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Mozal Plant Spurs Investment and Growth in Mozambique

Last Updated: May 2007
IDA at Work: Encouraging Investments and Economic growth in Mozambique

Challenge

Following the end of conflict in Mozambique, restoring macroeconomic stability and fostering conditions to promote potential high growth sectors were critical challenges.

Approach

The Mozal project, which aimed at building a smelting facility to produce aluminum for export, was the first major foreign investment project in Mozambique. The joint efforts of IDA, the Multilateral Investment Guarantee Agency and the International Finance Corporation - all part of the World Bank Group - led to the completion of Mozal I six months ahead of schedule and under budget. The first aluminum was produced in June 2000. In 2003, the Mozal plant was expanded to double its capacity to more than 500,000 tons per year, making it among the largest smelting facilities in the world.

Results

A catalyst for foreign investment into Mozambique following the civil war, the project contributed approximately 3 percent of GDP and 5-10 percent of recent economic growth, with strong employment, tax, foreign exchange, and infrastructure contributions.

Highlights:
- The project tripled the country's exports and added more than 7 percent to GDP in its initial years of operation and an estimated 10 percent in 2001. Its impact on the trade balance was has been a positive US$173 million per year.
- In its first five years of operation, the project generated more than US$300 million in foreign exchange earnings for Mozambique, and about US$70 million in fiscal receipts for the government.
- Roads, ports, power generation, telecommunications, water supply, and drainage systems were built or upgraded in order to build Mozal.
- Mozal created 15,000 jobs, mostly for Mozambicans, during both phases of its construction. The project currently provides jobs for 1,150 permanent staff, 1,600 contractors, and 10,000 indirectly through locally owned contractor firms.
- Through special trust funds - the Mozal Community Development Trust (MCDT) and the SME Empowerment Linkage Program (SMEELP), Mozal supports communities living around the smelter with activities in community infrastructure, education and training, health (AIDS prevention, malaria, etc.), environment, small business development, sports and culture.
- The largest foreign investment in Mozambique's history, the project demonstrated that large scale investments could be successful in the country's post-conflict environment. Foreign investors have since developed several other capital-intensive projects (Moma Mining Project, SASOL pipeline, and Maputo Port).

Results

- In 1998, MIGA supported the project by issuing a US$40 million guarantee to the Industrial Development Corporation of South Africa Limited (IDC) to cover its loan guarantees to the European Investment Bank (EIB) for its investment in the project. The guarantee covered the investment against the risks of expropriation and war and civil disturbance. In 2000, MIGA extended another US$70 million guarantee to Eskom, South Africa's electricity company, for new electricity distribution facilities that provided critical energy supply to the Mozal facility and the surrounding area.
- IFC supported the Mozal project both with financing and by helping the company improve its sustainable contribution to the local community. IFC provided US$75 million for the initial construction of Mozal's facility, and US$91 million for its expansion in 2003. In addition IFC helped develop Mozal's Small and Medium Enterprise (SME) Empowerment Linkages program, with grants for SME capacity building, and management support to mentor suppliers. To support Mozal's community health initiatives, IFC provided US$100,000 to an AIDS awareness and prevention program, as well as strategic support to one of Mozal's Community Development Trust's medical clinics to prevent mother-to-child transmission of HIV.

Contribution

Following the end of conflict in Mozambique, IDA's strategy focused on restoring macroeconomic stability, fostering conditions to promote potential high growth sectors, and developing human resources. In the years leading up to 1998, the year the Mozal project was commissioned,US$1.4 billion in IDA funds were approved for projects in Mozambique. Some of these projects, such as public administration reform, indirectly bolstered the country's investment climate. Other IDA projects during this period played a more direct role in paving the way for the Mozal investment:
- Infrastructure development : A series of IDA investments in transportation development and upgrades, such as the Maputo Corridor Revitalization Technical Assistance Project and the First Roads and Coastal Shipping Project, improved the road, rail, and port systems which serves Maputo city and its environs.
- Privatization of transportation : Initiatives aimed at reducing the government's participation in the private sector, such as the Industrial Enterprise Restructuring Project and the third Economic Recovery Credit, assisted with the privatization of the Port of Maputo and railway operations, improving freight access to the facilities.
- Energy supply upgrades : Through its Energy Technical Assistance and Rehabilitation Project, IDA committed to refurbishing the physical assets and improving the managerial oversight related to Maputo's energy distribution network. This effort, coupled with Eskom's energy investment in 2000, improved the reliability of electricity supply to processing and manufacturing plants throughout the Maputo area.
- Private sector promotion : Other IDA efforts, such as the Small/Medium Scale Enterprise Development Project and other non-lending activities like the Private Sector Development Conference and study on Impediments to Industrial Recovery, improved Mozambique's investment climate and promoted the country's potential as an investment destination.

Next Steps

Presently, Mozambique's development agenda is focused on harnessing the positive impacts of large-scale projects like Mozal to drive economic growth in other areas of the economy. While “mega projects” have contributed substantially to increasing economic growth and incomes, many local small and medium firms throughout the country are sill struggling; labor and capital productivity are below regional averages; and some bank portfolios are distressed. In addition to the recent US$2.4 billion debt forgiveness program in Mozambique, IDA's current country assistance strategy envisions growth sourced in agriculture and labor-intensive manufacturing and services, which could serve to distribute wealth and economic opportunities more evenly throughout the country.




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