Special Report on the secret US$2billion debt

A breakdown of the report of the Parliamentary Commission of Inquiry into the situation of the public debt.

Guarantees violate law and Constitution and are void:

According to the report of the Parliamentary Commission of Inquiry into the situation of the public debt: “It must be understood that the guarantees issued are void”, since the act of issuing the guarantees exceeded the limits set in the 2013 and 2014 budgets and thus “violated” Article 179 of the Constitution.

The state guarantees “constitute a violation of the Constitution and the budget laws … It is the conviction of this Commission that the government has violated the budget laws because it exceeded the legal limits on the guarantees to be granted, which obliged it to ask the National Assembly for authorization to retrospectively issue the guarantees, in both 2013 and 2014”. The guarantees “constitute an affront to the principle of separation of powers that informs our democratic system”.

“Summing up the replies of the Minister of Economy and Finance, [Adriano] Maleiane, and the former minister of finance, [Manuel] Chang, it turns out that the formation of the companies was the decision of the respective shareholders, while the issuance of the guarantees resulted from SISE’s request in its role of co-ordinator of the project, in a process that did not involve the Council of Ministers and the Office of the Attorney General because, in the view of the former minister of finance, the law gave him the right to issue such guarantees in the name of the government”.

In response to the Commission’s findings, Chang said that: “Normally, when the state contracts a debt directly through the treasury, it is necessary that there be approval of this financing by the Council of Ministers and that there is the legal opinion of the Attorney-General’s Office. In this case, our conviction at the time was that there would be no debt to the state. This was our belief, so we were giving assurance that those companies could make (the investment) and quickly repay their debt”. But Chang went on to admit that “only with Proindicus did we have a guarantee that there would be a quick return on financing. Unfortunately, also the case of Proindicus, we see that until today it has hardly started the activity that might generate high revenues”.

The government budget for 2013 authorised loan guarantees of MT183.5million (US$5-million at the exchange rate of the time). But guarantees were granted in 2013 for a US$622-million load to Proindicus and a US$850 Eurobond for Ematum. The government budget for 2014 authorized the same level of guarantees, US$5-million, but a loan to MAM for US$535-million was guaranteed. The Tribunal Administrativo says the guarantee level for 2014 was US$500million, still less than the guarantee. Chang admitted that “without doubt it is clear” that the guarantees “exceeded the guarantee limit” in the budget.

At least one guarantee was not signed by a minister, but by the National Budget Director, Isaltina Lucas, the first Proindicus guarantee on 15 January 2013. Lucas is now the Deputy Minister of Finance.

According to the report, the Commission recommends that the government must continue to hold the companies accountable for the payments of these debts. However, the loan contracts also say that any issues arising from the guarantee will be adjudicated under English law and that English courts have exclusive jurisdiction. Furthermore, “the guarantee renounces … any immunity over goods and services in any jurisdiction … The state effectively renounced its sovereignty and submitted itself to English courts”.

“The Commission is convinced that the Banco de Moçambique was not requested in advance to give its opinion on the issuance of guarantees” but that it would have been good if it has done so. The haste to approve the guarantees was justified by Chang: “the urgency to resolve those problems meant that in fact we exceeded the budget guarantees”.

The Commission was not convinced – negotiations lasted two years and there was more than enough time to go to parliament. Mozambique will have to pay nearly US$400-million per year on this debt, and Minister Maleiane said simply “I do not see the capacity” to pay. “We have to restructure this debt service to be US$50million per year instead of US$400million”.

Justification largely military:

Chang said that: “The request [for guarantees] came from the Defence and Security sector, via SISE, which was the promoter of the projects, and indicated the necessity to respond urgently to these threats”.

From the hearings and documents submitted, this was to be “a national project, resulting from the political will to ensure security and protection of the state, This project was seen not only as a solution that would allow the Mozambican state to enforce the legislation and protect its sovereignty and heritage, but also as a profitable and sustainable business opportunity”.

