33695 Pilot Investment Climate Assessment Mozambique Industrial Performance and Investment Climate 2003 John Nasir, Gilberto de Barros, Dileep Wagle, Manju Kedia Shah, Chad Leechor, Pradeep Srivastava, Alan Harding, Vijaya Ramachandran August 2003 Confederaçao Das Associaçoes, Economicas de Moçambique (CTA), Centro De Promoçao De Investimentos (CPI), Regional Program on Enterprise Development (RPED), Africa Private Sector Group, The World Bank Contents 2 Acknowledgments 3 Executive Summary 4 1. Introduction: The Policy Environment in Mozambique 9 2. Mozambique's Investment Climate in an International Perspective 16 3. Investment Climate at the Sub-National Level 52 4. Policy Recommendations 59 Appendix A: The Sample of Firms and Firm and Owner Characteristics 76 Appendix B: Results of the Probit Estimations for Investment and Access 93 Appendix C: Firm Registration Procedure 95 Appendix D: Timber Export Procedures 99 Appendix E: The Mozambican VAT Refund Policy 101 Acknowledgments 3 The Mozambique Investment Climate Assessment significant responses from the private sector. Mariamo was a joint effort of the World Bank Group's Regional Carimo, the Executive Director of PoDE, organized Program on Enterprise Development (RPED), the local financial support, which made the survey Confederation of Business Associations of possible. Mozambique (CTA), PoDE/CAT, and Centro De Louis Sitoe and Olga Massango of the Ministry of Promoçao De Investimentos (CPI). John Nasir led Industry and Trade were supportive in designing the the RPED team comprised of Chad Leechor, Manju study and guiding its implementation. Kedia Shah, Pradeep Srivastava, and Vijaya The team is indebted to the World Bank's Country Ramachandran from the World Bank, and Apolinario Director, Darius Mans, and the members of the World Panguene coordinated the survey for CTA, along with Bank's resident mission for their support--in particular Alan Harding. The discussion of policy reforms was Gilberto De Barros, Lurdes Malate, Leopoldina provided by Gilberto de Barros and Dileep Wagle. Nhantumbo and Brad Roberts. Hooman Dabidian provided valuable analytical The survey would not have been possible without support and cross country comparison. Additional the cooperation and willingness of the managers and input on the survey was provided by Albert Zeufack, owners who took their valuable time to speak with Ximena Clark and Tilahun Temesgen from the the interview teams. Finally, regional private sector Development Economics Research Group of the organizations such as ACIS in Sofala provided World Bank. assistance and information needed for a richer The field team included Paulino Bernardo, Sheila understanding of the business environment. Bolha, Benedito Jose Dgedge, Nadya Faquir, Finally, the RPED team would like to thank Sherri Goncalo Ferrao, Melissa Himes, Joao Jeque, Emanuel Archondo, James Emery, Peter Mousley, Axel Peuker, Mabumo, Benedito Marino, Faridah Muhammed, Uma Subramanian, and Andrew Stone for detailed and Damiao Xavier. Patricia Rajeriarson provided comments on a review draft of this report. comparative information in Madagascar. Gerry Maketos of PoDE/CAT rendered invaluable guidance and was instrumental in the achieving Executive Summary 4 For Mozambique to achieve its ambitious poverty problems in Mozambique. Over 84 percent of the reduction goals, it must maintain an annual growth survey sample reported that the cost of finance was a rate of 8 percent over the next seven years. While this major problem, and it was the most-often-cited is within the range of recent performance, sustaining problem overall. Very few firms are using external such high growth in the face of declining aid flows is credit. In the sample enterprises relied on their own an enormous challenge. It is not enough to rely on funds for 90 percent of working capital requirements capital-intensive mega projects. Alleviating poverty and almost two-thirds of their investment needs. requires a high level of broad-based private sector Only 12 percent of respondents had bank investments, which has been constrained by the weak overdrafts, while 29 percent reported having bank investment climate. To this end, the Confederation of loans. Almost all respondents declared that collateral Business Associations of Mozambique (CTA) and the was a requirement for their most recent overdraft or World Bank's Regional Program in Economic bank loan. The amount required as collateral was Development (RPED) updated their 1998 survey of quite high, averaging almost 140 percent of the credit manufacturing firms to assess progress and identify amount. remaining constraints to private sector growth. Most firms that did not have bank loans had never applied for one. The most important reason given for Key Constraints to Investment and this was high interest rates. The nominal interest rate Productivity for bank credit reported by the sample firms is quite From an analysis of 193 firms surveyed in 2002, high, averaging just over 28 percent. Given the issues related to inadequate finance emerged as very inflation rates, real interest rates are around 13­18 severe constraints to doing business in Mozambique. percent, high by international standards. Lack of access to and the high cost of finance were cited by 78 percent of the sample as Policy Uncertainty & Government large or severe. The second most often cited category Regulation was the uncertain policy environment and Corruption. It is widely believed that firms have to regulatory/administrative barriers overseen make informal payments to public officials "to get by the government. The overall policy environment things done," and corruption was perceived as a large (including matters such as taxes and corruption) or severe problem by 64 percent of the sample. Firms ranked more troublesome than the costs imposed that admitted that payments were needed, claimed by regulatory and administrative procedures (such that the annual median amount for a typical firm like as business licenses, labor regulations, access to theirs was 5 percent of annual sales. land). However, difficulties with government policy and regulation were perceived as more significant Legal System. The courts and legal system in than inadequate infrastructure. Given the Mozambique are notoriously unreliable, which underdeveloped state of Mozambique's infrastructure, significantly increases the risk and uncertainty of this amply illustrates the importance of government doing business. In the World Bank's Doing Business actions. data base, Mozambique ranks 79 out of 84 countries on how long it takes to resolve a business dispute; Finance. The lack of affordable finance from the time a suit is filed until a judgment is continues to be one of the fundamental business enforced. Executive Summary 5 Taxes administration and rates. Tax administration average of 17 days to clear a shipment, with the and tax rates were heavily criticized. Some 47 percent average longest time of 21 days. During the of the sample said that tax administration is either a interviews, firm owners and managers put particular major or very severe obstacle to doing business, and emphasis on the process of clearing trucks arriving in 55 percent said the same for tax rates. In addition, Maputo from South Africa. The average reported time managers reported that they believe the average firm to clear a truck was almost 7 days (the median was 5 only reports 67 percent of its profit. Delays in VAT and days). Such long delays negate the advantage of other refunds owed to the private sector are also a close proximity to South African markets. serious problem. In the sample, over 24 firms reported being owed government refunds and the average Labor Market Regulation. In the most recent survey, amount was more than 13 percent of their annual almost 37 percent of the firms who responded to the sales. Those companies that received refunds question said that they retained more workers than reported having to pay large bribes and that it took was optimal. On average these enterprises would them an average of 99 days to receive their refunds prefer to retain only 63 percent of their current work (the median time was 30 days). force. The lack of labor flexibility is most important for foreign investors, with almost 45 percent of the Regulatory and Administrative Barriers foreign-owned firms in the sample claiming they retain Registering Businesses. One widely recognized excess workers, compared to only 17 percent of indicator used to measure the bureaucratic burden of Mozambican firms. Privatized companies were nearly a given investment climate is the time and money two and half times more likely than always-private required to start a business. Based on interviews with firms to have a work force larger than their ideal. local consulting firms, experienced consultants are Mozambican labor regulations require that a able to register a new firm anywhere from three and a retrenched worker receive up to three months pay for half to five months, depending on the nature of the every two years of service. Although workers who are business, how politically connected a firm is, and how terminated for just cause are not eligible for these much a firm is willing to pay. Results from the survey benefits, the process of terminating a worker can be support this claim. For the few firms that could drawn out in the courts for such a long time that often accurately recall how long it took, the median time to companies relent and pay severance to workers register was 138 days. Consultants charge in the caught stealing or otherwise violating terms of their range of US$1,000­$1,500 for their services, which is employment. In addition, 26 percent of survey then added to the fees required by the government respondents said that hiring expatriates was a agencies. significant problem and that on average it took them 90 days and almost US$400 to obtain a work permit. Import/Export Process. For the 2002 sample, the median time it took to clear goods after they arrived at Land. Obtaining land in Mozambique can be a the port of entry was 7 days, but there was a wide major problem. All land is officially owned by the state, variation and the average was almost 12 days. and private companies can only seek the right to use Underscoring how unpredictable the importing it. The cost of gaining access to land is best process is, the average longest time for clearance illustrated by the experience of the few firms in the reported in the last year was 18.5 days. Exporting survey that had recently tried to acquire land-use firms reported that in the last year, it took them an rights. For this small group of companies the process Executive Summary 6 took on average almost 12 months and cost over The average investment to capital ratio (amount $18,000. invested by firms relative to the replacement value of capital) was not very large, about 7 percent. Most Infrastructure Constraints investments are. The investment that does take place In the past 15 years Mozambique has received vast id small, being undertaken by firms using internal amounts of aid directed at improving the funds, and directed almost entirely toward increasing infrastructure, which is beginning to make an impact. production or replacing worn machinery with current However, poor infrastructure remains a serious drag technologies. Very few resources are devoted on competitiveness. to improving production processes or introducing new products. Although the majority Power. Electricity ranks as the most serious of firms are currently financing investments out of infrastructure problem for the Mozambican internal funds, access to external credit does help manufacturing sector, with nearly 64 percent of firms invest. Some firms with access to bank finance respondents ranking it as a major or severe problem. (presumably larger firms) are undertaking much More than twice as many firms ranked power as the larger investments. This observation underlines the number one infrastructure problem as did those that fact that bank finance is insignificant in its coverage prioritized the next most important problem--the but highly significant in its impact. condition and density of roads. About 23 percent of Industrial growth in all countries is inextricably Mozambican firms own generators. The median firm linked to growth in total factor productivity. The in the sample suffered power interruptions about five performance of firms in Mozambique is analyzed by times a month in the last year, and the median loss to examining the productivity of key factors--labor and production from power outages was 2 percent of capital--and then by looking at total factor sales. productivity. The evidence shows that firms in Mozambique, on average, have very low labor Transportation. Transportation remains a significant and capital productivity compared to other factor in the high cost of doing business in countries in Sub-Saharan Africa. Mozambique. While considerable progress has been Value added per worker is an approximate made in strengthening the transportation network, it is measure of labor productivity and is the lowest in still costly to ship goods. Freight forwarders in Beira Mozambique of all the eight countries considered. report that shipping a container to Harare is almost 30 Given the low skill levels of the work force in percent more expensive than sending it two-thirds the Mozambique's manufacturing firms, an important area distance to Maputo. of policy attention is worker training--a critical input for enhancing worker productivity. However, firms in Investment, Productivity & Growth the 2002 survey showed ambivalence toward worker The key constraints discussed above--lack of training. Also, an overwhelming majority of external finance, unsupportive policy environment, responding firms cited inability to define or prioritize administrative barriers and inadequate training needs as a constraint. Low capital infrastructure--combine to reduce the productivity of productivity is related to the high capital intensity in labor and capital as well as the overall productivity of the manufacturing sector. Capital intensity may well each enterprise. reflect burdensome labor regulations. Some firms stated that they chose to increase mechanization in Executive Summary 7 order to avoid hiring additional labor and the · Labor Flexibility. The government must provide administrative entanglement that comes with it. more flexibility for firms to adjust their work forces How do capital and labor interact to affect overall in response to market forces, while still ensuring firm performance? Total factor productivity results protection of workers' rights. The cost of show that average firm efficiency is very low--0.38 for retrenchment is particularly a problem for large, the entire sample, (on a scale of 0 to 1). Exporting foreign-owned, and privatized firms. Labor firms, privatized firms, and foreign-owned firms regulations should be amended to allow the perform better than others. The high dispersion in payment of piece rate, which is a standard way of efficiency shows that many inefficient enterprises linking pay to productivity in most labor-intensive survive alongside some very efficient ones. This industries. situation demonstrates a lack of competitive pressure, · Expatriate Work Permits. Until an adequate local as well as market segmentation. supply of skilled workers develops, the private Sales and employment data from this survey sector must rely on expatriates for many provide only an indication of how the manufacturing specialties. The government should move quickly sector is performing. However, taken in its totality, the to make the process of employing foreign, skilled evidence suggests that growth has decelerated. workers less cumbersome; possibly adopting the Sectors consisting of older firms are finding it difficult proposal of the private sector to allow a fixed to compete in the global market, while new entrants, percentage (minimum 10) of foreign workers at the such as printing and plastics, are operating discretion of the employer. successfully. But overall manufacturing has not shown · Access to Land. The Ministry of Agriculture has strong employment creation or rapidly growing sales successfully reduced the time it takes to obtain and investment levels have been low. land, once all documentation is in place, to 90 days. The process of collecting documents Conclusions & Recommendations should be streamlined to involve fewer institutions, While there has been much progress since 1998, be less complicated and more predictable. The the government must continue efforts to create government must also move to improve land conditions in which a dynamic private sector can registries. thrive and make use of Mozambique's natural · Customs Clearance. The time it takes to clear advantages. The results of the ICA indicate that there both incoming and outgoing shipments must be needs to be additional analysis undertaken to brought in line with international standards. determine specific actions to address problems in the Particular attention should be paid to speeding following areas. clearance of ground shipments from South Africa. The government must set benchmarks for · Fostering Entrepreneurship. The government clearance times and monitor progress toward must move immediately to bring the time and cost meeting the targets. of starting a new operation in line with its · Foreign Exchange and VAT Refunds. The time it international competitors. The registration takes to make VAT reimbursements should be procedure must be simplified, expedited, and lowered to 30 days, and the government should made more transparent. CPI and other pay market rates of interest on late organizations must help new investors of all sizes reimbursements. Ultimately, to further improve the negotiate the process. competitiveness of export-oriented producers, a Executive Summary 8 system should be implemented to give them · Electricity. Almost 78 percent of the survey access to imported raw materials and sample ranked power as a severe problem, and intermediate goods at world prices, rather than firms ranked it as the biggest infrastructure having to pay VAT and heavy duties and then problem most often. As capacity utilization await refunds. increases and firms begin to engage in · Improving the Financial Sector. Continued continuous production, erratic power supply will efforts must be made to strengthen the balance become an ever-increasing constraint. Steps sheets of banks. In addition, there is significant should be taken to improve the consistency of crowding out of private borrowing by government electricity provision. borrowing. The government should implement · Transportation. Improved transportation facilities policies designed to encourage the commercial are needed to reduce the cost of shipping and banking system to hold a larger portion of their improve competitiveness on the world market. assets as commercial and industrial loans. Steps Road transportation continues to be costly. The to improve accounting standards and create government should complete the concessions for functioning credit bureaus and property registries Maputo port and the Ressano Garcia rail line, the will help foster a safer lending environment. Nacala port and rail corridor, and extend the · Dispute Resolution. A major factor in the high concession program to other rail lines and ports. cost of external finance and lack of trade credit is The liberalization of coastal shipping, stalled since the difficulty of enforcing contracts. Efforts should 1998, should be completed quickly. be directed toward improving the efficiency of the · Telecommunications. The telecommunications judicial system and to encouraging the system has improved considerably over the last widespread use of the private system for five years. However, the government should Alternative Dispute Resolution established in complete the liberalization of the fixed and mobile 1999. The government should expedite public sectors and ensure that a strong regulator discussion of the proposed new commercial protects smaller value-added consumers and code. operators, particularly in Internet-related services. 1. The Policy Environment in Mozambique 9 Pursuing Broad-Based Growth 10 Trade 12 Reducing Aid Dependency 14 1. The Policy Environment in Mozambique 10 In spite of frequent natural disasters and economic of the business environment. Of particular importance shocks, Mozambique has been able to achieve rapid is upgrading the regulatory framework and economic growth as well as relative price stability. administrative services of front-line public sector Since 1996, real growth has been impressive, agencies. In addition, sustained efforts to improve averaging about 9 percent per year with relatively low firms' access to external sources of credit are inflation of about 6 percent. Going forward, the essential. These actions will have a major impact on macroeconomic environment will be governed largely enterprise development, while raising investment and by the implementation of the government's poverty expanding trade. The recent investment climate reduction strategy (PARPA), which envisages a survey discussed in the following chapters identified a reduction in the poverty rate from 70 to 50 percent of variety of bottlenecks that increase the cost of doing the population by 2010--an objective to be achieved business in Mozambique. Dealing successfully with within the context of a vibrant economy, low inflation, these issues is necessary to promote growth and and sharply reduced aid dependency. To realize significantly advance the poverty-reduction goals. these goals, the government will need to overcome a variety of challenges and risks. Maintaining growth is the primary challenge and is Pursuing Broad-Based Growth essential for reaching the poverty-reduction targets. Sustaining growth will require a substantially higher On the basis of existing income distribution and level of broad-based investments undertaken by demography, PARPA envisages an average growth private sector enterprises, rather than relying on rate of 8 percent per year between its inception in large-scale projects that generate relatively few and 2001 and 2010. This target growth is well within expensive jobs. Maintaining the growth momentum Mozambique's historical record of economic also calls for expanded trade and investment relations performance. Furthermore, a pipeline of "mega with regional and global markets to take advantage of projects"--with expected investments of more than $7 Mozambique's abundant natural resources, low billion (twice the country's current GDP)--has been wages, and advantageous location. Coping with the approved and is supposed to be implemented during expected sharp decline in foreign aid over the next the PARPA horizon. On the surface Mozambique few years represents a further challenge. appears well positioned to fulfill its poverty-reduction Restructuring of fiscal programs is needed to protect objectives. A closer review, however, indicates that priority poverty-reduction initiatives while reducing aid this might not be the case. dependency and maintaining price stability. Even with unwavering commitment by the Mega Projects government, meeting these challenges is made more A key government strategy in recent years has been difficult by major risk factors, including natural to attract large-scale foreign direct investment (FDI). disasters, a slowdown in world trade and investment, Mozambique has generated considerable interest the possibility of failure of proposed mega projects to among foreign investors, with more proposed mega materialize, insolvency of major banks, or an projects planned than typical African countries. These unexpected resurgence of inflation due to imperfect large-scale projects will help boost economic activity, instruments for monetary control. raising manufacturing outputs and improving trade To overcome the challenges and guard against balance, as well as increasing government revenue. the risks, the government must address critical areas As figure 1.1 shows, the completion of one of the 1. The Policy Environment in Mozambique 11 Figure 1.1 Exports as a Percentage of GDP, 1990­2001 35 30 25 20 15 10 5 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Madagascar Mozambique South Africa Tanzania Source: Statistical Information Management and Analysis, World Bank. projects, the Mozambique Aluminum project between now and the year 2010. In addition, each of (MOZAL), has already contributed to a sharp increase the jobs directly or indirectly created by these mega in Mozambique's exports and in the share of projects is estimated to cost between US$1 million manufactured goods within total exports. However, and $2 million in terms of initial investment outlays. By the net effect on the balance of payments has been contrast, the recent CTA/RPED survey found that the much more modest. The export earnings are offset to average capital per worker of existing firms in a large extent by a sharp increase in imports and by Mozambique is about $15,000, based on replacement the payments of interest and dividends to investors. value of assets. In other words, with a given amount of The mega projects are important sources of investment funds, an average firm in Mozambique growth and will lead to increased output and exports. can create 100 times as many jobs as the mega However, they are not sufficient to provide the scale of projects. job creation needed for the massive poverty reduction envisaged by PARPA. According to a recent review, Policy Reforms and Privatization the current and planned mega projects have In the early 1990s and before the arrival of the mega projected investments of about US$10 billion, almost projects, the government undertook extensive reforms two and a half times current GDP. But they would only to stabilize the economy, remove controls, and generate about 20,000 jobs in Mozambique: 5,000 privatize state-owned enterprises. The privatization within the companies involved, and another 15,000 was broad and swift, with over 850 companies among suppliers and service providers.1 transferred from government ownership within a few To put these figures into perspective, the 20,000 years. These reforms provided an impetus for a strong jobs represent less than 1 percent of the 3.7 million postwar economic rebound, which resulted mainly new workers projected to enter the job market from firms bringing idle production facilities back on- 1. The Policy Environment in Mozambique 12 line. In the manufacturing sector, the average rate of Furthermore, agriculture, which provides livelihood to capacity utilization rose from about 20 percent in 1989 about two-thirds of the population, has grown more to about 48 percent in 1998.2 But according to the slowly than other sectors. In the same period its share recent survey, this rate has stayed relatively stable in GDP fell from 30 percent to less than 20 percent since then. (table 1.1). Fundamental reforms of the financial system, Because of low wages and an advantageous however, were not as extensive. Banking practices location, Mozambique's manufacturing sector has remained inadequately supervised, resulting in major potential for strong growth, but it remains only a small cases of banking insolvencies and public loss of part of the economy. Since the mid-1990s, its share confidence. Financial depth, which reflects the has remained relatively constant at about 10 percent banking system's ability to extend credit, showed of GDP, and it is highly concentrated. The food and initial signs of improvements in the early 1990s, with beverages sector alone accounts for over 38 percent the M2/GDP ratio rising to about 30 percent, before of manufacturing production. Aluminum production by collapsing again below 25 percent of GDP in the Mozal is another 23 percent. Thus, food and second half of that decade. Meanwhile, little progress beverages along with metallurgy and minerals make has occurred with respect to funding options outside up close to 73 percent of manufacturing output. the banking system. The use of supplier (trade) credit, Meanwhile, important manufacturing subsectors such discounting of bills, and financial or operational leases as textile, garments, and footwear, which have served is rare. Business transactions are primarily cash- many developing countries as a platform for exports, based, which increases the costs to local firms and have actually floundered in the face of increasing reduces the overall efficiency of the payments system. international competition. New investment has been modest even during the high growth period of the 1990s, when private investment accounted for merely 2 to 3 percent of Trade GDP.3 Going forward, it will be very difficult to achieve similar growth without a substantially higher rate of Due to the limited size of the domestic market, greater investment. Idle capacity has been largely drawn penetration of both regional and international export down or depreciated through wear and tear, as well as markets represents the best long-term growth obsolescence. prospect for Mozambique's private sector. As a result of its rich endowment and low wages, Mozambique Structural Change has considerable potential for expanding a broad Overall, the rapid growth observed in recent years, range of exports (including tourism) and attracting even if it is maintained, may not have the desired more FDI. With an increasingly liberal trade regime impact on poverty reduction. As mentioned above, the and prudent exchange rate management, the mega projects currently driving much of the growth macroeconomic environment is also conducive to have limited employment effects. Another major growth. However, this potential has not yet been source of recent growth has been the construction realized in most sectors, and exports remain primarily industry, which since 1996 has seen its share of GDP resource based and agricultural. Recent gains in rising from 6.6 to 11.7 percent. The industry, however, Mozambican manufactured exports (and the flows of has benefited primarily from the investment phase of foreign direct investments) are mostly confined to the Mozal and aid-funded reconstruction projects. Thus, mega projects. Outside of aluminum and electricity, this growth rate may not be sustainable over time. the country's exports have remained generally 1. The Policy Environment in Mozambique 13 Table 1.1 Structure of the Mozambican Economy, 1996­2001 1996 1997 1998 1999 2000 2001 Agriculture 30.5 30.2 27.2 25.4 20.2 18.8 Fishing 4.0 3.9 3.0 2.5 2.0 1.9 Industry 16.0 17.4 21.5 21.8 22.7 24.8 Mining 0.2 0.3 0.3 0.1 0.2 0.3 Manufacturing 8.7 9.6 11.0 11.0 11.3 10.7 Electricity and water 0.5 0.8 1.9 3.0 2.4 2.1 Construction 6.6 6.7 8.3 7.7 8.7 11.7 Services 49.5 48.5 48.3 50.3 55.1 54.4 Commerce 23.2 22.5 21.5 21.1 20.3 17.2 Repair services 0.6 0.6 0.8 0.8 0.9 0.7 Restaurants and hotels 0.8 1.2 1.1 1.2 1.4 1.1 Transport and communication 8.6 8.9 9.2 10.2 12.6 16.0 Financial services 3.7 3.2 2.6 2.1 4.0 4.3 Real estate rentals 2.7 2.6 2.4 2.2 1.9 4.6 Corporate services 1.3 1.1 1.3 0.8 0.8 0.7 Government services 4.4 4.5 5.1 6.8 7.1 7.1 Other services 4.1 3.7 4.3 5.1 6.0 5.6 Source: Mozambique, IMF Country Report No. 02/139, July 2002. unchanged in the past five years (table 1.2). discouraging many small- and medium-scale Significantly advancing the poverty reduction goals investors from starting businesses. The high cost of will require increasing labor-intensive manufactured doing business is illustrated by the fact that local exports and developing more linkages between the producers of simple consumer goods, such as mega projects and local producers. The country garments and many food products (which enjoy a continues to rely heavily on imported consumer tariff protection of about 30 percent plus natural goods, as well as imported raw materials and protection from high transport costs), are nonetheless intermediate goods for local manufacturing unable to compete effectively with similar imports. production. There are, however, positive signals coming from Mozambique's apparent advantages seem to be local producers. In the 2002 survey, more than 10 outweighed by the impediments that firms face at the percent of the manufacturing firms exported a operational level. As discussed in the following significant share (54 percent on average) of their chapters, local producers operate in an environment outputs. Most of these exporters are processing of burdensome regulations administered by public agricultural or forestry resources, with a few garment sector agencies. These impediments have firms that engage exclusively in export production substantially increased the costs of local production, under quotas. About one-third of the sample firms' 1. The Policy Environment in Mozambique 14 Table 1.2 Key Exports from Mozambique, 1997­2001 (US$ million) Product Group 1997 1998 1999 2000 2001 Fish 84.4 66.4 74.8 100.7 102.2 Prawns 74.9 57.4 64.6 91.2 82.2 Agriculture (excl Fishery) 102.9 88.8 87.0 83.4 66.3 Wood 10.1 5.2 9.2 14.6 12.6 Textiles and Clothing 10.0 10.0 5.8 6.7 14.1 Rubber Products 0.7 3.6 1.1 0.3 4.8 Footwear 0.7 0.8 0.9 0.6 0.3 Minerals and Fuel 3.8 1.1 7.8 11.0 6.2 Machinery 5.3 13.0 6.6 4.7 6.5 Transportation Equipment 4.2 3.7 5.9 5.0 5.8 Miscellaneous 7.6 15.1 8.9 10.8 10.7 Subtotal 229.6 207.6 208.0 237.8 229.5 Aluminum 0.0 0.0 0.0 60.2 473.4 Subtotal (with Aluminum) 229.6 229.6 208.0 298.0 702.9 Electricity 0.0 37.0 62.8 67.0 70.0 Total 229.6 244.6 270.9 364.9 772.9 Source: Nathan Associates Inc., Mozambique--Mainstreaming Trade: A Poverty-Focused Strategy (Washington, DC: U.S. Agency for International Development, 2002. exports are shipped to destinations within Africa, to 8 percent for the rest of Sub-Saharan Africa while the rest is destined to broader world markets. (excluding South Africa). The high level of external However, for the survey sample, only 6 percent of total assistance has enabled the government to initiate far- manufacturing sales in 2001 were to export markets. reaching reforms, undertake postwar rehabilitation, Thus, there is enormous scope for further export and deal with the exigencies of natural disasters. For expansion. most of this period, foreign aid covered about half of public expenditures and helped restore budgetary and external payments balances. Reducing Aid Dependency In spite of the aluminum exports and large inflows of foreign aid relative to the economy and to the local Mozambique has benefited enormously from foreign financial sector, Mozambique has been able to ward aid. In the past decade, aid has averaged nearly 12 off undue currency appreciation (the so-called Dutch percent of GDP in Mozambique, compared to about 6 Disease). Many aid recipients, particularly in Africa, 1. The Policy Environment in Mozambique 15 Figure 1.2 Real Effective Exchange Rate 150 125 100 75 50 25 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Madagascar Mozambique South Africa Tanzania Source: Statistical Information Management and Analysis, World Bank. have seen the competitiveness of their exports eroded balances, public expenditures will need to fall in step by this inadvertent by-product of aid.4 But, as figure with the decline in foreign aid, except to the extent 1.2 shows, after allowing for differences in local that domestic resources can be mobilized. If actual inflation, the Meticai has remained competitive or foreign aid falls short of expectations, a greater fiscal become more so against the currencies of regional effort would be needed to narrow the deficit. Since trading partners, including South Africa, Tanzania, 1998, the expenditure trend has risen sharply upward, and Madagascar, that have not received as much while revenue mobilization shows only a modest gain. foreign aid. Although much of the recent rise in spending is But the biggest challenge lies ahead. Over time, attributable to flood relief and banking re- the flow of aid to Mozambique is expected to move capitalization, such events cannot be ruled out in the toward the regional average. The transition is already next few years. The goal of increased revenue underway. After a surge in response to the floods of collection demands sustained economic growth, and 2000, external assistance is moderating and here improving private sector performance is critical. projected to decline from more than 10 percent of GDP today to about 7.5 percent in 2005. Can the country cope with a decline of resources at the Notes disposal of the government without sacrificing the priority programs under PARPA, macroeconomic 1. Anderson (2001). stability, and the private sector's fragile growth 2. Biggs et al. (1999). prospects? 