Is there such a thing as predatory sovereign lending?

The Wall Street Journal has a great story on Mozambique’s stolen hidden debt scandal:

Screen Shot 2016-06-30 at 8.03.37 PM.pngThe government picked Mr. Safa’s company, Privinvest, to supply ships, including patrol and surveillance vessels, and asked its help getting financing. The company disputes the characterization of the ships as military, saying they weren’t outfitted with weapons. Privinvest approached Credit Suisse about a loan for Mozambique, and a committee of senior executives, including then-CEO Gaël de Boissard, approved the deal.

Credit Suisse’s top brass signed off in part because the bank had pioneered a way to lend in developing countries without taking on much risk.

The bank found it could purchase sovereign-debt insurance through the Lloyd’s of London insurance market to hedge as much as 90% of the loans against default. Credit Suisse charged higher interest rates on the debt than its insurance premiums, pocketing the difference mostly risk free.

The insurance policies Credit Suisse used only covered governments. So when Mozambique wanted to borrow the money through state-owned companies instead, the bank came up with a twist: Mozambique would cosign.

FT notes that:

The debt was originally borrowed via a special purpose vehicle for Ematum [tuna fishing company], an arrangement that does not require the same level of disclosure as a sovereign bond issue.

Basically Credit Suisse, the Russian VTB Capital, and their Mozambican accomplices knew exactly what they were doing.

When the money got to Mozambique it mostly went into private pockets. The proposed tuna business the loans were intended to finance went bust (realizing a paltry 2.5% of projected sales). And the security purchases (ostensibly to secure Mozambique’s vast yet-to-be-developed gas fields) proved useless.

Meanwhile…

…….conditions in Mozambique are worsening. Its foreign-currency reserves fell to $1.8 billion in May from $2 billion in January, and it is seeking $180 million in food aid. Intensified fighting has sent more than 10,000 refugees to neighboring Malawi, according to the U.N. High Commission for Refugees.

Credit Suisse is a Swiss financial services company. According to the WSJ Privinvest’s struggling subsidiary Constructions Mécaniques de Normandie built the ships sold to Mozambique. The latter is, of course, based in France. Corruption knows no borders.

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Mozambique may have squandered up to $2b of borrowed money

Public Finance is emerging to be one of the biggest development challenges of our age. Here’s Africa Confidential on Mozambique’s hidden loans, which may amount to more than $2b.

Screen Shot 2016-05-12 at 1.38.32 PMSources close to Rosário Fernandes, ex-head of the revenue authority, the Autoridade Tributária de Moçambique, have told us of systematic diversions of taxes straight into the pockets of the Frelimo elite, especially in the later years of President Guebuza’s term of office, when he exercised enormous patronage. Massively inflated contracts were commonplace. The latest to emerge is the extravagant, nearly complete, Bank of Mozambique building in Maputo, which boasts a helicopter landing pad on the roof. Originally estimated to cost $90 mn., the final cost is reckoned at at least $300 mn., with kickbacks and ‘commissions’ accounting for the cost inflation, say Frelimo sources.

Guebuza engaged in an ultimately doomed attempt to extend his term of office, which ended in October 2014, and this partly explains the extraordinary scale of his liberality towards loyalists, sources formerly close to him told us (AC Vol 53 No 18, The Putin option). The schemes became increasingly brazen, and the creation in 2013 and 2014 of three companies – Empresa Moçambicana de Atum (Ematum), Proindicus and Mozambique Asset Management (MAM) – was the culmination of this programme. The companies, which received the totality of the $2 bn. now owed by the state, were mainly in the field of maritime security, even though it was the intelligence and security services that provided the management. They bypassed parliament, illegally, and defence procurement, effectively privatising, as one commentator put it, national security while lining the pockets of the elite into the bargain. Yet the ill-equipped companies could not cope and quickly collapsed. Ematum, which originally claimed to be focused on tuna fishing, is no longer operating its few licensed vessels because it cannot pay salaries (AC Vol 56 No 24, Nyusi’s nightmare).

Kenya, Zambia, among others, have also borrowed enormous amounts of money that have not been properly accounted for. Several of these countries have recently gotten cover from the IMF that all is well. But the IMF has strong incentives to save face and maintain confidence that it does its job.

