Mozambique: the anatomy of corruption
The 'Africa rising' moment was at its apogee. Celebrating the theme with a conference in Maputo on 29-30 May 2014, the International Monetary Fund (IMF) flew in Christine Lagarde, its managing director.
Sitting alongside representatives of Mozambique’s government, Lagarde declared: “The overall outlook for the continent is optimistic.”
Mozambique, she said, nodding towards her hosts, “epitomises this positive spirit”. She spoke of its rapid growth, its steps to reduce poverty and its sound economic management”. Less than two years later, relations between the IMF and Mozambique had crashed and Lagarde was accusing the government of “concealing corruption”.
As Lagarde was speaking in Maputo in 2014, the Mozambican government, with a couple of investment banks and an Abu Dhabi-based shipbuilder, was working on a tuna fisheries and maritime security scheme that has saddled the country with a crushing $2bn debt. This became known as the ‘tuna bond’ scandal. International investigators have concluded that the deals were overpriced by at least $800m and that $1.2bn has not been properly accounted for.
The Africa Report is taking an in-depth look at the Mozambique case because it highlights the crucial elements that are needed to make corrupt schemes like this work all over the African continent and beyond. The billions of dollars in loans in Mozambique could not have been accessed without greedy politicians in positions of authority, weak government institutions, ineffectual international financial bodies, banks willing to turn a blind eye in return for big profits and contractors crafting projects that focus more on commissions than creating functional companies, amongst others.
With French logistics billionaire Vincent Bolloré the subject of investigations in France for his business activities in Africa, the IMF battling with the Zambian government about the disclosure of its opaque debts, and the Italian trial against oil majors Shell and Eni for their dealings with the OPL 245 project in Nigeria due to restart in June, it is crucial for investigators, the IMF and reforming governments to understand the anatomy of corrupt deals (see box) in order to protect future generations from the mistakes of current leaders motivated by personal profit.
The Guebuza giveaway
Back in Mozambique, the tuna bond scheme has triggered the country’s worst financial crisis since independence in 1975 and the breakdown of public health and education services. To date, no politician or state official has been held accountable, let alone prosecuted for what amounts to a gargantuan heist from the povo.
It all happened on President Armando Guebuza’s watch. One of Mozambique’s richest men when he took office in 2005, Guebuza claimed credit for an economic boom fired by strong international commodity prices and the prospects of Mozambique starting exports from its world-class gas reserves.
For years, foreign investors have enjoyed huge tax breaks and other perks in Mozambique in exchange for allowing officials from the ruling Frente de Libertação de Moçambique (Frelimo) party to benefit from their deals, says Mozambican economist Roberto Tibana: “By 2013, they were having difficulties in collecting enough revenue. The concessions negotiated with international investors had been too much of a giveaway.”
The trade-off failed, says Tibana: “The political elite were lobbying for not taxing those investors because they were their associates. This philosophy of tax breaks was a cover for political corruption.”
Unbeknown to the IMF’s Lagarde, as she sat beside Mozambique’s finance minister, Manuel Chang, at the Africa Rising conference, the government had just borrowed another $535m in secrecy, for a military shipbuilding project that would never come to fruition. It was the third in a series of state-guaranteed security loans that the government had attempted to keep hidden, distorting the country’s real level of debt. It was the most serious case of misreporting that the IMF had come across in Africa.
The IMF already knew about the first loan: $850m borrowed in 2013 for Ematum – a state tuna-fishing company bizarrely owned by the secret services and already known to be a front for a maritime security operation. It had come to light in September 2013, when the syndicated loan was sold on the international bond market. The same month, Guebuza and France’s President François Hollande visited a shipyard in Cherbourg where the fishing vessels were to be built.
Mozambique and the contractor, Privinvest, owned by Franco-Lebanese billionaire Iskandar Safa, said little about the deal. In France, the contract was a good-news story, saving hundreds of jobs at Privinvest’s CMN shipyard. Ministers in Maputo struggled to explain what it was all about. No surprise, as the deal had been signed without prior approval from parliament, violating Mozambican law.
