Mozambique free of landmines but extractive sector remains explosive

Mozambique free of landmines but extractive sector remains explosive

Extractive sectors face persistent security and political risks which could become increasingly serious as investment floods in, unless effectively managed by investors and the government.

On November 16, 2015, it was reported that local rioters attacked a Tantalum mine in Gile district, central Mozambique.

The occasion, provoked by an alleged killing of locals by police who protect the mine, resulted in $10 million of damage as the area was looted and offices were set alight.

Tensions between the locals and the mining company (Pacific Wildcat Resources) had risen as apparent promises by the company, to repair roads and provide a school and hospital as compensation for disruptive activities, had not been met.

Ahead of a near surge of foreign investment in Mozambique in 2016, when gas companies (Anadarko and Eni) seeking to profit from extensive gas reserves plan to finalise investment decisions which will inject $31 billion straight into the economy, the attack undoubtedly highlights the need for investors to ensure they engage with local communities and invest accordingly.

Although the government guarantees the protection of foreign investments, investors simply cannot over-invest in maintaining good relations with local communities.

Many local people optimistic about the benefits that extractive industries might bring are set to be relocated to make way for infrastructure developments in the northern coastal area. For example, plans are in place for a 180 square km complex to cater for the expatriate needs alongside the Anadarko LNG plant, which will mean thousands have to resettle.

These type of activities, unless conducted with high levels of sensitivity and integrity, will cause insecurity to become a pervasive problem as tensions inevitably rise between locals and foreign businesses and personnel.

Standard Bank estimates that the gas sector will bring just 15,000 direct jobs and 200,000 indirect jobs – hardly enough for the entire population of the country who is excited of the perceived transformative effects of gas.

If the presence of gas revenues instead results in heightened corruption and widespread poverty, echoing the case of Nigeria’s oil sector, then a cycle of perpetual political instability from social unrest could become, once again, the defining feature of Mozambique.

Expectations will need to be managed through effective communication strategies.

Political divisions

Although micro-level security threats can be easily mitigated through ethical security measures and an emphasis on benefiting and engaging with affected communities.

Macro-level political risks abound and require delicate strategic decision making which can adapt to the course of political events.

Mozambique is a politically divided country. Since the end of a 16-year civil war in 1992, the country has been largely stable. However, there remain high-tensions between the ruling Frelimo party and the opposition, Renamo, which have led to repeated violence. In one recent instance, on September 25, 2015, Frelimo hardliners ambushed a convoy, of the Renamo leader Afonso Dhlakama, which resulted in over 20 deaths.

Renamo, formally a rebel movement, demand a greater share of political power (regional autonomy) and in turn, a greater share of resource revenues.

The urgency of such aspirations are significantly enhanced by investment plans which have raised the stakes of gaining access to extensive resources which will triple the country’s GDP, bring in around $20 billion a year into the economy and make it the third largest gas producer in the world.

Although escalating high tensions and clashes can be worrying, they are unlikely to result in civil war. The opposition have the capability to launch a civil war, but it would not be a rational decision in light of their economic interests.

Their immediate interests are in a greater share of political power and concessions from the government.

Thankfully, the potential for an existential escalation in tensions resulting in violence has largely been hindered by Renamo’s electoral success in 2014 when it secured 89 of the 150 seats in Parliament.

Yet, Dhlakama’s push for regional autonomy in a number of states which hold large reserves of natural resources (coal and gas) does mean that extractive industry investors remain geographically and politically exposed to high-level political developments in the country.

Investor strategies

Investors are bound by Local Content Regulations to establish local business partners – many of whom are politically involved.

A difficult tension exists where investors will need to partner with well-connected political figures (who ‘can make things happen’) across political boundaries, to mitigate the potential political disruption. These partnering strategies will require in-depth stakeholder mapping and engagement efforts if they are to succeed.

Adding further complexity, it will also prove difficult to establish effective relationships which do not bring with them potential corruption and reputational risks. Due diligence measures are therefore of paramount importance.

Risk portfolio

Mozambique was recently declared ‘landmine free’, an issue born out of its years of civil war which has harmed many. However, mines and gas extraction are still explosive political issues on a number of levels and have harmed (and could increasingly harm) local populations.

The extractive sector is at the nexus of present political tensions and will become of increasing political importance as production begins and investment transforms the country’s economy.

Security risks remain for companies in the region, which could persistently result in destruction of assets and a host of similar problems.

These risks require sensitive management and the strategy must benefit local communities to genuinely mitigate long-term issues which would otherwise potentially undermine the success and sustainability of commercial operations.

About Author

Elliot Kratt

Elliot is a Freelance Analyst with The Economist Intelligence Unit. Prior to this, he held positions in a number of risk consultancies and has worked in East and West Africa. He has been quoted by journalists with the Financial Times and Wall Street Journal. Elliot holds a first class BA (Hons) in International Relations from the University of Leeds. All views expressed are his own.