If Mozambique could do it, what stops more sophisticated treasuries elsewhere on the Continent?

I am increasingly convinced that Africa’s newfound love with international creditors is a bond bubble waiting to happen. The 1980s and early 1990s sucked. And we might be headed for a repeat if the African states floating eurobonds continue on the same path.

How did Mozambique manage to hide more than $1b in debts from the IMF?

It’s common knowledge that most developing states have data problems. But even with those priors, the revelation that Mozambique managed to hide more than $1b in undisclosed debts (ALMOST 8% of GDP!!!) from the IMF for almost three years is cause for pause.

According to the FT:

Details of the previously undisclosed loans — which add about the equivalent of 10 per cent of gross domestic product to the government’s known debt burden — emerged after the “tuna” bond was restructured last month.

Of the two previously undisclosed loans confirmed last week, the first was for $622m to a state-owned company, Proindicus. The second, to another unidentified state company, was valued at more than $500m, a person familiar with the matter said.

Credit Suisse, the Swiss bank, and Russia’s VTB bank, both of which arranged the sale of the tuna bond, provided the undisclosed loans, the IMF said.

Basically Mozambique borrowed a lot of money ostensibly to set up a state-run tuna fishing company but ended up spending nearly all the money on military speed boats.

Borrowing so much money to spend on the military seems like a really REALLY bad idea.

Also, how did the IMF miss this for so long?

Public Finance is hard.

More on this here.

Resource Dependence in Africa (with some thoughts on Mozambique)

Source: The World Bank

Source: The World Bank. Click on image to enlarge  

This map shows resource rents as a share of GDP for the period 2009-2013. Note that the colouring on the map is about to change, with the Indian Ocean east coast getting some of the hydrocarbon action that has hitherto been a preserve of the Atlantic coast and a couple of landlocked states like Chad, Sudan and South Sudan (The biggest change in West Africa will most likely be in Guinea once the mining of its high grade iron ore in the Simandou Mountains gets going. A few contractual and logistical hurdles still stand in the way of the mega mining project).

The eastern African states of Kenya, Uganda, Tanzania and Mozambique are about to get a shade or more redder. Kenya and Uganda will start producing oil between 2016-17. Tanzania and Mozambique have massive amounts of natural gas, with Mozambique having recently climbed to top four in the world with a capacity to meet total global demand for more than two years.

As you may have guessed Mozambique is by far the country to watch out for as far as the ongoing eastern African resource bonanza is concerned. The country will continue to see a rapid rise in coal production, ultimately producing an estimated 42 million tons in 2017. Mozambique’s Gold production is also expected to more than triple by 2017 relative to its 2011 level. Estimates suggest that based on the full capacity exploitation of coal and gas alone the Mozambican economy could rise to become SSA’s third or fourth largest (after Nigeria, South Africa and (or ahead of) Angola). Going by the 2012 GDP figures from the Bank, that would be a change from US$14 billion to about $114 billion.

Have you enrolled in Portuguese classes yet?

As Mozambique gets wealthier in the next five years at a vertiginous pace, it will be interesting to see if it will go the Angola way. Both are former Portuguese colonies that had drawn out civil wars. Both tried to have democratic elections but then the ruling parties managed to completely vanquish the opposition. And both continue to be ruled by overwhelmingly dominant parties that appear to have consolidated power.

My hunch is that Mozambique is different, as FRELIMO is less of a one man show than is the MPLA. Indeed FRELIMO just selected a successor to Guebuza, the Defense Minister Filipe Nyusi (Nyusi’s background in engineering and the railway sector should prove useful for the development of the country’s coal industry).

The Tanzanian model of dominant/hegemonic party with term limits appears to have spread south. And that is a good thing. The other African country that appears to be embracing this model is Ethiopia (I think I can now say that the Zenawi succession was smooth and that Desalegn, also an engineer, is credibly term limtied).

Kampala, Kigali and Yaounde should borrow a leaf from these guys (that is, as a second best strategy given that their respective leaders do not seem to be into the idea of competitive politics).