Blindness beggaring belief
Strangely, the banks involved – Credit Suisse and Russia’s VTB Capital – showed scant interest in the risks. It would have been easy for them to discover that the companies had no revenue and no contracts to generate income, and that the loans were not legally authorised in Mozambique, says Tim Jones, a policy officer at the London-based Jubilee Debt Campaign: “And they [the banks] were paying the money straight to the supplier rather than into Mozambique. All of these things are massive warning lights […]. Either they didn’t ask basic questions or they ignored the answers they got.”
Jones is particularly critical of the IMF waving through the government’s bid to sanitise the deal’s illegality: “They [the IMF] knew about the Ematum bond. They didn’t ask where the money had gone.” The IMF had raised no objections when the government changed the law to accommodate an illegal sovereign guarantee on the loans. By law, finance minister Chang was allowed to guarantee up to $6m without parliamentary approval; he had guaranteed $850m.
What the IMF did not take into account – though it had been privately warned by a senior Frelimo figure and individuals with data from the banks – was that there was a second loan, this time for a maritime security project called Proindicus.
Also contracted from Credit Suisse and VTB in 2013, the loan was sold to private creditors rather than on the bond markets and totalled $622m. The third loan, contracted in April 2014 from VTB alone, was for Mozambique Asset Management (MAM) – a company that was supposed to maintain the Ematum and Proindicus vessels, and build ships.
All ultimately owned by the security services, the Serviço de Informaçãos e Segurança do Estado (SISE), none of the companies had a remotely credible business plan and none has turned a profit. So doomed to failure were the security projects and so clumsy a front was the tuna story, the logical conclusion is that the venture aimed to finance commissions rather than real businesses. The state was left to pay the companies’ enormous debts, rapidly leading to a sovereign default in 2017.
Mozambique’s once-promising economy imploded: its currency, the metical, lost more than 150% of its value at eye-watering speed; foreign reserves plunged to $1.7bn; growth slumped and investors fled. The crisis threatened the gas sector’s development, upon which the government was relying to repay the loans.
Publisher of the independent newspaper Jornal @Verdade, Erik Charas tells The Africa Report that the tighter the budget, the worse the government gets: “They don’t see any need to invest in health and education, when that can be done by donors. Last year, they even spent more on Ematum: M70m [$1.2m], when they could not find the M25m needed for critical equipment in the public hospitals.”
Spotting the loan pushers
The IMF has yet to issue a mea culpa on its failure to call out the scandal in time. A staffer, who wishes to remain anonymous, tells The Africa Report: “They failed in one of the core functions of the IMF, which is surveillance. They were cheated by a very small country.”
Despite the misreporting of the Ematum loan, the source adds that the IMF allowed the government to brush the scandal under the carpet. Had the IMF demanded that government come clean over Ematum instead of accepting that the deal was a front for defence spending, the third secret deal with MAM for another $535m may never have happened.
For several critical months, the IMF continued to accept government denials about additional borrowing. Even when finance minister Adriano Maleiane, who had replaced Chang, took months to sign a letter in December 2015 stating that the sovereign guarantees did not go beyond those already declared, the IMF did not sound the alarms.
Nigel Morgan, who runs local business intelligence company Rhula and knew of the additional loans, says: “The IMF didn’t get it. They dropped the ball. They didn’t take the message about the hidden loans. And they paid a big price for it.”
For those watching the politics in Maputo, the loans concocted under Guebuza’s presidency were the most extreme of a succession of scandalous deals. As Guebuza’s term was coming to an end in 2015, he tried to cling on by changing the constitution. When that failed, he tried to buy influence across factions and parties. “People were paid who didn’t even know where the money came from,” says a Frelimo activist in Maputo. “Now, they all feel implicated.”
Hungry for cash and with little understanding of the capital markets, Guebuza was a willing partner for companies looking for easy profits. But although his government contracted the secret loans, the banks have their own responsibilities under national and international law.
The feasibility studies for Ematum and Proindicus were deemed worthless by industry experts. It is unclear whether there was a feasibility study for MAM. Yet the banks paid all the money – minus their fees of almost $200m – directly to the contractor before any equipment or services were delivered.
“Who’s really culpable on all of this is the banks who went along with it,” says Rhula’s Morgan. “I think it was a matter of quick sell, and then we’ll make a lot of money.”
Joe Hanlon, an academic at the London School of Economics and author of several books on Mozambique, goes further in his analysis of the banks’ role in the scandal: “It is loan pushing. This happens when the banks have too much capital and push developing countries to take loans they do not need and cannot repay. It was outrageous and clearly the liability of Credit Suisse.” The banks involved are under investigation for predatory lending by the British and the US regulators.
