Economic diversification through resource-based infrastructure
Economists have long recognized infrastructure development projects to be one of the most potent levers for economic growth.1 Infrastructure built to support development of a country's natural resources can provide access to previously inaccessible areas and open trade routes, and generate investment into new sectors. Where that infrastructure crosses national borders, as is the case with several of Mozambique's current portfolio of development projects, it can also promote regional socio-political integration, economic growth and diversity.
Against the backdrop of Mozambique's improved economic outlook starting from 2018, this article focuses on how the country's opening of its mining logistics infrastructure can drive diversification of Mozambique's economy and its regional integration with landlocked neighboring countries that can use Mozambique as an import and export route. Especially in cross-border and regional infrastructure projects, investors can combine traditional and more creative treaty mechanisms to assist infrastructure financing and development.
Mozambique's coal and natural gas resources accounted for approximately 52 percent of the value of its total domestic export trade in 2017
ITC Trade Map
In this context, Mozambique has been willing to support cross-border projects through intergovernmental agreements, and is now participating in its first two investment arbitration cases. These are positive indications that the country understands investors' need for wider stakeholders' engagement and risk management tools, which make projects viable.
POSITIVE OUTLOOK IN THE MINING SPACE
After a challenging 2017, with the country's total indebtedness expected to reach 113.1 percent of its GDP (the highest in sub-Saharan Africa), Mozambique's economy is showing positive signs in 2018. Mozambique is stabilizing its currency and lowering inflation, suggesting a more optimistic economic cycle ahead. Mozambique's real GDP grew by 3.3 percent in 2017 and the IMF projects it to grow on average 2.5 percent per annum in nominal US dollars until 2022, then to climb to 9.9 percent in 2023 (Figure 1). Measured in Meticals, the local currency, economic research firm BMI forecasts that the Mozambique economy will grow on average 6.6 percent per annum over the next ten years.2
Mozambique's coal and natural gas resources accounted for approximately 52 percent of the value of its total domestic export trade in 2017.3
An increase in coal production is expected to result in an average growth of 10.1 percent in the value of its exports between 2017 and 2021.4
This increase will likely come from Mozambique's coal reserves of about 1.8 billion tons,5 most of which is high-quality coking coal, with primary deposits in the Tete province. To achieve its forecast growth, Mozambique will need infrastructure to support exploration and development of its reserves in the Moatize, Lower Zambezi and Mucanha-Vusi basins, as well as the deposits in Changara, Cahora Bassa and Magoe districts.
The country has already taken some positive steps to attract the investment required.
In recent years, the Government of Mozambique has made concerted efforts to enhance the country's business environment and thus attract trade and investment, particularly into the mining sector. Current mining legislation aims to ensure greater competitiveness and transparency, defining clear obligations and protecting national interests, while also protecting the rights of mining companies. Law No. 20/2014 (Legislação Mineira) and Decree No. 31/2015, for example, introduced clear rules for mining prospecting, research operations, development and exploration.
Some external market factors are likely to play an important role in raising foreign investors' interest in Mozambique's mining sector. Strong and sustained demand for coking coal in India, the uncertain socio-economic environment in Zimbabwe and the expected cost increase of mining in South Africa all place Mozambique at a regional competitive advantage.6 Mozambique's large coal reserves, high-quality product and strategic location relative to Asian markets create the potential for the country to become a key player in global coal markets.
Notwithstanding these positive factors, Mozambique needs to invest heavily in infrastructure to achieve its forecast growth, in particular roads, railways and ports, so several planned projects become viable and existing projects are optimized.
OPENING MOZAMBIQUE'S LOGISTICS INFRASTRUCTURE
Most of Mozambique's civil infrastructure was built during the country's colonial period. In 1931, the colonial state created the industry entity Portos e Caminhos de Ferro de Moçambique (CFM) to centralize the management of railways and ports in Mozambique.
Independence in 1975 was followed by a period of civil war that destroyed most of the country's transport network. By the restoration of peace in 1992, Mozambique faced financial difficulties and was unable to invest in rebuilding and expanding its infrastructure. The country was unable to cope with the needs of the growing coal export demand, yet the capital derived from coal sales was pivotal to national building following the civil war.7
In the 1990s, the Government of Mozambique approved the participation of private capital in the rehabilitation, exploitation, and management of rail and port infrastructure and services, ceasing the exclusivity regime of the operation of the railways and ports to state-owned entities.