The Commission report states that: “From the hearings and documents submitted to the Commission, the debts contracted by the three companies Ematum, Proindicus, and MAM, were based on the assumption of the existence of threats to sovereignty [and] territorial integrity, in particular characterized by illicit activities of maritime piracy, illegal immigration, drug trafficking, illegal fishing, the presence of private maritime security forces to protect private targets in national territorial waters, [with] insufficient financial and human resources for the effective protection of sovereignty”. This includes “an increase in subversive moves through electronic means that escape the control of national authorities”.

However, the Commission raises questions about “contracting out” security services and asks if the objectives of Proindicus do not “end up colliding with the areas reserved for the military component in the Law on Defence and Security Policy”. Part of objectives of Proindicus “coincides with the military component of national defence” which conflicts with the Law on Defence and Security Policy which “exclusively assigns this military component to the Armed Forces”.

Of the equipment bought with the loans, referred to variously as “military equipment” and “arms” (armamentos), some have been given to the Ministry of Defence, some to the Ministry of Interior and some to Proindicus.

Ematum was a cover for military purchases:

“Fishing is not the main activity of Ematum”, confirmed António Carlos do Rosário, a senior SISE official and the CEO of Proindicus, Ematum and MAM. Proindicus is the “mother company’ with which the project started.

Do Rosário explained that: “Proindicus was founded in February 2013. Initially we wanted US$2-billion, US$2.5.3-billion”. Crédit Suisse did two financing operations, US$372-million and then an increase, through syndicated loans, but then “it could not mobilise any more”. Do Rosário continued: “If we had it all under Proindicus, then we would not have needed to go to the others, but with the fishing activity we found a way to do this”. Chang added that: “we tried to find finance but we did not succeed without a government guarantee”. Minister Maleiane said that with Ematum “it was never clear what was fishing and what was coastal protection”. The Ematum bond was for US$850-million, but “it was clear from the first that US$500million … was for defence: radars and I don’t know what else”. It was eventually agreed that US$500-million would be transferred to the military budget. But, Minister Maleiane continued, Ematum remained with three trimaran patrol boats worth US$250-million which would be passed to Proindicus. The 24 fishing boats cost only US$91-million, he said.

The Commission asked: “is the passivity and tranquillity with which the affair is being treated not abnormal, bearing in mind that the Mozambican state has been tied to a financing of US$850-million, aiming at sovereignty, but that in the end it is concluded that the company can operate with only US$100-million?” The Commission continues by asking if “the main objective when creating Proindicus was in fact military equipment, and then Ematum appears as a subsidiary thing, to camouflage?” Just with enough boats so that “the fishing has some presence and visibility”.

Do Rosário effectively confirmed this, He said that: “it was clear to the lender, from the outset, because it is in the documents, that Ematum had two components, tuna fishing and coastal protection, but that it was not advisable to publicly share the information”.

The Commission quotes do Rosário as saying: “Of course, for us, we could not come and say to the banks and to anyone else that fishing was not the main part. [For us] the initial objective was to complement, increase and reinforce what we wanted, which we could not do via Proindicus. It was necessary to create

another company from scratch, with no liability whatsoever, but with a feasibility study of its own. And we managed to convince the banks”.

The Commission questioned the reason for the delay in sharing information about Ematum “in a very clear and transparent way”. Do Rosário replied: “secrecy is the soul of business, even more when it comes to very sensitive and strategic issues”. He added: “Do it first and then come out to explain how we did it. That way there’s no stopping it. It seems to have worked. Now, perhaps, we can take responsibility for having done as we did. But we did it deliberately, we had a goal of serving the state. And we succeeded. Things are here, companies are being built”.

Both military equipment and fishing boats unsuitable:

“The Ministry of Defence was not consulted”, Defence Minister Atanásio Salvador Ntumuke told the Commission. And if it had been consulted, “it probably would not be this equipment”. For defence of the maritime coast, “I am sure that the military would have made other proposals”, and not this equipment which “cannot even reach the high seas” and would survive “hardly three days”.

