 index. Nevertheless, the World Bank project, among other things. To be assured of the Enterprise Survey confirms that corruption in validity of those documents, the government often Mozambique is the number one obstacle to doing requires some sort of certification or legalization business for international and domestic investors that is meant to confirm that a document is indeed alike and is constant across all firm sizes (World what it declares to be. This can be a lengthy and Bank 2019b). Due to the opacity of the regulatory expensive process since it requires visiting and framework, fiscal authorities, for example, often receiving authentication from public agencies in charge more than they should. This creates different the home and the host country. The Hague Apostille challenges for investors. They may need to invest Convention of 1961 facilitates the legalization of in a strong compliance department to defend foreign public documents between state parties themselves against abusive practices. This situation where a government entity in the home country might also simply render the cost of doing business issues an “Apostille”—that is, a standardized too high, especially for small-size investors, which certificate to authenticate the document. For often decide to operate informally. Competition business, key benefits of the Convention are with the informal sector ranks second among (a) streamlined administrative procedures, (b) medium- to large-scale investors as the biggest reduction of red tape, (c) reduced time and cost, and obstacle in Mozambique’s business environment (d) more certainty about the process. Governments (World Bank 2019b). benefit from enhanced integrity and the possibility of charging a reasonable fee in exchange for Mozambique’s de facto barriers are a direct authentication services, while businesses and consequence of the lack of clarity, transparency, citizens benefit by saving time and the cost of and enforcement of its regulatory framework. authenticating documents, having to pay only once The existence of legal and procedural barriers is in the process (The Hague Conference on Private exacerbated by incomplete information, complex International Law 2013). rules and processes, and arbitrary decisions by government officials. Newly introduced laws and A convoluted system may also impose regulations are often written in general terms with a considerable risks for the government of promise of more detailed implementing regulations Mozambique. For the example of the obligation and guidelines to come. However, in practice, such to obtain an environmental license,36 vague details are often not provided or are provided much requirements and procedures may lead to friction later after the laws and regulations have come between the national and subnational levels into force. Investors, and often the implementing of government. According to private sector officials themselves, are thus unclear about how representatives in Mozambique, on a few occasions | 20 ASSESSMENT OF THE LEGAL AND REGULATORY FRAMEWORK FOR FOREIGN DIRECT INVESTMENT the municipal level did not always recognize the generous incentive packages are not able to make license that was granted by the central government, up for a poor investment climate overall, the creating a problem that stalled the establishment of mere existence of SEZs, without the provision the investment. This issue could pose a potential of anything truly “special” in terms of business threat to the central government because investors environment and infrastructure provision, neither in other countries have used such cases to allege improves the investment climate nor attracts a breach of their guarantees and called for an significant investments. The lack of transparency, investor-state dispute settlement.37 detail in regulation, and information as well as gaps in institutional capacity and coordination outlined Barriers to Facilitate Investment in the previous sections also apply to SEZs in Mozambique, making it harder for individual zones in Mozambique’s Special Economic to stand up to the competition in the region. Zones There is no single and independent SEZ law with Special economic zones (SEZs) are an investment associated implementing regulations, leaving policy measure aimed at providing preferential the investor with a complex and confusing set of treatment to investors.38 SEZs are geographic provisions to follow. Mozambique’s SEZ regime areas where the rules of business are different. In is governed by several ad hoc decrees, statutes, general, the business environment in an SEZ is and resolutions (see appendix B). These not only more liberal from a policy perspective and more mix the various forms of SEZs, including export effective from an administrative perspective than processing zones and free zones, but also include in the rest of the country. SEZs usually offer fiscal a myriad of fiscal and nonfiscal benefits without incentives, infrastructure and services, streamlined considering their value-added for attracting new business registration and customs procedures, investors nor their distortive effects on domestic facilitated processing of labor and immigration competition. An independent SEZ law and permits, and other investment facilitation services implementing regulations should be developed (Farole and Akinci 2011). There are many types to establish a streamlined business environment of SEZs, and they continue to evolve. The with clear and transparent rules and criteria (box various forms depend on the industrial structure 3.3). The law should provide the necessary level of a country, the institutional environment, and of detail on procedures, documentation required, the broad policy goals they want to achieve (for timeframes per process step, and associated cost. example, job creation, exports, reform laboratories, Since market conditions might change over time, it and so on), but they all aim to attract FDI. Today, is recommended not to include these specificities in SEZs are often general-purpose zones, attracting the law directly, so that they can be easier adapted. investors in a wide range of manufacturing and This information should be made available for services industries (UNCTAD 2018). investors in a handbook and published as broadly In Mozambique, the legal, regulatory, and as possible in foreign languages (at least in English institutional weaknesses of the general and Chinese) in addition to Portuguese. If such investment framework are duplicated when it basic information is not readily