3. Biggs et al. (1999). The answer depends on the government's fiscal 4. See, for example, Elbadawi (1999). effort in the next few years. To protect macroeconomic 2. Mozambique's Investment Climate in an International Perspective 16 Key Constraints to Investment and Productivity 17 Investment, Productivity and Growth in Mozambique 35 2. Mozambique's Investment Climate in an International Perspective 17 Key Constraints to Investment and · A particular effort was made to cover the largest Productivity firms in each sector (usually no more than 3 to 5 firms per sector and city), consisting of firms with The key constraints to doing business in Mozambique more than 100 workers. By contrast, relatively few were identified by means of a survey, which was microenterprises were sampled: the minimum designed to be a semi-random sample of establishment size covered by the INE register is manufacturing firms in Mozambique stratified by the theoretically 10 employees. Some smaller sector, size, and location of firms. The methods used unregistered firms were also visited, particularly in to build the 2002 sample of 193 firms were as follows: the Maputo/Matola region, but the survey was not designed to cover informal manufacturing · The survey team attempted to revisit firms that enterprises. had previously been interviewed as part of the 1998 RPED/CTA survey, with the assumption that Analysis of the survey data, described in the the firms had not ceased operations or changed following chapters, shows that the Mozambican activity and were willing to be interviewed (87 of manufacturing sector has not lived up to its 152 firms in the 1998 sample were successfully expectations. Despite inexpensive labor, re-interviewed). macroeconomic stability, and a location along · Replacement firms and additional firms were then important transportation corridors, growth outside of selected from the National Statistical Institute the mega projects has remained flat. Firm-level (INE) list of all registered establishments, which productivity and firm growth are also low. It appears includes a classification by city and sector, as that the primary cause of these problems is the poor well as some information about total employment business environment. When firms were asked about in each establishment. their perceptions of business problems, responses fell · In each city visited, a target sample size and generally into three categories: the high cost and lack composition by firm sector and size was of external finance, uncertainty imposed by calculated, based upon the INE sample frame. government policies and the lack of availability of Firms were then chosen from the 1998 RPED list good infrastructure. These inefficiencies have and randomly from the INE replacement list until discouraged investment, restricted attempts by the the target sample size had been reached. private sector to expand markets, and significantly · Five major cities were visited: Maputo City, increased the costs of doing business. Comparisons Matola, Chimoio, Beira, Nampula City, and of firm productivity between Mozambique and other Nacala. It was not possible to revisit the firms countries reinforce the notion that Mozambique's previously visited in Quelimane due to time business environment has created a significant drag constraints. on its private sector. · The sectors covered were based on the CAE Table 2.1 rank-orders the perceptions by the (Classificação das Actividades Económicas) percentage of the sample that ranked a given classification used by INE, which is similar to the problem as a large or severe. We see that on average ISIC-rev3: Food and Beverages (class 15), problems with finance are cited as large or severe by Textiles and Garments (35), Wood (20), Metals a larger percentage of respondents than any other (28), Machinery (29), Furniture (36), Other (30). group. Problems with finance on average were cited by 78 percent of the sample as large or severe. The 2. Mozambique's Investment Climate in an International Perspective 18 Table 2.1 Percentage of Firms Ranking Issues as Problems No or Minor Moderate Large or Severe Type Problem Problem Problem Problem Credit (Average) 78 Cost of financing 12 4 84 Access to domestic credit 18 7 75 Access to foreign credit 25 1 74 Government (Average) 49 Policy Uncertainty (Average) 59 Corruption 24 12 64 Macro-instability 22 15 63 Anti-competitive practices 27 13 60 Economic policy uncertainty 33 9 58 Tax rates 28 17 55 Crime theft and disorder 31 15 54 Administrative Barriers (Average) 39 Skills and education of workers 40 10 50 Tax administration 36 17 47 Customs and trade regulations 35 20 45 Labor regulations 45 17 38 Business licenses 61 11 28 Access to land 67 6 27 Infrastructure (Average) 37 Electricity 23 13 64 Transportation 58 15 27 Telecommunications 60 20 20 Source: CTA/RPED Survey 2002. next most often cited category were problems Mozambique's infrastructure this amply illustrates the associated with government. Policy uncertainty was significance of the burden of government. much more of a concern to the private sector than costs imposed by regulatory and administrative Access to Finance procedures. Policy uncertainty was perceived as a In Mozambique, as in several low-income Sub- significant set of problems by more managers than Saharan countries, the level of credit relative to the was infrastructure. Given the underdeveloped state of GDP is low (18 percent). Among the causes of low 2. Mozambique's Investment Climate in an International Perspective 19 intermediation are high interest rate spreads (which progress in improving access to finance for the reached 19 percentage points in 2002), high and private industrial sector (for a comparison of sources volatile real interest rates (currently also at around 20 of finance with China and India, see table 2.2). percent in meticais) as well as a generally poor legal and institutional framework that limits the scope for Utilization of Bank Credit. The Mozambican sound lending. A decomposition of bank spreads manufacturing sector uses an unusually low level of reveals that 44 percent of bank spreads are explained external finance. In the sample, enterprises relied on by loan-loss provisions and 35 percent by high their own funds for 90 percent of working capital overhead costs. The analysis also reveals that high requirements and almost two-thirds of their investment loan losses in the largest Mozambican bank drive up needs (table 2.2). The main source of external credit, spreads in all banks. however limited, is locally-owned commercial banks, Although inflation has declined from the very high which provide only 7­8 percent of the sample firms' levels attained during the mid-1990s, inflation volatility financing needs. Trade credit and informal loans are remained substantial during the last three years. As a negligible, and informal funds from family and friends result, real lending rates in meticais remained high also appear to be insignificant.5 These figures, (with intermediation spreads of about 20 percentage however, may be misleading. When interviewed, points) and highly volatile. Moreover, the relatively managers often do not make the distinction among unattractive real deposit rates in meticais (given the retained earnings, funds from other businesses they high uncertainty), the increasing loan dollarization, own, family funds, or other informal or internally and the very high share of non performing metical generated funds. Still, it is clear that trade credit and loans all suggest that the volatility of the metical has formal external finance play only a limited role in limited the scope for intermediating in local currency financing firms' operations in Mozambique. and increased the risk associated with such In the 2002 survey, only 12 percent of respondents intermediation. had bank overdrafts, while 29 percent reported The lack of affordable finance continues to be one having bank loans. In comparison, almost 77 percent of the fundamental business problems in of the sample in a 2001 survey in Nigeria had some Mozambique. Over 84 percent of the survey sample form of bank credit. The level of bank credit in reported that the cost of finance was a major problem, and it was the most-often-cited problem overall. Because of high costs and procedural delays, very Table 2.2 International Comparison of Top few firms are using external credit, and most are Sources of Finance for Investment forced to rely on their own funds for both working capital and investment. In addition, the Mozambican private sector faces severe strains on their cash flow. Mozambique China India Companies have large amounts of funds tied up in Internal funds 64.9 51.5 30.4 raw materials and finished goods inventories, overdue Bank Loans 10.1 20.6 36.1 payments, and even refunds owed by the Trade Credit 0.0 4.1 -- government. Thus, inadequate external finance, -- Not available. combined with extraordinary demands on internal Sources: Mozambique data from CTA/RPED Survey, funds, inhibits investments in profitable opportunities. 2002; China and India data from World Bank Investment Climate Assessments. The recent survey suggests that there has been little 2. Mozambique's Investment Climate in an International Perspective 20 Mozambique is also well below that found in non- amount of internal funds and assets for collateral--not African countries whose goods compete with by opportunities. Mozambique's on the world market. For example, 46 The distribution of use of bank finance in percent of Chinese firms report having access to bank Mozambique, whether in terms of loans or overdrafts, loans, and 22 percent have access to overdrafts. The depicts patterns found widely elsewhere. It is pattern in Mozambique is also unusual because in consistent with theoretical predictions that smaller most countries, banks typically extend overdraft firms face greater barriers due to high transactions facilities to loan recipients because firms found costs related to problems of information, creditworthy for term loans should be creditworthy for communication, and enforcement. Table 2.4 shows very short­term overdraft facilities.6 the share of firms receiving bank credit by firm size. The 1998 CTA/RPED survey had similar findings, The survey results merely confirm the general belief with only around a third of the sample utilizing bank that small firms usually do not have access to external loans and very few firms, mostly foreign-owned, had credit, but it is worth reiterating that utilization of bank true overdraft facilities (i.e., lines of credit based upon credit for financing working capital requirements is firm performance and not secured by collateral). More quite low across all size categories. than a third of the overdraft recipients in the present A multivariate regression analysis of determinants survey were foreign-owned firms. Access to overdraft of firm access to bank credit confirms that large firms facilities continues as a problem for manufacturing are more likely to receive bank credit (see table B.1 in firms in Mozambique. There are few provisions for appendix). Size is strongly significant in the probit credit secured by an analysis of a firm's potential. regression, while other factors such as location, Rather, credit is secured by high levels of collateral. sector, and privatization status do not appear to Therefore, as shown in table 2.3, a company's ability matter. The age of firms is also insignificant. However, to invest and conduct business is restricted by its it is interesting to note that firms established prior to Table 2.3 Relative Importance of Different Sources of Finance (% of total requirement, averages across all firms) Source Working Capital New Investments Internal funds/retained earnings 90.0 64.9 Local bank (overdrafts/loans) 6.9 8.2 Foreign-owned bank (overdrafts/loans) 0.4 1.9 Leasing arrangement 0.2 0.0 State 0.0 0.0 Trade credit 0.5 0.0 Credit cards 0.0 0.0 Equity: sale of stock 0.5 1.1 Friends and family 0.6 0.4 Informal sources (e.g., money lender) 0.0 0.0 Source: CTA/RPED Survey, 2002. 2. Mozambique's Investment Climate in an International Perspective 21 Table 2.4 Use of Bank Finance by cover their inventories. But managers in the Firm Size, 2002 CTA/RPED survey reported that the majority of their (% of firms in each size category) business is conducted on a cash basis. Only 40 percent of firms said that they sell any of their products on credit, with the average share of total Size Overdraft Loans sales made on credit is only about 34 percent. This Micro 0.0 16.7 compares to developed countries where 30-day credit Small 5.5 18.2 is standard practice for all sales. In Nigeria, over 75 Medium 10.3 35.9 percent of the sample either gave or received trade Large 21.9 40.6 credit. Very large 41.2 58.8 Firms do not provide trade credit because they Source: CTA/RPED Survey, 2002. themselves are cash constrained and because of the difficulty in collecting payment. Managers reported 1992 were much more likely than new firms to have that when they do sell on credit, the standard term is bank credit. This suggests that information and 30 days. But on average it takes close to 49 days to enforcement problems are so large that firms require actually collect, and almost 15 percent of their sales is long-established contacts and strong reputations to tied up in overdue payments. Given the expense and be able to obtain bank finance--yet another indication unreliability of the judicial system, most firms' only of the difficulty of entering the Mozambican market. recourse in the face of nonpayment is to convert the debtor to a cash customer or terminate the business Trade Credit and Internal Funds. Mozambican relationship altogether. Consequently, companies in companies are forced to finance the vast majority Mozambique provide credit only to long-standing of both their investments and working capital needs customers, when there is recourse to an alternative from internal sources, yet firms face extraordinary dispute resolution system, or when they are desperate demands on their cash flow. A major factor is the lack for sales.7 of trade credit. In most economies, companies As shown in table 2.5, a smaller proportion of finance a large portion of their working capital large firms sell on credit than do small firms. Since requirements by balancing accounts receivable with large firms have better access to external credit, it accounts payable and relying on supplier credit to would make sense for them to pass along this credit Table 2.5 Percentage of Firms Selling on Credit Size Category Share of Firms Mean/Median Amount (Number of Employees) Selling on Credit Sold on Credit Less than 25 19 46/30 25 than 49 59 45/50 50­99 49 44/50 100­199 50 49/40 200 and More 22 83/90 Source: CTA/RPED Survey, 2002. 2. Mozambique's Investment Climate in an International Perspective 22 to their smaller partners in the form of supplier credit. had never applied for a loan reported that either they However, it appears that large firms often have more did not want to take on debt or interest rates were too market power than smaller firms and can avoid high. Very few companies cited procedural hurdles. In providing trade credit in this high risk environment. In the recent survey the findings are similar. The most the sample, the few very large firms selling on credit important reason remains high interest rates. But there were international exporters who sold almost is a distinct strengthening in the perception that completely on credit to regular customers or parent application procedures are cumbersome, with almost companies. Smaller firms often must provide credit or half the respondents citing it as a reason for not lose sales. The very smallest firms, however, usually applying for bank loans (table 2.6). operate completely on a cash basis. The burden of high collateral is highlighted in Due to the difficulty collecting payment and table 2.7. Almost all respondents declared that assessing credit risk, most managers said that they collateral was a requirement for their most recent are unwilling to extend credit to distant customers who overdraft or bank loan.8 Furthermore, the amount they cannot closely monitor. Some managers reported required as collateral was quite high, averaging that they cannot expand their sales because they will not extend trade credit outside of their immediate Table 2.6 Reasons Why Firms Did Not Apply vicinity. The lack of credit information and the difficulty for Bank Loans of enforcing contracts lead to the low level of trade credit, which constrains interregional trade and keeps firms from growing to optimal size. % of In addition to the lack of trade credit, firms' respondents internal funds are also strained by the need to keep Interest rates too high 76.1 large inventories. The median company in our sample Collateral requirements too stringent 50.5 kept a 30-day supply of raw materials on hand and Cumbersome application procedures 48.6 almost 21 days of finished goods. Companies keep No need 33.0 such large inventories because of the delays in Corruption in bank credit allocation 8.3 receiving raw materials caused by customs, irregular Against my religion 3.7 shipping, and long distances to suppliers. Managers Source: CTA/RPED Survey, 2002. in the sample reported that it would take them almost 27 days to obtain replacement materials if their main supplier failed to deliver. The median was only 10 Table 2.7 Ratio of Collateral Value to Credit days, but for some goods the wait could be as long as Amount, by Firm Size one year. Size Mean Impediments to Accessing Bank Credit. In Small 141.3 the 1998 survey, most firms that did not have bank Medium 174.5 loans had never applied for one. Only 8 percent of Large 126.8 firms reported the rejection of a loan application. A few Very Large 107.0 firms did not need bank loans, relying instead on All 130.5 parent companies. Still others did not seek loans due to low levels of operations. But the majority of firms that Source: CTA/RPED Survey, 2002. 2. Mozambique's Investment Climate in an International Perspective 23 almost 140 percent of the credit amount. In China the show any specific trend vis-à-vis firm size, except for average was only 86.8 percent. The ratio of collateral the largest firms. Smaller firms do not appear to be to the credit facility is higher for the smaller firms and discriminated against in terms of facing higher lower for the larger ones. This is consistent with the collateral requirements or interest rates. However, it is belief that small firms are riskier because it is more probable that large firms are more likely to receive difficult to collect information on them and monitor longer-term loans and overdraft facilities. their activities. In addition to requiring high collateral ratios, bank Government Policy and Uncertainty credit is also of short duration. The average duration The 1998 CTA/RPED survey first identified of bank loans for the sample as a whole was just short government policy and bureaucratic burden as a of three years (35 months) and that includes an outlier significant constraint. While inadequate access to reporting a 20-year loan. Table 2.8 reports the percent finance, poor infrastructure, and low consumer of responding firms receiving loans of various demand were all cited as serious problems, in 1998 durations. The distribution of the duration of loans is they were of less concern than issues related to somewhat bi-modal, with a number of credit contracts government policies and administrative barriers. clustered at 12 months and 36 months. Thus, loans of Since then, the Government of Mozambique has up to one year and loans of up three years are the made noteworthy progress toward creating a most common, with almost 75 percent of the sample competitive environment, yet the recent survey shows reporting loans not exceeding a maturity of three that regulatory burdens and uncertainty created by years. poor policy continue to significantly increase The nominal interest rate for bank credit reported operating costs and limit productivity growth. by the sample firms is also quite high, averaging just The government has undertaken numerous over 28 percent. How much of this reflects the high initiatives to create a friendlier operating environment risk of the Mozambican business environment and for business. For example, the Public Administration how much is due to large amounts of government Decree 30/2001 of 15 October requires government borrowing or lack of competitiveness in the banking agencies to respond to requests for decisions in a system is unclear. But given the inflation rates, real fixed time, and there are now provisions for export interest rates are around 13­18 percent, high by processing zones--called Industrial Free Zones (IFZ) international standards. Average interest rates do not in Mozambique--and investment and export incentives. The government has introduced new Table 2.8 Duration of Bank Credit customs procedures and transformed the tax system, (percent) including the introduction of a VAT. These new laws are welcome progress but have not had the expected effect. In the recent survey, managers reported that Duration Mozambique Nigeria government officials retain so much discretion in Up to 1 year 46.77 29 implementing new laws and regulations that the laws Up to 2 years 6.45 4 are often rendered ineffective. Officials often obstruct Up to 3 years 22.58 14 implementation of new policies by delaying or even > 3 years 24.19 15 ignoring decrees. In some cases local officials have Total 100 62 never even heard of legislated changes. Because Source: CTA/RPED Survey, 2002 and RPED Nigeria Data. of the amount of discretion, there are regional 2. Mozambique's Investment Climate in an International Perspective 24 differences in the perceived level of government- only 27 percent of companies in the survey admitted related uncertainty. making such payments. Most firms said that they In a recent survey of IFZs in Madagascar, many made no such payments or would not answer. managers reported that their companies had However, those firms that did admit that payments considered Mozambique before settling in were needed claimed that the median amount for a Madagascar.9 The low labor costs, advantageous typical firm like theirs was 5 percent of annual sales. location, and investment promotion laws attracted them. However, upon further investigation, they Courts rejected Mozambique because the difficulty of day-to- The courts and legal system in Mozambique are day operations and because they were not convinced notoriously unreliable, which significantly increases that promised incentives would materialize. Managers the risk and uncertainty of doing business. Courts cited the uncertainty of actually being granted IFZ take a long time to render decisions, and then status, obtaining work permits for expatriate executing judgments is even more problematic. managers, quickly clearing goods through customs, Consequently, businesses avoid using them to settle receiving VAT refunds, and realizing other promises. disputes as much as possible. Firms in the survey As one manager stated, "We came to Madagascar were most likely to be in court over labor disputes, because here the laws actually work." The results of because there is little way to avoid it if a worker wants the 2002 CTA/RPED survey verify that their fears were to challenge a company's actions. well founded (see table 2.1). In the World Bank's Doing Business data base, Mozambique ranks 79 out of 84 countries on how long Policy Uncertainty and the Regulatory it takes to resolve a business dispute, (from the time a Burden suit is filed until a judgment is enforced).10 At 540 Bureaucracy and red tape were the area of most days, Mozambique far longer than its nearest concern in the 1998 survey, and the Government of neighbors and global competitors, and it is more than Mozambique has made strides to improve the six times longer than in South Africa (see table 2.9). situation. In the recent survey, respondents It was reported that the courts are improving, and complained less often about inspections and petty some bankers suggested that if they use a skilled harassment by government officials, although lawyer and carefully prepare documents, then they Mozambique remains a highly bureaucratic business are able to get quick judgments. However, for the vast environment. However, corruption, crime and majority of businessmen, the judicial system is not disorder, macro instability and other areas reflecting a seen as a viable option to resolve disputes, and they lack of confidence in government are still perceived are consequently less willing to enter into new as large problems. The survey results reveal that the business arrangements. Recently an alternative average senior manager devotes around 11 percent dispute resolution system of arbitration was of his time to dealing with bureaucracy, which is on established, but no firms in the survey sample par with China at 9 percent, Latin America at 11 reported using it. percent, and countries in transition in Eastern Europe at 12 percent. It is widely believed that firms have to Taxes make informal payments to public officials "to get Tax administration and tax rates were heavily things done," and corruption was perceived as a large criticized, as the private sector in almost any country or severe problem by 64 percent of the sample. Yet, is likely to do. Some 47 percent of the sample said that 2. Mozambique's Investment Climate in an International Perspective 25 Table 2.9 Days to Resolve a Business respondents were due VAT refunds or duty drawback Dispute on products they exported or on VAT-exempt products they imported, but no firms received refunds in a Country Number of Days timely manner. Those companies that received Botswana 77 refunds reported having to pay large bribes and South Africa 84 waiting an average of 99 days to receive their refunds Malaysia 90 (the median time was 30 days). Some companies Uganda 99 spoke of having to wait years because they were India 106 unwilling to pay up to 10 percent in unofficial fees to Malawi 108 the officials involved. China 180 One of the most prolific complaints from the Zimbabwe 197 survey participants concerned what they viewed as Kenya 255 the discriminatory impact of the tax system. Very large Mozambique 540 firms and project such as Mozal are able to negotiate industrial free zone status and other tax incentives Source: World Bank Doing Business Data Base. from the government. According to many firms interviewed, informal producers and traders are often tax administration is either a major or very severe able to avoid tariffs and other taxes, such as VAT, due obstacle to doing business, and 55 percent said the to the weak customs enforcement regime despite same for tax rates (table 2.1). Even so, only 10 firms recent reforms. By contrast, formal-sector domestic reported having been involved in a tax dispute in the producers who are not big enough to attain special last three years, and in the past year the average firm concessions are required to pay a variety of sales and was inspected only once by national officials and labor-based taxes, putting them at a competitive twice by local tax inspectors. In addition, managers disadvantage. This is reflected by the large number of reported that they believe the average firm only firms citing "anti-competitive practices" as a large or reports 67 percent of its profit. While firms complain severe problem. about the discretion of tax authorities and high taxes, The inefficiency of the tax system is also reflected most firms are not reporting full profits and are not by the fact that only six companies reported having being heavily inspected. Some firms, however, are obtained exemptions on imported capital equipment. receiving numerous inspections (the highest number To obtain these exemptions it took on average 100 of inspections cited was 22) and are facing heavy days. Many respondents said that though they were fines, indicating that tax administration can be a eligible for such incentives, it was faster and easier to problem for some enterprises. import capital equipment and pay the duty. No firms A far more serious matter appears to be delays in reported using the duty drawback incentive, and only VAT and other refunds owed to the private sector. In one firm was operating as an IFZ, a status it took many the sample, over 24 firms reported being owed months to obtain. Investment incentives are useful government refunds and the average amount was only if they are credible and firms believe that they will more than 13 percent of their annual sales. This actually receive what has been promised. seriously affects firms' ability to manage cash flow Unfortunately, Mozambique has developed a and in a country with such high real interest rates reputation, especially among foreign investors, as a imposes an enormous cost on some firms. Many country unable to deliver on its promises, regardless 2. Mozambique's Investment Climate in an International Perspective 26 of whether or not it allows easy access to work permits days.13 In the World Bank's Doing Business data or duty exemptions. base, Mozambique ranks last among 110 countries in the time it takes to register a company. Consultants Regulatory and Administrative Barriers charge in the range of US$1,000­$1,500 for their services, which is then added to the fees required by Registration, Entry, and Exit the government agencies.14 One foreign firm recently Open economies, where firms can easily enter and registered a $100,000 investment in Beira and paid exit, have higher growth rates than less dynamic ones. $3,700 (including payment to consultant), almost 4 The competition fostered by new entrants forces percent of the investment. existing firms to raise their productivity and improve Once a firm has a final inspection that does not their competitiveness or be driven from the market. mean it can begin operations. It must then register High barriers to entry allow low-productivity firms to with the tax department to obtain a number. A foreign survive and make it costly to reallocate resources to firm must also apply to open a bank account and the most efficient uses. High barriers to entry and exit begin applications for residence, work, and import also discourage foreign investment, which has proven permits--tasks that can add another four months to to be one of the most effective ways of transferring the wait. Most firms begin operating before they have technology and raising productivity. Complex work permits for their expatriates and use others' registration procedures are probably a major factor in import permits to bring in their initial capital. Even the persistence of large variations in firm productivity when foreign firms begin operating without all of the discussed in detailed in the following section. necessary permits, it can still take at least three Entry into the Mozambican market is made months after they are formally registered to begin extremely difficult by the time-consuming and work.15 Because of the bureaucratic burden, many expensive procedures for firm licensing and companies just give up and decide not to invest in registration.11 As reported in a recent FIAS report, Mozambique. One consulting firm stated that recently government uses the registration process as a form of four of the nine foreign firms they have worked with control and an inappropriate mechanism for enforcing abandoned their investment plans after obtaining a regulations.12 Few entrepreneurs are willing to endure registration certificate but before having a pre- the process, and consequently most economic inspection of their proposed premises. activity remains unregistered. Those firms that do Navigating the registration bureaucracy is a attempt to register formally cannot hope to do it alone daunting barrier for potential entrants, and it is difficult and are forced to hire consultants who specialize in for new investors, particularly foreign investors, to find registering firms. Based on interviews with local the needed expertise to help them do so. It is consulting firms, experienced consultants are able to necessary for firms to register with CENTRO DE register a new firm in anywhere from three and a half PROMOÇAO INVESTIMENTOS (CPI) if they want to take to five months, depending on the nature of the advantage of any investment incentives, and all business, how politically connected a firm is and how foreign firms are encouraged to register. While the CPI much a firm is willing to pay. Results from the survey can provide some information, the organization support this claim, and for the few firms that could provides little help working through the registration accurately recall how long it took, the median time to process and provides no assistance once a firm is register was 138 days. By contrast, the median time to established. However, managers also reported that start a business in India was 90 days and in China 30 individuals in CPI will help in a private capacity as 2. Mozambique's Investment Climate in an International Perspective 27 independent consultants. CPI does not deal with take advantage of its location astride trade routes. foreign investments of less than $50,000. Since firms Quick clearance of shipments is vital to avoid must be recognized by CPI to receive investment disruption in production, reduce the need for large incentives, this effectively means small foreign inventories, and improve responsiveness to investors are ineligible for government help. In customers. addition to the difficulty in registering firms, There has been progress to some extent in prospective investors also face a challenge in finding customs procedures since 1998. Namely, the process affordable and competent local consultants to help of obtaining import licenses is easier and inspections them through the process. Mozambique is replete with are more efficient.16 However, there are still long stories of investors who hired local lawyers, delays in clearing goods. For the 2002 sample, the consultants, or moonlighting civil servants, but after median time it took to clear goods after they arrived at paying substantial sums and waiting months, never the port of entry was 7 days, but there was a wide received a certificate of registration. variation and the average was almost 12 days. The difficulties in Mozambique seem more Underscoring how unpredictable the importing daunting when contrasted with the environment in process is, the average longest time for clearance Madagascar, where local consultants report that it reported in the last year was 18.5 days (for a takes between 10 and 20 days to begin operations. A comparison of clearance times with China and India, good consultant charges around $800, and total fees see table 2.10). due the government for a $100,000 investment would During the interviews, firm owners and managers be around $650. In addition, Malagasy consultants put particular emphasis on the process of clearing advise that firms can obtain IFZ status in around three trucks arriving in Maputo from South Africa. The months. In Mozambique, obtaining IFZ status--for the average reported time to clear a truck was almost 7 very few firms that have managed to do so--has taken days (the median was 5 days). Such long delays more than a year. In light of this, it is easy to see why negate the advantage of close proximity to South Mauritian and other firms looking to set up in low-cost African markets. It takes just a few hours to drive from countries have not selected Mozambique. South Africa but 5­7 days to clear customs. Consequently, when firms need time-sensitive imports Trade Regime such as spare parts, they resort to smuggling. An efficient customs regime is necessary for The length of time it takes to clear imports also Mozambique to be internationally competitive and forces firms to carry higher inventories, increasing the Table 2.10 Length of Time to Clear Goods in the Last Year China Mozambique India Avg. Days to Clear Imports 7.9 12 10.6 Avg. Longest Days to Clear Imports 12.5 18.5 21.2 Avg. Days to Clear Exports 5.4 17 5.0 Avg. Longest Days to Clear Exports 8.0 21 9.2 Source: CTA/RPED 2002 survey and World Bank Investment Climate Surveys. 