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Public-Private Partnerships as an engine of economic growth in Mozambique


Although the Law on Public-Private Partnerships ("PPP") was approved by the Assembly of the Republic in 2011 - Law 15/2011, of 10 August - and regulated by Decree in 2012 (Decree 16/2012, of 4 July), PPPs have been a reality in Mozambique for much longer, especially in the ports and railways sector. PPPs currently stand out as a mechanism used by governments to finance the realisation of public infrastructure, and Mozambique is no exception.

Mozambican law defines a PPP as an "Undertaking" carried out in areas of public domain or public service provision, in which, by means of a contract and with total or partial financing from the private partner, the latter undertakes to make the necessary investment and operate the respective activity/provide services or goods, the availability of which to users is guaranteed by the state.

The main aim is to economically valorise the assets and other national resources integrated into this "Undertaking" and/or to provide efficient, qualitative and quantitative public services and goods to users.

The rationale is therefore to use the financing and investment of a private partner to ensure the satisfaction of collective needs in public infrastructures, such as ports, roads, airports, silos, electricity production or the provision and management of public services, such as the provision of certain healthcare services, such as haemodialysis, imaging or clinical analysis services.

By opting for a PPP, state costs can be reduced and public budget restrictions can be accommodated, while the state benefits from the technical and technological expertise and efficient management of the private partner. Associated with efficiency will be risk, which must be allocated to the party best placed to manage it.

In fact, measures to allocate, mitigate and share risk are one of the guiding principles of PPPs, which are expressly provided for in the multi-contractual model that will govern their implementation. Without prejudice to the autonomy of the parties, Mozambican law proposes the allocation of a set of "typical" risks associated with this type of contract, ensuring their correct application.

There are risks that, by their nature, tend to be retained by the public partner, such as the legislative risk, the political risk, the risk of institutional conflicts of interest and the risk of the land concession, and there are other risks that tend to be transferred to the private partner, such as the risk of demand, supply, commercial, financial and exchange rate risks or the risk of environmental impact.

Another guiding principle is related to the private partner's entrepreneurial freedom and competitiveness; the fact that there is private investment immediately justifies allowing for the amortisation of the investment made. For this reason, the PPP is a long-term contract, which should ensure that the private partner has the freedom to choose the means necessary to manage the infrastructure and/or public service, for a reasonable and appropriate period so that the investment can be financially returned.

The question of the PPP's term will also be directly related to whether the PPP concerns greenfield developments or developments that already exist and are even operational, but which will either be rehabilitated or privately managed.

This characteristic should justify the choice of one of the three modalities provided for in the law: the concession contract, the exploitation transfer contract or the management contract.

Of these modalities, the concession contract ("BOT", "DBOT", "BOOT", "DBOOT", "ROT " and "ROO") tends to be the most typical model with the longest life span. The law stipulates that concession contracts for greenfield projects can have a term of thirty years, renewable for a further ten years.

While it is true that the success of the PPP is often based on the freedom given to the private partner to choose the means necessary to manage the infrastructure and/or public service, it is essential that the public partner defines beforehand the objectives it wants the PPP to fulfil.

On the one hand, it is essential that, prior to launching the PPP, surveys and feasibility, technical, economic-financial and environmental studies are carried out on the object of the PPP, the so-called "base case" , and on the other hand, it is also important that, at a different time, i.e. after the PPP contract has been awarded, various control and reporting mechanisms are defined to enable the public partner to monitor, intervene if necessary and evaluate the success of the model implemented.

These mechanisms, whether prior to or after the choice and selection of the private partner, require a series of preparatory works to be carried out before the PPP is launched, which are sometimes time-consuming, costly and demanding (if not undervalued) and must be reconciled with the urgency of implementing this model.

Strictly speaking, a well-defined base case will bring advantages to both parties in the PPP contract: to the public partner, because it correctly defines the outputs and targets to be achieved, and to the private partner, because it allows it to better manage the commercial risk inherent in operation and the investment needed to make the Undertaking profitable and financially sustainable.

In fact, in order for the venture to be financially sustainable, the state must make a certain level of commitment. It is very common for the state to intervene a priori, removing restrictions that could jeopardise the viability and economic value of the venture. This is facilitated by the fact that these processes are dealt with at the highest level of government, with direct intervention by the ministers responsible for finance and the sector.

In addition, it is often the case that the existing legal framework needs to be adapted, because there are rules that need to be modified in order to accommodate the interests in question or to streamline existing procedures, which are intended to be quick and effective.

Adapting the existing legal framework is generally also a way of protecting the position of the parties, given the size and impact of the Project on the state's economy and finances and, in particular, to give legal certainty to the private partner, which tends to be a foreign entity from another jurisdiction.

As land in Mozambique is the exclusive property of the state and cannot be sold or otherwise alienated, mortgaged or pledged, PPPs involving national resources require the private partner to be granted the Right to Use and Benefit from Land ("DUAT"), the validity of which is linked to the implementation of the Project and the activity carried out.

The PPP law, complemented by the new Investment Law, also provides that guarantees and incentives can be given to the private partner, in return for which, downstream, the efficient and rational exploitation of national assets and resources and the sharing of benefits with the public partner.

In fact, another guiding principle of the PPP is the sharing of financial and socio-economic benefits by the private partner with the public partner.

The types and modalities of the benefits must be determined on a case-by-case basis in each contractual structure, without prejudice to the fact that the PPP legal regime provides from the outset that a certain percentage of the private partner's share capital, usually a vehicle created for the purpose, is reserved for the Mozambican state, Mozambican public or private legal entities and Mozambican natural persons.

Still in terms of financial benefits in favour of the public partner, the private partner is also expected to pay fees, with fixed and variable components, the latter indexed to operating revenue (and levied on gross revenue net of indirect taxes on invoicing), which revert to the Mozambican state. These fees are also a source of wealth for the Mozambican state, which appears to be one of the main stakeholders in the success of the PPP model implemented.

While the fact that the promoter of the project is a foreign entity may at first be strange, experience tells us that these entities bring a number of socio-economic benefits to the public partner. The private partner builds the country's technical capacity; it shares its technology and know-how with Mozambicans; it creates jobs; it offers vocational training programmes for Mozambican workers; it makes Mozambican small and medium-sized enterprises ("SMEs") grow by contracting goods and services and it takes on various obligations in terms of social responsibility to develop and implement with local communities.

In fact, according to the General State Account for the financial year 2023, in terms of job creation, the existing PPP ventures in Mozambique employed a total of 5,905 workers, including 5,834 nationals and 71 foreigners, and 1,674 SMEs were contracted to supply goods and services. In terms of social responsibility, the total amount invested in the activities carried out by the PPP ventures was 3,645.41 million Meticais.

These figures show the positive impact of PPPs on Mozambique's economy, actively contributing to the country's economic growth.

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Article by Mafalda Teixeira de Abreu, professional partner at Abreu Advogados (partner firm in Portugal)

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