available, the SEZs comes to SEZs. While SEZs have shown some in Mozambique simply will not end up on the long advantages globally, many have failed to attract list of potential investors. significant investments. In the same way that ASSESSMENT OF THE LEGAL AND REGULATORY FRAMEWORK FOR FOREIGN DIRECT INVESTMENT | 21 Box 3.3. Best Practices on Legal Provisions for SEZs Best practice special enterprise zone (SEZ) regimes are typically governed by one comprehensive and independent SEZ law with implementing regulations that provides predictability, accountability, and transparency to investors. Ethiopia, Kenya, and South Africa, among others, have such laws in place. The legal provisions should be published and include the following: n Negative list of activities not permitted with SEZs n Clear criteria for SEZ eligibility, selection, and approvals n Protection of private property and intellectual property rights as well as conformity to World Trade Organization membership and standards n Ability to export without minimum thresholds and to sell into the domestic customs territory while paying taxes n Guarantee to transfer funds (foreign exchange) freely into and out of the SEZ and country n Dispute resolution measures in line with international practices n Permission to sell, resell, or lease land n Transparent rules, processes, and procedures to streamline the enabling environment n List of legal rights and obligations of zone developers, operators, users, and residents n Autonomous regulating agency (legal and financial autonomy) comprising public and private membership that can independently approve all types of and financial levels of investment projects n Promotion of private sector or public-private partnership –driven opportunities for development n Proper master planning controls in SEZs to protect investments, minimize land use conflicts, and ensure environmental safeguards n Guaranteed quality facilities and reliable infrastructure and utilities n One-stop shop and aftercare that eliminate jurisdictional conflicts between ministries, departments, and agencies and that fast-track business establishment n Package of fiscal and nonfiscal incentives Source: Background note for IFC 2021 by Deborah Porte; Farole and Akinci 2011. International best practice recommends an usually requires a different set of staff and tools to autonomous regulator for SEZs. Since the Office perform each role well. Thus, it is recommended for the Accelerated Economic Development Zones to have an autonomous regulatory body established (GAZEDA) was merged in 2016, APIEX has been that is responsible for SEZs (box 3.4), reports to the guardian of the SEZ regime in Mozambique. an independent board, has a business and service Therefore, the functions of the regulator, developer, culture, and hence may also charge for services and promoter are all under the same roof, creating provided to be self-sufficient. significant conflicts of interest. Moreover, it | 22 ASSESSMENT OF THE LEGAL AND REGULATORY FRAMEWORK FOR FOREIGN DIRECT INVESTMENT Box 3.4. SEZ Authority Roles The SEZ authority should be equipped with a strategic mandate and fulfill the following roles: n Strategically plan and promote SEZ development in line with Mozambique’s development objectives n Designate and select sites, package land, and establish land use and development guidelines for SEZs n Conduct feasibility studies n Develop off-site infrastructure n Develop off-site infrastructure n Train and provide workforce development and social services; administer, regulate, and monitor compliance with the SEZ regime’s legal framework, policies, standards, and requirements n Ensure investors obtain first-rate customer service and aftercare Source: Background note for IFC 2021 by Deborah Porte. Besides the regulatory and institutional SEZ agency examine ways to attract private sector weaknesses, another key constraint to promote zone developers to Mozambique to avoid political investment to SEZs in Mozambique is the lack of interest interference with SEZ development based developed SEZ projects. The new SEZs planned on market demand. Furthermore, the agency should in Nacala, Mocuba, and Manga-Mungassa have proactively investigate ways to improve the general not yet been developed, meaning that there is no infrastructure and utilities surrounding the SEZ serviced industrial land connected to infrastructure areas. To do so, the agency needs to nurture close (that is, plots with roads, reliable power, water, relationships with local municipalities, the Roads drainage, telecommunications, and wastewater Commission, and power and water providers. treatment facilities) available for lease. Recalling Mozambique’s shortcomings on some Enterprise Modernizing the SEZ regime is key to being Survey indicators related to accessing infrastructure, competitive in the region. The competition such as getting electricity (see section 3.2. on de on SEZs is significant in East and Southern facto barriers), well-serviced SEZs could fill a Africa, where most countries in the immediate critical gap in attracting investors to Mozambique neighborhood (Ethiopia, Kenya, South Africa, and helping the country compete with its neighbors. Tanzania, Zambia, and Zimbabwe) are proactively However, it is important to note that SEZ promoting their SEZs as an attractive investment development needs to be based on comprehensive location. These countries have prepared their feasibility studies, including future market demand institutions, including through higher capacity of assessments, since a “build-it-and-they-will-come” staff to operate in foreign languages, to master their approach often used by governments usually does mandate, and help investors set up operations. not deliver results. It is thus recommended that the ASSESSMENT OF THE LEGAL AND REGULATORY FRAMEWORK FOR FOREIGN DIRECT INVESTMENT | 23 | 24 ASSESSMENT OF THE LEGAL AND REGULATORY FRAMEWORK FOR FOREIGN DIRECT INVESTMENT 4. GAPS IN THE INVESTMENT PROTECTION FRAMEWORK Investment protection guarantees are critical reinvestments recently, while countries such as for retaining and expanding investments in Kenya and Tanzania have. the long term across all types of FDI. Over 90 percent of all investors rate various types of legal Treatment of the Investor protections as important or critically important (World Bank 2018a). Those rules may be enshrined Protection against nondiscrimination via in the constitution or under a specific regulation the national treatment principle such as an investment law and also typically form