By Sanday Chongo Kabange, The Red Flag Group®
Mozambique is one of five Portuguese-speaking African countries (collectively referred to as “Lusophone Africa”). Strategically located in the south-eastern part of Africa, bordering countries such as South Africa and Zimbabwe, Mozambique enjoys a massive coastline of the Mozambique Channel in the Indian Ocean.
Mozambique obtained its political independence from Portugal in 1975. At this time, the country was considered one of the poorest in the world due to a 16-year-old civil war between pre-independence movement, the Mozambique Liberation Front (FRELIMO), and former guerrilla group (now a conservative political party), the Mozambican National Resistance (RENAMO). The sporadic tension between FRELIMO (which has ruled Mozambique since 1975) and some staunch RENAMO cadres still persists to date. However, the advert of multipartism in the 1990s paved the way for a new constitution, multiparty elections and a free market economy. Mozambique grew at an average annual rate of six to eight percent in the decade up to 2012, making it one of the continent’s strongest performers in recent years.
The liberalisation of the country’s economy has opened up opportunities for investments in Mozambique’s vast and extensive natural resources, such as the recently-discovered liquefied gas and base metals.
Mozambique’s economy is largely dependent on agriculture, energy, tourism, mining and, more recently, petroleum production, which is growing at a very fast pace. Mozambique’s potential to attract large investment projects in natural resources such as natural gas, coal, titanium and hydroelectricity production is expected to fuel its economic growth in the years to come. As more multinational companies are searching for raw materials to feed their industries and support their production and profits, economic experts predict that Mozambique will be attracting attract large-scale foreign investments in the coming five years.
According to Doing Business 2014, produced by the World Bank and the International Finance Corporation, the once poorest country in the world is expected to climb up three steps, from 142 in 2013 to 139 in 2014 (out of 189 economies).
Key players in the oil and gas industry, as well as those in the IT, aviation and health industries, will want to channel their future investment prospects in the untapped natural gas and titanium deposits in Mozambique.
Apart from owning the rights to explore and harvest Mozambique’s natural gas, there is a great opportunity for foreign investors to provide and conduct business with the country’s small- and medium-sized businesses, which officials from Mozambique’s Ministry of Industry and Trade say account for 90 percent of the country’s economy.
Anadarko Petroleum, an American energy company, is setting up a number of liquefied natural gas terminals in northern Mozambique after discovering vast reserves of natural gas in the Rovuma Basin. The company is expected to ship its first liquefied natural gas out of Mozambique in 2018. Dubbed “Offshore Area 1” and covering approximately 2.6 million acres, it is estimated that Anadarko’s total recoverable reserves hold between ten and 65 trillion cubic feet of natural gas. Anadarko announced in November 2013 that it had paid US$15 million to Mozambican small- and medium-sized companies involved in construction, transport, catering and other services. These companies are regarded as being of key importance in establishing Anadarko’s activities in Mozambique.
According to mining giant Rio Tinto, which is exploring southern Mozambique for titanium: “Drilling, sampling and metallurgical test work suggests a combined potential contained ilmenite content of between 140 and 170 million tonnes with a further 10–15 million tonnes of contained zircon and rutile.” This is yet another high-potential area for prospecting as the use of titanium is very important for a wide range of industries, such as aviation and aerospace, IT and electronics, and healthcare.
Due to human rights issues and armed conflict in the Democratic Republic of Congo and some parts of Eastern Africa, the United States Securities and Exchange Commission passed Section 1502 of the Dodd–Frank Wall Street Reform and Consumer Protection Act, requiring electronics companies to disclose and verify their sources of minerals. With its vast resources of titanium, Mozambique provides an alternative route for companies to source the so-called conflict minerals without abrogating or coming into conflict with the requirements of the Dodd–Frank Act.
Mozambique’s vast coal reserves also provide opportunities for foreign investors. Rio Tinto holds mining and exploration licences in the Moatize Basin in the Tete Province of Mozambique and produces two types of coal: hard coking and thermal coal. Coking coal is also known as metallurgical coal and is mainly used for producing steel, while thermal coal is considered one of the more environmentally-friendly sources of energy, providing an opportunity for companies and countries considering switching to cleaner energy.
Freight and logistics
Mozambique’s open access to the Indian Ocean gives it a competitive advantage above its landlocked neighbours which rely on Mozambique’s seaports to access international trade markets. Mozambique has six ports: Maputo, Beira, Quelimane, Tete, Nacala and Pemba. These ports are currently used by countries such as Swaziland, Zimbabwe, the Democratic Republic of Congo, Malawi and Zambia to transport goods and services by rail or road to destinations in Asia, Europe and Latin America.
