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Mozambique: Audit into 'hidden debts' shows at least $713m missing

Dollar banknotes are seen in this picture illustration

Dollar banknotes are seen in this picture illustration

Published Jun 25, 2017


Maputo- Auditors cannot account for at least 36% of the over two billion US dollars borrowed from European banks (Credit Suisse and VTB of Russia) in 2013 and 2014 by three Mozambican security related companies, Ematum (Mozambique Tuna Company), Proindicus and MAM (Mozambique Assets Management).

The Mozambican Attorney-General’s Office (PGR) on Saturday published the long awaited executive summary of the audit of the three companies by the London branch of Kroll Associates, reputedly the world’s foremost forensic auditing firm.

This audit is a key condition for the International Monetary Fund (IMF) and other western partners to resume financial assistance to Mozambique.

The Kroll audit report is devastating, not merely for the financial mismanagement that it reveals, but also because it points to huge gaps in the information available, indicating that perhaps more than $700 million, and maybe as much as $1.2 billion is missing.

Kroll was unable to obtain “any form of reliable valuation of the assets and services to be provided by the Contractor (the Lebanon-based Privinvest Group) under the three supply contracts with the Mozambique Companies”. 

So Kroll hired an independent expert “to estimate the price discrepancy of the assets and services provided under each supply contract”.

Kroll compared the prices on the invoices from Privinvest with the prices estimated for the same goods by the independent expert – and the differences amounted to $713 million. 

“This difference may be explained in additional documentation from the contractor that has not been provided to Kroll”, the report added. 

“However, at the conclusion of Kroll’s Independent Audit the differences remain unexplained and warrant further consideration”.

The discrepancies between the invoices and what the Kroll independent expert believed should have been paid are enormous. Thus, according to the invoices, each of the 24 fishing vessels purchased for Ematum cost $22.3 million. 

But the independent expert estimated that each of the boats should have cost no more than two million dollars. So each vessel cost $20.3 million more than Kroll’s expert considered the true cost should have been.

These discrepancies are far from the only problem. The Ematum loan was for $850 million – but the greater part of this sum, $500 million, was incorporated into the state budget, supposedly to pay for maritime security equipment. But Kroll could find no sign of any such military equipment.

“The Ministry of Finance has not been able to confirm to Kroll any details of the maritime security equipment that was effectively included in the $500 million allocation, nor if the transfer of responsibility has actually been complete”, the report noted.

Privinvest insists that it does not supply military equipment, and the report says it “categorically stated to Kroll that the assets delivered to Ematum were per the agreed supply contract and specifically that no weapons were provided”.

“Until the inconsistencies are resolved, and satisfactory documentation is provided, at least $500 million of expenditure of a potentially sensitive nature remains unaudited and unexplained”, Kroll remarked.

500 million plus 713 million is $1.213 billion, or just over 60% of the two billion dollars in loans.

Kroll was also frustrated by the refusal of the three companies to cooperate with the audit. The report says that companies only provided “limited financial data, including incomplete trial balances and bank statements for certain periods, and incomplete supporting documentation, such as loan facility agreements and supplier contracts. 

As a result, it became apparent that a significant amount of the information originally envisaged to be held by the Mozambique Companies in Mozambique was not available”.

 “As a result”, it added, “Kroll cannot rely on the completeness of this information for the purposes of this report”.

Kroll found that the three companies “appear to be inadequately managed, are not fully operational, have generated no meaningful revenues, and have no contracts in place to provide future revenues”.

The business plans and feasibility studies claimed that the companies “were expected to generate combined operating revenues of USD 2.3 billion by December 2016”. But these projections verged on the fantastic. 

Kroll remarked that “at the time of reporting, negligible revenue has been generated and the Mozambique companies can only meet debt obligations and operational expenses with the financial support of either shareholders, the Ministry of Finance or the Contractor”.

All three loans were fully guaranteed by the previous Mozambican government, under President Armando Guebuza. 

A parliamentary commission of inquiry pointed out last year that the guarantees were illegal, since they smashed the limits on loan guarantees set by the 2013 and 2014 budget laws. 

They were also unconstitutional since the Mozambican Constitution states that such debts can only be authorized by parliament. 

The guarantees mean that, when the companies default (as they are doing) the responsibility to pay the loans falls on the shoulders of the Mozambican state and taxpayers. 

The three guarantees increased Mozambique’s foreign debt by 20%, ensuring that it was no longer sustainable.

Kroll warned that the process for issuing loan guarantees “appears to be inadequate”. 

It noted that “no documentation was provided to evidence that any assessment took place” before three of the five government guarantees, with a combined value of a billion dollars, were signed.

The IMF immediately welcomed the release of the audit report summary, but any hope that the IMF would soon resume normal relations with Mozambique were quickly dashed.

For the IMF said, as Kroll itself openly admitted, that “information gaps remain, in particular on the use of the loan proceeds”.

The IMF announced that a staff mission from the Fund will visit Mozambique in mid-July “to discuss the results of the audit with the authorities and possible follow-up actions; including working with the authorities to address concerns related to the management of public resources”.

Independent Foreign Service

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