«Industrial Policy in Mozambique Matthias Krause Friedrich Kaufmann Industrial policy in Mozambique Matthias Krause Friedrich Kaufmann Bonn 2011 ...»
30 German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) Industrial policy in Mozambique Besides providing information for SMEs (market information, business linkages, etc.), IPEME will apply instruments like interest-rate bonification24 with commercial banks and leasing institutes, credit guarantees, and matching grants facilitating access to businessdevelopment services and credit for SMEs (República de Moçambique 2007c). Moreover, a think tank will be formed (in or out of the institute) to prepare policy papers and studies for identifying market failures and growth barriers for SMEs in the specific national context.
Currently, talks with donors are being held to secure financing for these activities (see also Box 1 for examples of major World Bank projects in the area of SME promotion). Confidence in the new institution still has to develop, and the Government must show that it has learned from previous failures to support SME activities. The fact that IPEME is conceived as a facilitator and that the private sector is to be involved in the institute’s steering committee, as well as in the elaboration of its action plan, are promising signals (República de Moçambique 2007c).
Box 1: Recent World Bank projects in the area of SME and private-sector development Like several other donors, the World Bank supports SME and private-sector development in Mozambique through various projects. Worthy of mention is the ‘Project for Entrepreneurial Development (PODE)’, which is managed through a separate project-implementation unit. PODE’s technical learning component helped hundreds of local SMEs (mostly around Maputo) to develop their business through a matchinggrant scheme that co-finances training sessions, consultancies, export promotion activities, etc. (Borgarello et al. 2004, 23). A welcome side effect was the increase in demand for businessdevelopment services in Maputo and the founding of new firms that offer these services.
The recently approved ‘New Mozambique Competitiveness and Private Sector Development Project’ (2/2009) integrates various approaches, including selective industrialpolicy measures. The project’s volume of USD 25 million is far bigger than the Ministry’s (MIC) budget. Whether the project will cooperate with the new SME institute, IPEME, is still unclear. There is a certain risk of duplicating functions in the area of SME promotion. One project component aims at developing the competitiveness of SMEs through the provision of credit and technical assistance. Another component focuses on improving the general business environment and implementing the existing strategy for that purpose (see Section 5.5. below). A third component includes selective measures for certain regions and sectors. It plans to promote the tourism sector in the province of Inhambane as a model and anchor province for tourism. A horticulture technological centre for the province of Nampula is also envisaged. As in the PODE case, project implementation is conducted by a special unit, which is linked to the MIC and headed by the former National Director for Industry – who left the MIC to take up this post.
Project management through special implementation units that are institutionally separate from the State administration or line ministries may be more efficient because these units are able to recruit qualified staff, assign a sufficient part of the budget for administration, monitoring and evaluations, and typically follow rigid rules for procurement. But this weakens the public administration because project implementation units create parallel structures and accountability relations, and tend to recruit Government employees by offering better salaries and incentives. In fact, given the huge project budgets, project implementation units in Mozambique can be more powerful than their ministerial counterparts.
5.4 Investment promotion strategy Investment Law 4/93 is the main document that regulates investment procedures and investment incentives. The law aims at promoting domestic and foreign investment in general, following what could be described as an ‘open-door-policy’ approach. Fiscal benefits are by far the most important (and often the only) instrument used for investment promotion.
24 An instrument to achieve lower interest rates through providing grants.
The implementing agent for the promotion activities, both at the national and international levels, is the investment-promotion agency, the Centro de Promoção de Investimentos (CPI), which was created under the Ministry of Finance and Planning (now the Ministry of Planning and Development). The CPI’s most important operational function is to authorise investments and approve them for qualification of fiscal benefits. In addition, the agency acts as a ‘troubleshooter’ helping investors deal with the bureaucracy and comply with regulations. Moreover, the CPI proactively markets the country, with offices in Shanghai, Brussels, and South Africa. Presidential visits, international trade fairs, delegations and conferences, such as the World Economic Forum, are some of their working platforms.25 The Investment Law guarantees equal treatment of all investors and explicitly mentions international investors (Article 4). Nevertheless, labour regulations constitute a disincentive for foreign investors, in particular those that restrict the number of work authorizations for expatriates, thereby hampering the transfer of human capital and skills (DNAEP 2006).