But equipment began arriving in 2016. “Bought, through what money, we do not know; if we have debt, we do not know, but there are the objects. Airplanes are in the air base, the ships are in our naval bases”. Carlos Xavier, director of the National Navy Institute (Instituto Nacional da Marinha, Inamar), told the Commission that the fishing boats were unsuitable, because “they have restricted range” and the manufacturer specifies that they can only operate in waves up to two meters high.

Payment direct to contractor:

Do Rosário, CEO of the three companies, said that the contract was given to Constructions Mécaniques de Normandie/Abu Dhabi Mar (CMN/ADM) as a negotiated contract, without a public tender. CMN/ADM also negotiated the financing. The money went directly to CMM/ADM without passing through the Mozambican treasury; Mozambique receives equipment and services but not the money.

The Commission “wanted to know the reason for the speed with which such large amounts of money was transferred [to CMM/ADM], from one month to the next, when the import, construction and pre-shipment inspections are longer processes”. The Commission was worried that “such procedure could have caused the receipt of equipment without quality guarantees”. Do Rosário explained that this was a “turnkey” (chave na mão) contract.

He said that: “on the one hand, it was convenient from the point of view of secrecy, since the equipment was mostly for the surveillance system, and on the other hand because the money was not under the control of the companies”. He added “all these companies were first financed and they only existed on paper. Only later did they actually exist on the ground”.

According to the Commission’s report, “As regards enforcement, the CEO said that he was satisfied with the supervision that the FADS [defence forces] made”.

“Paying the entire loan directly to the contractor ignored the need for working capital, the cost of hiring and training staff, and the cost associated with bureaucratic processes such as licencing and recruitment”. Even do Rosário admits lack of working capital is proving to be a serious problem.

“Borrowing by the firms showed an unreliable degree of linkage between credit institutions, contractors and borrowing companies. The relationship between the companies Ematum, Proindicus, and MAM and the contractors, and these with the creditors, were not transparent, showing that the government should have certified the process of the execution of the orders through an appropriate audit entity”. Do Rosário admitted that the contract was “unusual”.

Secrecy:

The Commission raises questions about the “high degree of secrecy”. Do Rosário said that the request to the then minister of finance to grant the guarantees was made orally, given the confidential nature of the transaction, which was linked to defence and security.

Do Rosário said that he and Chang discussed the idea of going to parliament to try to raise the loan guarantee limit. But they felt they needed to act quickly and “without creating a fuss because we do not want to create alarm at this stage”.

Chang knew he was putting his career at risk and even risking arrest, do Rosário said, but “others have already done more for the greater good. Some sacrificed their lives and did not see independence. As an official of the state he swore to serve the country and Mozambicans”. The secrecy was broken when Crédit Suisse, contrary to the instructions of Mozambique, launched a public Eurobond. The CEO stated that: “the soup was already spilled, but we succeeded in managing things”. (“O caldo já estava entornado; o que conseguimos fazer foi gerir as coisas”).

The Commission lamented to the Minister of Finance that: “The problem is that since the start of our hearings, no one takes responsibility for anything. The minister responsible for the companies says that it is with A or B, and no one takes responsibility. … So we remain without adequate answers”. Minister Maleiane responded: “Actually (it’s a pity) the company could not clarify – at least the co-ordinator of this process, which, as I said, is SISE”.

“Although the involvement of these two financial institutions (Crédit Suisse and VTB) was of great national and international interest, in particular because of a lack of transparency, the Commission was unable to establish details of the application of the funds and the transfer of the amounts to the contractor, CMN in France, although this information was requested at the hearing on 14 October 2016 with the CEO [do Rosário] of the three companies”.

The Commission asked what checks the Ministry of Finance was making to ensure that equipment was actually being delivered? Otherwise, “the state runs the risk of being tricked or cheated. It looks like a phantom exercise. Is there something that corresponds to the US$500-million” from the Ematum loan? Minister Maleiane responded “that there is, as yet, no proof that anything has been delivered”. But he added it is not the task of the Ministry of Finance to verify.