In 2011, with the promulgation of Law No. 15/2011, the guidelines were established for contracting, implementing and monitoring public-private partnerships (PPPs), large-scale projects (LSPs) and business concessions (BCs). Under Law No. 15/2011, PPPs, LSPs and BCs are defined as:
PPPs – All projects that involve an agreement between public entities in Mozambique and private entities under which the latter contracts to implement and manage public interest projects, services and activities, bearing some or all of the financial and other risk involved
LSPs – All investment projects authorized or contracted by the Government of Mozambique, the value of which exceeds 12,500 million meticals at value date January 1, 2009 (roughly US$500 million at prevailing exchange rates at the time)
BCs – Projects carried out under contracts aimed at prospecting, exploring, extracting or exploiting natural or other resources or other assets belonging to the state
The enactment of this law was a landmark in Mozambique's quest to attract private investment and promote efficiency and transparency with these types of projects.
Notwithstanding these trends toward a broader participation of the private sector, CFM continues to play an important role in Mozambique's infrastructure development. It continues to control the management of some principal railways and ports. These include the Sena-Beira railway, which is used for the transportation of coal produced in the Tete province to the coast, and the Beira port, which is an important export exit for the country's interior and landlocked Zimbabwe, Zambia and Malawi.
CFM's portfolio of development initiative includes infrastructure and logistics projects across a range of industries, such as the reconstruction of the Machipanda railway connecting the Beira port to Zimbabwe, creating opportunities around the transport of fertilizers, wheat, rice, granite and fuel, and the development of a new coal terminal in Beira (Figure 2).
The Sena-Beira railway is not sufficient for the export of the volumes of coal being produced in the Moatize area. This has forced larger mining companies to look for more efficient alternative routes and integrated logistics solutions to transport coal from the inland basins to seaports for export.
The need for a more efficient solution underpinned the landmark project for the connection of brownfield and greenfield railways in Mozambique and Malawi sponsored by Vale S. A., the Brazilian mining company, and the Japanese company Mitsui & Co., which also included the construction of a new deep sea coal terminal in Nacala-a-Velha in Mozambique (the Nacala Project).
CROSS-COUNTRY PROJECTS AND REGIONAL DEVELOPMENT
The infrastructure needed for Mozambique's growth in coal production can have a much wider economic, political and social impact and be more attractive to investors if it is developed based on a regional strategy, bearing in mind the country's many landlocked neighbors.
Infrastructure development projects that cross national borders can result in stronger regional economic growth and integration. Economic connectivity reduces the likelihood of conflict between countries, fosters the increase of GDP per capita and enhances education levels in the workforce, creating a virtuous cycle of economic growth, stability and socio-economic development.
In the case of Mozambique, cross-border infrastructure is vital for the integration of landlocked economies and the facilitation of trade in goods and services. Cross-border road and rail infrastructure can help address logistics bottlenecks to regional integration and facilitate economic transformation of Mozambique and those economies, because local and foreign investors can look at opportunities from a regional perspective.
The Nacala Project is a good example of this type of cross-jurisdictional project. It starts in the Moatize area in the western part of Mozambique, crosses Malawi and terminates in two seaports: one for general cargo and one for coal in Mozambique's Nacala-a-Velha. The project enables landlocked Malawi to use the railway to import goods and export its production of cotton, tobacco, pigeon peas, sugar and other products. Importantly, it also improves the transport of passengers between the two countries, giving the project a much wider base of stakeholders.
TRADITIONAL AND NEW INVESTMENT PROTECTION MEASURES
Cross-border projects naturally give rise to investment protection issues, usually covered by bilateral investment treaties (BITs), and to legal issues relating to the different and often conflicting jurisdictions where two or more countries are involved.
Mozambique is party to 27 BITs. But with the exceptions of South Africa and Zimbabwe (in which BITs have been signed, but are not yet in force), the country has no such treaties with neighboring countries, all of which have their own and differing regulations. This requires tailor-made solutions to manage typical investors' risks specific to the countries involved in a particular project.
In the case of the Nacala Project, there was no Mozambique-Malawi BIT, and differing rail infrastructure regulations meant that the countries had to find specific solutions to enable cooperation. A key part of the solution was to establish an intergovernmental agreement (IGA), setting out guidelines for the interaction of both countries during the operation of the project. In the IGA, the countries recognized the need for adequate and efficient routes for regional and international trade and the desire to promote good neighborliness and peaceful cooperation for the benefit of their people. Interestingly from the investors' point of view, Mozambique and Malawi were prepared to amend an initial IGA when the Nacala Project was project financed.
