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Encouraging Foreign Direct Investment into Mozambique

January 27, 2003—When Mozambique gained independence from Portugal in 1975, its economy was predominantly agriculture-based, with little industrial development. 17 years of civil war subsequently ravaged the country, leaving it one of the poorest, most debt-ridden countries on the African continent.

The country’s fortunes slowly began to turn when in 1987, it embarked on a massive economic reform program, which enabled, ten years later, the first issuing of a guarantee by MIGA, the Multilateral Investment Guarantee Agency of the World Bank Group. Since then, the organization has issued guarantees for seven projects in Mozambique, totaling $190 million in coverage and ranking Mozambique ninth in terms of outstanding coverage.

MIGA’s guarantees span an array of sectors, but one project has stood out for its remarkably wide-reaching impact, both economically and socially. Launched in 1997, the project involves a $1.3 billion aluminum smelter, Mozal, which has become 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), which is in charge of the venture along with 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 by 2003, Mozal will be one of the largest aluminum smelters in the world.

The Mozal project has effectively demonstrated 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 major 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 foreign direct investment (FDI) proposals, strengthening the government’s capacity and nudging it to develop a more responsive regulatory framework and investment climate.

The project has furthermore 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. Due to the fact that the sizable investment was the first in its kind, several 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," said Eddy Kenter, Mozal’s manager for Finance and Administration.

Mozal is also paving the way with regards 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 benefited from the trust’s activities, which 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.

A number of important civil works in and around the project area have also been realized due to Mozal’s activity, 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.

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 could provide critical energy supply to the Mozal facility. In addition to supplying the cheap and sustainable power Mozal needs to operate, the investment has also benefited the people living in southern Mozambique, South Africa, and Swaziland, by providing low-cost, reliable power 24 hours a day.

Useful links: For more information on MIGA’s work, please visit www.miga.org

 



PHOTOS | Clockwise, top left, 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




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