Via The Financial Times, a report on Mozambique’s efforts to balance its agreements with international companies interested in investing in its natural resources.  As the article notes:

Mozambique is attracting the interest of foreign investors with its potentially huge coal and gas riches – which has sparked a debate in the country about whether the impoverished nation will get its fair share of the resource cake.

But does the government have the capacity and experience to negotiate with savvy multinationals? And should Mozambique be looking at the existing contracts with overseas companies?

The issue gained further prominence recently when Cove, a London-listed company that has a 8.5 per cent stake in a gas field off Mozambique’s northern coast, became the subject of a bidding war after putting itself up for sale in January. Royal Dutch Shell, Thailand’s PTT Exploration, and two Indian companies, ONGC and Gail India are among its suitors.

As the bidding war began, Mozambican journalists used every opportunity to ask government officials their views on a potential deal and whether the state would have any say. This led to Esperanca Bias, the mining minister, saying the government wanted to impose capital gains tax on any sale of Cove.

Her response may have been spontaneous but was not all together surprising – there is a degree of frustration that the state missed out when Rio Tinto acquired Riversdale Mining, which had coal assets in Mozambique.

As mining companies, including Brazil’s Vale, exploit some of the world’s richest undeveloped coal reserves in Tete Province, and Italy’s Eni and Anadarko, the US group, announce ever greater gas discoveries, civil society groups have been pressuring for greater transparency on contracts and more advantageous tax regimes for the state.

At the same time, there’s a sense that the government has been overwhelmed by the rush of investor interest. Still, Bias’ comments raise several questions – can a capital gains tax be imposed on a foreign deal?

The government, supported by the IMF, is reviewing its mining and petroleum laws, with perceived loopholes in the fiscal regime – including capital gains – seen as a priority. But would potential amendments be in place before any Cove deal and could they apply to foreign companies listed overseas?

In the view of Ismael Faquir, managing partner of Ernst & Young in Mozambique, “taxation cannot be imposed on the gains resulting from transfers of shares in foreign companies, such as Cove and Riversdale”, even if changes are made to the fiscal regime.

Civil society groups, however, also complain about tax breaks that they believe were granted to Mozal, the aluminium smelter operated by BHP Billiton, and Sasol, the South African petrochemicals company, which is leading a $2.1bn natural gas project that started in 2004.

Those projects were considered key to proving Mozambique was open to international investment. Thus they were granted generous incentives.

Armando Inroga, the trade minister, insists no contracts will be changed unilaterally.

“We are [a] country that when it does a contract, we respect it,” Inroga told the FT. “During the time that Mozal came here, no one company around the world looked at Mozambique as a place to invest and now people come and say maybe the contract with Mozal must be reviewed,” he says. “But no one understands what was our objective.”

Faquir agrees with his minister: “The implication to change unilaterally what has been previously agreed is enormous and the disadvantages that this will bring to the country will be higher than the possible benefits.”

The government has to seek a fine balance between a fiscal regime that still attracts investment, and the concerns in society that the nation should reap its fair share of the benefits.

Getting that balance right could go some way to warding off potential problems in the future.