Similar opportunities exist in several other parts of southern Africa and in other parts of the continent, where infrastructure projects could benefit from similar legal hybrid structures, incorporating innovative instruments such as IGAs to provide comfort for sponsors and lenders that local legal specificities will be carefully thought through and addressed in advance, thus reducing project risks for investors and host states.
In Mozambique, there is clearly further opportunity for the country to offer its landlocked neighbors—such as Zambia, Zimbabwe, Malawi and Botswana—export and import routes via its railways and seaports.
For example, Botswana has an estimated 200 billion tons of coal reserves in the east side of the country in the Selebi Phikwe coal region. Botswana also benefits from good political and economic stability, and the government is eager to finance construction of trans-regional highways and railways to create capacity to transport general cargo, minerals, fuel and passengers through Zimbabwe to a Mozambican port in the south of the country.
MOZAMBIQUE'S INVESTMENT PROTECTION MECHANISMS TESTED FOR THE FIRST TIME
The spring 2018 edition of Africa Focus described Mozambique's well-developed investor protection landscape, which is generally available to investors from countries that have a BIT in force with Mozambique. Mozambique's BIT system is being tested for the first time in two investor-state disputes: Oded Besserglik v Republic of Mozambique, concerning investments in the fishing sector, and Cementisti CMC Di Ravenna SOC Coop v Republic of Mozambique, concerning road construction projects in Mozambique.
The first BIT case ever filed against Mozambique was brought pursuant to the Mozambique-South Africa BIT 1997.10 The claimant, a South African national with investments in shrimp fishing and trading operations in Mozambique, claimed that the indirect expropriation of prawn-fishing quotas adversely affected its investment in a fishing operation. Although there is limited publicly available information on the dispute, Mozambique seems to have contested jurisdiction on the grounds that the BIT is not yet in force, pending ratification by both houses of parliament in South Africa.11 While this first case is well advanced, there were no jurisdiction or merits awards issued at the time of publication of this article.
The second BIT case filed against Mozambique commenced in July 2017, pursuant to the Italy-Mozambique BIT 1998.12 The claimant is an Italian construction company, which has been involved in large-scale highway construction and other infrastructure projects in Mozambique.13 The proceedings are still in their initial phase and will take a number of years to be concluded.
Mozambique's participation in those two proceedings demonstrates that the country is engaging with the systems in place to protect foreign investment.
Mozambique's engagement in BIT disputes, combined with its potential willingness to assist cross-border investments through the signing of IGAs, is good news for investors who wish to invest in the country's infrastructure and have regional aspirations.
RESOURCES INFRASTRUCTURE AS LEVERS TO ECONOMY DIVERSIFICATION AND INTEGRATION
While the short- to mid-term economic development of Mozambique and many other African countries remains linked to exploration of natural resources, the development of infrastructure to exploit those resources will remain a crucial enabler of that development, economy diversification and regional integration.
Infrastructure projects associated with exploration and extraction of mining resources can promote economic and social impacts for the countries involved. In addition to traditional project documentation, BITs and other well-known treaties and conventions, investors in cross-border or regional projects could also look into creative structures such as IGAs, which place their projects in the context of a wider cooperation between two or more states.
In some cases, these creative structures will make the difference between whether a project can proceed or not.
1 World Development Report 1994: Infrastructure for Development.
2 BMI research, Mozambique Country Risk Report, Q2 2018.
3 ITC Trade Map.
4 BMI research, Mozambique Country Risk Report, Q2 2018.
5 BMI research, Mozambique Mining Report, Q3 2018.
6 BMI research, Mozambique Country Risk Report, Q2 2018.
7 BMI research, Mozambique Country Risk Report, Q2 2018.
10 Oded Besserglik v Republic of Mozambique (ICSID Case No. ARB(AF)/14/2).
11 ‘Businessman sues SA too', The Citizen, 3 February 2018.
12 Cementisti CMC Di Ravenna SOC Coop, CMC MuratoriCementisti CMC Di Ravenna SOC Coop ARL Maputo Branch and CMC Africa, and CMC Africa Austral, LDA v Republic of Mozambique (ICSID Case No. ARB/17/23).
13 Z. Williams, ‘Mozambique faces another investment treaty arbitration', IA Reporter, 17 July 2017.
Bruna Beloso, associate at White & Case assisted in the development of this publication.