part of international investment agreements (IIAs), As a World Trade Organization member, such as bilateral investment treaties (BITs).40 While Mozambique needs to uphold the national the investment law provides core guarantees for treatment principle.41 This guarantee is defined by investors operating in the country, the protections a a host country’s offering treatment as favorable to country offers domestically have to be aligned with foreign investors as it does to a domestic investor those it offers internationally. This section assesses in like circumstances. As such, this guarantee has a the coherence and quality of investment protection relative standard since it observes the treatment that in Mozambique compared to best international two types of investors receive when faced with the practices. same situation to determine if there is a violation or not. Mozambique grants variations of all five fundamental guarantees for foreign investors. Mozambique guarantees this principle both These are grouped into three categories: at the domestic and international level, but the domestic quality of the protection is not n The guarantees for nondiscrimination and aligned with best practices. Article 4 in the fair and equitable treatment both refer to the Investment Law states that domestic investors treatment of the investor. and foreign investors will have the same rights n The protection against unlawful expropriation and obligations. However, it leaves gaps in the and guarantee for the free transfer of funds and quality and scope of the guarantee. First, article 4 profits relate to the protection of the established should also mention that it treats investors equally investment. “in like circumstances.” That is, to establish if discrimination occurred, one has to observe if the n Access to investor-state dispute settlements situation in which a domestic investor was favored provides mechanisms to settle grievances in the is indeed the same situation that a foreign investor process. is in. Adding this qualifier would better protect the government of Mozambique from frivolous claims Investment is a long-term relationship, not a one- and potential arbitration proceedings. The BITs with time transaction. The level of reinvested earnings the Economic Union of Belgium and Luxembourg, as a share of FDI inflow is a good indication of how India, and Japan already include this clause. Thus, foreign investors perceive the project’s risk and it is simply a question of modernizing the language quality of protection. Globally, roughly 25 percent under Mozambique’s Investment Law. Second, of FDI inflow on average are reinvestments from the scope of the guarantee as currently phrased is investors already present in the country per year unclear and creates a gap regarding international (World Bank 2018a). As of 2016, Mozambique commitments. This guarantee can extend only had not received any reinvestments since 2011. to the post-establishment phase (that is, once the Among the peer group, performance is mixed. investor has started operation) or also include the Ethiopia, Ghana, and Zimbabwe also have not had ASSESSMENT OF THE LEGAL AND REGULATORY FRAMEWORK FOR FOREIGN DIRECT INVESTMENT | 25 establishment phase. In its BITs with Japan42 and a large amount of interpretation to the arbitrators the United States,43 investor activities are defined in an investor-state dispute. Mozambique has had as covering both phases, therefore extending an arbitration procedure under the ICSID from an the guarantee further than its definition in the Italian investor for violation of the FET provision Investment Law. Therefore, it is important to raise of the Mozambique-Italy BIT.46 The investor argued the attention of the government of Mozambique sudden and arbitrary conduct from the government to this discrepancy since investors from Japan and when it refused to pay compensation that it had the United States are entitled to start an arbitration supposedly agreed to. Although the ICSID award procedure against Mozambique even before they was in favor of the state,47 it reflects the risk of other have started operation in the country. such cases in the future. It is therefore recommended that the country define the FET provision in the Fair and equitable treatment: Investment Law to have more control over what an absolute standard of protection may fall in the scope of this guarantee. This guarantee has become the most important standard in investment disputes but is not Protection of Established defined in Mozambique’s Investment Law. The Investments fair and equitable treatment (FET) standard is designed as a rule of international law and is not Protection against unlawful determined by the laws of the host state. Thus, expropriation unlike national treatment, the FET standard might Mozambique is regarded as having a medium even be violated if the foreign investor received the risk for expropriation, but its performance is same treatment as a domestic investor. Thus, a clear deteriorating. Per Credendo’s assessment, the definition of this is paramount for the government risk of expropriation in Mozambique is at par with and investors alike. This provision is currently Ethiopia and Tanzania (all at 5 out of 7 = highest risk) left out of Mozambique’s Investment Law. and better than Zambia and Zimbabwe (both 6 out Mozambique upholds this guarantee in its BITs but, of 7). However, in the International Country Risk again, without providing a granular definition. This Guide’s (ICRG’s) assessment,49 which classifies absence could allow different arbitral tribunals to indicators from 0 (high risk) to 4 (low risk), the risk give different interpretations as to what the content of expropriation in the country changed from 3 in of such a standard may be.44 2015 to 2 in 2019, suggesting an increase in this There is no consensus on a FET definition type of risk for investors. encompassing all possible forms of prohibited It is a government’s prerogative to expropriate action by the state. However, tribunals have investors for matters of public purpose. tended to focus on the following subcategories However, this procedure needs to be done lawfully for potential violations, which are now found in and following a transparent procedure. According the FET definition of best international practice to best international practice, an expropriation investment agreements.45 The examples listed in is seen as legal if it (a) is done to serve a public the subcategories (box 4.1) are not exhaustive but goal, (b) follows a nondiscriminatory