2. Mozambique's Investment Climate in an International Perspective 28 demand on their working capital. The survey asked their sales last year because of delays in clearing how inventories would change if companies could imports. Another three firms said they lost an average guarantee container clearance in 24 hours as some of $18,000, or close to 8 percent of their sales, Asian countries do. For the 60 firms who import because of delays clearing outgoing containers. directly, such an improvement would have a large These are significant figures given the small scale of impact and would mean that on average they could firms in Mozambique, and they illustrate the reduce inventory levels by 21 percent. Such a importance of improving the customs regime. significant change would free up large amounts of funds for productive investment and reduce operating Labor Laws costs in an environment with nominal interest rates of To be internationally competitive, firms must retain the more than 25 percent. flexibility to correctly size their work force, while also Exporting from Mozambique is also difficult. respecting the rights and protections of their workers. Exporting firms reported that in the last year, it took This is particularly important for labor-intensive them an average of 17 days to clear a shipment, with manufacturing firms--such as garment manufacturers the average longest time of 21 days. Firms are working under the Africa Growth and Opportunity Act required to get export permits and provide (AGOA) provisions--that depend on orders to keep transportation and other support to the inspecting their workers employed. Enterprises in Mozambique officials. They then hope their paperwork is correct are able to retrench workers when business slows and will be quickly processed. Firms shipping goods down or when they adopt laborsaving technology, but by sea, but still within the country, have to complete only at a high cost. Mozambican labor regulations the same process as if they were exporting. For some require that a retrenched worker receive up to three reason, even firms sending used equipment out for months pay for every two years of service. Although servicing must go through a lengthy process to obtain workers who are terminated for just cause are not permission to export and then re-import. eligible for these benefits, the process of terminating Consequently, many companies resort to smuggling a worker can be drawn out in the courts for such a equipment out for repair and then back into the long time that often companies just pay the severance country. In a world where turnaround times and for workers caught stealing or otherwise violating guaranteed delivery are critical, no enterprise can terms of their employment. hope to be internationally competitive given these In the most recent survey, almost 37 percent of the delays and uncertainty. Before recent political firms who responded to the question said that they upheavals in Madagascar, a country with low labor retained more workers than was optimal. On average costs similar to Mozambique, clearing exports these enterprises would prefer to retain only 63 through the port took on average between 3 to 4 percent of their current work force. A rough calculation days.17 based on the average wage of unskilled workers, Most companies adjust their business plans suggests that on average the cost of unneeded knowing that the process of importing and exporting workers is equivalent to 21 percent of firms' annual is difficult and uncertain. Although they keep large sales. A few companies retained excess workers so stocks of raw materials and do not enter contracts that they could respond quickly to increased demand, but require strict deadlines, firms still lose opportunities most companies cited the high cost of retrenchment because of delays. In the sample, nine firms reported and provisions of the privatization program as reasons losing an average of $15,000, or almost 6 percent of why they have too many workers. The lack of labor 2. Mozambique's Investment Climate in an International Perspective 29 flexibility is most important for foreign investors, with a reasonable price. However, as shown in table 2.11, almost 45 percent of the foreign-owned firms in the almost 33 percent of the managers in the sample cited sample claiming they retain excess workers, the skills and education of their workers as a major compared to only 17 percent of Mozambican firms. problem. Firms must pay a premium for skilled Privatized companies were nearly two and half workers, and in interviews managers often cited the times more likely than always-private firms to have a difficulty and cost of finding skilled technicians and workforce larger than their ideal. Although there may supervisors as the biggest impediment to increasing be no formal law preventing privatized firms from productivity. The Mozambican workforce lacks downsizing, owners report there is intense political sufficient skilled labor, yet the private sector is also pressure to retain all workers. In addition, it is unable to easily avail itself of its neighbors' resources prohibitively expensive. New owners were required to in this area. take on all current workers, even idle workers, when One of the most difficult regulatory problems they acquired the firm. If they want to shed workers, facing firms is obtaining permits for expatriate they have to pay the normal severance. Since this is workers, although recently there does appear to have based on years of service and most privatized firms been some improvement. In 1998, 35 percent of the are long-established, reducing the work force would sample said that hiring expatriates was a significant be a huge cost for the new management. The high problem compared to 26 percent in 2002 (table 2.12). cost of retrenchment in Mozambique increases the Nevertheless, it remains a serious burden. In the risk of expanding production or entering the market. It current sample, enterprises that used expatriates adds an additional burden to purchasers of former reported that on average it took them 90 days and state-owned enterprises and may be one reason that almost US$400 to obtain a work permit. The difficulty privatized firms in the 1998 sample were less likely to of getting work permits varies widely, and a few firms exit than firms that had always been private. reported that it took up to two years and nearly Like many developing countries, Mozambique US$1,250 to finally obtain a permit. Some foreign faces a shortage of skilled labor. But because it is investors even claimed that they had been unable to immediately next door to countries with large pools of obtain permission to work in their own businesses. relatively inexpensive skilled labor, firms should in Managers have devised a host of methods to deal theory be able to easily access any skills they need at with the problem of bringing in skilled workers--none Table 2.11 Firms' Perceptions of Specific Labor Regulatory Requirements (% of firms) No problem Small problem Big problem Hiring procedures cumbersome for foreign workers 26 23 50 Layoff procedures and cost of retrenchment 28 34 37 Limits on temporary hiring 42 42 16 Minimum wage laws 32 52 16 Hiring procedures cumbersome 47 43 10 Inflexible salary scale for skilled workers 41 51 8 Source: CTA/RPED Survey 2002. 2. Mozambique's Investment Climate in an International Perspective 30 Table 2.12 Share of Firms Reporting Labor Access to Land Regulations as Major or Severe Problem Obtaining land in Mozambique can be a major problem. All land is officially owned by the state, and 1998 2002 private companies can only seek the right to use the Dealing with the Inspectorate of Labor 37 36 land. If a firm buys an existing building, the right to Hiring Foreign Workers 35 25 use the land comes with it. Most firms in the sample had been in operation for many years or had moved Source: CTA/RPED Survey 2002. into existing premises. Thus, 27 percent of the sample identified it as a major problem (see table 2.1 at the of which are efficient and all of which drive up the costs beginning of this chapter). of doing business. Some firms bring in experts on However, the cost of gaining access to land is tourist visas and force them to leave the country every illustrated best by the experience of the few firms in 30­90 days to renew their visas. Others have the survey that had recently tried to acquire land-use expatriates begin work prior to obtaining legal rights. For this small group of companies the process authority, and some firms chose not to invest in new took on average almost 12 months and cost over technologies because of the difficulty in hiring experts. $18,000. Most of the difficulty appears to come in These restrictions affect all enterprises trying to identifying and addressing all competing claims to improve their productivity, but they hit foreign-owned particular plot. These difficulties cited by a number of firms the hardest. Interviews suggest that restrictions local consultants as a reason that potential investors, on employing expatriates are a significant reason why especially in the agriculture sector, decides against some investors have shied away from Mozambique. investing in Mozambique. The process and possible Almost 48 percent of the firms with foreign ownership solutions are explored in depth in the 2001 FIAS report in the sample said that hiring expatriates was a major "Mozambique: Continuing to Remove Administrative problem for their business, compared to less than 20 Barriers to Investment." percent of the indigenous firms. Labor regulations and inspections provide a Infrastructure Constraints constant source of irritation for some firms, and there Mozambique's infrastructure, never well-developed, appears to have been little improvement since 1998 suffered tremendous devastation during the (table 2.34). In the first survey, 37 percent of firms said prolonged war. Bridges were demolished, roads that dealing with the Inspectorate of Labor was a mined, power transmission facilities destroyed and problem. Recent interviews cited a similar share of the railroads heavily damaged. In the past 15 years, overall sample. Foreign and large firms were more Mozambique has received vast amounts of aid likely to identify this as a constraint than local or small directed at improving infrastructure, which is firms. Almost 50 percent of firms with more than 200 beginning to make an impact. Road transportation workers reported that the Inspectorate of Labor was a between the south and the center of the country has problem compared to only 32 percent of smaller firms. reopened, and now many goods that previously had Labor regulations and inspections impose a cost on to go by sea are shipped over land. However, poor all firms, but they are particularly burdensome for infrastructure remains a serious drag on foreign-owned firms and large firms, further competitiveness. Table 2.13 gives a general indicator discouraging them from increasing their size or of the extent to which Mozambique still lags behind formally registering. competitors. 2. Mozambique's Investment Climate in an International Perspective 31 Table 2.13 Indicators of Infrastructure Provision for Selected Countries Power consumption, Paved roads Telephone lines Internet hosts 1999 as share of total, per 1,000, per 10,000, (kwh/ca) 1995­2000 2000 2000 Ghana 284 30 12 .06 Kenya 130 12.1 10 .32 Mozambique 54 19 4 0.10 Uganda -- 7 3 .07 India 379 45.7 32 -- Indonesia 345 46.3 31 -- Malaysia 2,474 76 199 -- Sources: World Development Report 2003: Sustainable Development in a Dynamic World; World Development Indicators 2002; and African Development Indicators 2002. Power the power grid for electricity the majority of the time. In Electricity emerges as the most serious infrastructure the 1998 survey, almost 34 percent of the sample problem for the Mozambican manufacturing sector, owned generators, which may indicate that the with nearly 64 percent of respondents ranking it as a situation is improving. major or severe problem. More than twice as many The difficulties faced by the firms sampled are firms singled out power as the number one related to the inadequate performance of the state- infrastructure problem as did those that prioritized the owned vertically integrated power company next most important problem--the condition and Electricidade de Moçambique (EdM) and the lack of density of roads. Moreover, only about 23 percent of periodic tariff adjustments. Currently, only about Mozambican firms own generators (table 2.14). This is 220,000 (equivalent to only 6 percent) of the total less than in China, where 30 percent of firms surveyed number of households have access to electricity. had their own generator, and India, where 69 percent Moreover, the pace of access expansion for all did. On average, firms generate about 22 percent of economic agents has been slow: only 31,000 new their own power needs. But the median value is only 8 customers were added between 1996 and 2000, and percent, indicating that most firms are able to rely on less than 50,000 are targeted for the next four years. This compares poorly to the more than 100,000 new Table 2.14 Power Constraints households that will be established. Even where households and firms already have access, supply reliability is very low. Percent of sample with own generator 23 Although there have been some improvements in Median percent of self-generated power 8 a few areas recently, EdM is also inefficient. Energy Median times/month of inadequate power 5 losses are more than 20%. Sales per employee are Median lost production from power problems (% of sales) 2 only about 5 MWh per year. The ratio of payroll to operating expenses has increased from 18% to 24%. Source: CTA/RPED Survey 2002. The level of receivables has deteriorated from 123 2. Mozambique's Investment Climate in an International Perspective 32 days to 147 days. While some of these problems may increases and manufacturing moves to processes be partly attributable to the floods of 1999 and 2000, requiring continuous power, unreliable electricity much, under the control of EdM, could be done to provision will become an even more severe constraint. improve performance, including better financial management (e.g., better recurrent expenditure Transportation control and capital expenditure planning), improved Transportation remains a significant factor in the high operational management, as well as more timely cost of doing business in Mozambique. While approvals of tariff adjustments considerable progress has been made in To remedy this situation, the Government of strengthening the transportation network, it is still Mozambique intends to implement reform of the costly to ship goods. For example, in 1998 firms in energy sector. This reform is designed to ensure Beira reported that they generally shipped goods to immediate efficiency improvements as well as Maputo by sea because it was too difficult to send commence implementation of the longer term strategy them by road. Road transportation has now improved to ensure that improvements are permanent and to the extent that it is now less expensive and faster to especially that there is a significant acceleration in ship goods from Beira to Maputo by land.18 Road access expansion. At the completion of this reform, travel is made even more attractive because sending there would be an increase access to modern energy, goods by sea requires companies to go through the in peri-urban and rural areas, thereby facilitating same formalities as exporting. improved quality of life of the respective communities Freight-forwarders in Beira report that shipping a and generating income. The program will comprise container to Harare is almost 30 percent more reforms necessary for improved performance of the expensive than sending it two-thirds the distance to power sector. More specifically, an independent Maputo (table 2.15). This illustrates one of the major regulator will be established to regulate and oversee impediments to trade. The higher costs reflect the the sector. Additionally, investments will take place to difficulties of crossing borders and dealing with the build a short medium voltage and low voltage formalities of exporting. Security is also an issue; the distribution line to intensify the consumer base where average firm in our sample loses about 1 percent of the transmission system is already in place. This will any shipment along the way to theft and damage. involve grid-based and isolated grid electricity The lack of ships calling at Mozambican ports, (including renewables). It will also promote the especially outside of Maputo, makes it difficult for adoption of modern energy in rural areas by removing firms to export. On the one hand, ships will not come the barriers identified, and mitigate CO2 emissions. until there is a large enough concentration of firms to Despite some indications of improvement, warrant their stop. On the other hand, exporters are inadequate power remains a serious problem reluctant to locate where vessels do not call. In the representing significant costs to firms. Table 2.14 interim, one way to mitigate this problem would be shows that the median firm in the sample suffered lower the costs of land transportation to Durban. This power interruptions about five times a month in the way, producers (especially those in Sofala province) last year, and the median loss to production from could send containers cost-effectively by road to be power outages was 2 percent of sales. Firms in loaded on ships in Durban. Currently, the cost of Mozambique are generally operating well below full doing this is prohibitive, and firms state that the main capacity and can delay production to times when sources of the high costs are the delays and fees power is available. However, as capacity utilization required at the border. 2. Mozambique's Investment Climate in an International Perspective 33 Table 2.15 Shipping a 20-Foot Container from Beira Average Transport Cost Average Time To Maputo by Land $770 2 days To Maputo by Sea $815 3­5 days To Durban by Land (no return cargo) 5­7 days $5,000 To Durban by Sea $900 4­5 days To Harare by Land 0­14 tons road $1,185 0­14 tons rail $1,285 14­22 tons road $1,445 14­22 tons rail $1,285 Notes: By road maximum allowable weight on Mozambican roads is 28 tons including container weight (per truck). A fine of $210 is applicable for cargo exceeding 28 tons. Source: CTA/RPED Survey 2002. On a positive note, several reforms in the Southern African Region; in particular, for Gauteng transportation sub sectors (port, railways, roads Province in South Africa. However, South African airport, airline) have been or are being implemented companies would only choose to ship or receive their and should help reduce the cost and time required goods if there is a significant increase in the efficiency to ship goods within the country and outside of port operations at the Maputo port and if the facilities of Mozambique. Some of them have already started and infrastructure in and around it are improved. to be implemented. Consequently, significant These improvements are very likely to take place improvements are likely to take place soon. given that over the next three years MPDC intends to A good example is in the port sector. Since mid April rehabilitate and develop the port. This will include the 2003, an international consortium, called Maputo Port introduction of two modern-design tugs, each with a Development Company (MPDC), made up of Britain's bollard pull of at least 35 tons; the construction of a Mersy Docks and Harbour Company's, Sweden's new port entrance linking the port directly to the N4 Skanska BOT AB, Portugal Liscont Operadores de highway--allowing quick transport to South Africa; the Contentores--who jointly hold 51% of the shares of purchase of new cranes and other material handling MPDC and state-owned enterprise Mozambique Ports equipment; berth repairs; dredging; as well as the and Railways Company (CFM) took over the operations upgrading of the roads and rails in the port. of the Maputo port through a concession. The railway sub sector is also undergoing This concession of the port is expected to changes in order to improve railway systems as well significantly improve the quality of services provided as intermodal links with ports, roads. For example, the by the Maputo Port and improve the competitiveness 88 kilometer Ressano Garcia railway line, which links of Mozambique by being the port of choice for the Mozambique to South Africa and is currently being 2. Mozambique's Investment Climate in an International Perspective 34 upgraded following the award of the concession to In the air transportation, Mozambique can no operate the line to Spoornet of South Africa will longer rely on Linhas Aéreas de Moçambique to either contribute to improving the quality of transportation to meet the increased air transportation demand or and from the Southern provinces of Mozambique and facilitate domestic and regional market integration, to neighboring countries. while improving trade logistics. This is due to the fact In the management of airports, Mozambique has that the provision of air transportation services in also made some significant progress by receiving Mozambique is costly and limited in frequency as well proposals for a 15-year concession of the Maputo as in geographical coverage within the country. airport, the country's largest airport. It is expected that The Government has thus decided to divest from the new manager will not only bring additional LAM and bring a private operator to manage and management and know-how but also much needed operate the airline. This privatization is currently under investment. It is estimated that the selected bidder will preparation and will help address the above- need to invest at least US$ 25 million to improve the mentioned inadequate service provision. At this runway, lighting systems, security, cargo handling as stage, LAM has been transformed into a limited well as access to roads. This would provide the airport liability company (SARL), a step which is necessary with much needed investment since the current for its divestiture. Following this legal transformation, terminal building and other facilities were built more LAM is now owned by the State of Mozambique (80%) than 30 years ago. and by the employees and management of the However, more needs to be done regarding airport company (20%). It should be noted that a previous management since the Maputo Airport, while the largest offer to sell LAM was not successful. Consequently, of the country, is only one of nineteen major airports the divestiture of the State from LAM will need to be managed by the State-owned enterprise Aeroportos de carried out based on a sound strategy and adequate Moçambique. Other important airports such as those in sequencing of the sector's reform, which would Nampula and Beira would also benefit from new include the establishment of a complete set of management and investments. This is important, since regulations (technical and economic) that establishes the current traffic levels at the main airports, Maputo, clear regulations for the sector oversight as well as for Beira and Nampula are much lower than the minimum the establishment of a capable regulatory body that volumes for efficient air transport operations and will oversee the sector. Moreover, a transparent and infrastructure. For example, it is foreseeable that the sustainable approach for the provision of public Maputo Airport could double the number of passengers service obligations will need to be established. that it receives on an annual basis from the less than 500,000 to 1,000,000. If the level of performance in terms Telecommunications of both passengers and aircrafts received does not Telecommunications was reported to be the least raised significantly, there is a risk that the international significant infrastructure problem. In fact, few of the and regional traffic be diverted to other destinations, firms surveyed complained about communications. In including to the hub-and-spoke Johannesburg most industrial areas there is reliable telephone International instead of capitalizing on increased service, due primarily to the introduction of cellular linkages with development corridors and feeding the telephone service in 1998­1999. Well over 80 percent domestic market with an increased traffic flow, which will of the sample stated that they regularly use cell lead to increased frequencies and improved prices, due phones. However, only about a third of the sample to the better spreading of fixed operating costs. uses electronic mail, and close to 18 percent have 2. Mozambique's Investment Climate in an International Perspective 35 Web sites. Telecommunications has significantly low wages is more than offset by various constraints improved in recent years and does not seem to be to investment and productivity. In particular, the lack of a major limiting factor for doing business in access to finance has greatly affected firms' ability to Mozambique, at least for medium to large sized invest in productivity-enhancing technology and enterprises. Nevertheless, the low degree of uptake capital equipment. In addition to this, firm-level of Internet services by businesses and the low productivity remains low because firms are unable to availability of any kind of telecommunications service hire skilled labor in a timely and cost effective manner. beyond the main urban centers are indications that Uncertainty caused by government policies and further reforms in the sector are needed, which the regulations has also hindered the use of new government has begun to implement. To that end, the technology by firms and has raised the barriers to Government of Mozambique has embarked on a foreign direct investment. The relatively low cost of wide-ranging and ambitious telecommunication unskilled labor does not compensate for these reform. The objectives of this reform are to improve problems. The results described in this section show access and quality of efficient and affordable that Mozambique remains stuck in a low-level communication services. This is being achieved by productivity trap; without improvements in the creating the enabling environment for competition, business environment, it is difficult to envision a and private sector participation in both the fixed and significant increase in productivity and growth in the mobile telephone operations. private sector. Thus far, the reform has led to the establishment of an independent telecommunication and postal Investment services regulator, the Instituto Nacional das Let us begin by looking at investment. The survey Comunicações de Moçambique (INCM). Tenders to elicited information about investment undertaken by invite entry of second cellular mobile services firms in the previous year in four categories: land and operator has taken place and negotiations to award buildings, new machinery, old machinery, and new or this bid are underway. Additionally, a pro-competition old vehicles. A total of 67 investments were reported telecommunications law conducive to a multi operator for the sample: 11 in land and buildings, 35 in environment has been drafted and is currently being purchase of new machinery, 18 in purchase of discussed, while the strategy to divest the state- vehicles, and only 3 in purchase of old machinery. The owned fixed line operator Telecomunicações de number of sampled firms that had undertaken at least Moçambique (TDM) is being prepared. Additionally, one investment is 51 (30.4 percent of all responding key regulatory decrees on interconnection, licensing firms in the sample). About 25 percent of firms had and INCM organization have been enacted, showing some foreign ownership, which implies almost one of that the Government is making progress in this sector. every two firms with foreign ownership invested in 2001. The average investment to capital ratio (amount Investment, Productivity and invested by firms relative to the replacement value of Growth in Mozambique capital) was not very large, about 7 percent (table 2.16). However, there were some firms that invested a The problems in Mozambique's business environment much larger ratio.19 Table 2.17 summarizes the ratio of appear to have a significant impact on investment, investment to replacement value of capital for the productivity and growth. The advantage of relatively investing firms. 2. Mozambique's Investment Climate in an International Perspective 36 Table 2.16 Investment to Capital Ratio and classes that are investing. This ratio increases with Fraction of Firms Investing firm size, from 8 percent for microenterprises to 41 and 53 percent for the largest firms. Thus, larger firms are investing proportionately more than smaller firms % of firms in the sample, and this may help explain the higher Mean I/K investing productivity of large firms. Mozambique .07 27 The food sector and the category "others" Nigeria 2000 .095 56 comprise the largest share of investing firms, while Kenya 1994 .11 54 firms in the wood and furniture sector account for the Source: CTA/RPED Survey, 2002; and RPED data base smallest proportion (table 2.19). In terms of the share of firms investing by sector, 40 percent of firms in Table 2.17 Average Investment Ratio other sectors undertook investment, as did almost a Relative to Replacement Value of Existing third of the firms in food sector. In contrast, the lowest Capital percentage of investment is seen in wood and furniture companies, followed by textiles and Number Average garments firms. The "others" sector comprises Up to 1% 14 0.4 plastics, printing, and other recent entrants to the 1­10 % 21 5.5 markets, who are likely to be investing because they 10­50% 7 27.5 are new. Garments and wood are under duress but More than 50% 8 -- are operating well below maximum capacity utilization. Source: CTA/RPED Survey, 2002. Table 2.20 summarizes investment behavior of firms that were privatized against firms that were not Table 2.18 provides size distribution of the privatized. Thus, the latter group also includes firms investing firms. Only 4 percent of investing firms are that still have government ownership (although their micro-enterprises, a third are small firms employing number is small). The table shows a clear inequality less than 50 workers, and a quarter are large firms between investment rates for privatized firms. Only employing 100 to 250 workers. In the last column, the about one in four privatized firms invested in 2001, table also displays the share of firms in specific size compared to almost a third of other firms investing. In Table 2.18 Distribution of Firms Investing, by Size, 2001 Size Number % of Investing Firms % of Firms in Size Class 1 Micro 2 3.92 8.3 2 Small 17 33.33 22.1 3 Medium 10 19.61 25.6 4 Large 13 25.49 40.6 5 Very large 9 17.65 52.9 All 51 27.0 Source: CTA/RPED Survey, 2002. 2. Mozambique's Investment Climate in an International Perspective 37 Table 2.19 Distribution of Firms Investing, by Sector, 2001 Size Number % of Investing Firms % of Firms in Sector Food 15 29.4 31.3 Textiles & Garments 9 17.6 22.5 Wood & Furniture 3 5.9 10.7 Metal 8 15.7 24.2 Others 16 31.4 40.0 Source: CTA/RPED Survey, 2002. addition, the average investment ratio--or the value of greater percentage of firms using bank credit investment relative to the replacement cost of existing undertook investment in 2001 relative to firms without capital--was 6.8 percent for the privatized firms access to external credit. On the other hand, less than versus 7.8 percent for the other firms. Privatized firms half the firms investing had access to bank credit. This as a group are therefore investing less than other implies that although the majority of firms are firms. financing investments out of internal funds, access to Finally, we can note the relative utilization of bank external credit does help firms to invest in new credit from among the investing firms. Only 15 percent equipment.20 of the firms investing had access to bank overdrafts. Table 2.21 analyzes sources of financing for A key constraint highlighted by the survey data is that investments in new machinery, which is the largest only 22 firms in the sample had access to overdrafts; category of investments reported by the sampled this indicates that a third of the firms with overdraft firms. The first column shows unweighted averages; access invested in 2001, against 25 percent of firms the second column shows relative share of various that invested without overdraft facilities. Similarly, 44 sources weighted by the size of the investment.21 percent of the investing firms had access to bank Taken together, the two columns show that internal loans. Thus 40 percent of firms with bank loans funds are the most important source of investment invested in 2001 relative to only 20 percent of firms finance in terms of the number of investments being without access to bank loans. On the one hand, a undertaken, with two-thirds of the investments being Table 2.21 Financing of Investments in Table 2.20 Investment by Privatized Versus New Machinery Always Private Firms Unweighted Weighted Always Internal 67.2 40.3 Privatized Private Banks 28.5 54.3 % investing 24.5 33.0 Friends and family 0.0 0.0 Average investment ratio 6.8 7.8 Other 4.2 5.4 Source: CTA/RPED Survey, 2002. Source: CTA/RPED Survey, 2002. 