Encouraging FDI into Mozambique

Encouraging FDI into Mozambique

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PHOTOS | From top, student in school supported by Mozal Trust; Eskom power plant; workers spraying mosquito-infested areas; and aerial view of aluminum smelter

CREDITS | Federica Dal Bono and Mozal archives

September 2, 2002—When Mozambique gained independence from Portugal in 1975, its economy was agriculture-based, with very little industrial development. For more than 17 years, a prolonged civil war raged in the country, home to 17.6 million inhabitants in southeastern Africa. Two decades of conflict had taken their toll, leaving Mozambique one of the poorest, most debt-ridden countries on earth.

Starting in 1987, the country embarked on a massive economic reform and privatization program, considered the most active in Africa. Peace and political stability have reigned for the past decade, and the country is now considered a post-conflict “graduate.”

Since 1997, MIGA has issued guarantees for seven projects in Mozambique, totaling $190 million in coverage. Today, Mozambique ranks ninth in terms of outstanding coverage. MIGA is guaranteeing projects in an array of sectors, including a project that is rehabilitating the country’s largest sugar estate, seen as key to supporting the country’s reconstruction.

Amid these changes is a single project that is having a remarkable impact on many fronts, putting Mozambique on the map for other investors and helping to kick-start the emerging economy. Launched in 1997, a $1.3 billion aluminum smelter, called Mozal, is the largest foreign investment in Mozambique’s history and one of the three lowest-cost producers of aluminum in the world. MIGA is providing $40 million in coverage for loan guaranties issued by the Industrial Development Corporation of South Africa (IDC).

The project is a joint venture of IDC, BHP Billiton, a British company, Japan’s Mitsubishi Corporation and the government of Mozambique. Mozal currently produces 250,000 tons of aluminum ingots a year, mainly for export, and is being expanded to increase production to 500,000 tons. When the current expansion phase is completed, expected by 2003, Mozal will be one of the largest aluminum smelters in the world.

Three years after providing the Mozal guarantee, MIGA extended $70 million in guarantee coverage to Eskom, South Africa’s electricity company, for new electricity distribution facilities that provide the critical energy supply to the Mozal facility. In addition to supplying the cheap and sustainable power Mozal needs to operate, the investment also benefits the people living in southern Mozambique, South Africa, and Swaziland, by providing low-cost, reliable power 24 hours a day.

In both projects, MIGA guarantees are protecting the investors against the risks of expropriation and war and civil disturbance.

MIGA is not the only agency of the World Bank Group to have supported Mozal. The project is a true showcase of positive synergies among the World Bank Group agencies. The International Financial Corporation has contributed $145 million in loans to Mozal, its largest investment to date.

Perhaps the project’s biggest impact is its “demonstration effect”—showing other foreign investors that a mega project could be successfully undertaken in the post-conflict environment of Mozambique, and giving the country credibility as an investment destination. Several new jumbo deals (over $1 billion) involving foreign investors are now under active consideration. The project has also played an important role in creating a blueprint for assessing and processing FDI proposals, strengthening the government’s capacity and nudging it to develop a more responsive regulatory framework and investment climate.

The Mozal project has had an important regional impact, enhancing the viability of the Maputo corridor, promoting regional trade integration, increasing traffic through ports, and benefiting the South African economy through exports, jobs, and government tax revenues.

The project contributed an estimated 10 percent to Mozambique’s GDP growth in 2001. It employed 9,000 employees, mostly Mozambican, for the first part of construction and is employing 6,000 for the second part. Once construction is done, Mozal will provide jobs for about 860 permanent staff, primarily local, with another 4,000 jobs to be created in related industries.

Mozal also paved the way for improvements in investment legislation, the creation of incentive regimes for different industries, and even the creation of labor organizations. Because there had never been an investment of this size, various ministries would meet regularly to address impediments as they came up.

“We’re profoundly changing how business is done here. This project is in many ways serving as a model for other investors. Everyone is watching what happens,” says Eddy Kenter, Mozal’s manager for Finance and Administration.

Mozal is also a leader when it comes to strong corporate citizenship. Through a special trust fund—the Mozal Community Development Trust—the company supports communities living around the smelter. So far, about 17,000 people have been impacted by the trust’s activities. The trust involves all relevant stakeholders, from local and national government to NGOs, and from private sector partners to local communities representatives.

The trust’s activities are in community infrastructure, education and training, health and environment, including the provision of clean water, small business development, and sports and culture. It is developing prevention and awareness programs to fight two of Mozambique’s major plights, AIDS and malaria, which pose serious economic threats due to loss of worker productivity and deterrence to foreign investment.

Mozambique ranks eighth in the world in terms of HIV infection, with 14 percent of the population infected with the virus. “Education is the first step in the fight against AIDS,” says Birgit Holm, director of ADPP, a Danish NGO that is working with the trust. “We have been distributing pamphlets with information on HIV prevention and transmission and we now see a difference in how people react to information about AIDS.”

The trust also supports the government’s efforts to prevent malaria by sponsoring a variety of activities, including spraying houses with insecticides and providing bed nets to local residents. “Malaria is epidemic in Mozambique,” says Elisabeth Street, with the Malaria Research Program of the Medical Research Council of Mozambique, another program that is working with the trust. “Last year the spraying campaign financed by Mozal helped protect more than 25,000 families living in the [project] area. Since Mozal came on board in 2001, we have seen a 40 percent reduction in malaria cases.”

A number of important civil works in and around the project area have also been realized because of Mozal, such as the building of access roads and bridges, telecommunications systems, an industrial park, and a wastewater treatment plant. The works include the expansion and upgrading of two elementary schools, installation and maintenance of potable water tanks, expansion and upgrading of a health clinic, and construction of two sport centers and a police station.

“Mozal’s shareholders believe that the measure of a successful project should go beyond world-class construction and operational performance, to include world-class environmental and social ethical performance,” says Alcido Mausse, director of the trust.