process in are used to illustrate their meaning. which the investor has a right of appeal, (c) offers Mozambique already had to defend itself at the a fair market value compensation to the investor International Centre for Settlement of Investment equivalent to the value of the good directly before Dispute (ICSID) on the basis that it had violated the expropriation process, to be paid without undue the FET provision. Most international arbitration delay in a freely convertible currency, and (d) proceedings started by foreign investors are based allows this compensation to be transferred outside on FET violations. As stated, this guarantee is on a of the host country.50 spectrum, and when not precisely defined it gives | 26 ASSESSMENT OF THE LEGAL AND REGULATORY FRAMEWORK FOR FOREIGN DIRECT INVESTMENT Box 4.1. Subcategories under Recent Jurisprudence of the FET Provision n Frustration of an investor’s legitimate expectations and failure to act in good faith: A host government cannot break a promise made to the investor. If, for example, the state offered the investor an exoneration of tariffs for a certain time, it cannot completely change those exonerations arbitrarily thus substantively changing the situation compared to the one the investor agreed to when they entered the country.a n Lack of a stable, consistent legal regime: The state does have the right to adapt its regulatory regime to circumstances of public need, such as rolling back incentives granted to foreign investors when the fiscal health of the state demands it. Nevertheless, in cases like these, the jurisprudence has stated that the host country cannot just ignore its investment treaties obligationsb and therefore has to offer fair treatment to foreign investors in such situations, mindful not to completely change their situation in the country.c n Arbitrary, discriminatory conduct, lack of due process, or denial of justice: This standard dictates that investors are to be given a fair hearing and a right to appeal after a decision is taken. There are four cases where an investor can carry a denial of justice against the state: (a) if courts refuse to entertain a suit, (b) if the investor is subject to undue delay, (c) if justice was rendered in a seriously inadequate way, and (d) if malicious misapplication of the law is found.d It is relevant to underline that according to international cases, an investor will only be able to claim denial of justice in an international arbitration case when all local remedies have been exhausted.e n Failure to act transparently: This condition means that investors must be able to know the rules applying to their business. In addition to the above examples, transparency is then the effort from the state not to change the essential features the investor relied on at the time of the investment or at least informing the investor in a timely manner that the regime will be modified. a. Ioan Micula and others v. Romania, ICSID Case No. ARB/05/20. b. ADC v. Hungary, ICSID Case No. ARB/03/16. c. Eiser Infrastructure Ltd. v. Spain, ICSID Case No. ARB/13/36. d. Mondev International Ltd. v. United States of America, ICSID Case No. ARB(AF)/99/2 paragraph 126. e. Saipem S.p.A. v. People’s Republic of Bangl., ICSID Case No. ARB/05/07 paragraph 151. Source: World Bank Group Investment Policy and Promotion Team research. The domestic regulation in Mozambique the amount will be determined by individuals does offer protection against unlawful selected by the state, so the compensation may expropriation, but key elements of the provision not necessarily be equivalent to free-market value are not present. The Investment Law states that before the expropriation. This is typically of great expropriation will only occur for public purposes concern to investors because they may not be and ensures the promptness of the compensation adequately compensated. Last, but a minor detail, and its transferability (art. 14). However, all other the Investment Law does not explicitly state that conditions are either absent or could be improved foreign investors will not be discriminated against on. Per the Investment Law, investors may ask the during the process. Since Mozambique already Council of Ministers to review their case, but this has many BITs in force that flesh out all the is not standard due process. Investors should be recommended conditions for this provision aligned allowed to argue the decision by the government with best international practices, it could simply to expropriate in the judiciary to ensure the fairness update the Investment Law following, for example, of the review. Further, the Investment Law secures art. 5 of the BIT with India. compensation for the investor, but it states that ASSESSMENT OF THE LEGAL AND REGULATORY FRAMEWORK FOR FOREIGN DIRECT INVESTMENT | 27 Mozambique needs to fill the gaps in domestic and without undue delay. This is how it is stated legislation related to indirect expropriation. in Mozambique’s BITs with India (art. 7) and with International law distinguishes two types of Japan (art. 15). Most importantly, those BITs ensure expropriation: (a) direct, which means that the that all types of profits may be repatriated out of the government takes clear action to seize the property host country. There is one accepted exception to this title, and (b) indirect,51 which is the accumulation international standard, which is in times of balance of actions that result in a de facto expropriation for of payment crises. In such a case, a state may restrict the investor. The latter is, by far, more common. the transfer of funds for a determined period of time. While the Investment Law does not mention this Nevertheless, Mozambique enforces a minimum type of expropriation, Mozambique is committed transaction threshold set at approximately $40,000 to enforce it under the BITs it has signed. This to allow the transfer of funds out of the country.54 constitutes an important misalignment between Not only does this limit affect smaller investors domestic and international commitments. disproportionally, but this provision also goes Mozambique already had to defend itself at ICSID against all BITs that Mozambique has in force and for indirect expropriation alleged by a South African thus, again, exposes the country to arbitration risk. investor.52 Although the award was rendered in favor of Mozambique, it was only done because Access to Investor-State Dispute the BIT with South Africa was not in force at the time the decision was made (October 2019). Thus, Settlement a procedural aspect