2. Mozambique's Investment Climate in an International Perspective 38 financed by internal funds, followed by 29 percent of processes or introducing new products. In the last the investments being financed by banks.22 When the three years, about a quarter of the firms in our sample figures are adjusted for the size of the investment, have introduced new products. bank credit dominates, funding more than half the Our data show that few firms engage in internal total investment undertaken, while internal funds technical innovation. Less than 10 percent of the account for 40 percent of the investments. Thus, while sample had personnel that they considered devoted most investments are small and being undertaken to research and development. Most of these firms by firms using internal funds, some firms with access were medium to large with the average number of to bank finance (presumably larger firms) are employees being 145 and the number devoted to undertaking much larger investments financed by R&D less than 4. Less than 7 percent of firms bank credit. This underlines the fact noted above-- subcontracted R&D work. Most new technology is bank finance is insignificant in its coverage but highly embodied in new machinery and firms in significant in its impact. Mozambique usually work with equipment suppliers to A multivariate probit model analyzing the identify appropriate technology. likelihood of investing helps pull all these factors It is also clear that government policies and together. The results show that size, access to bank regulations have a significant impact on firm-level loans, and foreign ownership are all positively productivity in Mozambique. A number of regulatory correlated with investment (see table B.2 in the barriers affect private learning mechanisms and appendix). Age was also significant, with younger prevent Mozambican firms from making investments firms being more likely to invest, even though firms in raising productivity. The difficulty and expense of established before 1992 were more likely to have bringing in foreign experts makes many companies bank credit. Once all factors were controlled for, unwilling to invest in new technology that is unfamiliar sector and location do not appear to affect the to local workers. Several managers said that they probability of investment. In addition, privatized firms refused to buy equipment that could not be up and are not less likely to invest than firms that were always running in the length of time covered by a tourist visa. private. If the new owners are foreign investors or Only 20 companies in the sample have ever used have access to bank credit, then they are much more external training or consulting services and most of likely to invest and improve productivity. It is clear that them were local. Most respondents said that there the level of investment by a firm in Mozambique is was a lack of technical services in Mozambique but linked to its access to finance; firms which are unable that they could acquire almost any services they to get access to bank loans are also unable to take needed from neighboring South Africa. Clearly many advantage of investment opportunities. more companies had used external services than reported they had. But they had brought the Linkages Between the Business consultants in on tourist visas due to the enormous Environment and Firm Level Productivity regulatory burden related to obtaining business visas. The linkages between low levels of investment and This same burden creates problems in terms of productivity are worth noting in the case of attracting and sustaining outside investment as well. Mozambique. Most investment that does take place Foreign direct investment bring benefits beyond just goes to increase production or replace worn more investment. It is also a major source of machinery with current technologies. Very few innovation and technology transfer. But outside of the resources are devoted to improving production large projects that are able to negotiate special 2. Mozambique's Investment Climate in an International Perspective 39 arrangements with the government, foreign investors Labor. Mozambique's relatively low cost of labor face many obstacles, due to the uncertainties of should in theory offset to some extent, the constraints government regulation. The challenges of licensing of finance and policy uncertainty that were discussed and registering a new company are the most visible. earlier. Data from the 1997 population census and But identifying land, obtaining work permits, importing labor force survey confirm that Mozambique has capital equipment and the ability to repatriate profits abundant supplies of surplus, low-cost labor not are also very problematic. While there is no restriction currently engaged in formal wage-earning on repatriating profits, many foreign investors in the employment. But productivity is so low that despite sample had not yet done so and were wary of trying. the low wages, labor costs are high. In addition, the Given the difficulties obtaining VAT refunds, lack of labor market flexibility in terms of hiring skilled investment incentives, and other promised services, labor raises the cost of labor. Skilled labor is relatively investors were not confident that they would be able scarce in Mozambique. In principle, this is not a to easily repatriate profits. problem given the proximity to neighboring countries The slow-moving import and export regime is an with abundant skilled workers. However, additional impediment to improving productivity. administrative barriers and regulatory hurdles make Uncertainty in clearing customs makes it difficult for accessing skilled labor from outside Mozambique companies to commit to delivery times, a key costly. The low wage level of unskilled labor is not requirement for participating in the world market. The enough to offset the regulatory burden imposed by complications of sending out equipment for repair is government. yet another disincentive to acquiring modern Table 2.22 shows average monthly wages in the technology. Exports are composed predominantly of a sampled firms by skill category.23 The average few products based on natural resources. These unskilled production worker in Mozambique earns products, while extremely helpful, are not enough to almost $43 a month, and professionals earn up to promote competitiveness throughout the entire $188 a month. The most useful earnings figure for economy. international comparison is that of unskilled labor, which is significantly below that of many other Firm-Level Productivity countries. For example, in Madagascar, export Industrial growth in all countries is inextricably linked processing zone (IFZ) firms in the garment sector to growth in total factor productivity. In this section we reported paying between $55 and $65 per month for analyze the performance of firms in Mozambique first unskilled labor. In Nigeria in 2001, the average by examining the productivity of key factors--labor compensation for production workers was over $87 and capital--and then by looking at total factor per month. Clearly, in terms of wages, Mozambique productivity. We find that firms in Mozambique, on has an advantage in unskilled labor. But given very average, have very low capital and labor productivity low levels of labor productivity, many firms are still not compared to other countries in Sub-Saharan Africa. competitive. This is offset somewhat by the extremely low wages of As in many countries, larger firms appear to pay Mozambique's workforce. For some firms this leads to higher wages. Table 2.23 shows that the average low unit labor costs, which allows them to compete wage increases with size category. This information with other companies across Africa. But for many was obtained by randomly selecting ten workers from firms, productivity is so low that even the inexpensive each firm across all worker categories and directly labor is not enough to make them competitive. interviewing them about their wages. It could be that 2. Mozambique's Investment Climate in an International Perspective 40 Table 2.22 Labor Costs (wages and compensation in U.S. dollars) Max w/o Mean w/o Type N Mean Sd Outliers Outliers Outliers Management 37 105.2 84.1 Professional 27 188.1 204.1 583, 666, 800 416.6 126.2 Skilled 422 65.3 99.0 949, 1527 566 59.7 Unskilled 405 43.7 29.2 187, 210, 338 166.6 42.2 Non-production 248 67.0 85.0 562, 593, 833 375 59.7 Source: CTA/RPED Survey 2002. Table 2.23 Average Wages by Firm Size Max w/o Mean w/o Size N Mean Sd Min Max Outliers outlier outliers 1 85 35.0 19.4 2.8 125.0 2.8, 4.2, 104,124 66.7 34.6 2 479 57.7 108.2 2.6 1916.7 <4, >200 187.5 45.7 (total 15 obs) 3 323 59.3 52.6 4.6 583.3 <8, >200 223.4 55.4 (total 6 obs) 4 205 75.8 90.2 18.8 949.4 >300 250 63.1 (total 6 obs) 5 81 107.1 200.6 11 1527.1 <15, >600 327.9 74.4 (total 5 obs) Source: CTA/RPED Survey 2002. there were more skilled workers in the sample of is directly related to earnings. Older and more larger firms, but even after controlling for skill level, experienced workers also receive higher pay. larger firms pay higher wages. Firm size is highly significant in the regression; A multivariate regression explaining earnings of even when controlling for other factors, larger firms workers in the Mozambican manufacturing sector pay higher wages, as do firms established since finds that, as expected, highly skilled workers are paid 1992. Though statistically insignificant, foreign higher wages. Managers and professionals receive ownership is positive, suggesting that foreign-owned the highest pay, and the amount of education a worker firms pay higher wages--a finding consistent with the 2. Mozambique's Investment Climate in an International Perspective 41 labor market in many other countries. The regression indicative of lack of awareness of the benefits of results also suggest that food processing firms pay investing in worker training, which is also supported higher wages than garments, metal, or wood firms; by the fact that nearly 44 percent of the respondents wages for firms in the "other" category are on par with claimed that there was no need for training--workers the food sector. There also appears to be a regional could just learn on the job. These responses may also effect with companies in Maputo paying higher wages reflect the fact that most firms in Mozambique are than companies in the center of the country. using antiquated production methods that require little The higher cost of labor for large firms, after formal training to attain a minimum level of efficiency. controlling for the quality of workers, is consistent with As discussed earlier, this lack of investment may well the widely held belief that that large firms face a be caused by lack of access to finance. substantially heavier burden (and higher transactions costs) from regulations and institutions. This is Partial Factor Productivity. Table 2.25 reflected in the greater percentage of large presents the median capital to labor ratio across eight companies with excess workers that cite labor laws as Sub-Saharan African countries.24 We see that firms in a large problem. Large firms also tend to be more Mozambique are very capital intensive compared to unionized, which lowers their flexibility and raises most other countries. Their capital intensity is similar costs. If the higher cost of labor is the result of higher to that of firms in Cote d'Ivoire and greater than that of transactions costs associated with the regulatory firms in Ghana, Kenya, Tanzania, Zambia, and burden, this may well deter firms from growing and Zimbabwe. This is clearly driven by historical factors; informal enterprises from registering. many firms in Mozambique were highly capital- Worker Training. Given the low skill levels of the work force in Mozambique's manufacturing firms, an Table 2.24 Factors Underlying Lack of important area of policy attention is worker training-- Training a critical input for enhancing worker productivity. However, firms in the 2002 survey showed % of firms ambivalence toward worker training, as evident from Cannot define/prioritize training needs 98.9 responses to two questions asked in the survey: (i) Lack of government incentives for training 52.4 Would government incentives for worker training have Cannot afford formal internal or external an impact on their business? and (ii) How important is training 49.5 worker training to business growth? In both cases, No need--staff can train on the job 43.9 firms' responses fell equally across three categories-- Too risky--trained staff may leave 21.7 a third ranked worker training as having no impact, a Staff are uninterested in learning new skills 17.9 third as low impact, and a third as high impact. Cannot identify competent trainers for Table 2.24 summarizes firms' responses for the internal training 12.3 reasons why worker training was not undertaken in Lack of training by chambers of industry, business associations 10.2 their firms. As would be expected, considerations of Lack of training institutions for external affordability and desire for government incentives training 8.4 ranked quite high. Interestingly, an overwhelming No need--can hire staff from other firms 4.8 majority of responding firms cited inability to define or Source: CTA/RPED Survey 2002. prioritize training needs as a constraint. This may be 2. Mozambique's Investment Climate in an International Perspective 42 Table 2.25 Distribution of Capital-Labor Ratio Cote Mozambique Cameroon d'Ivoire Ghana Kenya Tanzania Zambia Zimbabwe 2001 Median By Size 11496 5469 946 4511 4065 4417 4382 5302 By Size Micro 0.763 0.424 0.295 0.370 0.449 0.522 0.270 0.19 Small 0.808 0.893 0.773 0.899 0.814 0.920 0.696 1.19 Medium 1.148 1.739 1.352 0.853 0.856 0.951 0.851 0.99 Large 2.156 1.639 1.481 1.203 0.903 1.031 0.913 2.11 Very Large 1.388 1.525 2.001 1.060 1.828 1.129 1.196 0.62 By Sector Food 1.157 1.749 2.016 1.005 1.031 0.945 1.106 1.80 Metal 1.170 0.935 1.744 0.586 0.746 0.884 1.133 1.05 Textile 0.715 0.409 0.851 0.513 0.649 0.774 0.716 0.38 Wood 0.849 0.837 1.179 0.915 1.085 0.557 0.582 0.98 Notes: The median data are in U.S. dollars. All other values are median value of the group as a percentage of the full sample the median. Data for other countries was collected for three consecutive years between 1992 and 1996. These values presented are averages across the three waves of data. Source: RPED. intensive, state-owned enterprises in the past. There contention that the very largest firms are saddled with are very large differentials across size classes as a labor force larger than that required for optimal well--capital intensity in micro firms is only 19 percent efficiency. The pattern of changes in labor productivity that of the median value, while large firms have more and capital intensity across firm size suggests that than double the capital intensity of the average firm. firms are operating under constant returns to scale, The result is that capital intensity declines in the and thus differences in productivity are primarily largest size class, compared to the median, even driven by differences in capital intensity. This is though the absolute values of capital for large firms confirmed when we estimate a Cobb-Douglas are high. production function. Table 2.26 examines value added per worker Examining differences in capital productivity, we which is an approximate measure of labor see that firms in Mozambique have very low capital productivity. We see that productivity in Mozambique productivity compared to other countries (table 2.27). is the lowest of all the eight countries considered. Part of the reason is undoubtedly the higher capital However, there are major differences across size intensity. Except for micro firms, the differentials are classes. Labor productivity dramatically increases not very large across size groups, while in other with firm size--large firms have more than double the countries we see sharp declines in capital productivity labor productivity of the median firm. But productivity with firm size. This may be driven by the past falls for the largest size class, which supports the government ownership of a large number of firms in 2. Mozambique's Investment Climate in an International Perspective 43 Table 2.26 Distribution of Value Added per Worker Cote Mozambique Cameroon d'Ivoire Ghana Kenya Tanzania Zambia Zimbabwe 2002 Median By Size 9656 1122 1304 3337 1862 2962 3999 977 Micro 0.501 0.242 0.588 0.478 0.784 0.601 0.544 0.45 Small 0.731 0.959 0.919 1.000 0.758 1.050 0.772 1.00 Medium 1.988 1.251 0.868 1.011 1.220 1.017 0.970 1.53 Large 2.011 1.860 1.899 1.395 1.117 1.392 1.000 2.06 Very Large 1.784 1.805 2.656 0.848 2.016 1.576 1.230 0.89 By Sector Food 1.459 1.472 2.015 1.603 1.848 1.153 1.796 1.65 Metal 0.924 1.213 1.103 0.578 1.042 1.487 0.954 0.76 Textile 0.659 0.335 0.773 0.549 0.553 0.666 0.780 0.68 Wood 0.798 0.889 0.703 0.802 0.478 0.534 0.640 1.17 Note: The median and standard deviation are in U.S. dollars. All other values are median value of the group as a percentage of the full sample the median. Source: RPED. Table 2.27 Distribution of Value Added to Capital Ratio Cote Mozambique Cameroon d'Ivoire Ghana Kenya Tanzania Zambia Zimbabwe 2002 Median By Size 0.89 2.45 1.41 0.81 0.66 0.64 0.88 0.19 Micro 0.65 1.77 2.42 1.07 1.60 1.03 1.49 2.37 Small 1.11 2.36 1.28 0.70 0.31 0.54 0.84 0.79 Medium 0.87 2.32 0.95 0.84 0.40 0.47 0.70 1.42 Large 0.80 2.65 0.65 0.73 0.37 0.59 0.93 0.95 Very Large 0.88 2.97 0.77 0.48 0.19 0.78 0.75 0.84 By Sector Food 0.85 2.01 1.47 0.91 0.60 0.66 0.91 0.74 Metal 0.99 3.09 1.11 0.83 0.67 0.68 0.62 1.16 Textile 0.78 1.67 1.99 0.86 0.53 0.47 1.01 2.26 Wood 0.85 2.76 1.01 0.75 0.72 0.70 0.98 0.84 Notes: The capital data for Cote d'Ivoire are less reliable than those for other countries. There was confusion in responses among sale, replacement, or market value of capital. This may explain the much higher VA/K ratio for this country. Sources: Data for Mozambique from CTA/RPED Survey 2002; data for other countries from RPED 1992­1996. 2. Mozambique's Investment Climate in an International Perspective 44 the sample, even among the smallest ones. Often Examining differences across sectors, wood is the government-owned firms, with their easy access to poorest performing sector, while upstream, industries finance, are more capital-intensive compared to firms such as garments and furniture are the best in the private sector.25 The higher capital intensity may performing (table 2.29). Since the garments and also reflect burdensome labor regulations. In the furniture industries are labor intensive, and in interviews, several large firms stated that they chose Mozambique furniture has a low domestic resource to mechanize so that they could avoid the hiring more cost, a move to these industries should reflect a move workers and increasing their administrative burden. toward efficiency. Total Factor Productivity and Firm Table 2.28 Efficiency Differentials across Efficiency. How do capital and labor interact to Firm Size, 2001 affect overall firm performance? Analysis using the total factor productivity approach shows that average Firm Size Mean Efficiency (range = 0 to 1) firm efficiency is very low--0.38 for the entire sample, Micro 0.38 indicating that many firms are inefficient compared to (0.24) the "best practice" firm in Mozambique (which would Small 0.36 have a score of 1). Exporting firms, privatized firms, (0.23) and foreign-owned firms perform better than others. Medium 0.45 Mean firm efficiency is lowest for the largest size class (0.26) of firms (those with more than 250 employees). The Large 0.41 (0.22) high dispersion in efficiency shows that many Very Large 0.28 inefficient enterprises survive alongside some very (0.23) efficient ones. This situation demonstrates a lack of Source: CTA/RPED Survey 2002. competitive pressure, as well as market segmentation. Total factor productivity is estimated using the stochastic frontier approach. A frontier function was Table 2.29 Efficiency Differentials By Sector estimated including capital, labor, capacity utilization, and sectors as explanatory variables. The residuals of Sector Mean Efficiency (range = 0 to 1) this regression provide us with efficiency indices for Food 0.34 each firm, which is a measure of its total factor (0.23) productivity. The best practice firm receives a score of Wood 0.29 1, while the poorest performing firm a score of zero. (0.20) The average efficiency of firms in Mozambique is Furniture 0.45 0.38, indicating that there are many inefficient firms (0.24) surviving along with some very efficient firms. Textile 0.31 Examining differences across firm size, we see (0.33) that efficiency is similar for most size classes, Garments 0.45 (0.36) increasing marginally between the micro and the medium size class and then falling again.26 It drops Metal Working 0.36 (0.25) significantly for the largest size class, falling to 0.28, Source: CTA/RPED Survey 2002. compared to 0.45 for medium firms (table 2.28). 2. Mozambique's Investment Climate in an International Perspective 45 A comparison of mean efficiency scores between Table 2.31 Mean Efficiency Differences by privatized firms and firms that were never state-owned Size Class: Privatized vs. Always Private shows that privatized firms perform marginally better Firms than always-private enterprises. There is no statistical difference between local and foreign-owned firms. Firm Size Always Private Privatized Exporters perform significantly better than non- Micro 0.38 n.a. exporters, with mean efficiencies of 0.47 and 0.37, (0.24) respectively (table 2.30). Small 0.37 0.31 Sharp differences emerge when we examine (0.24) (0.24) variations in average efficiency between privatized Medium 0.44 0.45 and always-private firms across size classes (table (0.33) (0.18) 2.31). We see that the smaller privatized firms are Large 0.29 0.46 (0.17) (0.23) actually performing marginally worse than always- Very Large 0.25 0.36 private firms. In medium-size firms, there is no (0.26) (0.15) difference between the two groups. However, for the Source: CTA/RPED Survey 2002. large size class (100­249 employees), privatized firms perform much better than firms that were never state-owned, with a mean efficiency of 0.46 compared improving in the face of competition. Most of these to 0.29 for always-private firms. The difference is also efficient firms have invested in new technologies, significant for the largest size class, where privatized often in conjunction with foreign owners or partners, to firms have mean efficiency of 0.36 compared to 0.25 increase their productivity. for always-private firms. This indicates that surviving The third and final element in our discussion of privatized firms in the larger size classes are firm performance is firm growth. So far, we see that investment levels and firm productivity have suffered due to the constraints of lack of finance, inability to Table 2.30 Efficiency Differentials across hire skilled labor and import new technology, and a Other Firm Characteristics burdensome regulatory environment. Let us now look at the factors determining firm growth in Mozambique. Firm Type Mean Efficiency (range =0 to 1) Always Private 0.36 Firm Growth (0.25) After a severe contraction in the early 1990s, the Privatized 0.41 Mozambican manufacturing sector rebounded sharply (0.21) in 1995­1996. Firms began to bring back on-line, Non-exporters 0.37 capacity that had been left idle during the war. Firms (0.23) grew rapidly, in large part because they were starting Exporters 0.47 (0.27) from a very low base. Managers were optimistic and Foreign-Owned 0.39 confident that rapid growth would continue; a 1998 (0.23) CTA/RPED survey of Mozambican manufacturing found Domestic Firm 0.38 that almost three-quarters of the sample expected (0.24) sales to rise in subsequent years. Actual experience, Source: CTA/RPED Survey 2002. however, has run contrary to this optimism. 2. Mozambique's Investment Climate in an International Perspective 46 Sales and employment data from this survey distinct patterns. Most important, firms that reported provide an indication of how the manufacturing sector levels of output per worker in the lowest decile had the is performing. Given that many firms did not respond highest probability of exiting; those in the highest 10 and that there is little overlap between the 1998 and percent were much more likely to survive. This 2002 survey samples, it is not possible to say suggests a move toward higher overall efficiency as categorically how sectors are performing from these low-performing firms exited in the face of increasing data. However, the evidence does suggest that competition. growth has decelerated. The manufacturing sector is Controlling for size, location, privatization status, still going through a process of restructuring, sector, and productivity, large enterprises were more inefficient firms are closing, and more efficient likely to survive than small ones, which is consistent companies are seeing rapid growth. Sectors with the view that the business environment is more consisting of older firms are finding it difficult to difficult for smaller companies. Firms in the north were compete in the global market, while new entrants, significantly less likely to exit than those in other such as printing and plastics, are operating regions. A larger percentage of wood and furniture successfully. The story regarding firm growth is firms closed than any other sector. Remarkably, consistent with the results for productivity and privatized firms displayed significantly lower investment; manufacturing has not shown strong probability of closing than firms that had always been employment creation or rapidly growing sales and private. investment levels have been low. Mozambique's business environment is acting as a drag on all of the Sales and Employment Changes. Consistent key indicators of firm performance and private sector with the high rate of exit, the sales and employment development. data collected in the survey suggest that the manufacturing sector has not been growing rapidly. Firm Exit. More than 30 percent of firms from the For the 1998 sample, the average annual real sales 1998 survey were no longer operating and could not growth between 1992 and 1997 was 20.5 percent.27 be re-interviewed in 2002. In addition, a few firms that There is, however, a high degree of variation in sales were still open were essentially moribund with almost figures, and the median value was only 1.4 percent no sales. An analysis of the firms that failed showed (Table 2.32). Some firms were growing at explosive Table 2.32 Annual Percentage Real Rate of Sales Growth, Various Years Mean Median Percentage with Average Annual Average Annual Negative Growth 1992­1997a 20.5 (68) 1.4 45.6 1997­2001b 1.1 (68) 5.4 38.3 1997­2001c 4.0 (60) 6.0 36.7 1999­2001c 3.8 (60) 0.9 45.0 a. 24 companies overlap between 1992­97 and 1997­2001. b. 73 companies reporting 1998 and 2001 data. c. 60 companies reporting 1998, 1999, and 2001 data. Source: CTA/RPED Survey 2002. 2. Mozambique's Investment Climate in an International Perspective 47 rates as they brought productive capacity back on- data in both 1998 and 2002.30 The median growth rate line and regained access to markets denied to them was 0.8 percent. Turning to the larger sample during the war. Other companies, which previously available for 1999­2002, the growth rate is actually operated in protected markets or had guaranteed negative, and the median and mean average growth contracts from the government and clients in Eastern rates are ­1.6 and ­2.0 percent, respectively (table Europe, could not compete, and saw dramatic 2.33). This is similar to the results from the previous declines in sales volume. But as mentioned earlier, survey that found average annual growth rates of most managers either had expected high sales employment declining at about the same rate. It growth in the post-1996 period. appears that firms are still restructuring and shedding The 2002 survey attempted to re-visit all firms workers. This may be due to rigid labor laws that have seen in the earlier survey and assess changes in prevented firms from fully adjusting their workforce, or performance. Unfortunately, because of the high rate it may be in anticipation of falling sales growth. It is of exit and the lack of recall data, we were left with clear, however, that firms in the manufacturing sector only a small sample of 73 firms that reported sales have not been growing significantly and do not data from 1997 and 2000 or 2001, and only 24 of anticipate doing so in the near future since most these firms were also in the 1998 survey.28 The companies in the sample are reducing their average annual rate of real sales growth for the employment. 1997­2000 sample was only 1.1 percent, but the Analysis of performance by sector shows distinct median was a much stronger 5.4 percent.29 This changes during the last four years. Firms in the "other" evidence demonstrates that there is still considerable category have grown sharply (table 2.34). These are restructuring taking place. Weaker firms are suffering mostly companies in plastics, printing, and other large decreases in sales as competition from imports recent entries into the market that were not seen in intensifies, and some new entrants are showing rapid 1998. The food sector has shrunk in terms of both sales growth. But the very high average growth rates sales and employment after previously being the have leveled off, as most productive capacity is back fastest growing sector. Many food processors have on-line and few firms are investing significantly to suffered in the face of import competition, and even create new capacity. some of the very large companies in the food industry Employment data, often a more accurate indicator have experienced hard times. The garments sector of firm performance than sales, indicates an average firms appear strong, but this must be put into context. annual growth rate of 0.5 percent for firms providing Those garment firms that have been able to survive by Table 2.33 Annual Percentage Rate of Growth in Employment Mean Average Median Average Percentage Annual Annual Losing Workers 1992­1998 ­0.5 (80) ­1.6 60.0 1998­2002 0.5 (70) 0.8 49.3 1999­2002 ­2.0 (120) ­1.6 62.5 Note: Thirty-five firms overlap between 1998 and 2001. Source: CTA/RPED Survey 2002. 2. Mozambique's Investment Climate in an International Perspective 48 Table 2.34 Annual Percentage Real Rate of Sales Growth and Employment, By Sector 1992­1997 1997­2001 Real Sales Employment Real Sales Employment Food Mean 26.0 ­1.8 ­10.6 ­5.4 Median 4.7 ­0.9 ­4.2 ­2.4 Metal Mean 9.1 ­3.1 4.7 2.5 Median ­5.1 ­3.2 6.2 2.6 Garments Mean 50.4 1.4 7.9 ­2.1 Median 10.4 ­1.5 13.4 ­4.0 Wood Mean 13.2 4.1 ­2.4 ­0.5 Median 4.5 0.9 4.7 1.7 Other Mean 11.9 ­4.1 14.1 3.0 Median 8.6 ­4.1 21.0 1.2 Source: CTA/RPED Survey 2002. exporting or contracting with the government have Privatized firms report laying off workers faster done well, but many others have exited, and all of the than always private firms, and their sales growth textile companies in the earlier sample appear to have figures are significantly lower. This suggests that closed. privatized firms are finding it hard to compete and that In the recent survey, large firms had the lowest their low exit rate might be due to provisions of the average annual sales growth (table 2.35).31 This is in privatization program. contrast to the 1998 survey that found that large firms Controlling for sector, size, age, and other factors, were growing the fastest. Firms in the smallest size our analysis confirms that larger firms grow more category have been increasing in sales since 1997 slowly than smaller firms, and older firms grow more but have also been shedding workers faster than slowly than newer firms. In the earlier survey all firms other categories. This is consistent with the fact that were growing from an equally small base as output labor regulations prevent large firms from reducing was re-established. Most excess capacity has now workers as quickly as they would like but that small been restored, so smaller and newer firms are firms are less affected by such constraints. growing faster because they are starting from a lower 2. Mozambique's Investment Climate in an International Perspective 49 Table 2.35 Annual Percentage Real Rate of Sales Growth, By Size 1992­1997 1997­2001 Number of Workers Real Sales Employment Real Sales Employment 1­49 Mean 18.7 ­1.3 0.5 ­5.5 Median 0.7 ­2.9 9.7 ­6.5 50­99 Mean 18.0 ­0.2 13.9 0.6 Median ­2.1 ­0.9 7.3 0.0 100 + Mean 31.2 0.5 ­5.3 ­1.8 Median 9.0 ­1.5 0.3 0.0 Source: CTA/RPED Survey 2002. base. Interestingly, after controlling for various factors, Notes privatized firms appear to have grown more gradually than companies that were never state-owned. 5. The previous survey also found the use of trade Employment by exporters has increased more than in credit to be miniscule in Mozambique, as well non-exporting firms, and garments have had lower as the use of informal loans. See CTA/RPED growth compared to other sectors. The "other" sector (1999). has the highest growth rate, and firms in the north 6. Companies providing leasing arrangements have showed negative growth compared to companies in recently begun operations in Mozambique and the other regions. (For sales growth figures by export appear to hold great promise. status and privatized versus always private, see 7. Some ethnic communities have their own dispute tables 2.36 and 2.37). Overall we do not see a high resolution systems. For example, in Mozambique rate of growth in the Mozambican private sector. and other East African countries it is reported that Things have slowed substantially after the initial some members of the Muslim community use rebounding of the private sector in the mid 1990s. religious leaders to mediate disputes. It is clear from our analysis of the survey data that 8. One of the four firms citing that collateral was not firms are severely constrained by lack of finance, required was a very large firm with more than 250 policy uncertainty and the regulatory burden, and lack workers. The others were in the 100­250 size of infrastructure. Even the low cost of labor does not category. compensate for the burden imposed by the business 9. Cadot and Nasir (2001). environment. These constraints have retarded private 10. For the exact methodology please access the sector growth in Mozambique, as evidenced by the Doing Business Web Page at http://rru.worldbank. low levels of productivity, investment and firm growth. org/DoingBusines 2. Mozambique's Investment Climate in an International Perspective 50 Table 2.36 Annual Percentage Real Rate of Sales Growth, By Export Status 1992­1997 1997­2001 Real Sales Employment Real Sales Employment Exporter Mean 25.0 2.8 ­10.0 ­1.5 Median 7.7 ­0.9 ­8.6 2.2 Non-Exporter Mean 19.3 ­1.2 3.1 ­1.6 Median ­0.3 ­2.1 6.0 ­2.1 Source: CTA/RPED Survey 2002. Table 2.37 Annual Percentage Real Rate of Sales Growth, Privatized versus Always-private 1992­1997 1997­2001 Real Sales Employment Real Sales Employment Privatized Mean 22.3 0.8 ­3.4 ­3.5 Median 3.2 ­0.6 0.7 ­3.7 Always private Mean 19.3 ­1.2 4.6 ­2.4 Median 1.3 ­2.0 9.7 ­4.0 Source: CTA/RPED Survey 2002. 