The Protection Of Foreign Investments In Mozambique As Strategy For Development – Part Two

The regional context:

Mozambique’s development program has hardly been affected by the slowdown in global growth and world trade over the past two years because its growth has been driven by strong internal investment in new export-oriented projects. Over the next few years, it has many opportunities to develop its metals industries for export and its ports and rail facilities to provide services for the regional market in southern Africa. In that respect, a resolution to the current problems in neighboring Zimbabwe would help Mozambique to develop those regional transportation facilities that could support the Zimbabwe economy.

Like any African country, Mozambique’s challenges go deeper than absolute poverty, low income, falling trade shares, low savings and slow growth! They also include high inequality, uneven access to resources, social exclusion, and insecurity.

The environment for investment protection in Mozambique

The policy strategy currently pursued by Mozambique is explicitly intended to improve conditions for foreign direct investment (FDI). However, the environment for foreign investments protection in Mozambique is still inadequate to attract high quality and efficiency-seeking investments and the incentive framework continues to suffer from a number of deficiencies.

An investor in Mozambique is of course faced with many of the bureaucratic and infrastructural hurdles usually encountered in developing countries. One major bottleneck for many investors, especially the smaller ones, is the country’s limited administrative capacity. Administrative handling of queries and requests often reveals the deep roots socialism has put down in public-sector culture. With external donor assistance, the Government has now undertaken various red-tape analyses to identify unnecessary administrative difficulties and the ways in which they might be solved.

The increasing importance of FDI in Mozambique

Mozambique is a good example of a least developed country in which the basic constraints on development are being gradually removed by a decisive and reform-minded Government which commands popular support. The sustainability of these efforts depends to a large extent on the tangible results they produce in the main areas of the economy. The Government is aware of this and in general committed to continuing on its current path. It is also aware that private-sector participation and, in particular, foreign direct investment with its unique combination of tangible and intangible assets, is indispensable to economic growth. In sum, Mozambique is developing as a major investment location in Africa, as shown in the following paragraph.

The importance of FDI in the SADC region and Mozambique is confirmed by the following facts:

- Global flows of foreign direct investment reached a record US$ 1.3 trillion in 2004

- Mergers and acquisitions accounted for 85% of this amount

- Developing countries in total received about US$ 240 billion

- Africa received US$ 13 billion, of which about US$ 5 billion flowed into the 14 SADC countries

- Of the US$ 5.5 billion, Mozambique received US$ 1.5 billion, SA – US$ 760 million, Angola – US$ 735 million

- South Africa is the largest source of FDI in the SADC, accounting for up to 43% of Africa’s US$1.3 billion outflows, and accounting for up to 85% of total FDI in all other SADC countries in 2000.

- Large South African companies, long denied the opportunity to invest substantially offshore due to exchange controls, have increasingly sought out opportunities for expansion in SADC, Africa and beyond.

Experience of investment protection in Mozambique

The legal and regulatory framework experience

In 1999, a legislation providing for the establishment and operation of industrial free zones (Export Processing Zones EPZs). New legislations were introduced to take into account the special status of agricultural, hotel, tourism, regional rapid Development Zones, mining and petroleum investments, including their fiscal benefits. Additional investment incentives were adopted by law in 2003, allowing qualifying firms in particular sectors, including garments, chemicals, engineering, food and printing, to import duty free.

Mozambique has established itself in recent years as one of the leading FDI recipient countries in Eastern and Southern Africa. In 1997, FDI amounted to US $ 64 millions, and FDI inflows were catapulted to US $ 213 millions in 1998, and to US $382 million in 1999, with the two mega projects of Mozal Aluminum smelter and the Maputo – Witbank toll-road. After a decline in 2000, FDI rebounded again in 2001 to $255 million and to $ 380 in 2002. In 2004, it is reported an increase up to US $ 1,8 billions dollars.

In 2004, Foreign Investments in Mozambique were estimated at US $ 1,800 millions and positioned the country as the first recipient in the Southern African region. Half of the investments came from South Africa alone. Foreign direct investment (FDI) in Mozambique – on approval basis – reached a cumulative total of $ 1.6 billion between 1985 and 2000. The main sources of FDI were the Republic of South Africa with 28 per cent of the total volume. The United Kingdom with 22 per cent and Portugal with 19 per cent. Other leading investor countries are Japan, Mauritius and the United States. It is worth noting that investors from non traditional source economies like Japan, France, Hong Kong (China), United States, Malaysia and Mauritius have participated in key areas like banking, textiles, steel and sugar over the past five years.

South African investments in Mozambique are fairly diversified with the greater influx being directed to partnerships in major projects, but there are also investments in small and medium-scale projects, especially in industry and tourism. The United Kingdom has now moved to the second position as a source of FDI on account of Billion’s participation in MOZAL Project (an Aluminum melting mega project).

All these considerable investments were made despite major impediments, which still limit access to business development in Mozambique. This suggests that FDI could even be more dynamic if some key issues with the investment climate were resolves. These include land ownership issues, the competitive policies and laws for foreigners. According to a recent USAID report that despite significant improvements.

Investment opportunities are still widely untapped

With a mostly poor population of 19 million, the Mozambican market is small in itself. However, its integration into the Southern African Development Community (SADC) offers investors easier access to the main market in southern Africa: South Africa and the other 12 member countries.