According to the Commission, “When asked if the actual value of the equipment is in fact the one that appears in the Ematum accounts and if there were no overcharging situations, the CEO said that everything they received was in compliance with what they ordered and within the standards internationally accepted”.

“There is a difference between secrecy and confidentiality” do Rosário argued. “We succeeded, and we knew that if it wasn’t confidential, this project, like many others, would not have been realized”.

Not informing the IMF:

Chang said it was not the responsibility of the government or his Ministry to inform the International Monetary Fund (IMF) of the loans, and was only the responsibility of the lender. But the lender did not do this. The Commission rejects this and points to the agreement signed with the IMF in 2013 which says “the government will give technicians of the IMF documents relating to all external financial agreements.”

The report states that the Commission reacted with indignation to the statement of the former minister, stating that, “in the context of the insistent invocation of noncompliance with the agreement with the IMF, it was our duty to comply with the conditions of the treaties subscribed by we ourselves, especially since we have had cancellation of funding that led to the discussion that dominates all politics, and the entire society”.

Government did not understand the loan:

The Commission considers that the shareholders of the companies and the government itself did not properly evaluate the financial engineering of the operations. Because of the government guarantee, “the interest rates could have been much lower”. And in giving the guarantees, government should not have ignored the “heavy weight” such loans would have in the total national debt. The loans were commercial and not concessional.

Projects were never viable, could not repay loans:

According to the initial assumption of Project SIMP (Integrated Monitoring and Protection System – Sistema Integrado de Monitoria e de Protecção) which were included in the conclusions of the feasibility studies, it was assumed that three companies would be profitable, capable of amortising their respective debts”.

Indeed, “it was predicted that the project would be highly profitable. According to the forecast of the economic feasibility study, Ematum would amortise its debt in the sixth year, starting from a cash availability of US$50-million, which would serve to amortise interest costs as early as the first year. Cash flow would increase exponentially in eight years.

The Commission considers that the current reality shows the opposite, because the companies do not have the economic-financial capacity to amortise the debts within the contractually established terms, which means under the guarantee that the state must pay. The Commission notes that the financial projection was based on unsustainable and hypothetical assumptions, and without taking into account facts and elements of risk and uncertainty that were not negligible. In the case of Ematum, since it had no experience of tuna fishing, the catch volume, and therefore sales revenues, should not have been projected at a very fast pace of growth to the point where maximum capacity is reached as early as the third year. The study did not take into account the lack of experienced sailors and fishing people.

The feasibility studies for MAM did not take into account the lack of conditions to install shipyards in Maputo and Pemba, nor with lack of experience in the naval industry. Proindicus and MAM depended largely on gas projects, but no contracts had been agreed with Anadarko or ENI. “It appears that in the feasibility studies there was no attempt to take into account the inherent risks of the situation of the country and its economy, such as its vulnerability to changing import and export prices”.

Do Rosário admitted that: “the feasibility studies had been very optimistic and that unfortunately, as they went to work, they saw that there were some difficulties. For example, he mentioned the existence” of many competing tuna fishing companies, including one which already has a processing plant in Beira (Sofala Province).

Three companies – equipment and problems:

Minister Maleiane admitted the companies did not have effective business plans.

Proindicus:

Under SIMP, monitoring of the Mozambique Channel would be by fixed radars along the coast (40% of coverage), boats including some with drones (30%), aircraft (20%) and satellite (10%). Do Rosário said the following equipment had been delivered: 16 radars, one satellite service package, 36 boats and interceptors, three patrol boats, six patrol aircraft and one computer centre. But the command and control centre – which is the core of the whole project and essential for its functioning – had not yet been delivered. The drones had not yet been supplied and the radars have yet been installed.

The Commission’s report stated that: “the CEO [do Rosário] said that they have been inactive {parados} since the start of the noise {barulho} that exists about the company Proindicus. For two years there had been a satellite contract that gave up to 10% of the total surveillance planned in the SIMP. At the end of the period, it was assumed that Proindicus would take over the contract and continue to pay. But do Rosário said the satellite provider did not accept and refused to renew the contract, on the grounds that it first wanted to be sure of the purposes for which the images were intended, and that they feared that they were taking positions in the internal conflict in Mozambique, a stalemate that prevails up to the present moment”.

