Harnessing Mozambique’s potential

Mozambique has endured civil war and a lack of investment, but the discovery of natural resources could transform the country’s economy

 
October 31, 2012

Mozambique has emerged from a period of instability as a source of great interest for international investors, not least because of its abundance of natural resources. GDP has grown on average seven percent during the last two years, and many feel that the country is ripe for an influx of international investment. However, there are challenges that face the country, with a lot of work still to be done, according to Ernst and Young Mozambique’s Ismael Faquir.

Faquir believes that there are opportunities in a number of sectors borne out of the damage done to the country during the 16 years of civil war that ended in 1992. “There are lots of opportunities in all sectors,” he says. “The years of civil war that we had destroyed a lot of basic infrastructure. So we still have a lot of things to do. In terms of opportunities for investors, there are lots in all areas.”

According to Faquir, the economy has performed well as a result of the newfound stability in the political landscape. “I think it’s doing very well. Over the last two or three years we have been growing at an average rate of seven percent which, combined with improved social and political stability, leads me to believe that Mozambique is today one of the best destinations for investors. For everyone who comes to Mozambique, it’s clear that a lot is happening; there are new buildings, new roads, and so on. So it’s doing very well.”

Lack of infrastructure
There is still a great deal of work to be done, however. The lack of basic infrastructure in the country is something that has held back investors and prevented the sort of growth seen in other emerging markets. Faquir says that despite the large number of foreign workers coming to the country, there is a lack of suitable accommodation to house them.

The difficulty facing the Mozambique government is how to fund the infrastructure projects that are so desperately needed. Although many companies want to come to the country to capitalise on its natural resources, the government needs to realise that they must address the problem of a lack of infrastructure. “We can’t forget that in developed countries, it is the government’s responsibility to create basic infrastructure,” says Faquir, “and companies just have to invest in their core businesses to explore the natural resources, because they already have all the facilities and logistics that they need to transport their goods. That’s not the case in Mozambique.”

Faquir believes that the only realistic way to fund these projects is to encourage public-private partnerships (PPPs). “The government will not have the capacity to build all the facilities that Mozambique needs. The challenge that they have is to create the PPPs. It has already started with some power generation deals, but there needs to be an increase in PPPs to help grow the infrastructure.”

Newfound natural resources
The country is rich in natural resources, after a series of recent discoveries. Faquir says this will attract overseas investors: “The recent discovery of natural resources like gas, coal and other minerals, puts the country on the top of the world in terms of opportunities. These are linked to the lack of basic infrastructure. I believe that a lot of multinationals will invest in these natural resources.” However, he also says that there are challenges in attracting investment: “Even with all the natural resources that we have, if we compare the size of the investment that we receive in Africa, it is much lower than what has been invested in India or China, and that is because of the perception investors have of the stability. In my opinion, this is the responsibility of the government. Just to have the natural resources is not enough.

Africa’s (level of investment) is much lower than what has been invested in India or China, because of the perception investors have of the stability

The government needs to do a lot more to stimulate more growth in the country, says Faquir, and part of that process will be to reassure investors that Mozambique is not shackled by the corruption and instability that affects so many other African nations. “In spite of the fact that we have been one of the 10 fastest-growing economies in the world, I think that the perception of global investors looking at Africa is still negative. People are still afraid to invest in Africa because of the level of corruption, the political instability, and the lack of basic infrastructure. The government still has a lot to do; they still have to invest in selling the image of the country as an investment opportunity. It also needs to provide the guarantee that investors can safely put their money into the country. It’s very important from a political point of view to sell the image that we are a stable country, and that we comply with the contracts that we sign with our investors.”

“It’s not an easy task, but we have to analyse how we can involve all of Mozambique in this process. If we are not able to do that, it will create instability.”

Companies that are leading the way in exploring these new found resources include numerous international players. Anadarko, Italian firm Eni, and South African company Sasol are leading the way in gas exploration, while Brazilian firms Vale and Rio Tinto are the leaders in the mining industry. “We have a lot of multinationals operating in Mozambique today,” says Faquir. Additionally, Mozambique benefits from its geographical location, sprawling up the southeastern coast of Africa. Its location means that it has the capacity to deliver goods from its three large ports through the Indian Ocean to the rest of the world.

Although the lack of physical infrastructure has hampered the economy, there is also a stark lack of resources, and the government needs to implement a successful and reliable tax system. Faquir says: “The problem in the market is the human resource capacity. The tax authority is not prepared to implement all the rules that we have in our legislation. It is a fact that they have improved significantly compared to five years ago and they are also doing a lot to increase the level of knowledge. However, the discrepancy between the taxpayers and the tax authority, in terms of understanding the tax rules, is too big.

“Somehow, we as advisors feel frustrated to deal with the tax authority, with their capacity to respond to the tax payers. The bottleneck that we have, and the challenge the revenue authority has today, is to significantly improve the level of knowledge of their people, otherwise they will lose a significant part of the revenue that they should have.”

Communication is key
The benefits of finding natural resources are obvious for a country as underdeveloped as Mozambique. However, there are also serious risks involved. “We have to learn from the other countries that have had these opportunities with natural resources before us,” says Faquir. “Having natural resources can be an opportunity to grow the country, but it can also be a real problem, bringing civil war and other types of problems that other African countries have been facing. In my view, this is the big challenge that the government has.”

In order to prevent such unrest, Faquir says that the government should aim to include the whole of the country in exploiting the newfound resources: “It is important that the resources coming from exploration benefit everyone in Mozambique. The people should have opportunities to participate in all these projects. It’s not an easy task, but we have to analyse how we can involve all of Mozambique in this process. If we are not able to do that, it will create instability. The people will become a problem for all these multinationals wanting to explore the resources. With the people against you, it will not work.”

Managing the expectations of the people is also something that Faquir thinks the government should aim to do. “It is very important to have a clear communication with the population and to align their expectations. When a newspaper reports that a company like Anadarko has discovered huge quantities of gas, if we do not manage this information, the perception of the people is that the government is taking the revenues of this discovery and not passing it on to the people.

“There is still a lot to do between the time natural resources are discovered and the time you start to see revenues. If you don’t pass the message to the people, they will see that the country has discovered lots of gas, but their lives are not changing. It’s very important to manage the expectations of the people, to inform them how long the process takes. The government is aware of this, and is worried about passing on the right message. They need to say that it will take time; they need to invest, train the people, and involve all of the country in the process.”

Harnessing the vast potential that Mozambique has to offer for investors is vital if the
government is going to sustain, and increase, the impressive growth rates of recent years. Keeping the population on side while providing both physical and intellectual infrastructure growth is likely to be a challenge. What is certain is that Mozambique is set to be transformed over the coming years.