For more on the politics and management of natural resources in Africa see here, here and here.

Why are some African governments so bad at managing their countries’ resources?

UPDATE: According to Reuters,  Israeli billionaire businessman Dan Gertler sold one of his Congo-based oil companies to the government last year for $150 million – 300 times the amount paid for the oil rights – in a deal criticised by transparency campaigners.

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Just to reiterate what I have said before regarding the need to boost the capacity of African governments to manage their resources well, here is a long quote on Vale’s mining operations in Mozambique (H/T Anna).

The point here is that resource mismanagement in Africa is not just a story of rampant corruption and the complete lack of political will for reform. It is also a story of governments that remain completely out-staffed by multinations with far superior technical capacities. Improving resource management on the continent will therefore have to be as much about government technical capacity development as it will be about political reform.

Vale, for example, employs nearly 200,000 people around the world and has annual profits equivalent to nearly four times Mozambique’s state budget. It can recruit, train, and compensate employees to represent its interests on a scale far beyond what the government can do. Without Vale’s capacity for number crunching, Mozambique’s regulators lean on the companies they oversee for all manner of important data.

In 2011, the Mozambican government published an independent study of the country’s mining, oil, and gas industries. Conducted by a Ghanaian consulting company, Boas and Associates, the report was part of Mozambique’s application to the Extractive Industries Transparency Initiative, a World Bank-funded program designed to encourage an honest accounting of mining revenue and payments by participating countries and corporations alike. Mozambique’s candidacy was ultimately denied on the basis of its failure to publish what it earned from the companies involved, [but the report also noted a lack of qualified personnel in the agencies governing almost every aspect of the extraction of Mozambique’s natural resources]: licenses, prospecting, mining and drilling, sales, export.

According to the report, the [Mozambican government has no way of verifying the quality and quantity of minerals in the concessions it leases to private companies, and it depends on those companies for data on what is ultimately mined and exported]. Worse, the government has no system for monitoring global commodity prices or of tracking companies’ investment costs, which means it cannot independently verify a company’s profits.

Lesson? It’s not all corruption. It is also about the incentive structure that has resulted from government’s reliance on the word of profit-maximizing mining companies.

Improving government capacity to regulate resource sector operations is a key pillar of accountability and transparency that is currently missing from the discussion on how to manage Africa’s resources. It is easier to blame it all on thieving politicians and mining executives.

Not all governments might find it useful to improve their technical capacity (it is easier for them to steal if the valuation of state assets remain uncertain) but I bet many African states, especially those with moderately democratic regimes, can be persuaded to boost their technical capacity, if not for anything then just to improve their bargaining position vis-a-vis mining companies. At a minimum, this would mean more money for their pockets, and perhaps also more money for roads, schools and hospitals.

The 2013 Resource Governance Index

The 2013 Resource Governance Index (published by the Revenue Watch Institute) is out. The top performing African countries include Ghana, Liberia?, Zambia and South Africa, with partial fulfillment. The bottom performing countries are Equatorial Guinea, Zimbabwe, South Sudan, the Democratic Republic of Congo and Mozambique.

The 58 nations included in the report “produce 85 percent of the world’s petroleum, 90 percent of diamonds and 80 percent of copper.” Ghana, where we are doing some evaluation  work on extractive sector transparency initiatives, is the best performing African country on the list. Image

More here. 

And in related news, The Africa Progress Report was released last week. The report details the massive loss of revenue by African governments through mismanagement – either by commission and/or omission – of extractive resources. For instance:

The report details five deals between 2010 and 2012, which cost the Democratic Republic of the Congo over US$1.3 billion in revenues through the undervaluation of assets and sale to foreign investors. This sum represents twice the annual health and education budgets of a country with one of the worst child mortality rates in the world and seven million pupils out of school.

The DRC alone is estimated to have 24 trillion dollars worth of untapped mineral resources.

The most bizarre case of resource management in Africa is Equatorial Guinea, a coutnry that is ranked 43rd on the global per capital GNI index but ranks 136th on the Human Development Index (2011).

Below is a map showing flows related to Africa’s vast resources:

RESOURCE-MAP