11. A description of this torturous process is given in 15. See Annex C for a detailed break down of appendix C. registration steps. 12. The recent report by the World Bank Group's 16. It was recently announced, after the data for this Foreign Investor Advisory Services group (FIAS) study were collected, that the system of pre- details the process along with recommendations declaration, whereby firms had to pay a deposit of to improve it. It recommends automatic 15 percent of duties owing before importation, has registration and licensing for only selected been abolished. This is an important step toward industries. improving the trade regime. 13. Recent World Bank Investment Climate 17. Interviews with Malagasy Exporters. Cadot and Assessments. Nasir (2001). 14. Based on interviews with local consulting 18. It should be noted that almost the entire sample agencies. was drawn from enterprises located in major 2. Mozambique's Investment Climate in an International Perspective 51 urban areas along transport corridors. Roads frontier will be explored in future, along with a remain a serious issue in outlying areas. cross-country analysis of productivity differentials 19. Among the eight firms with investment ratios by estimating a common cross-country frontier. exceeding 50 percent, three show investment 27. These figures differ from what was reported in the ratios of higher than 6,000 percent, which may be 1998 report because of different ways of due to underestimation of their capital stock calculating growth rates and also because only combined with an investment large in absolute clearly unexplained outliers were dropped. value. 28. The sales data from the 1998 survey are for 1997. 20. Of the 29 firms that invested and had access to The 2002 survey was conducted between May bank overdraft or loans, 5 had access to both and July 2002. Firms do not have to close their loans and overdrafts, 2 to only overdrafts, and 17 books until May for the previous year. to only bank loans. Consequently, many firms interviewed early in the 21. One firm reported using friends and families as a process could not report sales data for 2001 and source, and only two reported "other" sources of instead substituted 2000 figures. financing. However, two of these three 29. The percentage change in real sales over the investments also happened to be by far the period ranged from a few thousand percent for largest investment amounts. These outliers have start-up firms to almost negative 100 for moribund been dropped from the results reported here. firms. The high variation in real sales is also a 22. More precisely, if all investments were of equal result of inaccurate reporting data. Very large magnitude, internal funds would be financing 67.2 statistical outliers that could not be explained percent of the investments and banks 28.5 were dropped. Additionally, firms in which the percent. interview team accountants found the figures to 23. For easier international comparability, the average be inconsistent and unreliable were dropped. wages are depicted in U.S. dollars using an 30. Sales figures are notoriously unreliable; firms exchange rate of US$1=24,000 Mts. misrepresent them, the choice of deflator radically 24. Due to the high variance across firms, the median alters the real value, and it is often difficult to was found to be the best measure of central construct recall data. While sales may fluctuate tendency. widely from year to year, firms attempt to structure 25. Other RPED countries such as Tanzania and employment levels on expected long-term trends. Zambia also had many state-owned enterprises. In economies where there is little investment However, they were not as extensive and did not toward labor-saving productivity, as in appear in all size categories as they do in Mozambique, increases in employment are a Mozambique. The samples in the other countries good predictor of expected sales growth. In had a much lower proportion of firms that were addition, companies are usually much more recently privatized. willing to provide accurate employment figures 26. The results here are simple averages across than sales figures. different groups and provide a good indication of 31. We have combined the medium, large, and very efficiency differentials. A more rigorous large size categories into one to give a larger econometric analysis, examining each of these in sample size and to remain consistent with the a multivariate regression by augmenting the 1998 survey report. 3. Investment Climate at the Sub-National Level 52 Performance 53 Business Environment 54 3. Investment Climate at the Sub-National Level 53 There are marked differences between the investment. Table 3.1 reveals several trends when business conditions of the different regions in growth is analyzed by region. Sales appear to be Mozambique. Because of the long distances, the much higher in the Maputo region than in the north or underdeveloped transportation network, and strong center. However, employment growth seems a bit provincial governments, the north, south, and center stronger in the north. The difference between the of the country can be viewed as distinct economic growing employment and falling sales in the north is environments. The survey found that in all regions, probably due to the fact that some firms reported firms source on average over 90 percent of their sales and not employment, and others reported domestic resources and make over 90 percent of their employment but not sales. There are more firms sales in the same region. Regional trade patterns reporting sales figures than employment, and it reinforce these differences, with the natural trade appears that generally growth is a bit weaker in the routes in the south running from Maputo to South north. Surprisingly, the unrest in Zimbabwe that was Africa; in the center from Beira through Chimoio to expected to have a severe impact on the center does Zimbabwe; and in the north from Nacala to Nampula not clearly appear in this data. However, anecdotally, and to Malawi. To understand these regions and how many local businessmen suggested that some effects their local investment climates may differ, the sample may be masked by the aggregate data. Some firms included firms in all three of the major regions. may have been deeply affected, resulting in negative average sales and employment growth, but most firms are growing, so the median figures are positive. Performance The analysis of investment probabilities did not find a significant regional difference. However, With its better infrastructure and proximity to South examining total factor productivity differences across Africa, the south has seen the majority of new location, we find that firms in the north have much Table 3.1 Annual Percentage Real Rate of Sales Growth, By Region 1992­1997 1997­2001 Real Sales Employment Real Sales Employment Maputo Mean 15.8 ­1.2 6.1 0.3 Median ­0.3 ­2.1 7.6 ­0.3 Center Mean 26.3 ­1.6 ­4.1 ­1.9 Median 1.4 ­0.9 4.1 1.8 North Mean 26.6 ­0.6 ­14.1 0.2 Median 4.5 ­2.9 ­18.4 2.6 Source: CTA/RPED Survey 2002. 3. Investment Climate at the Sub-National Level 54 Table 3.2 Mean Efficiency Differences data from the 2002 survey suggest that there is some by Location truth to this but that the regional differences are not as pronounced as some perceive them to be. Location Mean Efficiency Confidence North 0.27 One area in which regional differences occur is (0.26) business confidence, which remains relatively high in Center 0.35 (0.21) all regions and highest in the center. The South 0.40 Beira­Chimoio corridor has suffered because of (0.23) recent problems in neighboring Zimbabwe. Source: CTA/RPED Survey 2002. Nonetheless, firms in the center of the country on average reported that they expected sales to increase in the next year by nearly 10 percent more than firms lower efficiency than firms in the center and south, in Maputo and over 15 percent more than those in the with the south being the most productive (table 3.2). north. Expected investment was also correspondingly Manufacturing in the area around Maputo has had higher (table 3.3). more growth and higher levels of productivity than the other regions. Much of this stronger performance can Bureaucratic Burden be traced to the better business environment. The The central region--and the Sofala province in overall operating conditions, including the regulatory particular--has a reputation for being a less business- burden and provision of infrastructure appears to be friendly and for suffering from a higher level of better in the Maputo area than in either the north or the bureaucratic burden.32 The survey data appear to central regions justify this contention to a certain extent, although it is not as severe as sometimes suggested. By many measures, the center seems to suffer more from overly Business Environment bureaucratic business regulation than either the north or the Maputo regions. Central region companies It has been suggested that the business environment reported that it took an average of 215 days to is significantly different among regions and that register, but the median time was only slightly higher outside of Maputo, the cost of doing business rises than reported in the other regions. In the north and the because of high administrative barriers, heavy center, a few companies reported that it took almost bureaucratic burden, and poorer infrastructure. The two years to register, but in the Maputo area no firm Table 3.3 Expected Changes in the Next Year Mozambique Maputo Center North Average Expected Increase in Sales 19.5 19.0 26.0 13.5 Average Expected Growth in Investment 14.0 13.7 19.7 6.8 Source: CTA/RPED Survey 2002. 3. Investment Climate at the Sub-National Level 55 Table 3.4 Days to Register and Required Permits Mozambique Maputo Center North Days to Register a New Company Mean 167 172 215 167 Median 137 141 165 103 No. of Permits Required to Open Mean 2.4 2 3 1.3 Median 1 1.5 3 1 Source: CTA/RPED Survey 2002. reported more than a year. The average number of (such as health, labor, or others) six times in the last permits required to open a business was also year. By these measures, the lowest bureaucratic reported to be higher in the center than in the north or burden appears to be in the north, where both the Maputo (table 3.4). average number of inspections and the average The red tape that firms face can also be measured management time spent on government regulations are by the number of inspections and the amount of senior the lowest of the three regions (table 3.5). management time spent on government bureaucracy. Here again, the Beira­Chimoio area fares worse than Customs Clearance other areas. It is interesting to note that the number of A significant regional difference is the amount of time inspections by local tax officials is higher in the center that it takes to clear goods into and out of the country. than elsewhere, while the average number of Firms in the center take nearly 30 percent longer to inspections by national authorities does not clear imports than firms in the north or Maputo. But appreciably differ. This lends credence to the argument when it comes to exports, managers in the north that local officials are responsible for the higher report that it takes almost twice as long to clear goods administrative costs. Overall, the number of inspections as it does in Maputo. The longest times reported to was highest in the center with the average firm being clear shipments in the last year were also much longer subjected to some type of government inspection in the north and center than in Maputo. It is impossible Table 3.5 Management Time and Inspections Mozambique Maputo Center North Avg. Percent of Senior Mgmt. Time Spent Dealing with Gov't Regulations 11.3 11.8 14.0 5.5 Avg. Number of Tax Inspections by National Authorities 1.3 1.2 1.5 1.6 Avg. Number of Tax Inspections by Local Authorities 2.2 1.9 3.0 0.8 Avg. Number of all Inspections 4.5 4.3 6.0 3.3 Source: CTA/RPED Survey 2002. 3. Investment Climate at the Sub-National Level 56 Table 3.6 Average and Longest Clearance Times Mozambique Maputo Center North Average Days to Clear Imports 12 10.5 13.9 10.8 Average Days to Clear Exports 17 10.2 13.5 20.5 Average Longest Days to Import 18.5 17.3 24.2 21.3 Average Longest Days to Export 21 12.3 32.6 36.7 Source: CTA/RPED Survey 2002. for companies to be competitive with such long biggest overall infrastructure problem with little delays, especially in an economy so dependent on difference among the regions. But by most measures, imported raw materials. Of course, these power supply appears to be a smaller problem in the discrepancies may be due to several factors, Maputo area. As table 3.7 shows, the fraction of including poor infrastructure and bureaucratic delays, companies in the center and the north with their own but it appears that one of the most overwhelming generators is significantly higher than in the Maputo impediments to operating outside of Maputo is the region. Likewise, the median average number of customs clearance process (table 3.6). power outages in the areas outside of Maputo is almost twice that in Maputo. This is generally the Infrastructure same pattern reported in 1998. The average number The most striking difference among the regions is the of power outages has changed little in all regions. level of infrastructure development. As the 1998 "Roads and transportation" was the second survey revealed, the quality of the infrastructure ranked infrastructure obstacle. Although roads are declines as one moves north. The Maputo area is generally considered worse in the center and the better served in almost every facet than either the north, a larger fraction of managers in Maputo ranked northern or central regions. transportation as their number one infrastructure Managers ranked erratic power supply as the problem than did those in the center. This is single most important infrastructure problem, followed undoubtedly because firms in Maputo are more likely by poor roads; 46 percent of firms rated power as the to ship goods long distances than those in either the Table 3.7 Percentage of Firms with Generators and Average Power Outages % with Avg. No. of Power Median of Avg. No. of Generator Outages per Month Power Outages per Month Mozambique 22 17.5 5 Maputo 16 11.4 4 Center 41 30.1 10 North 25 29.4 10 Source: CTA/RPED Survey 2002. 3. Investment Climate at the Sub-National Level 57 center or the north. One should keep in mind, Security and water are also significant however, that subjective rankings of infrastructure infrastructure concerns. Around 67 percent of the constraints depend on the nature of the business. If overall sample ranked security as a major problem, the infrastructure is particularly poor in one area of the with 8 percent ranking it as their number one country, firms located there may structure their infrastructure problem. Significantly, security seems operations to mitigate this constraint. For example, if less of a concern for firms in the north. Water supply firms consider the roads to be in bad condition, they is ranked as the number one problem more often in will search for ways to reduce their use of them. the north than in the other regions and more often in However, as businesses grow, this "latent demand" the Maputo region than in the center. However, these cannot be ignored, and transportation can become a subjective rankings are a bit misleading. More more serious constraint. Road conditions and density companies in Beira have their own water supply than in general are so poor in the north that 30 percent of in any other region, and the average number of days the sample listed them as their number one per month without required water is also higher in the infrastructure problem, and almost 40 percent said center (table 3.9). that they were a major or severe problem (table 3.8). Table 3.8 Infrastructure Obstacles in Mozambique Mozambique Maputo Center North % % % % % ranking % ranking % ranking % ranking ranking No. 1 ranking No. 1 ranking No. 1 ranking No. 1 Major or Infr. Major or Infr Major or Infr. Major or Infr. Severe Prob. Severe Prob. Severe Prob. Severe Prob. Power 64 46 71 44 55 50 54 50 Security 67 8 72 10 65 7 37 6 Transport 28 25 25 27 26 13 39 30 Telecoms 21 1 23 2 21 0 4 0 Water NA 7 NA 7 NA 5 NA 10 Source: CTA/RPED Survey 2002. Table 3.9 Share of Firms with Own Water Source/d Incidence of Inadequate Water Supply Average No. of Times % with Own Water Source Water is Inadequate (per Month) Mozambique 23 13 Maputo 19 12 Center 41 14 North 16 37 Source: CTA/RPED Survey 2002. 3. Investment Climate at the Sub-National Level 58 Table 3.10 Share of Firms Regularly Using Telecommunications % Using % Using % Using % Using Landlines Cell Phones E-mail Web Sites Mozambique 91 86 36 19 Maputo 93 92 40 19 Center 97 89 43 29 North 76 62 14 7 Source: CTA/RPED Survey 2002. Overall, telecommunications facilities were not Not all aspects of the investment climate are reported as a significant problem in any region. The better in India. The cost of electricity is slightly higher, north, however, appears to have less access when and Indian firms report that they would keep slightly compared to firms in the Maputo and center regions. fewer workers if they were allowed to shed excess As table 3.10 indicates, use of e-mail and Web sites labor. Indian firms do use e-mail more than their are particularly lacking in the north, which managers Mozambican counterparts and report a higher rate of generally blame on the costs and reliability of Internet inspections. access. We estimated a simple growth equation to look at Finally, it is interesting to look at what the growth the difference in the growth rate of the private sector, rate of the private sector would be in Mozambique if it if Mozambique adopted India's investment climate acquired the investment climate that currently prevails variables. We estimate log (annual growth rate of in India. In particular, we would like to know the gains sales between 1999 and present) as a function of log to the private sector if the investment climate as of initial sales in 1999, log of number of workers, measured by four key indicators--frequency of sectoral dummies, and the four investment climate inspections, cost of electricity from the public grid, indicators mentioned above. We found that if overmanning, and the use of e-mail--improves to the Mozambique had India's investment climate levels of India. Table 3.11 shows mean values of these indicators, the overall annual growth rate of its private four variables in Mozambique and India. sector would be higher by an additional 1.9 percent per year. This is almost 25 percent higher than its current annual growth rate of 7.9 percent. In particular, Table 3.11 Key Indicators of Investment the large difference in e-mail usage has a substantial Climate effect on growth. Key Indicators Mozambique India Cost of electricity 7c/kwh 9c/kwh Note Optimal share of workers (%) 84.1 82.8 Frequency of inspections/year 3.48 9.14 32. See Harding 2000. Share of firms using e-mail to contact supplier (%) 31.1 43.9 Source: RPED/CTA Survey and FACS Survey 4. Policy Recommendations 59 Macroeconomic Stability 60 Encouraging Investment 60 Reducing the time and cost for doing business 60 Labor Flexibility 61 Expatriate Work Permits 61 Investment Incentives 61 Land 62 Trade 62 Customs Clearance 62 Foreign Exchange and VAT Refunds 62 Finance 62 Competition in the Banking System 64 Dispute Resolution 65 Information 65 Infrastructure 65 Energy 65 Transportation 65 Telecommunications 66 4. Policy Recommendations 60 Government policies should focus on creating an Reducing the time and cost for doing enabling environment that encourages investment business and supports efforts to raise productivity levels. While there has been much progress since 1998, the The Mozambican economy has been slow to adjust government must continue efforts to create conditions and reallocate resources to their most efficient use. The in which a dynamic private sector can thrive and difficulty in entering the market has reduced make use of Mozambique's natural advantages. competitive pressure to improve productivity and allowed inefficient firms to survive. It has also discouraged informal firms from becoming formal Macroeconomic Stability and availing themselves of investment incentives and other benefits of formality. The government must Mozambique has been successful in limiting inflation, move swiftly to bring the time and cost of starting a new preventing undue appreciation of its currency, operation in line with its international competitors. The managing public debt, and generally achieving registration procedure must be simplified, expedited, macroeconomic stability. It must sustain this stability, and made more transparent. CPI and other which will be increasingly difficult in the face of organizations should provide better support to declining aid. investors in going through the firm registration process. Mozambique must manage public debt prudently On the basis of the enterprises surveyed for this and maintain a buffer to accommodate increased Industrial Performance and Climate Assessment public debt when needed. After a recent round of Survey, it takes on average 138 days to register a debt relief that cut its external public debt by about company. While any data on the number of days that two-thirds, Mozambique has such a buffer. Today, the it takes to register a company as well as the present value of Mozambique's external public debt is associated cost with this process has inherently a about 24 percent of GDP or roughly equal to current degree of subjectivity and could thus be disputed, value of annual exports, with a debt service to exports there is a general consensus that the registration ratio of about 4 percent. Without the necessary fiscal process of firms is extremely complex, time effort, annual deficits will progressively erode the consuming and costly. Very few entrepreneurs are buffer and leave no room for the government to deal willing to endure this process leading to the with contingencies, which are a virtual certainty over substantial risk that this entrepreneur may give up on the medium term. The resulting instability could the investment or remain unregistered. rapidly choke off growth and make poverty-reduction The process (see Appendix C: Firm Registration goals unobtainable. Process) is cumbersome and time consuming. For example, the process of commercial registration, which takes a few hours in many other countries, Encouraging Investment takes over 30 days. Additionally, the publication of the company bye laws will take well over 30 days. The government must resolve administrative barriers Moreover, the cost related to the registry of a firm will, that discourage investment, increase the cost of doing on average, be of several hundreds of dollars making business, and hamper productivity growth. it difficult for small and medium enterprises to register. 4. Policy Recommendations 61 Once a firm has a final inspection that does not the implantation of more technologically advanced mean it can begin operations. It must then register industries in Mozambique. Until an adequate local with the tax department to obtain a number. A foreign supply of skilled workers develops, the private sector firm must also apply to open a bank account and must rely on expatriates for many specialties. begin applications for residence, work, and import Administrative barriers negate the benefits of close permits tasks that can add another four months to the proximity to South Africa and other sources of wait. Three key policy steps need to be taken to low-priced skilled labor, raising the cost of skilled address this problem--(i) modernize the registration labor above the cost in competitor countries. The process by computerizing the entries and retrieval government should move quickly to make the of information (ii) streamline the registration process process of employing foreign, skilled workers less and integrating the operations of all three institutions cumbersome; possibly adopting the proposal of the involved in this process, namely the Notary Office, private sector to allow a fixed percentage (minimum the Public Commercial Registry (Conservatória de 10) of foreign workers at the discretion of the employer. Registro Comercial) and the State's Printing Office, (Imprensa Nacional), so that the investor does not bear the burden of dealing with each of these offices Investment Incentives separately and moving the process along from one office to the other and (iii) outsource the functions that There is a wide range of legislated investment can be more efficiently provide by the private sector. incentives, but few firms have been able to take advantage of them. IFZ status has not been widely granted, and many firms in the survey reported Labor Flexibility difficulty obtaining duty exemptions on imports of capital equipment or other incentives. To attract Wages in Mozambique are extremely low by foreign investors, the government must assure them international standards, but low productivity and lack that they will actually be able to access legislated of flexibility make labor costly. The government must incentives. CPI currently only deals with foreign provide more flexibility for firms to adjust their work investors investing at least US$50,000. There must be forces in response to market forces, while still a process to extend incentives to smaller investors, ensuring protection of workers' rights. The cost of domestic as well as foreign. retrenchment is particularly a problem for large, It appears that many of the planned mega foreign-owned, and privatized firms. Labor regulations projects and enterprises in the mineral-processing should be amended to allow the payment of piece sector are seeking to follow Mozal's lead and register rate, which is a standard way of linking pay to their projects under the IFZ legislation. This legislation productivity in most labor-intensive industries. was intended to attract labor-intensive manufacturing exporters, but this has not happened in practice. Extending the favorable tax treatment to capital- Expatriate Work Permits intensive mega projects and mineral processors will have a detrimental impact on Mozambique's fiscal The difficulty of obtaining expatriate work permits is a position and may not be optimal in light of declining major impediment to raising productivity and hinders aid flows. 4. Policy Recommendations 62 Land Particular attention should be paid to speeding clearance of ground shipments from South Africa. The Obtaining clear right to use land is an expensive and government must set benchmarks for clearance times difficult process in Mozambique. It is not a major and monitor progress toward meeting the targets. problem for existing enterprises, but for investors Procedures to deal quickly with unexpected problems seeking a green field expansion, obtaining access to (such as delivery to the wrong port of entry) must be land is problematic. This is a particular constraint for established to add flexibility to the trade system. agricultural enterprises. The Ministry of Agriculture has successfully reduced the time it takes to obtain land, once all documentation is in place, to 90 days. Foreign Exchange and VAT Refunds The process of collecting documents should be streamlined to involve fewer institutions, be less Of particular importance is ensuring that the trading complicated and more predictable. The government community has the economic freedom to retain and must also move to improve land registries. More manage foreign exchange proceeds, which remain fundamentally, the inability to own land serves to considerably restricted. The delays in making VAT reduce its value as collateral. The government should refunds and other payments to qualified firms put consider alternative mechanisms for land distribution an enormous strain on companies' cash flows. They that regularize land market dynamics. also serve as a signal to potential investors that Mozambique is not serious about providing promised incentives. The time it takes to make VAT Trade reimbursements should be lowered to 30 days, and the government should pay market rates of interest Given the limited domestic market, Mozambique's on late reimbursements. Ultimately, to further improve best chance for industrial growth is penetrating the competitiveness of export-oriented producers, a the regional and world export markets. Unilateral system should be implemented to give them access domestic actions by the government in overcoming to imported raw materials and intermediate goods at administrative and trade policy barriers can world prices, rather than having to pay VAT and heavy significantly expand trading opportunities for the duties and then await refunds. private sector.33 Finance Customs Clearance The Mozambican banking system is characterized by Delays in clearing imports require firms to tie up large a high level of foreign ownership, high concentration amounts of working capital in inventory. Delays in and increasing dollarization. As in other low-income clearing exports make companies unsure of meeting Sub-Saharan countries the level of credit relative to strict delivery deadlines and prevent them from GDP is low (18 percent). Among the causes of low competing in valuable export markets. The time it intermediation are high interest rate spreads (which takes to clear both incoming and outgoing shipments reached 19 percentage points in 2002) as well as must be brought in line with international standards. high, volatile real interest rates (currently also at 4. Policy Recommendations 63 around 20 percent in meticals). A decomposition of environment, several short and longer-term actions bank spreads reveals that 44 percent of bank spreads should be undertaken including: are explained by loan-loss provisions and 35 percent by high overhead costs. The analysis also reveals that · The establishment of a commercial court, high loan losses in the largest Mozambican bank dealing with the largest cases. drive up spreads in all banks. · The adoption of a new Commercial Code, Additionally, it is worth noting that while inflation together with a revised Code of Civil Procedure. It volatility was in part due to significant (weather- may be worth noting that there have been no related) supply shocks, it also resulted from large, attempts to revise the 1967 Civil Procedure Code. fiscally-induced, demand shocks and weak monetary · The simplification of judicial procedure in light management. Although the sharp tightening of of the fact that comparisons with neighboring monetary policy that took place in mid-2001 appears jurisdictions show that procedural complexity is to have been effective in stabilizing prices and the very high in Mozambique. This is particularly exchange rate, it contributed to the high level problematic given the lack of trained judiciary and volatility of interest rates mentioned above. In and widespread corruption. order to reduce such volatility (of both prices and · The enhancement of the scope and reliability of interest rates) and enhance the scope for local the credit registry administered by BM. currency intermediation--thereby limiting financial · The training of judges in commercial dispute dollarization--the Banco de Moçambique needs to resolution, the reform of the land-registry and adopt a more transparent, pro-active (yet smoother), the establishment of a registry for movable forward-looking, monetary management. All the property. factors described above have contributed to a severe lack of affordable finance for enterprises in To that end, the Government of Mozambique Mozambique as shown in this report. This remains the should seek legal advice on the design and practice single most important constraint to the development of commercial courts; the revision of the commercial of the Mozambican private sector. Real interest rates code and civil procedures; as well as establish and collateral requirements appear higher than in monitoring process to identify progress in achieving other countries. The high cost of external funds and designated outcomes. the lack of trade credit make it difficult for companies to undertake needed investments. Monetary and public debt management In order to remedy this situation and stimulate the Although the sharp tightening of monetary policy that commercial banks in making sound new credits in the took place in mid-2001 appears to have been effective difficult Mozambican lending environment, immediate in stabilizing prices and the exchange rate, and medium terms policy reform will need to be it contributed to the high level and volatility of interest adopted. Based on the recommendations of the rates mentioned above. In order to reduce such Financial Sector Assessment (FSAP) findings the main volatility (of both prices and interest rates) and areas of focus are as follows. enhance the scope for local currency intermediation-- thereby limiting financial dollarization--the Banco de Enhancing the scope of financial Moçambique needs to adopt a more transparent, pro- intermediation active, forward-looking, monetary management. In order to stimulate the commercial banks in making To achieve this goal, the current monetary sound new credits in the difficult Mozambican lending framework needs strengthening. In particular, it 4. Policy Recommendations 64 lacks transparency; market participants do not Microfinance industry appear to fully understand the goals or procedures of Improving access to finance for micro enterprises monetary policy. This partly reflects insufficient efforts would also contribute to lessening the constraint by the Banco de Moçambique to communicate and imposed by the high cost of capital in Mozambique. explain its goals and operating procedures, as well as Overall, the microfinance industry has grown rapidly flaws in the design and operation of its monetary recently but still has a very small outreach, with instruments that send conflicting signals on the stance high concentration in Maputo. There are good of monetary policy. The apparent contradiction prospects for its development in Mozambique and between the very high central bank rates with the key several best performing MFIs are already in rate being the one-year central bank bill rate and the partnership with well renowned international rapidly declining short-term market rates during 2002 microfinance service providers. However, important was particularly confusing to market participants. bottlenecks need to be eliminated, including Acting preemptively to limit deviations from restrictions on deposit taking (that limit the size monetary policy objectives will require a strengthening and usefulness of the micro-finance institutions) and of BM's analytical capacity and greater emphasis on lack of human resources (that increases the cost inflation targets and developments. At the same time, it of intermediating). The current legislation under is important to rely more closely on an intermediate preparation should allow micro finance institutions to monetary target. To enhance transparency and avoid take deposits and would be well served if it benefited interfering with market signals, it is recommended that from expert advice in finalizing the micro finance BM conduct its monetary operations in the overnight law. money market. Moreover, it would be useful that Mozambican MFIs strengthen their cooperation with well-known Capital market international NGOs or international financial A better functioning capital market could also cooperative networks that have been effective in contribute to improving the terms of lending for developing good-practice MFIs "from scratch" by enterprises in Mozambique. However, it should be drawing upon existing informal practices, traditions noted that the Mozambican capital market is very and small community-based organizations. small and that there is limited scope for development in the short term. At this stage, the first objective should be to develop the market for public securities, Competition in the Banking System thereby providing a market-driven benchmark for the issuance of private securities. Beyond this, a The banking system has suffered from near collapses minimalist approach should allow for the local listing and high levels of bad debts. Continued efforts must and trading of securities with sufficient disclosure but be made to strengthen the balance sheets of banks. without overburdening the process and favoring as In addition, there is significant crowding out of private much as possible regional integration and economies borrowing by government borrowing. The government of scale. In this context the current capital controls will should implement policies designed to encourage need to be reviewed to ensure that they do not unduly the commercial banking system to hold a larger restrict regional integration and the movement of portion of their assets as commercial and industrial capital across the region. loans. 