Service providers in freight and logistics have a window of opportunity to invest in this sector. Mozambique’s ports handle a variety of cargo, including break-bulk, neo-bulk and bulk cargo, including petroleum products. Zambia (Africa’s largest copper producer) uses some of Mozambique’s ports to transport its copper to China and other Asian markets. Zimbabwe is also said to make use of the ports in Mozambique to transport its mineral resources, including gold and controversial diamonds from the troubled Marange diamond fields.
Cargo coming into Malawi from Asia, the United States and Europe also enter via Mozambique’s ports.
Potential risks and challenges
Like Angola, Equatorial Guinea, Nigeria and the Democratic Republic of Congo, Mozambique holds very rich and extensive unexplored raw materials. Natural gas, especially in liquefied form, remains one of the largest potential income generators due to high demand from the world’s largest economies, including China and the United States.
Corporations from all over the world are making in-roads into Africa to fetch resources to fuel their economies or increase their revenue streams. The depletion of natural resources in the countries that traditionally supplied raw materials is also pushing investors into untapped countries like Mozambique, where risks may be lower and profits higher.
However, Mozambique is not immune from the “curse” that comes with such an endowment of natural and raw resources. Political interference, government controls, corruption, crime, money laundering, conflicts of interest and petty bureaucratic red tape in administering resources transparently pose huge risks for entrants into the Mozambican market.
Mozambique is ranked 123rd out of 178 countries in Transparency International’s 2012 Corruption Perceptions Index – a drop from 120th out of 184 in 2011. Corruption is rampant at all levels of society. According to the World Economic Forum’s The Global Competitiveness Report 2012–2013, corruption is the second-most problematic factor of doing business in Mozambique. The country’s bureaucratic and prolonged procedures for setting up businesses brew corrupt tendencies among public officers as bribes offer an opportunity to cut corners or shorten long processes.
Corruption has been a challenging trend in Mozambique for a long time. It is endemic from low-level public officers, such as customs officers, doctors, police, teachers and procurement officers, to high-profile figures, such as judges, ministers, provincial heads, business executives and politicians.
Political influence and power
The government of Mozambique is reported to hold interests in private businesses, either through direct ownership or through stocks, and maintains or holds minority stakes in companies that are considered strategic, such as those in media, energy or telecommunication sectors.
The Indian Ocean Newsletter reported that all ministers in Mozambique, including President Armando Guebuza, also have strong commercial interests. Since President Guebuza’s accession to the presidency his family has allegedly gained influence through various firms in which stakes are held. According to an exposé dated 31 October 2009, President Guebuza himself holds a stake in Intelec Holdings. In addition, his family owns an entity named Focus 21 and holds direct or indirect stakes in several other Mozambican companies.
Several other politicians either directly own or hold interests in private entities that are set up by family members or close associates. Political influence in business is spread across various sectors, including mining, real estate, public health and energy.
Crime, political instability and poor infrastructure
Some of the pre-civil war infrastructure in Mozambique is still undeveloped, with many roads and bridges in poor condition and parts of the country being largely inaccessible. The country’s crime rates are also high, with low-level drug trafficking and timber smuggling over Mozambique’s borders posing serious concerns.
The on-and-off tension between the FRELIMO and the RENAMO continues to threaten foreign investors. In June 2013, tension flared between Mozambican authorities and RENAMO, raising fears of a return to civil war. Threats by the former RENAMO guerrillas to disrupt rail traffic prompted Rio Tinto to suspend coal exports.
All the above risks are detrimental factors to investors; however, the Mozambican Government has acknowledged the extent to which corruption is widespread and is affecting its foreign investment perception. The Anti-Corruption Unit in the Office of the Attorney General (later renamed the Central Office for the Combat of Corruption) was set up in 2005. In July 2012 President Guebuza signed the Public Integrity Act and the Witness and Protection Act, which aim to promote transparency and protect whistleblowers.
High-profile politicians have also been prosecuted for corruption, including former ministers. In March 2011, former Mozambican Interior Minister Almerino Manhenje, and former director and deputy director of the financial department of the Interior Ministry, Rosario Fidelis and Alvaro de Carvalho, were all found guilty and convicted of illegal budgetary decisions and mismanagement of expenses dating back to 2004.
Despite the many risks which foreign investors may encounter in Mozambique, the country provides huge opportunities. Although human rights issues are fewer and safety concerns are less evident than in some neighbouring countries, the crime rate poses serious concerns, state and political involvement in the economy is widespread, and corruption is rampant.
Investors considering establishing themselves in Mozambique are strongly advised to consult, develop, implement and strengthen their compliance frameworks and carry out extensive due diligence before committing funds into Mozambique.