Credit Suisse told The Africa Report that it attributed the failure of the security and fishing companies to the fall in oil and gas prices, which delayed new investment into the national economy. It strongly denied that it had misled investors over the tuna bonds: “The Ematum loan participation notes were marketed only to the most sophisticated institutional investors […] and explicity disclaimed any reliance on Credit Suisse and undertook to conduct their own due diligence protocols.”
The moment of truth came at the end of March 2016, when the government admitted it could not pay the tuna bonds and restructured them into a new instrument, the Mozam bond. Just before that, ratings agency Standard & Poor’s had downgraded Mozambique’s debt to a CC – this is junk rating, indicating a high risk of default.
Stephen Bailey-Smith, a senior economist at Global Evolution, which bought converted Mozam bonds, says the debt repackaging finally demystified the tuna bonds: “Investors assumed this was effectively sovereign debt. I don’t think anyone in their right mind thought they were taking a risk solely linked to a tuna-fishing company. Remember, at the time, people were jumping up and down about how Mozambique would be the next big thing, one of the largest gas producers in world, and people wanted to get in early. With limited other opportunities, the bonds provided a way in.”
Following the downgrade, the government changed tactics. After finance minister Maleiane and central bank governor Ernesto Gove repeatedly denied the existence of the secret loans to the IMF, prime minister Agostinho do Rosário flew to Washington DC, where he apologised to Lagarde. After that the World Bank, the IMF and other financial institutions suspended disbursements to Mozambique.
Mozambique needs to protect its offshore gas projects and its coastline, but what could have been a productive venture ended up as a rent-seeking operation, according to an investigation by Kroll, a business intelligence firm. Experts describe much of the equipment purchased as a bad fit for Mozambique. The fishing vessels, which on paper cost $22m but were found by Kroll to be worth around $2m, require a major refit if they are to ever to catch tuna efficiently. Kroll stopped short of concluding that the tuna project was simply a racket, but its findings are devastating.
Privinvest, the Abu Dhabi-based shipbuilder, has come under fire from civic activists for the failures of the tuna-fishing and maritime security companies Proindicus, Ematum and MAM, and the massive debts they have accumulated. In response to questions from The Africa Report, Privinvest denies all responsibility for those financial failings. It says the Kroll audit lays much of the blame on the companies’ shortcomings: “… delays and failures to commence operations appear to have been the result of management failings on the part of the Mozambique Companies.”
One of the reasons why the security and fishing companies haven’t succeeded is the lack of a trained personnel; a comprehensive training programme was part of the Privinvest contract. Again Privinvest quotes the Kroll audit and blames the local companies: “the shortage of properly trained crew is a result of inaction and failures by management of the Mozambique Companies to perform their duties.”
Rear Admiral (retired) Chris Parry of the UK’s Royal Navy explains that building an effective maritime security operation from scratch requires years, if not decades, of support from experienced operators. Of Proindicus, which took out security loans, Parry says: “No maritime security professional would want to be involved in such a shabby scheme. I don’t believe I have ever seen such a flimsy case for that scale of loan. Credit Suisse clearly did not do their homework.”
Ole Stage is a Danish consultant with many years’ experience of working in Mozambique. He sounded an alarm when he discovered that his Danish pension fund, MP Pension, held Kr42m ($6.7m) of Ematum bonds. The fund investigated the matter and “the implicit conclusion was that the bonds shouldn’t have been bought,” says Stage. “I had experienced the collapse of the state companies in Mozambique, how they went bankrupt, how they didn’t work.” As Stage feared, Ematum lost millions of dollars then stopped operating after barely six months of fishing in 2015.
With the company in disarray, staff on strike over non-payment of salaries, the financial director suing Ematum for unfair dismissal and Ematum’s boats rusting in Maputo port, it fell to the government to pay bondholders. It paid two tranches in September 2015 and March 2016 then defaulted on the restructured bond in January 2017. MAM defaulted on its loan repayment the previous May. The government is likely to continue defaulting until at least 2023, according to the IMF.