protected the state. As stated Granting foreign investors access to international earlier in this report (see 3.2 De Facto Barriers), arbitration is a common standard of foreign Mozambique has weak coordination between investment legislation. Since the independence agencies and different levels of government. This and quality of the judicial systems vary across example shows that uncoordinated and unaware the globe, and executive interference in court government actions may considerably increase the proceedings is likely (especially where substantial risk of arbitration based on indirect expropriation financial amounts are at stake), this is an important claims. According to ICSID, cases involving guarantee for foreign investors to resolve disputes indirect expropriation are the second most common with the host state. Weaknesses of the courts in type of cases brought forward by investors. Mozambique may be verified by its ranking at 168th out of 190 countries in the World Bank Free transfer of funds Doing Business indicator measuring enforcement of a contract (World Bank 2020c).55 It measures The restrictions on transferring funds out the time and cost of implementing a decision by of Mozambique severely hurt its investment a first instance court in the country.56 The ranking competitiveness. Mozambique and Zimbabwe suggests that companies need to invest a significant rank as the countries with the highest risk on amount of time and money to get a decision in transfer and convertibility of currencies. Just as the first instance of the courts, making them less with the expropriation indicator, Mozambique’s likely to try or be willing to solve disputes that way, performance has deteriorated from 2015 to 2019 53 especially when the government is involved. The repatriation of profits and capital to the investor’s home country is a primary concern of It is thus very positive that Mozambique offers foreign investors who, hence, pay close attention to access to international arbitration at both the this provision. international and domestic levels. All the BITs in force and the Investment Law (art. 25) include a To be compliant with international commitments, provision that grants access to investor-state dispute Mozambique cannot restrict the amount of funds settlement (ISDS) to foreign investors. However, if that can be transferred. Under international law, the investors may benefit from access to arbitration, this guarantee needs to explicitly offer the foreign it is also important for the host country to clearly investor the opportunity to transfer funds in and define the scope of this provision. Doing so protects out of the country in a freely convertible currency | 28 ASSESSMENT OF THE LEGAL AND REGULATORY FRAMEWORK FOR FOREIGN DIRECT INVESTMENT the state against frivolous claims since ISDS can that they tend to solve severe issues with the be very costly. Currently, the Investment Law offices of the president or prime minister directly offers only a very general provision of ISDS and and thus do not believe placing this function in a investment in extractives; the majority of FDI stock line ministry is an effective choice. International in Mozambique, is not covered by the Investment examples that were able to fulfill this objective had Law and as such access to ISDS is unclear at the two institutional features in common: domestic level. It should be in the interest of the government of Mozambique to consider a more n An empowered lead agency: The body in-depth definition of this clause in the Investment responsible for operating the ombudsman needs Law and clearly identify in which circumstances to have legal experts able to identify when a case can be brought to arbitration. Rather than an investor grievance can be received by the allowing any dispute as receivable, the state ombudsman and what the degree of severity of could, for example, define that a grievance can be the grievance is. It is fundamental that, through brought to arbitration if investors demonstrate they law or decree, the ombudsman is conferred a have incurred damage directly due to a guarantee clear scope of operations. violation. The state can also provide more details n Buy-in from a political decision-making as to how the procedural aspects of ISDS should body: While the ombudsman performs the be set. This would entail fleshing out the rules technical assessment and forms the link between to be used, implementing that the process of the investor and the government, it has to have choosing arbitrators, their review of the evidence, a strong link with a political decision-making and their legal reasoning be transparent (that is, body that has the clout to indeed implement the the documents would be accessible to the public). changes needed (for example, correct policies, Mozambique has BITs that already offer such a level call out misconduct of public entities, and so of detail on the ISDS clause, and the government is on). advised to align its domestic legislation with those international standards.58 The lack of coordination between government agencies affects the understanding and Given the challenges ISDS can pose to host awareness of its international commitments. economies, solving grievances before they escalate Often, the distribution of competencies across into a legal dispute is in the host country’s best government separates the body in charge of the interest. Even if awards are at the end rendered in formulation of the domestic investment policy from favor of a government, having an increasing track the body negotiating international agreements. For record of ISDS cases affects the perceived political example, the Brazil Mozambique Cooperation for risk and attractiveness of an investment location for Facilitation Agreement signed in 2015 (which is not future investors. Defense in investor-state disputes yet ratified), on the Brazilian side, was negotiated further requires considerable public resources. by the Ministry of Foreign Affairs. However, the Governments have therefore started to focus their government agency in Brazil developing investment attention on the beginning of the investor-state policy at the time was the Ministry of Industry and conflict continuum and have developed grievance Commerce. This may pose challenges absent good mechanisms, such as an ombudsman office, that transparency between government agencies since help them resolve problems before they escalate. once an international agreement is implemented, all Investors in Mozambique have been calling on levels of the government