Upcoming Local Content Law – Unnecessary, but in Tune with Public Expectations

By August 2017Mozambique

Mozambique’s government is keen to ensure that the lucrative oil and gas sector develops links with the wider economy. Therefore, the Council of Ministers will consider a new local content law, under development for some time, “in due course.” At an oil and gas conference in Maputo in July, Vasco Nhabinde, the director of economic and finance studies at the Ministry of Economy and Finance, stated that the law aims to stimulate “domestic production and generate employment and income,” as well as benefit local businesses through training and technology transfer. Vice Minister for Mineral Resources and Energy Augusto Sousa Fernando added that the local content law will be aligned with the petroleum law, which shows the government’s determination to “maximize the multiplier effect of investments in the national economy.”

However, it is unclear why this law is needed. Mozambique already has a local content policy, which is enshrined in a number of laws, including the petroleum law and mining code. Existing local content provisions for IOCs already include requirements on employing and training Mozambicans, a petroleum resource quota for the domestic market, third-party access to infrastructure, and procurement of goods and services. Additionally, IOCs operating in the country must be listed on the Mozambique Stock Exchange (BVM).

It is unclear whether the new proposed local content law will replace these provisions or be an additional regulatory requirement. In our view, it is very unlikely that other laws containing local content provisions would be updated or repealed. Thus, a dedicated local content law would be superfluous and perhaps even counterproductive to Mozambique’s business environment. It would risk creating excessive red tape and increasing the potential for contradictory legislation.

Although a local content law may be at best unnecessary and at worst damaging to business, it makes sense from a political perspective, as President Fiipe Nyusi is under pressure to show some economic successes. He is trying to maintain the domestic private sector’s political support by catering to its expectations of legally benefitting from major foreign investments.

In the past, the low price of oil has limited the law to the drawing board, as local content requirements could have deterred investments by IOCs. However, this has now given way to the political expediency that Nyusi and his administration can potentially gain from such a law ahead of elections in 2018 and 2019.

Meanwhile, IOCs are taking decisions that make an exit from Mozambique due to red tape on local content less likely, which is a contributing factor toward pressing ahead with the new law. Key senior positions at bilateral and multilateral institutions as well as private companies in Mozambique have traditionally been filled – at least in part – by Mozambican nationals. Typically, these positions benefit from capacity building and training where required. These highly desirable jobs are a key source of pride and influence, and many of these employees have strong links to Frelimo. While investors may criticize this practice as running counter to meritocratic hiring practices, it is seen in Mozambique as promoting local content. Therefore, IOCs and other multinational firms are expected to follow suit. Discontent that this has not happened enough is a powerful reason for Nyusi to promote a local content law.

Heightened talk about the law shows that Mozambicans’ expectations for economic prosperity are once again on the rise. In our view, foreign investors will have to do most of the heavy lifting to meet these expectations by providing jobs and business opportunities. Therefore, we expect local content to remain a key policy issue affecting IOCs in the long term. However, while expectations are growing, capacity is not. Investors will face an uphill battle to manage raised expectations while competing to find capable local partners that can add value. This means that training and capacity building will become increasingly necessary for companies investing in Mozambique.