Mozambique’s rainy-day fund [NGW Magazine]

Mozambique announced October 12 a plan to establish a sovereign wealth fund (SWF), which will receive the income from the sale of its natural gas riches. The impoverished east African nation stands to benefit socially and economically if it manages the fund properly.

Its central bank said the Conta Unica do Fundo Soberano de Mocambique (CUF) will maximise value from three large projects that are being developed to liquefy and export natural gas from offshore finds in the north. The CUF will manage some $96bn that the country expects to earn over the 25-year lifespan of the projects starting from 2022 when first gas exports are due.

Mozambique, one of the world’s poorest nations, expects to reap big from the 180 trillion ft³ of the resource, some of which is to be developed by oil giants like French Total, America’s ExxonMobil and Italy’s Eni. But the Covid-19 crisis hit before ExxonMobil took a final investment decision.

Agostinho Machava, spokesperson for Mozambique’s Centre for Democracy and Development, said gas revenues would take the country into the ranks of the world’s largest producers.

“With the recent discoveries of enormous natural gas reserves and their consequent extraction projects going forward, the creation of such a fund for Mozambique seems like the next natural step in order to secure that decades of development find firm footing on which to stand on and benefit future generations as well,” Machava said in an August 14 statement ahead of a webinar to discuss the need for a SWF.

The CUF, said the central bank, would seek to accumulate savings so that revenues can be shared among Mozambicans over generations while also aiming to enhance fiscal stability in periods of price fluctuations.  According to the bank, income that the country will earn from the resource would be split on a 50:50 basis between the national budget and the fund in the first 20 years.  Thereafter, 80% of the revenues are to be channelled into the fund, with the budget share dropping to 20%.

Mozambique’s legislators will have the responsibility of coming up with a priority list of investments but they will have to be in industries separate from natural gas. The central bank will manage the CUF’s operations and the funds may not be used to guarantee other debts. It will be for the government, through the economy and finance ministry, to plan the fund’s investment policy and monitor its performance. The central bank said the CUF, which it will hold in US dollars, should be functioning by the time of first gas exports.

North Sea tactics

Joseph Hanlon, a visiting senior fellow at the London School of Economics and longtime writer on Mozambique, said a SWF would help Mozambique to mobilise money to invest in the kind of infrastructure that normally does not attract private investment. “I live normally in Britain and remember North Sea oil and gas,” he told NGW.

“Norway set up a wealth fund and still benefits,” he said, contrasting it with the successive UK governments that spent the taxes they were harvested. “So, from experience, a wealth fund is clearly a good idea. Mozambique desperately needs infrastructure investment with long term return which would not attract foreign private investment – electricity and roads, perhaps industries with local development potential such as fertilizer,” he said.

Three consortiums led by international oil companies – Total, Eni and ExxonMobil – are developing the gas in offshore Rovuma Basin in northern Cabo Delgado Province. 

Total is the operator in the Area One project with a 26.5% stake. Partners in the venture are Japan’s Mitsui, Mozambique’s national oil company ENH, Thailand’s PTT and India’s ONGC Videsh, Bharat Petroleum Resources and Oil India.  They project to invest $20bn developing gas in their 18 trillion ft³ find and building a 12.9mn metric ton/yr onshore LNG facility to come online in 2024.

ExxonMobil is leading a separate project in deep-sea Area 4. Together with Portugal’s Galp Energia, South Korea’s Kogas, Italy’s Eni and the China National Petroleum Corporation (CNPC) and the state oil company ENH, it wants to invest $30bn for a 15.2mn mt/yr facility. Covid-19 frustrated their plan to take final investment decision this year but that is now expected next year with exports likely between 2025 and 2026.

The third and smallest of the three is the $4.6bn, 3.4mn mt/yr Coral South floating LNG venture led by ENI. First gas in the venture that Eni is advancing together with ExxonMobil, CNPC, Portugal’s Galp, Korean Kogas and ENH should be in 2022 thus the project is set to be the first to contribute to the CUF.

Something for a rainy day

The managing director ethics, risk and resilience, Africa Programme at Chatham House Alex Vines said in principle, a SWF for Mozambique was a good idea to help manage gas rents for future economic downturns and longer-term development opportunities. “A sovereign wealth fund, if properly run, can invest funds to ensure they act like an endowment for the state but also intervene in periods of economic shock. The Covid-19 crisis and how a SWF has played a role for Norway is a good example,” he said.

Observers however say Mozambique has to overcome a number of challenges if it is to fully benefit from its gas wealth. The country has a long history of instability while corruption is common. Because of these and other factors, the hoped-for windfall may not reach $96bn. 

Mozambique fought a civil war from independence from Portugal in 1975 to 1992 when a peace deal was signed. But rebels, despite the agreement with the government, continued to run parts of central Mozambique until their leader Afonso Dhlakama died in May 2018.  No sooner had that rebellion ended than another broke out, in Cabo Delgado. Fighters who say they are linked to the Islamic state recently seized a town, Mocimboa da Praia, just 60 km (37 miles) south of the gas fields.  More than 2,000 people have been killed in the fighting and 310,000 forced to flee their homes since the conflict broke out in October 2017.

Government forces are struggling to contain the rebellion. President Filipe Nyusi first sought the assistance of the Southern African Development Community states, a regional bloc, but they have not committed any help, possibly fearful for their own security after the rebels warned them of attacks.  The president sought the assistance of the European Union, which agreed to play a part on October 9.

Counting chickens too early

By their nature, economic projections with regard to the extractive industry are speculative.  According to Machava, the forecasts assumed early exports, the rapid expansion of production capacity and very high LNG prices. This is now history, not only because of global factors such as low prices and Covid-19, but also more narrowly domestic factors, such as “bad governance, severe economic crisis and the military insurgency” near the concessions.

“These projections are based on modelling of Asia markets and also benefit from long term futures contracts that the international oil companies have been offering,” said Vines .

“The exact amount is uncertain, but there is little doubt Mozambican natural gas is at a scale that will provide a reasonable return.” On the possible impact on corruption on the success of CUF, Vines said: “This is a key question and look at how the Angolan fund was managed by the former presidents' son – Jose Filomeno dos Santos, also known as Zenu – who is now in jail on other corruption charges and how the private company managing that fund had to be forced to repatriate funds after legal action. The key is to build up a strong independent minded institution that isn't a piggy-bank for the presidency but maintains a long-term developmental vision.”

Mozambique ranked among the bottom eight on the World Human Development Index in 2019 and it came 146th out of 180 countries on the Corruption Perception Index with 26 out of 100 points.

Angola’s $5bn oil-backed SWF was established in 2011 but was pillaged during Eduardo dos Santos’ presidency. He appointed Jose Filomeno dos Santos to chair the board of the fund. Eduardo retired after 38 years in September 2017 and four months later, his hand-picked successor Joao Laurenco fired the top managers at the fund and appointed a new board. In September 2018, the president ordered the arrests of Zenu and others. Known for a jet-set lifestyle, he was convicted of siphoning $500mn from the fund.  

For the Mozambican fund to be effective, Hanlon said, there must also be independent oversight, more preferably led by civil society.

“The proposal does not spell out how investments would be decided, made and regulated. It is to be run by the central bank but there is no independent oversight – there must be some kind of civil society oversight body, and total transparency,” he said.