4. Policy Recommendations 65 Dispute Resolution issues in the provision of electricity mainly concern distribution and supply, it would be important for the A major factor in the high cost of external finance and reform underway to keep focusing on this part of the lack of trade credit is the difficulty of enforcing business in the first phase. This will help EdM improve contracts. Efforts should be directed toward its efficiency by: (i) intensifying connections where the improving the efficiency of the judicial system and to backbone supply lines are already in place and (ii) encouraging the widespread use of the private preparing for a private/public partnership, which system for Alternative Dispute Resolution established should be in place by the end of this phase. The latter in 1999. The government should expedite public will enable the government to leverage additional discussion of the proposed new commercial code. funding for further intensifying connections and rehabilitating and reinforcing the network, while (ii) taking advantage of the OBA scheme for otherwise Information non-commercial rural electrification (thus reducing the negative impact of rural energy on EdM's financial It is difficult for lenders to assess the credit risk of performance and help address the issue of potential borrowers. Steps to improve accounting affordability and accessibility of services for low standards and create functioning credit bureaus and income people and areas where there is a low property registries will help foster a safer lending population density. In addition to these changes at environment. the distribution level, the unbundling of EdM and the creation of a separate corporate transmission entity to provide transmission assets and perform system Infrastructure operation could also take place to help improve the system overall efficiency. The government has made significant progress These changes at the operational level will need to in both reconstructing extending Mozambique's be coupled with an institutional and legal reform that infrastructure, and this work must continue. will aim at establishing the enabling environment. In particular, it is important that an adequate regulatory capacity be established, within a transparent Energy environment that allow the establishment and the periodic review and adjustment of tariffs. This Almost 78 percent of the survey sample ranked power enabling environment will also help in protecting of the as a severe problem, and firms ranked it as the rights of consumers; as well as the promotion of biggest infrastructure problem most often. As renewable energy sources, which could contribute to capacity utilization increases and firms begin to productivity gains. engage in continuous production, erratic power supply will become an ever-increasing constraint. Steps should be taken to improve the consistency of Transportation electricity. In order to improve the access and the quality Transportation remains a significant factor in the of energy supplied to users and given that most high cost of doing business in Mozambique. While 4. Policy Recommendations 66 considerable progress has been made in passengers since they are significantly higher than strengthening the transportation systems, it is still other regional airports. While ADM charges US$72 costly and sometimes difficult to ship goods within per passenger, Johannesburg and Harare charge Mozambique or even outside of it. However, US$ 29.95 and US$ 49.57 respectively. inefficiencies, low quality of services and high cost Additionally, the quick improvements of the transportation services are still a significant constraint Nacala port and rail corridor will also be important to to the development of a competitive private sector. improve the competitiveness of the provinces in the This is so, since improved transportation facilities Northern part of the country. The liberalization of are needed to reduce the cost of shipping and coastal shipping, stalled since 1998, should be improve competitiveness on the world market. Road completed. In all of these cases, the focus should be transportation continues to be costly and ports are not on lowering the cost of transportation facilities to yet efficient enough compared to other ports in the private sector producers. region. In particular, it would be important to strengthen The government has made some important the institutional capacity of the Ministry of progress in all the transportation sub sectors (port, Transportation and Communications so as to improve roads, railways, airline and airports). More changes its ability to conceive, implement and monitor policies. need to take place in order to reduce the time that it Moreover, the establishment of the legal and takes to transport goods as well as to reduce its cost. regulatory framework that is conducive to private To that end, the Government will need to pursue its sector participation in all the transports sub sectors policy of increasing private sector participation in the would be important. delivery of infrastructure services. This would entail Another important transport issue that needs to be further divestiture from the remaining ports, airports, addressed is to find a cost-effective option to improve railways as well as from Linhas Aéreas de the conditions of the Zambezi River crossing at Caia. Moçambique (LAM), the State-owned airline operator. The existing ferry that provides the services at Caia is In addition to making the above-mentioned changes in poor condition and does not provide adequate in the operations and management of all the transportation services in terms of frequency, safety transportation sub sectors, the implementation of key and reliability. institutional reforms should not lose momentum. Moreover, in order to integrate some isolated In particular, it would be important that proper regions of the country, the rehabilitation of secondary attention be given the award of the concession roads as well as tertiary seaports should be contract for the operation of the Maputo International undertaken and completed. This would be effective Airport so that this transaction can be brought to if coupled with the establishment of transparent closure successfully. However, it should be noted that financing mechanisms for the provision of public this airport, although the largest of the country, is only obligation services for transport services, where the one of nineteen major airports managed by the state- services are not commercially viable. owned enterprise Aeroportos de Moçambique. Other important airports, such as those in Nampula and Beira would also benefit from new management and Telecommunications investments. Moreover, Aeroportos de Moçambique (ADM) will While the telecommunications system has improved need to revise the aeronautical fees that it charges to considerably over the last five years, the level of 4. Policy Recommendations 67 penetration of these services is still low, especially that the Government is making progress in this sector. with regards to Internet services, mostly due to The successful implementation of this reform currently the existence of a monopoly in the core segment underway will contribute to a notable improvement in of fixed line service and long distance. Hence, the telecommunication sector, facilitate national, the Government would help improved regional and international market integrations by telecommunications services by continuing the improving the enabling environment for private sector implementation of its comprehensive reform program development. and through steady progress towards further liberalization of the fixed and mobile segments. The Government's Private Sector Moreover the establishment of a strong and capable Development Strategy regulator coupled with a transparent and non- The PRSP establishes the private sector as the main discriminatory regulatory environment will help engine for economic development and emphasizes establish the regulatory and institutional environment whose development impinges upon the access and that is conducive to private sector participation in the quality of infrastructure services. provisions of fixed and mobile services. This enabling The Government is committed to establishing the environment will also contribute to the protection of enabling environment for an increased private sector the rights of consumers; as well as the promotion of participation in the country's economic growth. To that Internet-related services, which could help foster end, some concrete actions have taken place. Among improvements in the productivity. these, the most recent that may be worth mentioning The Government is encouraged to implement its are the market liberalization of several sectors, a wide-ranging and ambitious telecommunication including telecommunication, through the opening up reform. The objectives of this reform are to improve of both the fixed and mobile telecommunications access and quality of efficient and affordable segments to competition, and also air transportation, communication services. This is being achieved by water, to name a few. Other business friendly creating the enabling environment for competition, measures include the adoption of the Decree 30/21 and private sector participation in both the fixed and of October 15, 2001, which requires that public mobile telephone operations. institutions respond to requests from the private sector Thus far, the reform has led to the establishment within a determined number of days. of an independent telecommunication and postal Also, the demonstration effect of the success of services regulator, the Instituto Nacional das the "mega projects" in Mozambique has shown the Comunicações de Moçambique (INCM). Tenders to commitment of the government to create and maintain invite entry of second cellular mobile services a conducive environment for attracting foreign direct operator has taken place and negotiations to award investment. This is in contrast with the conditions that this bid are underway. Additionally, a pro-competition prevail for the average domestic or international telecommunications law conducive to a multi operator investor in Mozambique. environment has been drafted and is currently being However, the Government intends to pursue its discussed, while the strategy to divest the State- removal of administrative barriers, particularly in the Owned fixed line operator Telecomunicações de following areas: (i) reducing the time and cost for Moçambique (TDM) is being prepared. Additionally, business start up; (ii) adopting a new Commercial key regulatory decrees on interconnection, licensing Code that fosters private sector development; (iii) and INCM organization have been enacted, showing reducing labor market rigidities; (iv) clarifying 4. Policy Recommendations 68 property and land use rights; (v) improving trade electricity, communication, and civil aviation, regime; and (vi) implementing a legal and judicial respectively, without economies of scales and sector reform. It is worth noting that improving the consistency across sectors. These institutional business environment through pro-private sector settings will need to be harmonized, refocused and development is just one element of a broader program coordinated in order to improve their efficiency and of reforms, which also includes the focus of some ensure their long-term sustainability. sectors that are believed to be competitive. Support to SMEs Infrastructure reforms The Ministry of Trade and Industry will help foster the The government intends to deepen its infrastructure development of SMEs by helping address the reform to increase private sector participation in the underlying constraints facing SMEs. These include delivery of infrastructure services and to contribute to the lack of access to: (i) capital; (ii) skilled labor-- the improvement of the quality of infrastructure related including in management; (iii) modern technologies; services. These reforms aim at increasing access as well as (iv) modern management methods and to and quality of infrastructure services across techniques. infrastructure sectors. Private participation in the The government's strategy to mitigate these delivery of public service will require revision and constraints uses a three-pronged approach. The upgrading of the existing regulatory framework to Government of Mozambique will help improve access create a level playing field in several sectors to finance by addressing the long-term causes of the (telecommunication, airline transportation, railways, lack of affordable credit. In the short term, it would ports, energy, and water) to make them more seek a combination of sustainable solutions to provide attractive to private investors. The current regulatory access to finance for SMEs. Moreover, firms and and institutional framework lacks clarity on a wide financial and non-financial intermediaries located in range of matters, such as competitive market Mozambique will be provided with assistance in order structures, enforcement of regulatory arrangements, to build their technical capacities. Additionally, the "public service" obligations and financing. Moreover, Ministry of Trade and Industry will help coordinate issues such as the delineation of responsibilities for the Government's effort in removing the numerous regulation, supervision and operations, all functions administrative barriers that constrain enterprises' that, up until recently, have been performed de facto development. In particular, reduction of the time and by the public utilities and enterprises themselves cost of doing business will take center stage on the (eg. Telecomunicações de Moçambique in agenda. telecommunication, Electricidade de Moçambique in energy) will need to unbundled. Progress has been The World Bank Group's Private Sector made in the water and telecommunication sectors in Development Strategy establishing regulatory agencies, but some sectors In order to support the Government's strategy to still require comprehensive analysis and definition broaden growth, the World Bank Group's assistance of necessary regulations to address these issues strategy will be multi-faceted and will emphasize the so as to attract private operators. Moreover, following critical areas: (i) improving the business appropriate attention will need to be exercised in environment for private sector development (ii) creating regulatory institutions for each sector, reforming the financial sector (iii) supporting an resulting in separate arrangements for water, improved delivery of infrastructure services through 4. Policy Recommendations 69 an increased private-sector participation and (iv) will facilitate access to its investment guarantees by providing integrated support to develop strategic SMEs with an interest in Mozambique. Moreover, entry points. This will encompass critical diagnostics, the use of MIGA's email-based investor outreach dissemination of knowledge, financing, improved service, the FDI Xchange, a tool to bring together donor coordination and selected support in entrepreneurs and project developers in developing implementation in coordination with the IFC and countries with potential partners, technology, and MIGA. The main areas of support are described capital worldwide will be promoted. Firms and below. This assistance is predicated upon the individuals that sign up for the free service will receive understanding that growth will come from several periodic e-mail updates containing new investment entry points: (a) natural resources--mega-projects information, customized according to their region, (from "within" as well as enterprises that establish sector or topic of interest. The FDI Xchange will also linkages with the mega projects); (b) tourism; (c) allow SMEs in Mozambique to spread the word to agriculture and agribusiness (d) export oriented potential partners worldwide regarding their particular manufacturing in labor-intensive activities in the product or market opportunity, using the CPI as a sectors of textiles, garments and footwear and (e) conduit. SMEs. The World Bank Group's strategy in Mozambique The World Bank will support the development of with regard to the private sector can be summarized domestic firms so as to improve productivity and as follows: broaden the base for growth. This will take a two-track approach. On one hand, this would take the form (a) Improving the business environment. of the provision of "matching grants" for the Despite progress made in removing administrative development of technical and managerial skills of barriers to the establishment and operations of domestic enterprises and intermediaries in a manner enterprises in Mozambique, there are still a number of that would build the capacity of domestic business constraints to the development of the private sector. development services (BDS) providers and stimulate To sustain the current economic rate of growth and markets for BDS. On the other, the partnership and broaden the base of private sector participation, linkages to foreign direct investments would be Mozambique is committed to further improving the strengthened. This support, which will also form an overall business environment. Although most of the integral part of IFC's strategy for Mozambique, would barriers negatively impacting on private sector target the development of firms/products/sectors that development were identified a few years ago, have demonstrated or shown potential for export and progress in removing these constraints has been competitiveness. This includes--but is not limited slower than expected, despite the commitment of to--firms in manufacturing and services supporting relevant stakeholders. The lack of progress seems to manufacturing and exports, tourism, agro-industry results from a lack of appropriate structure to follow up and fisheries. on agreed agenda between the relevant parties as MIGA will work also with the World Bank and IFC well as a lack of adequate prioritization in removing in support of SME development in Mozambique, administrative barriers. To achieve significant results under the Enterprise Development Project (PODE) during the implementation of this CAS, the World and through other initiatives that are implemented Bank, in collaboration with IFC, MIGA and other under this CAS. Promotion of investments related to donors, will complete the Mozambique Performance SMEs is one of MIGA's priority areas and the agency and Investment Climate Assessment to provide 4. Policy Recommendations 70 relevant stakeholders with an updated analysis of the with the private sector, in the development and the main administrative barriers and recommendations on delivery of business facilitation. how to effectively remove them. (c) Export Promotion and Export (b) Institutional Capacity for Private Processing Zones. This institutional capacity Sector Development and the Public-Private building will be coupled with analysis to improve the Dialogue. This support is meant to contribute to the understanding of the products/sectors in which enhancement of the capabilities of public and private Mozambique is competitive or could be competitive. institutions to deliver business support services Since competitiveness is critical to maintain the as well as supporting public agencies in their country's high economic growth rate, it will need to be transformation process, which is being changed strengthened. To that end, adequate support will from maintaining control functions to providing be provided to develop firms' ability to export and business facilitation and promotion services, including generate linkages within the Mozambican economy. improving the capacity of these institutions to identify Additional assistance will be offered to help facilitate and ease constraints to private sector development. greater trade and investment. This assistance has been provided by IDA under Moreover, support for the Centro de Promoção de PoDE and will continue during the period of this CAS. Investimentos (CPI) will also be continued to develop, Planned assistance from the World Bank will help implement and monitor a three-year strategic plan, structure the dialogue between the public and private which will build upon the last one that brought about a sectors, to enable it to focus on and contribute to the transformation of CPI from a regulator to a facilitator speedy removal of constraints to private sector and promoter of foreign direct investment. development. Important among these are the various The two elements mentioned above will help CPI constraints contributing to raising the cost and time broaden its appeal to foreign investors engaged in for establishing and starting to operate a business. labor-intensive employment creating activities to Other constraints that the dialogue will help complement the successful attraction of the capital- addressed relate to the labor law rigidities, adoption intensive mega projects, which have thus far been the of a new commercial code, property rights, and land primary achievements. It will also contribute toward use rights. In all of this, there is a need to establish focusing CPIs efforts on the sectors and products in consultative mechanisms that will bring about a which Mozambique has a competitive advantage and greater focus in the dialogue between the public and is likely to attract foreign direct investment. private sectors. The World Bank will also provide While the enabling environment for private assistance to the Confederation of Business sector participation is being improved, the Bank will Associations of Mozambique (CTA) to improve the also support a strategy to attract labor-intensive business environment. This support will take form of manufacturing investments to be based in the export consultancy services, studies, and training program processing zones, which build upon the transport aimed at building the institution's capacity. The public development corridors--established or being institutions, which will directly benefit from this developed. Additionally, limited investments in the support, are the Ministério da Indústria e do Comércio development of the infrastructure of export processing (MIC) and Ministério do Turismo (MITUR). This zones to "jump start" the process of establishing support will help both Ministries in addressing them outside of the Maputo province will also be continuing weaknesses in the business environment considered in order to help foster the development of and will enhance their role as a channel for dialogue manufacturing and processing industries. 4. Policy Recommendations 71 the last assessment of the Basel Core Principles was (d) Furthering reform of the financial conducted; however, significant work remains to be sector. Reform of the financial sector will need to be carried out in four key areas: First, the current loan completed to address the issue of improving the classification and loan loss provisioning systems need lending environment, decreasing banking system to be brought into line with international practices. vulnerabilities, increasing competition in the sector, Second, trigger points need to be established that will dealing with the high cost of capital, and improving the prompt one or more legal actions once a bank's oversight capacity of Banco de Moçambique. Advice capital falls below the minimum requirements. Third, on these and other activities is being provided to as most Mozambican banks are foreign-owned, the the Mozambican authorities within the framework of Banking Supervision Department needs to establish a Financial Sector Assessment Program (FSAP) regular communication with the head offices of the currently being undertaken by the World Bank and the foreign banks, and the banking supervisors in their IMF. Specific assistance arising out of this diagnosis, countries of domicile. Fourth, clear steps need to to be provided by the World Bank and other donors, be taken to build the core knowledge of supervision would consist of conceiving and implementing a wide staff, especially to ensure their capacity to ranging reform program, including the crucial issue of independently validate information received from resolving the burden of non-performing loans, which is financial institutions. Parallel with above suggested concentrated in the portfolio of the market leader and improvements, it will be crucial to improve the is severely affecting interest rate spreads and thereby foundation for market oversight through the adoption raising lending rates of the banking sector as a whole. of IAS for all banks. The authorities have embarked on Given the importance of the banking system as by the process of defining a well-structured convergence far the largest component of the Mozambican financial plan, although--once the program is defined--the sector and--more generally--as the stepping stone authorities will need to devote considerable resources for development of more sophisticated financial to ensure staged and effective implementation. This markets, the authorities are advised to place major will include: emphasis in the coming period on improving the institutional and regulatory framework for the banking industry. · The adoption of a new Commercial Code, (e) Enhancing the scope of financial together with a revised Code of Civil Procedure. intermediation. In order to stimulate the It may be worth noting that there have been no commercial banks in making sound new credit- attempts to revise the 1967 Civil Procedure decisions in the difficult Mozambican lending Code. environment, several short and longer-term actions · The simplification of judicial procedure in light will need to be undertaken to improve the of the fact that comparisons with neighboring legal/judicial environment, including the strengthening jurisdictions show that procedural complexity is of banking supervision. very high in Mozambique. This is particularly problematic given the lack of trained judiciary. Strengthening banking supervision · The enhancement of the scope and reliability of This will be crucial to improving the soundness of the credit registry. Mozambique's banking sector. Some progress has · The training of judges in commercial dispute taken place in this area over the past two years, since resolution, the reform of the land-registry and 4. Policy Recommendations 72 the establishment of a registry for movable so that the legal regulatory framework conducive to property. privatization is in place and a level playing field has · Eventually--once improvements in the been established. functioning of the judiciary are in place-- establishing a commercial court, dealing with Increased Private Sector Participation in the largest cases. Infrastructure (PPI) The Bank Group's assistance in infrastructure services Towards that end, the Government of will be delivered through several IDA projects Mozambique could seek advice on the revision of including the Communication Sector Project, the the commercial code and civil procedures; on Energy Reform and Access Project, the Water sector development/improvement of property registries and Project, and the Railways and Ports Restructuring on establishing monitoring process to identify Project, and through IFC investments and MIGA progress in achieving designated outcomes. guarantees. In so doing, the emphasis will be on the Provision of infrastructure services. new business model for infrastructure service delivery Assistance under the CAS will aim at increasing aimed at contributing to the Millennium Development private-sector participation and competition across Goals (MDGs). This model is characterized by an several infrastructure services, including emphasis on public-private partnerships, with telecommunications, transport, water and sewerage, enhanced integration of IDA, IFC and MIGA products, and energy. In order for private sector participation to not only to help establish the enabling environment for be augmented, there are a number of regulatory PPIs, but also to bring about the necessary comfort to issues that have to be addressed. potential investors so as to crowd in and facilitate private sector investments. This would include the Unbundling of policy, regulation structuring and financing of innovative mechanisms and operation for the private delivery of publicly funded Traditionally, the close relationship between infrastructure services, especially to the poorer government departments and State Owned segments of society. Enterprises has meant that policy-making, regulation and operations have generally been embodied in a Coordination within the World Bank Group single institutional process. However, these functions The design and implementation of these strategies for need to be unbundled and clarified, so as to: (i) private participation in infrastructure will be a well- design and implement regulations and competition coordinated and joint effort of the World Bank Group. policies in utilities and economic sectors (including While IDA will focus on supporting the upstream work transport, communication, water and energy); (ii) in terms of sector policy, strategy and design of the establish, strengthen and harmonize the regulatory transactions, IFC will be mobilizing sponsors and and supervisory bodies in these sectors; and (iii) train providing access to the necessary financing for regulatory staff and provide outside experts to advise investors to ensure successful implementation of the in regulation during the stage devoted to local projects. At the same time, MIGA will not only bring its capacity building. Implementation of private investment promotion knowledge and skills to bear on participation in the delivery of infrastructure services the successful completion of every transaction, but will need to be done with adequate policy sequencing will also seek opportunities to provide political risk 4. Policy Recommendations 73 coverage, where appropriate. In this way, the WBG Moatize coal mines to the Port of Beira, making this will be able to offer its full array of complementary integrated development feasible. skills and products to provide fully integrated Irrespective of the financing mechanism adopted, assistance to Mozambique. innovative cost recovery schemes will need to be in place to develop replicable and sustainable Transparent funding mechanisms infrastructure services to the poor. In light of Adopting market-based solutions to the delivery of Mozambique's fiscal constraints, direct cost recovery infrastructure services raises the issue of affordability mechanisms are critical to complement or replace of those services for low-income segments of the subsidization schemes. The subsidies would be population, especially in areas where there is a low targeted and could be used for both connections and population density. To mitigate this risk, transparent user charges, where appropriate. funding mechanisms will need to be designed to improve the affordability and accessibility of Strategic Entry Points for the World Bank infrastructure services to the poor and population in Group rural areas. Among other approaches, output based These entry points will be focused on natural aid (OBA) could be used to enable private resources, tourism, agriculture and agribusiness, and participation while improving the access and the development of SMEs in general. These are the affordability of services for the poor: the funding of sectors with the greatest growth potential, where the these public subsidies being provided by either the Bank Group will address constraints to development Government's own resources or from participation with a comprehensive approach. from the international community. OBA differs from the traditional public subsidies, which are typically Natural Resources--Mega-projects directed at inputs for delivery of a given service. The Bank Group has supported the development of Under the OBA approach the subsidy element would mega-projects within Mozambique, with the objective be linked to achieving a specific output (e.g. the of maximizing their economic contribution and number of consumers connected per year). development impact. On the Pande/Temane gas This coordination within the World Bank Group will fields and pipeline, IDA provided support to the bring about fully integrated support to Mozambique government to do preparatory work and evaluate the for private sector development. The coordinated most promising alternative uses of the gas, and in support will build upon past and ongoing PSD-related structuring the resulting concession. IDA is providing activities. Such an approach has already been put in a partial risk guarantee to project lenders, and IFC is place to unlock the significant development potential participating in the equity. Similarly, with the Moatize that exists in the Zambezi Valley. Working jointly with Coal and Zambezi Valley transport corridor, the Bank IDA, IFC is advising the Government of Mozambique Group is taking an integrated approach, with IDA and on how to plan and process the awarding of IFC involved in helping the government evaluate and concessions to develop the Zambezi Valley, with structure this complex project. The objective of this particular attention to the steam and coking coal early involvement by the Bank Group as a whole is to deposits at Moatize, the rehabilitation of the Sena ensure that maximum economic and social benefits railways, and the Modernization of the Beira port. In are incorporated into the projects that the private parallel, IDA's assistance is also being planned for the sector will deliver. IFC is also in early stage development of the Sena railway line, which links the discussions on the Corridor Sands project. 