Agriculture (cashews, cotton, tobacco, sugar and other cash crops) and fishing and aqua-culture (prawns and shrimp) are the backbone of the Mozambican economy. Investment opportunities are also available in the related agro-processing industries, especially in the southern region. The liberal economic reforms pursued by the Government, the almost complete privatization of formerly state-owned enterprises, and a variety of generous incentive schemes have laid the ground for profitable investment in a number of areas: cash crops, manufacturing, financial services, export-processing (cashews, aluminium), etc.

The traditional Mozambican role of providing its eastern and southern hinterland with access to seaports has given transport (rail, road, ports) and related services a central role in the economy, as illustrated by the Maputo, Beira and Nacala corridors. Their further development now depends heavily on private – and especially foreign – investment. The country’s location, its abundant endowment of renewable energy (e.g. the Cahora Bassa project), its still unexploited mineral wealth and, last but not least, its market-oriented policies have attracted a number of large-scale manufacturing and mineral-exploration projects to Mozambique in recent years.

The most prominent of these is the Mozambique Aluminium smelter project (MOZAL), which has made an initial investment of $1.3 billion. More such “mega-projects” are about to materialize and most of them are expected to offer substantial opportunities to a variety of suppliers. An example is furnished by the activities based in the Beluluane industrial park (an export-processing zone), located close to the MOZAL complex, south of Maputo.

Tourism, currently dominated by South African tour operators, is another sector with very considerable potential. Even with the existing infrastructure constraints (which investment could help remove), there are opportunities in such areas as game, adventure and coastal resorts.

Current constraints to the promotion and protection of FDI

Despite considerable efforts to modernize the investment legal, regulatory and institutional framework, Mozambique still has some legal and administrative barriers which hamper investment development. Article 109 of the Constitution states that land ownership is completely vested in the state, and that it cannot be sold or mortgaged. The land legislation (Law no 19/97 of 1 October and Decree no. 66/98 of 8 December 1998) both enhance the land ownership entrenched in the constitution.

The legislation on labour and employment of foreigners (Decree No. 57/2003 of 24 December 2003 on Employment of foreigners) is among issues cited as a serious barrier to foreign investments. Other problems most commonly referred to are red tape and corruption, lack of adequate competition laws, the existing legal limitations impose on foreign ownership of company shares, stocks in the financial markets and the labour requirements for nationals which do not allow the dismissal of employees even in case of gross misconduct or theft. A new labour law was adopted by the Parliament, and published, its provisions will become applicable in 2007. A tribunal in charge of labour disputes settlement has been established.

Identified specific constraints to the promotion of FDI in Mozambique include the following aspects

o Small size of the regional market, and this is compounded by relatively high transport costs of getting products to lucrative markets in the US and Western Europe

o Incentive and competition measures,

o Weak judicial institutions

o Labour laws and lack of equitable dispute settlement compulsory measures

o Red tape, crime and Corruption

o Infrastructure Weaknesses

o Corporate Governance Issues

o Inadequate market-friendly reforms (pace of privatization, reform of foreign ownership rules and rules governing the repatriation of profits)

o Climate, natural disasters – drought, floods, famine, etc

o HIV/Aids pandemic : one out of seven people is HIV positive (according to Health Ministry and WHO sources)

Urgent reforms are needed to facilitate fast tracking of industrial development

- Legal and regulatory reform to remove all remaining bottlenecks faced by foreign investors.

- Relaxation of investment restrictions.

- Reform of the financial institutions, markets and services with reference to international standards. Liberalization of exchanges and financial transactions, with increased controls and supervisory technology.

- Establishment of effective and well-capacitated institutions e.g. one-stop shops for investors

- Infrastructure upgrade and maintenance – public investment will ‘crowd-in’ private investment.

- Rural development – incentives to businesses to locate in rural ‘growth’ areas – spreading development, and curbing the rural urban migration patterns.

- Guided investment’ – state targeted interventions in specific industries, offering generous loans, tax and operating concessions, and tariff protection in the early stages.

- Massive investment by the state in research and development (R&D).

- Investment strategy to develop rural industries.

Additional measures to promote the flow of foreign direct investment should include: through government public works programs, increasing profit incentives for rural factories establishing rural-urban-global supply chains, reverse engineering tactics, investment in Research &Development, relaxation of foreign ownership and repatriation laws.

Concluding remarks

Mozambique has, over the last decade, demonstrated considerable efforts to create adequate legal and regulatory frameworks for the protection of foreign direct investments. However there remain serious impediments which still affect negatively the flow of foreign investments. Inconsistent policies and inadequate host country operational measures (HCOMs) are some of the challenges which call for more reforms.

There is need for increased awareness within the Government of Mozambique and public institutions on key issues related to the promotion and protection of foreign investments. The point is: foreign investors want to gain market access, have their investments protected and be free to operate in a manner of their choosing. Host countries want to develop services and infrastructure, meet local needs, produce exportable goods and improve locally available technology. The interest of foreign investors and host governments can be harmonized if the investment meets both sets of agendas. This can be done if investors decide on the viability of specific projects and the host governments decide on the priority sectors and conditions of FDI consistent with their economic and development objectives.

As in the case of Mauritius, this should be a credible development program backed by credible policy framework conducive to long-term economic and social stability. With such policies, the country is more likely to have the capacity over time to service the repatriation of profits, provide a skilled and healthy labour force, and develop suitable infrastructure. Financial institutions, markets and services should be reformed with reference to international standards.

Finally, this program should cover the need for convergent bilateral and multilateral investment and trading arrangements with countries members of SADC to avoid trade and investment deflection and diversion. This should also go along way towards removing administrative and fiscal barriers to the promotion of investments. There is also need to adopt appropriate legal, regulatory and institutional frameworks to ensure more flows of high performance foreign direct

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