need to abide by it. In the the government to establish an ombudsman. The case of Mozambique, there is also a misalignment institutional anchor had not been finalized at the between government agencies developing the time of this study. Although APIEX would be a Investment Law, which is the competence of possible candidate, it is not fully empowered to act the Ministry of Industry and Commerce (per the as a single window for investment and currently PANAM 2019–2021 policy) and the Ministry of lacks the technical capacity in this area. Investors, Economy and Finance that negotiates the BITs during conversations in December 2019, reiterated according to Decree 116/2015. ASSESSMENT OF THE LEGAL AND REGULATORY FRAMEWORK FOR FOREIGN DIRECT INVESTMENT | 29 Mozambique needs to align its domestic policy under the portfolio of the Ministry of investment policy formulation with its Economy.59 In other countries, an institutional international investment policy commitments realignment may not be enough as the investment and practice. Different countries have adopted law and the IIAs may also be in contradiction with different measures to create more alignment one another. Myanmar, for example, passed a new between their IIA commitments and their domestic investment law in 2016 that is closely aligned legislation. In the case of Brazil, mentioned with the obligations the country has under the previously, the government provided a new Association of Southeast Asian Nations (ASEAN) alignment of its ministries placing now both the Comprehensive Investment Agreement of 2009. negotiation of IIAs and the domestic investment | 30 ASSESSMENT OF THE LEGAL AND REGULATORY FRAMEWORK FOR FOREIGN DIRECT INVESTMENT 5. RECOMMENDATIONS The main weaknesses of the legal and regulatory e. Accede to the Hague Apostille Convention60 to framework for investment in Mozambique are simplify the companies’ legalization process the lack of transparency and clarity, the lack of by the delivery of a standard certificate. reform implementation, and the unpredictable Governments benefit from enhanced integrity and discretionary conduct by public officials at and the possibility to charge a reasonable fee all levels of government. The weaknesses not only in exchange for authentication services, while make it more difficult and costly for an investor to businesses and citizens benefit by saving time enter and operate in Mozambique, but they severely and the cost of authenticating documents, having affect the attractiveness of Mozambique as an to pay only once in the process (The Hague investment location in the first place — especially Conference on Private International Law 2013). outside the extractives sectors. These issues are not new to the country. Therefore, any serious f. Review the specificity and clarity of specific reform agenda must be sponsored by a reform provisions and procedures mandated by the champion with enough political clout to ensure Investment Law. implementation finally happens. 2. Introduce mechanisms that help investors 1. Modernize the Investment Law and other navigate regulations and procedures, streamline related legislation and align it with international the business environment, and address investment policy commitments: grievances. This could include: a. Implement a registration mechanism within the a. A functioning one-stop shop. OSSs, especially Agency for Promotion of Investment and Exports when they offer online portals to the extent (APIEX) instead of a screening mechanism. possible and useful, may reduce corruption, Moving to a simple registration process in the eliminate the need for physical presence, and Investment Law would considerably simplify cut costs and time. Linking up different agencies the process of establishing a new investment in requires a well-coordinated and politically the country. supported approach since other parts of the bureaucracy might fear the loss of control. b. Define and clearly communicate which sectors of the economy are open, restricted, or closed b. Establish an investment ombudsman within an to foreign direct investment (FDI). Develop a agency that has political clout. It is important that negative list to increase transparency on sectors the design and administration of the ombudsman where investment is restricted. functions restore trust with investors so that it can actually act on its mandate. c. Define the fair and equal treatment (FET) guarantee and the protection against indirect c. Systematic online publishing of laws and expropriation as those are the most common regulations, at least those governing investment. breaches alleged by investors under investor- 3. Transform the institutional framework and state dispute settlement (ISDS). enable facilitation of investments by clarifying d. To the extent fiscally possible, allow free transfer the lead ministry responsible for investment of funds in and out of Mozambique for foreign policy and empowering specialized agencies investors: As stated, the free transfer of funds is implementing it: one of the core guarantees that should be offered a. Design an FDI strategy under the leadership of to foreign investors in a host country. the Ministry of Industry and Commerce (MIC) ASSESSMENT OF THE LEGAL AND REGULATORY FRAMEWORK FOR FOREIGN DIRECT INVESTMENT | 31 that is aligned with national development b. Clarify criteria, procedures, costs, and timeline, priorities, sets objectives, define right targets, and compile this information in an investor and sequence of activities to support FDI inflows. handbook that is easily accessible and widely shared. b. Finalize the institutional reform of APIEX. Clarify how the investment promotion agency c. Set up an independent SEZ regulator and will implement the strategic vision developed by improve the business mindset and capacity of the lead ministry. To do so, the agency’s role, staff. priorities, reporting, monitoring and evaluation, and staffing should be developed. Therefore, it is d. Promote the creation of serviced industrial important to divide the regulatory and promoting land within Mozambique’s designated SEZs as roles for investment and exports where, once a product to offer its potential investors (roads, again, the former function should be with the power, water, telecom, drainage, and so on). ministry and the latter with the agency. 