4. Policy Recommendations 74 Tourism A critical element in this process will be to actively The World Bank Group would aim to support seek private sector involvement on the scale PROTUSC--Programa para Turismo Sustentável necessary to provide a critical mass of investment. e Conservação (Program for Sustainable and The World Bank Group will support the South East Conservation Tourism), involving implementation of Africa Tourism Investment Program (SEATIP) aimed the overall program along with other development at attracting the private sector investment on the partners. Some elements include support for policy necessary scale to have a measurable impact on and regulatory reform, institutional strengthening at poverty alleviation. Under this program community the National and Provincial level; the work of the participation and private sector joint ventures will provincial tourism facilitation commissions; and focus on providing communities with the tools and spatial planning at the provincial and district level. The assets to participate as full partners in the TFCA program would also include strengthening of the process while providing an enabling framework for the capacity in environmental and social assessment, and private sector to invest in tourism ventures in rural support for regional or district planning authorities, Mozambique. This assistance will aim to solidify such as the Elephant Coast Development Agency for community rights through the creation of trusts, Matatuine District, and ones that may be created for concessions or other equity structures, and would other PATIs. Support would continue for the TFCA-- help create incentives and frameworks for private Transfrontier Conservation Areas in the context of the sector and communities to develop joint ventures PROTUSC to assist Mozambique in improving the based on management plans including access to management of its natural assets, with a principal concessionary loans or small grants. Funding will be focus on the TFCAs, where opportunities exist for the needed for land demarcation, community funds and additional "capture" of these assets. Strong emphasis institutional support at the Provincial and National will continue to be placed on protecting the rights of level. communities inside and outside of core-protected An additional element of assistance will consist of areas, and developing community/private sector joint the provision of basic infrastructure (e.g. roads, park venture options. This program will also include facilities) for the core terrestrial and marine protected renewed emphasis on identifying biodiversity hot areas in the TFCAs, PATIs and basic infrastructure spots as a basis for more consistent planning and requirements linking community and private sector management. The program would also provide initiatives to TFCA cross-border infrastructure institutional, technical and other support for investments. Support will be provided for tourism sustainable management of core conservation areas. infrastructure planning. Designing infrastructure In terms of regional integration of tourism, IFC-- requirements will be done in the context of multi- in collaboration with IDA--will undertake sector sectoral spatial planning, which will also help focus analysis of the development of regional tourism infrastructure investment to priority areas. An integral opportunities between Mozambique, South Africa, part of the process would be to develop Strategic Swaziland and Zimbabwe. This review will assist in Environmental Assessments and environmental the in identification of key constraints, as well as assessments would be required for individual fundamental investment opportunities. IDA and IFC investments within the SEA framework. Strict will work jointly to develop plans for addressing environmental and social criteria would be applied to the constraints identified, so as to ensure future any project financed through this mechanism; and, investment opportunities. environmental management programs would be 4. Policy Recommendations 75 designed to monitor and implement environmental and hectares under sustainable irrigation systems. mitigation processes. Progress will also be measured in terms of agro processing opportunities created in terms of local as Agriculture and agribusiness well as regional/international investment. In light of the Government's objectives of making agriculture one of the sectors that would provide the Micro, Small and Medium Enterprises base for economic and social development, and to Support to local enterprises, a large proportion of focus its development towards the export market, the which are SMEs, will be provided through the IDA assistance will help remove the constraints to Enterprise Development Project (PoDE), which has reach these objectives. been restructured to help focus government and In particular, the assistance is meant to improve private sector resources in activities that will improve the impact of public expenditures in developing a the competitiveness of Mozambican firms. Technical positive enabling environment for sustainable and assistance will be provided to the Ministries of equitable growth in the rural sector, consistent with the Industry and Commerce, Tourism, the Investment reduction of poverty and improvement of food Promotion Agency (CPI) and the Chamber of security, while ensuring the protection of the physical Commerce. It is worth noting that the assistance and social environment. On one level, the objective of provided to the CPI is done jointly by MIGA and IDA. the first five-year phase of PROAGRI would be to Mozambique has also been included in a list of 8 establish an institutional structure designed to provide African countries that have been selected as pilot cost-effective delivery of a core set of agriculture and countries for a new joint IDA-IFC initiative for micro, natural resources related services. On another and small and medium enterprise development. The more basic level, the objective would be to enable proposed MSME program aims to address constraints sustainable and equitable growth in the agricultural to growth and competitiveness by (i) increasing sector. In order to build the technical and managerial access to finance (ii) opening access to new markets capacities of export orient agro-businesses, this by building the technical capabilities of businesses assistance will be coupled with the support provide to and intermediaries located in Mozambique (iii) private sector development through the Enterprise enhancing sustainable linkages between SMEs and Development Project. In addition, IFC, in support of larger private sector investments and (iv) improving agro-businesses in particular, will focus on developing the enabling environment for private sector a strategy to support specific crops in terms of their participation through reduction of red tape. This new export potential, with the involvement of regional and IDA-IFC collaborative approach is intended to global private sector partners. achieve greater impact through an integrated, The progress made under the agricultural sector coordinated strategy and is an opportunity to define a would also be assessed by the extent to which systematic work program for MSME development. competition and volume are increased in agricultural input and output markets, as evidenced by the number of traders; the narrowing of the gap between Note prices received by farmers and those prevailing in local markets; increases in agricultural production and 33. For detailed recommendations, see Nathan productivity; increases in the contribution of marketed Associates Inc. 2002, under the aegis of the U.S. agricultural produce to household income for small- Agency for International Development. holder subsistence level families of irrigation schemes; Appendix 76 Appendix A: The Sample of Firms and Firm and Owner Characteristics 77 Table A.1 Mozambique: Wave 2 Sample by Firm Size and Sector 78 Table A.2 Mozambique: Wave 2 Sample by Firm Location and Sector 79 Table A.3 Distribution of Industrial Enterprises in the INE Database 80 Table A.4 Foreign Direct Investment Approved by Province and Sector 1996­2000 82 Table A.5 Mozambique: Structure of Manufacturing Output in 2000 83 Table A.6 Selected Firm Characteristics by Firm Size 85 Table A.7 Selected Firm Characteristics by Firm Sector 86 Table A.8 Selected Characteristics of Firm Owners and Managers by Firm Size 89 Table A.9 Selected Characteristics of Firm Owners and Managers by Firm Sector 91 Appendix B: Results of the Probit Estimations for Investment and Access to Credit 93 Table B.1 Determinants of Likelihood of Investing 93 Table B.2 Determinants of Access to Bank Credit 94 Appendix C: Firm Registration Process 95 Table C.1 Registration of Group A Company Time and Cost Analysis 96 Appendix D: Timber Export Procedures 99 Table D.1 Timber Export Procedures for Mozambique 100 Appendix E: The Mozambican VAT Refund Policy 101 Appendix A: The Sample of Firms and Firm and Owner Characteristics 77 Overview of Sample Firms were then chosen from the 1998 RPED list and randomly from the INE replacement list until This section will give an overview of the distribution of the target sample size had been reached. firms in the 2002 sample, focusing on their size, · Five major cities were visited: Maputo City, Matola, sector, and location. We will also compare the sample Chimoio, Beira, Nampula City, and Nacala. It was with available evidence about the population of not possible to revisit the firms previously visited in manufacturing firms in order to assess its degree of Quelimane due to time constraints. representation. Along with the evidence about the · The sectors covered were based on the CAE number of firms in the population, we also consider (Classificação das Actividades Económicas) evidence on the contribution of the various industrial classification used by INE, which is similar to the subsectors covered by the survey to total ISIC-rev3: Food and Beverages (class 15), manufacturing output, value added, and employment. Textiles and Garments (35), Wood (20), Metals (28), Machinery (29), Furniture (36), Other (30). Sampling Procedures · A particular effort was made to cover the largest The survey is designed to be a semi-random sample firms in each sector (usually no more than 3 to 5 of manufacturing firms in Mozambique stratified by firms per sector and city), consisting of firms with the sector, size, and location of firms. In the absence more than 100 workers. By contrast, relatively few of a recent Industrial Census, the best source of microenterprises were sampled: the minimum information about the population of manufacturing establishment size covered by the INE register is firms is probably the National Statistics Institute (INE) theoretically 10 employees. Some smaller register of business establishments, which was unregistered firms were also visited, particularly originally compiled in 1998 and has been updated in the Maputo/Matola region, but the survey was regularly since then.34 not designed to cover informal manufacturing The methods used to build the 2002 sample of enterprises. 193 firms were as follows: Sample Distribution · We first attempted to revisit firms that had Tables A.1 and A.2 show the distribution of the 2002 previously been interviewed as part of the 1998 sample by firm size and sector and also by location RPED/CTA survey, with the assumption that the and sector. The size categories have been structured firms had not ceased operations or changed to ensure a relatively even distribution of firms across activity and were willing to be interviewed (87 of these categories. The boundaries take into account 152 firms in the 1998 sample were successfully that there are relatively few firms with less than 5 re-interviewed). employees in the sample.35 Hence, microenterprises · Replacement firms and additional firms were then are classified as those with 10 employees or less. On selected from the INE list of all registered this basis, 15 percent of firms are in the micro establishments, which includes a classification by category (1­10 employees), 21.2 percent are small city and sector, as well as some information about (11­30), 31.6 percent are medium (31­75), 24.4 total employment in each establishment. percent are large (76­250), and 7.8 percent are very · In each city visited, a target sample size and large (more than 250 employees). composition by firm sector and size was Out of a total sample of 193 firms in the 2002 calculated, based upon the INE sample frame. survey, 87 firms were previously interviewed in 1998, Appendix A: The Sample of Firms and Firm and Owner Characteristics 78 Table A.1 Mozambique: Wave 2 Sample by Firm Size and Sector Food & Wood & Textiles & Metal & Other All Beverages Furniture Garment Machinery Sectors Sectors Micro No. Firms 4 6 14 4 1 29 [1­10 emp.] % all sectors 13.8% 20.7% 48.3% 13.8% 3.4% 100.0% % all sizes 7.8% 14.3% 45.2% 11.8% 2.9% 15.0% RPED firms 2 0 2 1 0 5 Small No. Firms 15 12 3 5 6 41 [11­30 emp.] % all sectors 36.6% 29.3% 7.3% 12.2% 14.6% 100.0% % all sizes 29.4% 28.6% 9.7% 14.7% 17.1% 21.2% RPED firms 7 3 2 2 0 14 Medium No. Firms 13 15 4 15 14 61 [31­75 emp.] % all sectors 21.3% 24.6% 6.6% 24.6% 23.0% 100.0% % all sizes 25.5% 35.7% 12.9% 44.1% 40.0% 31.6% RPED firms 7 6 4 9 5 31 Large No. Firms 14 7 5 10 11 47 [76­250 emp.] % all sectors 29.8% 14.9% 10.6% 21.3% 23.4% 100.0% % all sizes 27.5% 16.7% 16.1% 29.4% 31.4% 24.4% RPED firms 12 5 3 7 1 28 Very Large No. Firms 5 2 5 0 3 15 [>250 emp.] % all sectors 33.3% 13.3% 33.3% 0.0% 20.0% 100.0% % all sizes 9.8% 4.8% 16.1% 0.0% 8.6% 7.8% RPED firms 4 1 4 0 0 9 All Sizes No. Firms 51 42 31 34 35 193 % all sectors 26.4% 21.8% 16.1% 17.6% 18.1% 100.0% % all sizes 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% RPED firms 32 15 15 19 6 87 Notes: RPED firms are those which were included in the 1998 RPED Survey in Mozambique; other sectors include construction materials, plastics and packaging; firm size categories are based upon total full-time employees in 2002. giving a substantial subsample for which we now in 1998 could not be re-interviewed because they have up to five years of continuous output, production exited the sector (43 firms), they were not willing to cost, and employment data covering the period participate (13), or they were in provinces not visited 1997­2001. The remainder of the 153 firms surveyed by the survey teams (10 firms in Quelimane). Appendix A: The Sample of Firms and Firm and Owner Characteristics 79 Table A.2 Mozambique: Wave 2 Sample by Firm Location and Sector Food & Wood & Textiles & Metal & Other All Beverages Furniture Garment Machinery Sectors Sectors Maputo/ Matola No. Firms 29 21 18 21 30 119 (South) % all sectors 24.4% 17.6% 15.1% 17.6% 25.2% 100.0% % all locs. 56.9% 50.0% 58.1% 61.8% 85.7% 61.7% RPED firms 22 10 11 15 6 64 Beira/Chimoio No. Firms 10 11 9 8 4 42 (Centre) % all sectors 23.8% 26.2% 21.4% 19.0% 9.5% 100.0% % all locs. 19.6% 26.2% 29.0% 23.5% 11.4% 21.8% RPED firms 5 3 2 2 0 12 Nampula/ Nacala No. Firms 12 10 4 5 1 32 (North) % all sectors 37.5% 31.3% 12.5% 15.6% 3.1% 100.0% % all locs. 23.5% 23.8% 12.9% 14.7% 2.9% 16.6% RPED firms 5 2 2 2 0 11 All Locations No. Firms 51 42 31 34 35 193 % all sectors 26.4% 21.8% 16.1% 17.6% 18.1% 100.0% % all locs. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% RPED firms 32 15 15 19 6 87 Notes: RPED firms are those included in the 1998 RPED Survey in Mozambique; other sectors include construction materials, plastics, and packaging. In terms of their distribution by region, 62 percent population of manufacturing firms in Mozambique? of the sample is in the south of Mozambique, 21.8 There are a total of approximately 1,500 industrial percent are in the central region, and 16.6 percent are enterprises, mainly manufacturers, in the INE in the north. This corresponds quite well to available establishment register (Section D of Mozambican evidence about the geographical distribution of Classification of Economic Activities, INE 1998). This industrial activities (see table A.2), although with some register was used as the sample frame for the 2002 bias toward the south where a greater proportion survey. of large- and medium-scale manufacturing The distribution of firms in the INE database by establishments are located. firm size and location by province is shown in table A.3. We can observe that our survey sample is Firm Distribution in Population essentially a census of the currently operational large- How does the distribution of firms in the survey scale enterprises in the sectors of interest and sample compare to available information on the locations visited. It also covers approximately 37 Appendix A: The Sample of Firms and Firm and Owner Characteristics 80 percent of the medium-sized firms and 12 percent of Table A.3 Distribution of Industrial the small-scale firms registered on a national basis. Enterprises in the INE Database As already noted, the survey deliberately under- samples firms in the microenterprise category, No. % including many informal sector enterprises, which are firms total prominent in some areas of manufacturing activity, Size Category including bakeries, garments, furniture production, Very Large (500+)a 2 0.1 and metal fabrication. Moreover, we designed the Large (101­500) 82 5.4 survey questionnaire to be implemented mainly with Medium (31­100) 165 11.0 formal sector manufacturing enterprises with Small (11­30) 330 22.0 organized accounts, and so it was difficult for the Micro (10 or less) 870 58.0 survey teams to implement with informal and microenterprises without significant amendment or Provincial Location loss of data quality. Maputo (including Maputo City) 510 34.0 The distribution of firms by province is also shown Sofala (mainly Beira) 387 25.8 in table A.3. From this, we estimate that the four Manica (mainly Chimoio) 67 4.5 provinces covered by the 2002 survey likely contain Zambezia 57 3.8 around 75 percent of all manufacturing Nampula 146 9.7 establishments in Mozambique and an even higher Tete 82 5.5 proportion of the large- and medium-sized Other Provinces (Gaza, Inhambane, manufacturing firms, which tend to be concentrated Cabo Delgado, & Niassa)b 251 16.7 near to the major ports and transport corridors. Total 1500 100% Characteristics of Locations Covered a. The very large enterprises are two agro-industrial Survey teams visited firms in four provinces and five conglomerates based in Nampula, both of which were major cities, which were selected on the basis that surveyed. they have by far the highest concentration of b. Detailed lists for the other provinces were not manufacturing activities in Mozambique (see map of obtained. Source: National Statistics Institute (INE), Register of Mozambique provided in this appendix). The Establishments 2002. locations selected were Maputo City and Matola in the south, Beira and Chimoio in the central region, and Nampula City and Nacala in the north. It will be immediately noticed that the cities covered in the of Mozambique's GDP in 1997 was approximately 40 survey include the locations of Mozambique's three percent in Maputo Province and Maputo City, followed main international ports, which are all linked with their by 14 percent in Nampula Province and 12 percent in hinterlands and regional neighboring countries via Sofala Province. Zambezia is the only other province operational road and railway corridors. contributing greater than 10 percent of Mozambique's In terms of density of economic as well as GDP. They also estimate that 60 percent of all industrial activity, Maputo City and the industrial area industrial activity is concentrated in the Maputo of Matola/Machava are the dominant locations. The conurbation. Maputo has also seen by far the highest World Bank (2001b) reports UN Development share of approved FDI since the mid-1990s as seen in Program figures showing that the regional breakdown table A.4.36 Excluding the Mozal project, Maputo still Appendix A: The Sample of Firms and Firm and Owner Characteristics 81 toll road that opened in 2001, the corridor is now home to a $2 billion plus investment project in the Mozal aluminum smelter located at Belaluane, which is situated approximately 25-km inland from Maputo port. By comparison, the central and northern regions of Mozambique have yet to see the benefits of any so- called mega projects, although there have been significant foreign investments in other sectors, such as agro-industry (particularly sugar production and cashew nut processing), as well as the hotels and tourism sector. A planned development of a new natural gas reserve found in Sofala Bay and an associated petrochemical complex near Beira have recently been abandoned due to lack of commercial feasibility. But the development of onshore gas reserves in northern Inhambane Province by the South African petrochemical company SASOL is taking place, and construction of a pipeline to deliver natural gas directly to industrial users in South Africa commenced in 2002 (due to be completed in 2004). An associated integrated iron and steel plant near Maputo is also being considered. Characteristics of Sectors Covered The sectors chosen for the survey incorporate all of the traditional manufacturing activities, which have the highest contribution to aggregate manufactured output and employment in Mozambique. These are: (a) food and beverage sector, which includes breweries, bakery products, and seafood processors; (b) wood processing (sawmills), wood products, and furniture firms; (c) textile, garment, and shoe manufacturers, although it should be noted that there accounts for 32.5 percent of all investment projects are relatively few surviving operational textile firms; approved during the 1996­2000 period. and (d) metal fabrication and machinery firms. The The investment and production bias toward the survey also included a number of firms in other south of Mozambique has been further reinforced in expanding manufacturing subsectors (for example, recent years by the rapid development of the Maputo construction materials, plastics, and packaging). Development Corridor, linking the capital city with the Table A.5 shows the relative contributions of industrial region of Gauteng in South Africa and also different subsectors to aggregate industrial output in with Swaziland. In addition to the privately managed Mozambique in 2000. Given the impact of the Mozal Appendix A: The Sample of Firms and Firm and Owner Characteristics 82 Table A.4 Foreign Direct Investment Approved by Province and Sector 1996­2000 FDI Total Investment US$ 000's % of total US$ 000's % of total Cabo Delgado 15,338 1.3% 71,268 1.4% Niassa 628 0.1% 36,603 0.7% Nampula 124,670 10.3% 364,365 7.3% Zambezia 33,329 2.8% 223,232 4.5% Tete 2,471 0.2% 98,829 2.0% Manica 23,230 1.9% 100,868 2.0% Sofala 60,647 5.0% 259,284 5.2% Inhambane 16,550 1.4% 67,343 1.3% Gaza 18,192 1.5% 55,830 1.1% Maputo (non-Mozal) 393,390 32.5% 2,299,004 46.0% Mozal Aluminum Smelter 500,000 41.4% 1,340,000 26.8% Multi-province 20,250 1.7% 75,875 1.5% Agriculture & agro-industry 130,681 10.8% 826,314 16.6% Fisheries & Aquaculture 15,780 1.3% 111,892 2.2% Construction 21,302 1.8% 358,107 7.2% Industry (non-Mozal) 242,395 20.1% 916,584 18.4% Mozal Aluminum Smelter 500,000 41.4% 1,340,000 26.8% Transport & Communications 23,914 2.0% 268,816 5.4% Banks & Insurance 153,200 12.7% 398,256 8.0% Mineral Resources 26,279 2.2% 131,743 2.6% Hotels & Tourism 50,849 4.2% 326,691 6.5% Other Sectors 44,296 3.7% 314,098 6.3% Total 1,208,695 100.0% 4,992,501 100.0% Notes: Total investment includes FDI plus national direct investment plus domestic commercial bank loans. Source: Adapted from data provided by Mozambican Investment Promotion Centre (CPI). aluminum plant, which by itself produced 22.7 output if this subsector is included, or 69 percent if it percent of total industrial output in this year, we is not. present the shares of total manufacturing output both There is currently little reliable evidence on the including and excluding the primary metals sectors. distribution of formal employment within The main sectors covered by the survey represent manufacturing in Mozambique, either by firm size or approximately 53 percent of total manufacturing sector.37 The 1997 population census showed that Appendix A: The Sample of Firms and Firm and Owner Characteristics 83 Table A.5 Mozambique: Structure of Manufacturing Output in 2000 Mt US Dollar Share of total billions equivalent Share manufacturing (current (thousands of total (excluding prices) of US Dollars) manufacturing primary metals) Total Manufacturing 7,575.7 500,344 100.0% Total excluding primary metals 5,842.2 385,856 100.0% Food & Beverages 3,029.8 200,104 40.0% 51.9% Food Processing 1,187.6 78,435 15.7% 20.3% Beverages 1,699.9 112,272 22.4% 29.1% Tobacco 142.3 9,397 1.9% 2.4% Textiles & Garments 523.6 34,581 6.9% 9.0% Textiles 330.0 21,797 4.4% 5.6% Clothing 193.6 12,784 2.6% 3.3% Footwear -- -- Wood Products & Furniture 352.2 23,263 4.6% 6.0% Wood Products 344.3 22,742 4.5% 5.9% Furniture 7.9 521 0.1% 0.1% Paper 448.2 29,599 5.9% 7.7% Chemicals & Plastics 533.7 35,248 7.0% 9.1% Chemical Products 38.8 2,565 0.5% 0.7% Other Chemicals 246.7 16,292 3.3% 4.2% Oil Refineries 31.6 2,088 0.4% 0.5% Rubber 79.7 5,262 1.1% 1.4% Plastics 136.9 9,042 1.8% 2.3% Non-metallic Minerals 820.2 54,173 10.8% 14.0% Glass 19.4 1,281 0.3% 0.3% Other Non-metallic Minerals 800.8 52,891 10.6% 13.7% Primary Metals 1,733.5 114,488 22.9% Aluminium Ingots 1,721.5 113,698 22.7% Iron & Steel 8.2 539 0.1% Other primary metals 3.8 252 0.1% continued . . . Appendix A: The Sample of Firms and Firm and Owner Characteristics 84 Table A.5 Mozambique: Structure of Manufacturing Output in 2000 (continued) Mt US Dollar Share of total billions equivalent Share manufacturing (current (thousands of total (excluding prices) of US Dollars) manufacturing primary metals) Fabricated Metal & Machinery 130.4 8,610 1.7% 2.2% Fabricated Metals 85.7 5,660 1.1% 1.5% Non-electrical Machinery 5.2 342 0.1% 0.1% Appliances and Elec. Machines 31.5 2,078 0.4% 0.5% Transport Machinery 8.0 529 0.1% 0.1% Other Manufacturing 4.1 271 0.1% 0.1% Source: Adapted from IMF Statistical Annex, July 2002, Table 8 (based on data provided by Mozambican authorities). Notes: There was a marked change in Mozambique's industrial structure in 2000 due to commencement of production of aluminum ingots by the Mozal smelter representing 23 percent of all industrial production in this year; official period average exchange rate for 2000 of 15,141 used to convert Meticals to U.S. dollars. only 3.2 percent of the economically active population ownership structure, firm age, and degree of export over 15 years of age was employed in manufacturing orientation, as well as whether surveyed firms benefit industries (in comparison to over 80 percent from the provisions of the 1993 Investment Law or the employed in agriculture, fishing, and forestry).38 This IFZ regulations. Table A.6 gives the breakdown by five corresponds to a total manufacturing labor force of firm size categories, while Table A.7 presents a similar about 420,000 (although this figure probably does not analysis by firm sector of activity. take account of the significant proportion of the Relatively large firms, in an African context, population engaged in informal, artisanal production dominate our sample with a sample mean of 95 activities). We are also completely lacking information employees and a median employment level of 45. on the relative employment contributions of the Large-scale firms particularly dominate in the food informal and formal manufacturing sectors. It is widely and beverage sector, wood products, and textiles and perceived in Mozambique that regulatory burdens garments. The smallest enterprises on average are and costs of formalization discourage firms from those in the furniture sector. entering the formal manufacturing sector, but there is The vast majority of firms are either sole traders or little hard evidence to support this hypothesis. partnerships (31 percent) or alternatively limited liability enterprises (41 percent). There are very few examples of remaining wholly state-owned Firm- and Owner-Level Characteristics enterprises or firms, which are subsidiaries of larger groups (either Mozambican or multinational Selected Firm Characteristics corporations). We first present a number of basic firm One immediate factor, which deserves comment, characteristics, including legal status of enterprise, is that nearly a third of firms in the sample (48 percent) Appendix A: The Sample of Firms and Firm and Owner Characteristics 85 Table A.6 Selected Firm Characteristics by Firm Size Table shows proportion of firms in each category (unless otherwise specified) Very Micro Small Medium Large Large All N=29 N=41 N=61 N=47 N=15 N=193 Average Firm Size (no. employees) 6.5 19.4 49.5 132.5 533.4 95.1 Legal Status of Firm Solo or Partnership 0.90 0.44 0.15 0.13 0.07 0.31 Association (Cooperative) 0.03 0.12 0.16 0.21 0.20 0.15 Limited Liability Enterprise 0.03 0.34 0.51 0.53 0.53 0.41 State Enterprise (100% owned) 0 0 0 0.02 0 0.01 Subsidiary of Mozambican enterprise 0.03 0.05 0.08 0.04 0 0.05 Subsidiary of Foreign enterprise 0 0 0 0.02 0.07 0.01 Firm Ownership Characteristics Privatised enterprise 0.21 0.44 0.52 0.53 0.80 0.48 Any foreign ownership 0.07 0.12 0.18 0.28 0.33 0.19 % foreign ownership, if any 80.0% 71.0% 73.0% 68.5% 48.2% 68.1% Any state ownership 0 0.02 0.03 0.15 0.27 0.07 % state ownership. If any -- 20.0% 25.0% 35.3% 24.8% 29.7% Firm Age New (1­5 years) 0.07 0.20 0.15 0.11 0.13 0.13 Young (6­10 years) 0.17 0.17 0.26 0.28 0.13 0.22 Mature (11­25 years) 0.55 0.32 0.20 0.19 0.20 0.27 Old (>25 years) 0.21 0.29 0.38 0.43 0.47 0.35 Export Orientation % total sales to local market 100.0% 100.0% 93.6% 88.3% 72.0% 92.9% % sales exported directly by firm 0% 0% 4.7% 9.5% 28.0% 6.0% % sales exported indirectly (via agent) 0% 0% 3.3% 2.2% 0.0% 1.6% Proportion of Firms Exporting 0 0 0.10 0.21 0.33 0.11 % exported (if any) -- -- 46.8% 43.7% 84.0% 54.2% Firm Benefits from Investment Code/IFZ Regulations? 