Yvette Babb, formerly with JP Morgan bank and now a senior portfolio manager at NN Investment Partners, says the tuna bond saga has left investors more aware of the risks, asking themselves: “Are they doing another Mozambique?”
In Mozambique, the damage has been done and the government is still dragging its heels. In January 2015, Guebuza grudgingly handed over power to Filipe Nyusi, who was defence minister at the time of the Ematum loans and whose signature is on several key documents relating to Proindicus. Nyusi was not one of the architects of the scheme but is reluctant to hold those responsible to account.
Nyusi has stopped short of admitting wrongdoing by Frelimo and refuses to come clean about where the money went. He has changed the head of the SISE twice. He also removed the chief executive of all the state-run companies involved, Antonio Carlos do Rosário, from his role as a senior SISE official.
But finance minister Maleiane remains, despite having lied to the IMF, as does his deputy, Isaltina Lucas. Also, a senior finance official was identified in Kroll’s report as ‘Person D’, who received a highly questionable $100,000 payment from Ematum and was deeply involved in the loan approval process.
Attorney general Beatriz Buchili, who Nyusi can remove at will, has her hands tied. Frelimo does not want prosecutions in the run-up to the 2019 elections, so all she can do is shift the responsibility for filling in the ‘information gaps’ in Kroll’s audit. She claims she can do little without cooperation from the other countries involved in the deals.
Buck stops with Maputo
Whilst many parties benefited from the deal and may have an interest in obscuring the truth, UK high commissioner to Mozambique Joanna Kuenssberg says that ultimate responsibility rests with the Mozambican government. “There are questions for the banks to answer, and they are being investigated by multiple jurisdictions. But I think avoiding the issue of the Mozambican leadership at the time taking certain decisions and running the risks that they ran – and didn’t really care about – still the buck has to stop here. But there is no sign that the buck is stopping anywhere.”
She says that government efforts to duck responsibility for filling the information gaps, rather than just admitting they do not intend to do so, will delay any resolution. She adds: “It’s that smokescreen that creates confusion rather than clarity, which doesn’t help anyone, least of all the poor Mozambicans whose interests are being ignored.”
With such gaping holes in the audit coupled with strong indications of misuse of funds, the IMF says it will not fully re-engage with Mozambique. But as the government tries to muddle through, this creates doubts and problems.
Evaristo Madime, who heads Mozambique’s American Chamber of Commerce, says that without IMF support “business will continue to be hard”. Functionally broke, the state is not paying its bills – leaving companies in turn unable to pay suppliers and creditors. The government’s heavy domestic borrowing to plug its widening budget deficit has also made credit too expensive for the private sector. Many companies face closure as credit dries up and revenue falls. “If IMF support does not come, I think we will need concrete signs on the oil and gas business. But it seems that the process is always being delayed. There is no clear timing. This makes business difficult,” Madime says.
Currency of trust
Kuenssberg agrees: “Mozambican companies cannot afford the credit at rates available because there is no international confidence in Mozambique. So formally clearing up the situation between the IMF and Mozambique, and the donors and Mozambique, would be the best possible signal – even if it didn’t come with money. It’s about credibility rather than just cash.”
But this looks a distant possibility. With such low investor confidence and the economy hanging by a thread, the tough times will continue, at least until the gas starts to come online in five years or so. The recovery should take at least a decade. Far from trying to bring clarity in order to move on, Nyusi’s government, like Guebuza’s, is suppressing information. In the current climate, few are hopeful for a resolution anytime soon.
Members of the regime regularly threaten its critics, who are sometimes attacked or even killed. Academic José Macuane, who was abducted and shot in the legs in May 2016 after criticising the government on a local talk show, says the issue of the hidden debt is particularly sensitive. Earlier this year, local paper Canal de Moçambique published evidence of Nyusi having signed documents authorising Proindicus’s loans, apparently prompting threatening messages to circulate on social media. “Whenever there is any comment about the debt, messages go around. People feel threatened. It conveys the view that debt is still very sensitive for some people,” Macuane says.
Startlingly absent from the Kroll audit is Guebuza himself. And this, the biggest of all scandals in Mozambique, begins and ends with President Armando Guebuza’s responsibility to protect the wellbeing of his people. But in the chaos of spies running tuna fleets, pre-fabricated gunships rusting in containers, donor strikes and IMF soul-searching, Guebuza remains just out of reach.