5. Reduce the prescriptive and mandatory c. Strengthen capacity to proactively deliver the nature of performance requirements. core services to investors, including foreign a. Consider adapting the hard quota on foreign language proficiency, a business mindset, and labor to implement a more flexible quota based service mentality. on economic needs or at least a rule adapted to 4. Improve the legal, regulatory, and institutional sectoral needs. framework for special economic zones (SEZs). b. The government of Mozambique should This reform area is intertwined with the reconsider its economywide local content law. transformation of APIEX and the modernization The draft bill on the table is unclear and risks of the laws and regulation, but there needs to be duplicating already existing laws and regulations. an explicit space for SEZs that includes: It further is noncompliant with Mozambique’s a. Modernize current SEZ legislation and international commitments, increasing the risk streamline it into one independent SEZ law with for investor-state disputes while at the same corresponding implementing regulations. time potentially introducing new barriers for investment. | 32 ASSESSMENT OF THE LEGAL AND REGULATORY FRAMEWORK FOR FOREIGN DIRECT INVESTMENT APPENDIX A: LIST OF REVIEWED BITS All the following BITs have a provision mentioning Investment Law and therefore create a misalignment fair and equitable treatment, indirect expropriation, between Mozambique domestic and international and free transfer of funds, which are some of commitments for investment protection. the core guarantees that are not defined in the Table A.1. Mozambique Bilateral Investment Treaties Reviewed for This Report Parties Status Entry into force Algeria In Force July 25, 2000 BLEU (Belgium-Luxembourg) In Force September 1, 2009 Brazil (Cooperation and Facilitation Investment Agreement) Signed March 30, 2015 Finland In Force September 21, 2005 France In Force July 6, 2006 Germany In Force September 15, 2007 India In Force September 23, 2009 Indonesia In Force July 25, 2000 Italy In Force November 17, 2003 Japan In Force August 29, 2014 Mauritius In Force May 26, 2003 Netherlands In Force September 1, 2004 Portugal In Force October 31, 1998 Sweden In Force November 1, 2007 Switzerland In Force February 17, 2004 United States In Force March 3, 2005 United Kingdom In Force May 12,2004 ASSESSMENT OF THE LEGAL AND REGULATORY FRAMEWORK FOR FOREIGN DIRECT INVESTMENT | 33 APPENDIX B: LIST OF LEGAL TEXTS GOVERNING SEZS n Law No. 3/93 of July 24 (Investment Law) n Law No. 4/2009, of January 12 (the Fiscal Benefits Code) n Decree No. 43/2009, of August 21 (the Regulations of the Investment Law) n Decree No.75/2007, of December 24 (creating GAZEDA) n Decree No. 76/2007, of December 18 (establishing Nacala SEZ) n Decree No. 22/2012, of July 6 (establishing the Manga-Mungassa SEZs) n Decree No. 47/2013, of August 30, (establishing the Crusse and Jamal Integrated Tourism Development Zone) n Decree No. 75/99 (approving the Regulations on foreign Labor Contracts for the Industrial Free Zones (IFZs) n Decree No. 51/2011, of October 10 (for Minheuene Industrial Free Zone) n Decree No.50/2011, of October 10 (for Locone Industrial Free Zone) n Decree No. 28/2014, of June 6 (for the Mocuba Special Economic Zone) n Decree No. 29/2014, of June 6 (for Mocuba Industrial Free Zone) n Ministerial Diploma No. 14/2002, of January 30 (approving the Customs Regime of the Industrial Zones) n Ministerial Diploma No. 202/2010, of November 24 (the Regulations of Fiscal Costumes For SEZs and Industrial Zones) n Ministerial Diploma 43/2013, of September 13 n Resolution No. 15/2011, of October 15 (approving the Organic Statute of the Office For the SEZ Office) n Internal Resolution No. 15/99, of October 12 (for Beluluane Industrial Free Zone) | 34 ASSESSMENT OF THE LEGAL AND REGULATORY FRAMEWORK FOR FOREIGN DIRECT INVESTMENT NOTES 1. Rio Tinto eventually abandoned its major 9. The EIU’s Country Risk Model (EIU 2020) coal project in Benga, Tete Province, losing covers 131 countries, enabling the assessment approximately $3 billion after it was denied of five dimensions of country risk: sovereign, permission to transport coal on the Zambezi River. currency, banking sector, political, and economic structure. 2. A strong global position indicates that a country has a well-developed set of capabilities in a 10. Mozambique Credendo profile: https://www. given sector, that is, it possesses the skills and credendo.com/country-risk/mozambique. The technologies required to be a globally competitive lowest risk is a score of 1 and highest risk is the exporter. If a product requires low capability, it is maximum score of 7. Mozambique ranks 7 on all classified as less complex (generally low margin, political risk indicators (short-, medium-, and long- volume product); high capability is a more complex term). product (generally higher margin, low competition, specialized). 11. Law 3/93 art. 3.2. 3. Ed Reed, “Exxon Pushes Back Rovuma 12. Mining Law (Law No. 20/2014) and regulations LNG Decision, Again,” Energy Voice, April 4, (Decree No. 31/2015); Oil and Gas Law and 2020, https://www.energyvoice.com/oilandgas/ regulation (Decree No. 63/2011). africa/233338/exxon-pushes-back-rovuma-lng- 13. The reform was enacted by Decree 60/2016. decision-again. Area 4 is operated by Eni and includes the Mamba and Coral gas fields. 14. Decree 60/2016. 4. Gás do Rovuma: Projecto Coral Sul Dá Mais 15. A reduction in the volume of FDI also reduces, um Passo Importante [“Rovuma Gas: Another for example, tax revenues, jobs, competition, and Important Step for the Coral Sul Project,” May market access. 26, 2020, https://www.diarioeconomico.co.mz. Offshore Area 1 is located within the Rovuma 16. Investment Law 3/93 art. 11, ‘’All investments Basin, approximately 40 kilometers offshore are deemed open to investment except those northern Mozambique. expressly reserved for the state or only initiated by the public sector.’’ Article 12, ‘’The Ministerial 5. Five-year action plan for 2015–19 and the Action Council will define and indicate the sectors that are Plan for Business Improvement for 2019–21. reserved for the state or the public sector.’’ 6. Plano de Ação para a Melhoria de Negocios— 17. Decree 43/2009. Action Plan for Business Improvement 2019–21, 3. 18. See http://invest.apiex.gov.mz/invest/investing- 7. Based on a global survey of 754 executives of in-mozambique/investment-laws/ (accessed multinational corporations with investments in January 25, 2020). developing countries. 