0 0.07 0.10 0.26 0.33 0.14 Notes: sample sizes vary for some characteristics due to missing data for some firm; a total of 4 firms are 100% oriented to the export market all in the textile and garments sector. Appendix A: The Sample of Firms and Firm and Owner Characteristics 86 Table A.7 Selected Firm Characteristics by Firm Sector Table shows proportion of firms in each category (unless otherwise specified) Food & Wood Furni- Textiles & Metal & Other Beverages Products ture Garments Machinery Sectors All N=51 N=18 N=24 N=31 N=34 N=35 N=193 Average Firm Size (no. employees) 133.9 87.8 39.8 100.1 61.4 109.8 95.1 Legal Status of Firm Solo or Partnership 0.25 0.39 0.50 0.52 0.21 0.14 0.31 Association (Cooperative) 0.14 0.11 0.04 0.13 0.18 0.26 0.15 Limited Liability Enterprise 0.43 0.44 0.42 0.29 0.41 0.46 0.41 State Enterprise (100% owned) 0 0 0 0 0.03 0.00 0.01 Subsidiary of Mozambican enterprise 0.04 0.06 0 0 0.12 0.09 0.05 Subsidiary of Foreign enterprise 0 0 0 0.03 0 0 0.01 Firm Ownership Characteristics Privatized enterprise 0.53 0.44 0.33 0.35 0.50 0.63 0.48 Any foreign ownership 0.14 0.06 0.04 0.13 0.38 0.29 0.19 % foreign ownership, if any 65.0% 49.0% 42.0% 70.0% 69.6% 72.0% 68.1% Any state ownership 0.10 0 0 0.06 0.15 0.06 0.07 % state ownership. If any 23.4% -- -- 34.5% 36.0% 25.0% 29.7% Firm Age New (1­5 years) 0.18 0.22 0.13 0 0.12 0.17 0.13 Young (6­10 years) 0.20 0.33 0.21 0.10 0.32 0.23 0.22 Mature (11­25 years) 0.20 0.28 0.42 0.45 0.21 0.20 0.27 Old (>25 years) 0.41 0.17 0.25 0.39 0.35 0.40 0.35 Export Orientation % total sales to local market 90.8% 83.9% 99.1% 86.7% 97.8% 97.2% 92.9% % sales exported directly by firm 5.2% 16.1% 0.9% 13.3% 2.2% 2.8% 6.0% % sales exported indirectly (via agent) 4.0% 0% 0% 0% 0% 2.9% 1.6% Proportion of Firms Exporting 0.14 0.28 0.04 0.13 0.03 0.09 0.11 % exported (if any) 37.0% 58.0% 21.0% 99.8% 75.0% 31.3% 54.2% Benefits from Investment Code/IFZ Regulations 0.12 0.11 0.08 0.13 0.12 0.23 0.14 Notes: sample sizes vary for some characteristics due to missing data for some firm; a total of 4 firms are 100% oriented to the export market all the textile and garments sector, there are only 3 firms in the sample producing textiles, the remaining firms are all manufacturers of apparel footwear. Appendix A: The Sample of Firms and Firm and Owner Characteristics 87 are recently privatized enterprises. This particularly they would be competing for access to timber characterizes the modern manufacturing sector in resources with incumbent Mozambican-owned Mozambique and can be attributed to the earlier enterprises. Given that the wood processing sector is comprehensive nationalization of all areas of also the most export-oriented of the sectors covered, economic production from 1975 onwards, in line with with 28 percent of sampled firms exporting some the socialist principles of the post-independence proportion of their outputs, we would expect this Frelimo government. Following an extremely rapid export potential to attract both regional and and extensive privatization program in the mid-1990s, international investors to a greater degree than is various forms of private domestic and foreign apparent from our sample. ownership now predominate for firms in our sample. In terms of the age distribution of firms, 13 percent However, there is a clear legacy of continuing minority are new entrants (formed in the last 5 years), 22 state ownership in almost all sub-sectors and percent of firms are young (6­10 years of age), 27 particularly among medium- and large-scale percent are mature (11­25 years of age), and 35 enterprises: 15 percent of large enterprises (75­250 percent are older enterprises (formed at least 25 employees) and 27 percent of very large enterprises years ago). This indicates that almost one-third of the (more than 250 employees) have some degree of sample was formed before independence. This residual government involvement in their shareholding statistic provides an indication of the relative lack of structure. The government is apparently committed to dynamism within some parts of the industrial sector-- the gradual reduction of its remaining portfolio. at least until the mid-1990s when market-oriented Another factor, which may explain the durability of reforms opened a number of previously highly state involvement, is that private entrepreneurs view protected sectors to international competition. Two having the government as a minority partner in their related areas of emerging policy concern are enterprises as a useful insurance mechanism against competition policy and bankruptcy law, both of which arbitrary bureaucratic intervention by other state are comparatively underdeveloped in Mozambique. agencies in the running of their companies. To encourage the reallocation of both capital and A total of 19 percent of sampled firms have some labor into new higher productivity enterprises and degree of foreign ownership, although relatively few sectors, additional measures should be taken to firms are exclusively foreign owned. This can partly be facilitate the entrance of new enterprises (by relaxing explained by government policy during much of the licensing and registration requirements) and to 1990s that encouraged all foreign investors to form ensure that moribund incumbent firms are effectively joint ventures with local partners, without actually wound up. making this a legal obligation under the 1993 Firms in all size categories and sectors are investment legislation. As expected, foreign predominantly oriented to the domestic market. The ownership is concentrated among relatively large only examples of 100 percent export-oriented firms firms and also firms in the metalworking and are in the garments sector, which produce garments construction sectors, which are among the most in Mozambique for the European, South African, and capital-intensive. The lowest levels of foreign American markets under AGOA and other quota ownership are in the domestic resource-intensive access arrangements. Manufacture of export-oriented sectors of wood processing and furniture garments is an example of an infant industry in manufacture. This may indicate some difficulties for Mozambique that requires particular attention from the foreign companies in entering these sectors, where government to facilitate its growth and success. Appendix A: The Sample of Firms and Firm and Owner Characteristics 88 Internationally, two of the key competitiveness factors number of firms covered in the analysis of owners and for this footloose industry are easy access to low-cost, managers varies. First, we present the characteristics semi-skilled labor and the ability to employ skilled of the firm's senior executive (usually the managing expatriate labor to compensate (at least in the short director or director general). In some cases these term) for lack of managerial and technical expertise in individuals are owner managers (for entrepreneurial Mozambique. firms) or, more commonly, they are professional A total of 11 percent of firms in the sample export managers employed by the firm's owners. Second, we some proportion of their manufactured products focus on firms that have individual ownership (i.e., directly. These exports are predominantly to owners who are private individuals), where the owner international rather than regional markets, with is not also the managing director of the firm. There are approximately two-thirds of Mozambique's exports a total of 88 firms that fall into this category. Variation destined for markets outside Africa. This contrasts in the human capital characteristics of senior strongly with the experience of many other African managers and individual owners may have important countries (for example, Tanzania and Kenya), where implications for firm performance, some aspects of interregional exports tend to dominate. There is a which will be examined in later sections of this report. large potential market in South Africa and other SADC In tables A.8 and A.9 show the breakdown of states for consumer goods manufactured in selected characteristics by firm size and sector of Mozambique. However, at the moment, Mozambique operation. Very few firms have either female is at a relative disadvantage to Botswana, Lesotho, managers or owners, which is true across all sectors and other members of the South African Customs and size categories, with the possible exception of Union (SACU). We find that only medium- and large- large firms, where 11 percent report having female scale firms export, which is consistent with the managing directors. The years of tenure of the senior findings from other studies. Most firms export directly manager tend to decrease with firm size, from 14 themselves, rather than using agencies or other years for micro firms to 7.4 years for very large firms, marketing firms, which indicates a lack of indicating possibly that larger firms tend to rotate their specialization in this field. The wood products sector senior management more frequently, which in turn is the most export-oriented, followed by garments. may have important implications for firm learning, as However, only 6 percent of total manufacturing sales new management is brought in with more varied in 2001 were to export markets, which demonstrates experience. On average, managers have 15 years of the enormous scope for further export expansion. experience in their specific industrial sectors before Greater penetration of both regional and international reaching the position of managing director. export markets represents the best opportunity for In terms of educational qualifications, all firms medium- and long-term growth for Mozambican have both managers and owners with some formal manufacturers, due to the limited size of the domestic education (perhaps to be expected since relatively market, particularly outside Maputo. few informal microenterprises were interviewed). The proportion of managers with university education Characteristics of Firm Owners increases monotonically with size of firm, which is and Managers consistent with the theories of Lucas who This section looks at some of the human capital hypothesizes that the distribution of firm size is characteristics of firm owners and managers in the associated with the distribution of managerial Mozambican manufacturing sector. Note that the capability, with more capable managers running Appendix A: The Sample of Firms and Firm and Owner Characteristics 89 Table A.8 Selected Characteristics of Firm Owners and Managers by Firm Size Table shows proportion of firms in each category (unless otherwise specified) Very Micro Small Medium Large Large All Managing Director Characteristics N=28 N=41 N=60 N=46 N=15 N=190 Proportion female 0 0.07 0.03 0.11 0 0.05 Years of tenure with firm 14.0 11.6 10.8 8.6 7.4 10.7 Years of previous experience (in same industry) 11.7 18.5 13.4 15.4 18.3 15.0 University education 0 0.15 0.27 0.33 0.57 0.24 Secondary education 0.43 0.58 0.57 0.56 0.29 0.52 Primary Education 0.57 0.28 0.17 0.11 0.14 0.24 No formal Education 0 0 0 0 0 0 African 0.70 0.53 0.45 0.29 0.07 0.43 European 0.11 0.20 0.29 0.42 0.50 0.29 Asian 0.11 0.10 0.14 0.09 0.36 0.13 Indian 0.07 0.15 0.10 0.20 0.07 0.13 Other Ethnicity 0 0.03 0.02 0 0 0.01 How Firm Acquired (All Firms with Data) N=24 N=39 N=50 N=39 N=12 N=164 Owner founded firm 0.75 0.64 0.64 0.56 0.58 0.63 Current owner bought firm (non-privatization) 0.08 0.15 0.08 0.15 0 0.11 Current owner acquired firm in privatization program 0.08 0.13 0.20 0.18 0.17 0.16 Owner inherited firm 0.04 0.05 0.02 0.05 0 0.04 Other form of acquisition 0.04 0.03 0.06 0.05 0.25 0.06 continued . . . Appendix A: The Sample of Firms and Firm and Owner Characteristics 90 Table A.8 Selected Characteristics of Firm Owners and Managers by Firm Size (continued) Table shows proportion of firms in each category (unless otherwise specified) Very Micro Small Medium Large Large All Owner Characteristics (if individual and not MD) N=10 N=21 N=27 N=20 N=10 N=88 Proportion female 0 0.05 0.04 0.05 0 0.03 University education 0 0 0.16 0.25 0.10 0.12 Secondary education 0.40 0.72 0.64 0.35 0.50 0.54 Primary Education 0.30 0.33 0.32 0.20 0.10 0.27 No formal Education 0 0 0 0 0 0 African 0.30 0.45 0.54 0.25 0.20 0.38 European 0.50 0.30 0.31 0.45 0.40 0.37 Asian 0.10 0.15 0.08 0.05 0.10 0.09 Indian 0.10 0.10 0 0.20 0.30 0.12 Other Ethnicity 0 0 0.08 0.05 0 0.03 Related to managing director? 1.00 0.67 0.41 0.53 0.75 0.59 Notes: Top section shows characteristics of Managing Director of company (who may also be the owner/manager); the bottom section shows the characteristics of individual owners, where these individuals are not involved in the firm's day to day management. larger enterprises.39 Over 75 percent of managers in are managed by Europeans, who could be expatriate the sample have secondary education or higher. managers from Europe or South Africa or in some For the subsample of firms with individual owners cases Mozambicans of Portuguese origin. Twenty-six who are not also the managers, 59 percent report that percent of managers are either of Indian or other the managers they have appointed are family Asian ethnicity. This diversity of ethnic background members. These are most likely to be family-owned can be seen as an advantage due to the range of firms, where the older family members place greater social capital networks that managers of Mozambican trust in younger family members to run their manufacturing firms might be expected to maintain, businesses. Family-run businesses predominate in which should give them beneficial access to some sectors, particularly among smaller-scale technology and external markets through contacts operations in Mozambique. outside of Mozambique. There is a wide variation in the ethnicity of both We also have some information about how firms firm owners and managers in the sample. Only 38 were acquired by their current owners: 63 percent of percent of owners and 43 percent of managers are firms in the sample were founded by their current Africans. Twenty-nine percent of firms in the sample owners, and another 27 percent were purchased, Appendix A: The Sample of Firms and Firm and Owner Characteristics 91 Table A.9 Selected Characteristics of Firm Owners and Managers By Firm Sector Table shows proportion of firms in each category (unless otherwise specified) Food & Wood Textiles & Metal & Other Beverages Products Garments Machinery Sectors All Managing Director Characteristics N=48 N=42 N=31 N=34 N=35 N=190 Proportion female 0.04 0.07 0.03 0.06 0.06 0.05 Years of tenure with firm 10.6 11.4 13.6 10.7 7.4 10.7 Years of previous experience (in same industry) 13.1 17.7 15.0 13.8 14.5 15.0 University education 0.30 0.05 0.19 0.29 0.38 0.24 Secondary education 0.54 0.50 0.45 0.59 0.53 0.52 Primary Education 0.15 0.45 0.35 0.12 0.09 0.24 No formal Education 0 0 0 0 0 0 African 0.27 0.51 0.47 0.53 0.44 0.43 European 0.36 0.32 0.13 0.35 0.26 0.29 Asian 0.18 0.10 0.23 0.09 0.06 0.13 Indian 0.16 0.07 0.17 0.03 0.24 0.13 Other Ethnicity 0.04 0 0 0 0 0.01 How Firm Acquired (All Firms with Data) N=44 N=40 N=26 N=29 N=25 N=164 Owner founded firm 0.50 0.75 0.65 0.55 0.76 0.63 Current owner bought firm (non-privatization) 0.18 0.05 0.15 0.03 0.12 0.11 Current owner acquired firm in privatization program 0.16 0.18 0.08 0.28 0.08 0.16 Owner inherited firm 0.07 0 0.04 0.07 0 0.04 Other form of acquisition 0.09 0.03 0.08 0.07 0.04 0.06 Owner Characteristics (if individual & not MD) N=25 N=21 N=12 N=14 N=16 N=88 Proportion female 0.04 0.05 0 0.07 0 0.03 University education 0.08 0.33 0.08 0 0.06 0.12 Secondary education 0.58 0.56 0.50 0.54 0.50 0.54 Primary Education 0.29 0.22 0.25 0.38 0.19 0.27 No formal Education 0 0 0 0 0 0 continued . . . Appendix A: The Sample of Firms and Firm and Owner Characteristics 92 Table A.9 Selected Characteristics of Firm Owners and Managers By Firm Sector (continued) Table shows proportion of firms in each category (unless otherwise specified) Food & Wood Textiles & Metal & Other Beverages Products Garments Machinery Sectors All African 0.32 0.55 0.33 0.54 0.19 0.38 European 0.36 0.20 0.33 0.38 0.63 0.37 Asian 0.16 0.05 0.25 0.00 0.00 0.09 Indian 0.16 0.05 0.08 0.08 0.19 0.12 Other Ethnicity 0 0.15 0 0 0 0.03 Notes: top section shows characteristics of Managing Director of company (who may also be the owner/manager); the bottom section shows the characteristics of individual owners, where these individuals are not involved in the firm's day to day management. either from the government through the privatization 35. There are a total of 9 firms with 5 employees or program (16 percent) or from other private companies less. The largest firm visited had 970 employees. (11 percent). The relatively high proportion of firms Total employment figures include the owner/ founded by their current owners and, in many cases, entrepreneur if this individual is actively involved owned and managed by members of the same family in the firm's activities. is typical of the industrial sectors of many African 36. CPI estimates that around 70 percent of approved countries. These are characteristics of a relatively investments actually take place. Other sources immature business sector, with underdeveloped stock suggest that may be an overestimate. markets and other legal mechanisms for the effective 37. However, this should be one of the main outputs transfer of ownership of capital resources. These from the INE Industrial Census once completed. characteristics will certainly change over time, with 38. Based upon a total population estimate in 1998 of the rapid opening up of the Mozambican commercial 16,452,000 (with 80.4 percent economically sector to foreign investment since 1992, the active), this gives an estimate of 421,000 adults privatization and development of the commercial formally employed in manufacturing industries in banking sector, and the establishment of the Maputo Mozambique. This seems quite high compared to stock exchange in 2000. estimates from other sources. 39. Lucas (1976). Notes 34. The last industrial census in Mozambique was the 1988 UN Industrial Development Organization (UNIDO) Industrial Survey. INE is currently undertaking a new Firm Census (Censo de Empresas, CEMPRE) with results due by April 2003. Appendix B: Results of the Probit Estimations for Investment and Access to Credit 93 Table B.1 shows estimated results of a multivariate sector of activity, age of firm, ownership status, probit model analyzing determinants of investment. whether or not the firm has private, foreign, or The dependent variable is the likelihood of investing, government ownership, and whether or not the firm while explanatory variables include firm size, location, was privatized in the past. Two other variables included are the education level of the general manager (owner in case of proprietorships) and Table B.1 Determinants of Likelihood of whether or not the firm is part of a group of companies Investing that may share financial resources. The only significant variables are firm size and age, both of Constant 0.80 ­0.86 which are significant at 5 percent level of significance, 1.43 0.73 and access to bank loans and foreign ownership, Size 0.29* 0.26* significant at 10 percent significance level. 0.12 0.11 The second column shows a more parsimonious Location ­0.07 ­0.05 0.18 0.16 version of the same model, excluding some of the Sector ­0.02 ­0.02 insignificant explanatory variables, with similar results 0.08 0.08 except that access to bank loans becomes significant Privatized ­0.91 ­0.10 at the 5 percent level. The multivariate probit model 0.65 0.27 thus shows that, adjusting for all other variables, Age ­0.02* ­0.02* larger firms, newer firms, and those with access to 0.01 0.01 bank loans and with positive share of foreign Private ­0.82 -- ownership were more likely to invest were larger 0.63 -- firms.40 Foreign 0.54** 0.49** 0.31 0.30 A similar multivariate analysis of determinants of Government ­0.73 -- firms' access to bank credit, either in terms of loans or 0.65 -- overdrafts, shows firm size as the main explanatory Bank loan 0.48** 0.48* variable (table B.2). There are a number of reasons 0.26 0.25 why banks would prefer to lend to larger firms, all Overdraft ­0.12 ­0.24 stemming from problems of incomplete information 0.39 0.37 and resulting barriers to financial transactions already Education ­0.04 -- referred to earlier. 0.11 -- The only other variable with some explanatory Group membership 0.46 -- 0.73 -- power is the educational attainment of the general Ownership status 0.02 -- manager/proprietor, which is barely significant at 10 0.09 percent level of significance.41 None of the other Log-likelihood ­81.2 ­83.3 variables are statistically significant in explaining Pseudo R2 0.15 0.14 access to bank credit.42 In particular, sector and N 173 175 location effects on access to bank credit are ** : significant at 5 percent statistically insignificant. In both of the full and the ** : significant at 10 percent parsimonious models estimated above, the estimated Note: Figures in italics are standard errors of estimated coefficients for sector and location are negative and coefficient. mildly significant, at between 15­20 percent level of Appendix B: Results of the Probit Estimations for Investment and Access to Credit 94 Table B.2 Determinants of Access to Bank Notes Credit 40. Estimating the probit model above with firms classified as "new" (i.e., having come into Constant ­0.69 ­0.20 existence in or after 1992) compared to older 1.15 0.69 firms shows similar results with an equally Size 0.37* 0.36* 0.10 0.10 significant coefficient for the variable "new." Thus, Location ­0.20 ­0.19 firms established after 1992 were more likely to 0.16 0.15 invest than older firms. Sector ­0.11 ­0.13 41. The coefficient for education of manager is 0.07 0.07 negative because the highest levels of education Privatized 0.21 ­0.06 are coded as 1, while values from 2 to 5 represent 0.49 0.25 lower levels of educational attainment. Age ­0.01 ­0.01 42. Firm age is statistically insignificant when defined 0.01 0.01 as a continuous variable. However, if defined as Private 0.27 -- 0.47 -- a dichotomous variable, in terms of firms Foreign 0.19 0.16 established post- versus pre-1992, the likelihood 0.29 0.29 of new firms accessing bank credit is higher and Government ­0.14 -- the effect is statistically significant. Results with 0.49 -- respect to all other variables are qualitatively Education ­0.15** ­0.14 unaffected compared to the reported regressions 0.10 0.10 in table B.2. Group membership 0.33 -- 0.64 -- Ownership status ­0.04 -- 0.09 Log-likelihood ­101.1 ­99.7 Pseudo R2 0.15 0.13 N 187 181 ** : significant at 5 percent ** : significant at 10 percent Note: Figures in italics are standard errors of estimated coefficient. significance. This indicates at best a weak support for the hypothesis that bank credit is likely to be higher for firms in Maputo, than in central and northern regions. Similarly, a negative coefficient for sector would indicate higher likelihood of access to bank credit for firms in food processing, followed by those in wood and furniture, textile and garments, and metal sectors, but the effect is statistically insignificant. Appendix C: Firm Registration Process 95 Table C.1 was prepared by an experienced consultant consultant stopped the process after CPI approval. outside Maputo. The times are based upon the Once the steps below are completed, the firm is average experience of registering firms in the last registered but cannot legally begin operations until it year. It clearly illustrates the complexity of firm obtains a tax number. Foreign investors can add up registration and why potential investors might never to another three months until they obtain residence begin or give up along the way. Indeed, in this case and work permits and import licenses. nearly half the potential investors who engaged this Appendix C: Firm Registration Process 96 Table C.1 Registration of Group A Company Time and Cost Analysis Average Time Step to Complete Average Cost Comments & Problems Section I 1) Register name (Certidão 17 days 112,000 Mts. Signature on request letter must be Negativa) "recognized" by notary. Documents are held for the statutory 15-day period even if issued earlier. 2) Register Company 21 days A% Preparation of a typed copy of hand- Statutes (Escritura) written statutes for submission in Maputo takes the most time. FOR FOREIGN 30 days from date of Percentage of investment INVESTORS receipt of complete set capital of documents At this stage statutes, proof of ID of shareholders plus complete project proposal should be submitted to CPI. 3) Publication of Statutes in 30 days B% Time dependent on how many other Maputo (BR) items are ready to go into BR. Date of publication of release can be up to 15 days. 4) Registration Certificate 20 days C% As with name registration, this also (Certidão Definitiva) requires the purchase of large numbers of stamps to stick on each page of process. Requires submission of complete text of certificate, which is then re-typed by the Conservatoria. Sub-steps to the above Approx cost of document preparation per stage · Preparation of notarized · 1 day 75,000 Mts. · Copies of all documents must be copies of all documents submitted at each stage (except BR plus letter with authenti- which only requires statutes). cated signature. · Calculation of payment is complex · Submission and request · 3 days and varies widely from process to for quotation. process. continued . . . Appendix C: Firm Registration Process 97 Table C.1 Registration of Group A Company Time and Cost Analysis (continued) Average Time Step to Complete Average Cost Comments & Problems · Payment · 1 day · Payment can only be made to specific individuals. If they are absent the process is automatically delayed. Total (Section I) 88 days (118 for Total cost including document Calculation of % paid at each stage is foreign investors) preparation (copies, unverifiable. Figures vary and are notarisation, etc.): $66 plus based on a complex system of tariffs A+B+C=% and fees that are not available to the of stated public. This does not include fees and Capital investment percentages charged by CPI to Investment capital paid foreign investors. Value (approx) 0­$2,500 20% $2,500­8,400 15% $8,400­20,000 10% $20,000­32,000 5% $32,000+ 2% Section II 5) Pre-Inspection of 15 days 500,000 Mts. Date and time must be agreed with 3 proposed premises from date of request to inspectors from 3 departments. They inspection. must all be collected and transported. A further Obtaining information regarding 15 days alterations required to premises within to receive report on the stipulated time period is very result of inspection. difficult. Each pre-inspection makes different stipulations, often requiring the completion of processes that cannot be done until after the trade license is issued. Sub steps to the above: Depending on the inspec- tor, as a result of the inspection, a company is required to obtain: · Work Schedule · 30 days · 5,000 Mts. · It is not legally possible to obtain a work schedule without a trade license. continued . . . Appendix C: Firm Registration Process 98 Table C.1 Registration of Group A Company Time and Cost Analysis (continued) Average Time Step to Complete Average Cost Comments & Problems · Sanitary Control book · 5 days · 50,000 Mts. · The requirement for this book is solely at the discretion of the inspec- tor and is a concept peculiar to the · Registered list of · 2 days · 10,000 Mts. province. employees · It is illegal to employ anyone without having a trade license and also without being registered with the finance and labor department, which cannot be done until after the issuing of a trade license. Governor's Dispatch Submission and receipt controlled by Com- merce Dept., so it is impossible to give accurate data but at least 8 days from date of dispatch by governor's office to date of notification by Commerce. Final Inspection 11 days from date of 1,000,000 Mts.--license fee As with pre-inspection, you must payment 1,500,000 Mts.--Inspection fee collect documents from each depart- 500,000 Mts.--Health ment and deliver them to the other Inspection departments yourself and then collect and transport the inspectors. You are obliged to pay for the issuing of the license prior to the inspection, and the money is not refunded if the license application is rejected. Total (section II) 41 days Total cost including document preparation (copies, notarisa- tion, etc.) at each stage $160 Notes: Total time taken is approximately 4 months (5 months for foreign investors). This estimate assumes that there are no problems with documents at any stage and that the company is fully conversant with what is necessary. Experience shows that the process takes at least 5 months without a CPI investment. Following the above steps, an investor may register with the finance department to obtain his tax number and begin trading. Foreign investors may now apply to open a bank account and after obtaining finance registration may begin applications for work permits and residence permits. Importers may apply for an import permit to begin importing goods. Appendix D: Timber Export Procedures 99 Table D.1 was prepared by a timber exporter who products, such as flour must also receive certificates supplies rough-sawn parquet to the European market, that destination countries do not need. All shipments, and it illustrates the steps required to export even of non-agricultural goods, must be packed and agricultural products. The total time, if all goes well, is loaded under the supervision of customs officers, who 10 days. The steps are little different for other must be transported and provided allowances. If the products. The certificates listed below are required officials are not available export can not take place. by the Department of Agriculture and European Also all exporters must receive export licenses for no customers do not want them. Other agriculture discernable reason. Appendix D: Timber Export Procedures 100 Table D.1 Timber Export Procedures for Mozambique Average Average Comments Step Description Time Cost and Problems 1 Raise the invoice and get the "boldoro" (payment 1 hour Zero none guarantee) from the bank. 2 Obtain a Certificate of Origin from the Department Usually the Mts. 900,000 Payment in cash only. of Commerce. same day Customers in Europe do not require this certificate. 3 Request in writing, an inspection from the Forestry The authority for Payment made Division of the Department of Agriculture for the the inspection on issuing the issuing of a Certificate of Quality (CoQ). usually takes certificate. 24 hours. 4 Request in writing, an inspection from the Plant Usually same Mts. 500,000 Protection Service of the Department of Agriculture day (this fee is about for the issuing of a Phytosanitary Certificate (PC). to be increased, but the new tariffs are not yet available). 5 Collect official for PC inspection from city center. Company must supply transport. Will not come with CoQ inspectors forcing the company to make two trips. 6 Collect PC after inspection. 24 hours 7 Collect between 2 and 4 CoQ inspectors. Company must supply transport. 8 Pay CoQ inspectors daily allowance. Mts. 300,000 per Cash payments only, no person. checks accepted. 9 Return to get authority to pay for CoQ and make 24 hours Depends on the The department cannot payment. quantity, usually receive payment directly; Mts. 500,000 per the funds have to be 20-foot container. deposited into the bank. 10 Collect CoQ. Anywhere between 1 and 3 days after inspection. 11 Supply documents to agency to submit to customs. Between 1 and $100 (payment Many companies con- Loading is "supervised" by a customs officer who 3 days. made to agency tract and pay extra for an has to be supplied transport. not customs). agency to solve all cus- toms documentation and inspections problems. Appendix E: The Mozambican VAT Refund Policy 101 The Mozambican VAT refund policy "IVA Codigo" was both the refund approval process and the actual established to provide tax relief to specific private refunds are delayed by the VAT offices to offset the sector activities that fall under the value added tax VAT refund obligations per month. These delays refund structure (see "IVA Codigo"). However, while cause major cash flow problems for firms that have the law was designed to provide some tax relief large VAT refund requests. In the cases of the to Mozambican firms, it has been problematic for provinces, firm applications must be approved at both a select group of large formal sector firms. These the provincial and national level, which further delays businesses complain that the current refund system is approval and refunds. fraught with delays on repayment of VAT refunds, According to the Office of Taxes and Audits, the which negatively affects firm cash flow and makes refund delays are caused by businesses not firm level budgeting and project planning extremely complying with the necessary documentation, thereby difficult. The government's Office of Taxes and Audits delaying document approval. The Office states the (Direcção Nacional de Impostos e Auditoria), which most common issue is that businesses are resistant to handles VAT refunds, states that businesses do not submit proper documentation showing their suppliers, properly comply with documentation, thereby causing who they state must be up to date on VAT payments refund delays. In order to meet the goals of "IVA for the applying firm to request the VAT refund on Codigo," VAT refund problems must be resolved purchases from those suppliers. The Office further or the VAT system only further reduces the states that when the proper documents are delivered competitiveness of formal Mozambican firms. and approved, they meet the timelines defined by the law and that the survey time of 99 days includes firms VAT Refund Delays: that submitted improper documentation that had not Issue: According to the Office of Taxes and Audits, the yet been approved. The Office did state, however, VAT law stipulates that VAT refunds are to be made that additional staff could allow them to better attend within 45 days of documentation approval for to business applications. Firms, however, state that qualifying exporting firms and 60 days for qualifying these allegations are incorrect. They state that in non-exporting firms. However, the survey sample many cases the local VAT offices find non-relevant showed that firms must wait an average of 99 days for issues in the documents that delay the approval VAT refunds, with a large disparity of responses. When process and that refund delays still persist even when VAT documents are submitted, the documents need the proper paper work is submitted and approved. to be approved for a VAT refund to be disbursed Currently, several large firms have substantial VAT within the designated time period. Firms state that refund credits overdue with the government (reaching documentation for approval is not as problematic as $1 million) through VAT payments on imports. In the the refunds following the approval. Furthermore, case of VAT refunds on imports, documentation is private sector organizations point out that the majority simplified to one document, Documento Unico, of VAT refund problems are focused within a core making approval easier. However, firms state that the group of approximately 20 firms that make substantial large refund requests by importers, which can exceed refund requests based significant raw material US $1 million, cannot be met by the VAT refund office imports. According to one large firm, most companies within the 60 day time period due to insufficient with significant VAT activity have accountants familiar government funds. In order to reduce cash flow with the documentation requirements making problems for firms with large VAT outlays, the law does approval easier, but refunds are made well past the allow firms to offset their VAT refund credits against document approval timeline because of cash upcoming VAT payments, but only for VAT payments shortages in the VAT system to meet the refund on sales within the country. As a result, this flexibility requests. As a result of these shortages, sometimes does allow large firms that import raw materials to Appendix E: The Mozambican VAT Refund Policy 102 discount VAT payments on imports, where significant are submitted and approved, the Office states that VAT refunds remain delayed. payment is made within the time period defined by Solution: Delays in making VAT refunds payments law (45­60 days). Following payment the Office to qualified firms puts an enormous strain on carries out an audit to verify the details of the companies' cash flows. The delays also create a documentation. Upon completion of the audit, the perception to potential outside investors that guarantee is no longer needed. The guarantee is Mozambique is not serious about providing promised required so that the government has some recourse incentives and further puts formal private sector firms if the firm has entered a false refund request which at a competitive disadvantage for VAT compliance. It the audit identifies, or if the firm does not pay other appears that VAT funding issues are the core problem, VAT obligations. Government states that with the which is causing delays in both approvals and guarantee and the proper documentation, refunds are refunds. In order to reach the desired goals of the VAT disbursed on time. However, businesses contest that system, the government must show its commitment to with VAT repayment delays the guarantee requirement making the system functional. Firms paying the VAT in effect doubles the firms cash outlay thereby further should not be punished and put at a competitive reducing its cash flow for activities. Businesses also disadvantage as a result of government shortfalls and state that audits are delayed and can take more than limited compliance. If the government of Mozambique one year, therefore increasing the cost of the is serious about managing an effective VAT system it guarantee. must prosecute businesses that are non-compliant in Solution: The government should reduce the order to increase revenues to pay compliant firms. guarantee period from the current 1 year timeframe Firms also carry part of the burden by ensuring that to 6 months to improve firm cash flow. Bottlenecks they work with suppliers that are VAT compliant as the that allow the VAT offices to carry out the necessary government cannot be expected to pay VAT refunds verification/audit need to be addressed in tandem to firms in instances where the government didn't with the reduced timeframe. The Office of Taxes and receive the initial VAT payment from the firm's supplier. Audits stated that additional auditors could facilitate In this manner, both the private sector and the and improve the process and reduce perceived government should be working with the same goal of delays. improving the system's net cash flows. Hiring of additional VAT staff at the Office of Taxes and Audits Final observations: An effective VAT system requires could also be considered to improve collections. In sufficient institutional infrastructure and resources to the short term, it is advisable for the government to properly manage the system and make it functional. allow firms to offset VAT refund credits against future The current VAT system in Mozambique is currently VAT payments on imports, where the firm has paid punishing some firms that are compliant through the VAT to the government directly. This would solve delays on payment refunds. If the problem is financial, the problems of several large firms with cash flow as pointed out by the private sector, the government problems due to substantial VAT refund credits on must find a way to improve collection and expediently past imports. channel that money back to those firms that are in compliance with the VAT system. Compliant private Bank Guarantees: sector firms also need to be more vigilant to work Issue: According to the Office of Taxes and Audits, with VAT compliant suppliers. If the government does those firms that request a VAT refund are required to not have the resources to make the system function put up a bank guarantee for up to one year for 100% properly, then a new system of tax relief should be of the value of the requested refund. After documents considered. References 103 Anderson, P. 2001. "The Impact of the Mega Projects Nathan Associates Inc. 2001. Mozambique-- on the Mozambican Economy." 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