A major source of income for Proindicus was to be protection of the offshore gas installations and related shipping. Multinational companies prefer that security be done by joint venture companies of which they are part. There is no legislation to force the gas companies to use Proindicus, and they are unlikely to commit to using Proindicus until it shows that it has the equipment and can do the security job. Do Rosário admits that Anadarko “has been saying for a long time that it will never have a contract with Proindicus because it can use its own resources”. ENI remains possible. But he also claims that multinational companies are using the publicity about the secret debt as a reason to not sign contracts with Proindicus. Training only began in 2016, and do Rosário said that they are having trouble finding soldiers to train because they must have 12th grade, speak English, and know how to swim.

Ematum:

Shareholders IGEPE and GIPS had virtually no background in terms of the fishing industry and Emopesca was virtually inactive.

There is a dispute between do Rosário and the fisheries sector over changes demanded in the fishing boats after delivery. Do Rosário said that representatives of the Ministry of Fisheries visited the Normandy shipyard and should have demanded any changes then. Carlos Xavier Isidoro, director general of Inamar said that: “Inamar never received plans for the boats before their construction” as required by government regulations. No Inamar technician was involved in the technical specifications, no Inamar technician inspected the construction, and Inamar “does not know any technician who accompanied the construction of these boats”.

An Inamar technician told the Commission that: “on the basis of our inspection we saw horrible things that had to be corrected”, so modifications were demanded. Do Rosário claimed the Mozambican regulations date from 1945 and that they require berths for 16 people on a fishing boat, while the norm now is eight, and that Inamar demanded 16 births. Isidoro flatly denied this, and said Inamar actually suggested fewer berths and a crew of only five. Ematum lacks working capital and is “technically bankrupt”, do Rosário admitted. Ematum does not have a processing facility, which is essential for its commercial viability, because that will cost another US$3.5-million which it does not have. Ematum was projected to catch 20,000 tons of tuna per year, but has never caught more than 200 tons, and did not operate for most of 2016 because of lack of working capital.

MAM:

Do Rosário said that: “The multinational oil companies have indicated that as long as the issue of so-called hidden debts is not clarified they will not use our services, allegedly because MAM arose from a dubious financing process”. But ships need repairing and there is no other shipyard in Pemba.

“It means that multinationals have no alternative to MAM, they have to work with MAM”.

Proindicus was created first and intended to be the only company:

Proindicus was established first, in January 2013. It agreed its first loan in February 2013, to establish integrated systems of air, space, sea, lake, river and land security. Owned 50% by Monte Binga, a company of the Ministry of National Defence, and 50% by Gestão de Investimentos, Participações e Serviços (GIPS) – which in turn is owned by SISE. US$622-million syndicated loan via Crédit Suisse.

Ematum was established in August 2013 and took its loan in the same month for the import of fishing vessels and equipment for coastal protection. It is owned 34% by IGEPE, 33% by Empresa

Moçambicana de Pesca (Emopesca) – which in turn is 80% owned by IGEPE and 20% Fishing Promotion Fund (Fundo de Fomento Pesqueiro) – and 33% GIPS. US$850 Eurobond replaced in 2016 with a government sovereign bond. The Commission notes that “Emopesca, at the time, was a company which was not working and had no staff”.

MAM was established in April 2014 and took a loan in May 2014 for the construction of shipyards in Pemba, and Maputo, for the maintenance and repair of boats. Owned 98% GIPS, 1% Ematum, and 1% Proindicus. The Proindicus loan was first, but the Ematum loan was the first to be revealed. Their establishment was authorized by Decree 91/2013 of 31 December, which created SIMP.

Source: Mozambique News Reports & Clippings

Clearing Agent in Mozambique | Top Website | http://www.yukonservice.com | greg@yukonservice.com

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