19. See “Limits on Foreign Control and Right to 8. The ICRG rating comprises 22 variables in Private Ownership and Establishment,” https:// three subcategories of risk: political, financial, and www.state.gov/reports/2019-investment-climate- economic. The composite scores, ranging from 0 to statements/mozambique/ (accessed January 25, 100, are broken down into categories from “very 2020). low risk” (80–100) to “very high risk” (0–49.9). Data from December 2019. ASSESSMENT OF THE LEGAL AND REGULATORY FRAMEWORK FOR FOREIGN DIRECT INVESTMENT | 35 20. Law 3/93 art. 21.1 ‘’For investments to benefit barriers and trade-related investment measures from the guarantees and the incentives offered by such as local content or joint venture requirements this law they will have to receive an authorization did not have clear positive impact, but did limit or approval from the relevant government entities.’’ competition, and protect subscale operations, thereby dampening productivity performance (2). 21. Decree 43/2009 art. 10. ...Local content requirements created significant 22. Decree 43/2009 art. 12. costs by protecting low productivity players, but they were not necessary for the development of 23. As for developing countries, reforms to remove strong supplier industries” (25). Finally, the study screening have resulted in substantive growth of found no compelling evidence in favor of joint- FDI inflows. Liberia, for example, abolished its venture (JV) requirements. Where JVs provided economywide screening policy in 2010, reducing benefits, they tended to emerge naturally rather the number of sectors requiring screening, and than through JV requirements. saw an increase of $213 million FDI inflow for the following two years (OECD FDI Regulatory 33. Law 15/2011. Restrictiveness Index). 34. See https://www.enterprisesurveys.org/en/data/ 24. Madagascar art. 11 of Law n. 95-020; Tanzania exploreeconomies/2018/mozambique for more National Land Policy of 1995. information on the sample and methodology. 25. Law 19/1997 art. 17. 35. The comparative ranks for the peer group are Ethiopia (96), Ghana (80), Kenya (137), South 26. Law 19/1997 art. 1. Africa (70), Tanzania (96), Zambia (113), and Zimbabwe (158). Transparency International 27. Law 19/1997 art. 11. Corruption Perception Index, 2019, https://www. transparency.org/cpi2019. 28. Per Decree 37/2016 SEZs, the Oil and Mining sectors will have their own quotas. 36. Investment Law 3/93 Article 26. 29. World Bank Group interviews in December 37. See example of Metalclad Corp. v. United 2019 and findings of an APIEX workshop with Mexican States, ICSID Case No. ARB (AF)/97/1. investors supported by the Japan International Cooperation Agency conducted in April 2019. 38. This section is based on findings provided by Deborah Porte, SEZ consultant, in December 2019. 30. The Ministry of Labor in certain instances has required documents, such as a list of employees 39. SEZ areas are different from industrial free and corresponding salary levels, prior to zones, which are developed for investors who plan operationalization. to export the majority of their products. SEZs are a more flexible regime and do not have export 31. The reform of regime for work permits in requirements. Kosovo facilitated foreign workers to receive permits that were valid for longer than 30 days in 40. Disclaimer: For the purpose of this note, the 2013 and allowed foreigners to obtain residence World Bank Group has reviewed as part of the IIAs permits if employed in the country in 2014. As a that Mozambique has in force only 17 out of the result, investors in Kosovo quickly reduced their 20 BITs the country has in force, because the other cost for setting up a business within a year by about legal text were not made available. As such, the 30 percent. level of coverage by IIAs indicated in this note is to be seen as indicative. 32. See Hufbauer et al. 2013; Bauer et al. 2014; OECD 2016; Evenett and Fritz 2017; Moran 2006, 41. World Trade Organization agreements (art. 3 of 2007, 2014; Hoekman, Maskus and Saggi 2005. GATT, art. 17 of GATS, and art. 3 of TRIPS). Further, McKinsey (2003) found that “import | 36 ASSESSMENT OF THE LEGAL AND REGULATORY FRAMEWORK FOR FOREIGN DIRECT INVESTMENT 42. Article 1 of the Mozambique-Japan BIT defines A case-by-case analysis is introduced to determine an investor as ‘’someone that seeks to make or has whether an indirect expropriation has taken place, made an investment’’ and investment activities observing the economic impact, duration, and as activities ranging from the establishment, intent of the measure or series of measures taken by acquisition, expansion, and operation phase. The the government (CETA, art. 8.12 and annex 8-A.) highlighted phases under international law are understood as granting pre-establishment protection 52. Besserglik v. Mozambique, ICSID case ARB to all relevant guarantees under the agreement. (AF)/14/12, October 28, 2019. 43. Article 4 of the BIT with the United States also 53. Credendo ranks Mozambique and Zimbabwe at grants this level of protection to foreign investors 7/7; Ethiopia, Kenya, and Zambia at 6/7; Tanzania, by saying that ‘’this treatment extends to both the 5/7; and South Africa, 4/7. The ICRG indicator establishment and the post establishment of the went down from 3 in 2015 to 2 in 2019. investment.’’ 54. Investment Law 3/93 art. 14 Decree 43/2009 44. See, for instance, the BITs with France (art.3), art. 6. Germany (art.2), Italy (art.2.3), Mauritius (art.4.1), 55. Mozambique ranks behind neighboring and the United Kingdom (art.2). countries on the enforcing contract indicator: 45. Comprehensive Economic and Trade Agreement Malawi (149/190), South Africa (102/190), (CETA) art. 8.10. Tanzania (71/190), and Zambia (130/190). 46. See art. 2.3 of the Italian-Mozambique BIT. 56. See “Ease of Doing Business in Mozambique,” h t t p s : / / w w w. d o i n g b u s i n e s s . o r g / e n / d a t a / 47. Muratori Cementisti v. Mozambique, ICSID exploreeconomies/mozambique. Case N. ARB/17/23 CMC. 57. In 2019, two ICSID cases were decided in 48. See Credendo’s website on Mozambique, favor of Mozambique, but legal fees still cost the accessed January 24, 2020, https://www.credendo. government around $3.85 million. See ICSID cases com/country-risk/mozambique. ARB (AF)/14/12 and ARB/17/23. 49. PRS Group, ICRG Risk Guide, accessed January 58. See the BITs with the United States (art. 9) and 24, 2020, https://www.prsgroup.com/explore-our- with Japan (art. 17). products/international-country-risk-guide/. 59. Based on the medida provisória Nº 870 of 50. All BITs reviewed provide this definition for January 2019. protection against expropriation. 60. The Hague Apostille Convention of 1961 51. 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