Aside from a few sectors that are reserved for public ownership26, private (foreign) investments are welcome and qualify for fiscal benefits – as long as they are approved by the CPI and fulfil seven out of 10 investment objectives. The 10 investment objectives of
national interest are summarised in the following table:
Table 5: Investment objectives of national interest
a) The development, rehabilitation, modernisation or expansion of economic infrastructures for the operation of productive activities or for rendering services necessary for supporting productive economic activities and promoting the country’s development;
b) The expansion and improvement of national production capacity or of capacity to render services which support productive activities;
c) Contributing towards training, expansion, and development of national entrepreneurs and Mozambi can business partners;
d) The creation of jobs for national workers and the raising of professional skill levels of the Mozambi can labour force;
e) The promotion of technological development and the improvement of entrepreneurial productivity and efficiency;
f) The increase and diversification of exports;
g) The rendering of productive services and of those generating foreign currency;
h) The reduction and substitution of imports;
i) Contributing towards improving the supply of domestic markets and the satisfaction of the priority and basic needs of the population;
j) Any direct or indirect contribution towards improving the balance of payments and government budget revenue.
Source: Investment Law 4/93, Art. 7 25 See also www.mozbusiness.gov.mz/index.php/about-cpi.
26 Article 5 defines the national priorities (areas reserved for the public sector), namely:
a) the production of electrical energy for public consumption in accordance with the relevant legislation,
b) the public supply of water for domestic and industrial purposes in urban centres,
c) the operation of postal services and public telecommunications,
d) the development and operation of national parks, both marine and terrestrial, and of other areas under protection by law,
e) the production, distribution and trade of arms and ammunition.
32 German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) Industrial policy in Mozambique This broad formulation of objectives leaves space for the approval of almost any kind of investment. Fiscal benefits are partly differentiated by sector and geographic area, and on one occasion the CPI supported the creation of the Beluluane Industrial Park in a free zone (see below). Nevertheless, the CPI does not follow any clearly integrated strategy to target specific sectors with growth potential or promote the creation of industrial clusters, for example. Selective industrialpolicy approaches, like the ones discussed in the Industrial Development Strategy above, are mostly unknown to the CPI or are irrelevant in practice.27 One notable exception is the linkage programme around the MOZAL aluminium smelter that is coordinated by the CPI and the International Finance Corporation, (IFC; see the Case Study in Section 6.2). In general, the CPI works on an ad-hoc basis, trying to attract any kind of investment. One factor that hinders integrated approaches to investment promotion is the lack of public finance for investments in complementary public goods or infrastructure.
Fiscal benefits are regulated in the code of fiscal benefits, which was reformulated in 2009 (Law 4/2009). One objective of the reformulation was to increase Mozambique’s fiscal stability and reduce the extraordinary benefits for mega projects. The provisions for fiscal benefits are differentiated by geographical area and sector (see Table A2 in the Annex for an overview of the various fiscal benefits in Law 4/2009). The provisions include incentives for de-concentration: since Maputo has by large received the greatest amount of investments, the Government is now trying to promote investment outside the capital by offering greater fiscal benefits to firms that invest in the ‘hinterland’. Basic infrastructure, rural commerce, rural industry and agriculture, manufacturing and tourism, as well as science and technology parks, enjoy special fiscal regimes.
Finally, the law also grants extraordinary fiscal benefits to free zones (Rapid Development Zones, Free Industrial Zones, Special Economic Zones – see Table A2). In 2007, there were 16 free-zone projects in Mozambique (Wide 2010, 22), including the Beluluane Industrial Park outside Maputo (adjacent to MOZAL). So far, there is no evidence that the free zones have contributed to creating agglomeration economies and industrial clusters.
Only a few firms have settled in Beluluane, for instance.
5.5 Strategy for improving the business climate After many years of discussion, studies and pressure from the donors (the IMF, World Bank and bilateral donors), as well as from the private sector (the CTA and others), the Government elaborated a comprehensive strategy for improving the business climate that was approved in 2008 (MIC 2008b). It was personally backed by the President of Mozambique with hearings with the private sector, and discussions in the Council of Ministers.
MIC is responsible for coordinating the implementation of the strategy; the implementation plan is part of the public-sector-reform agenda that is supervised by the Comissão Interministerial da Reforma do Sector Público, or CIRESP, that is headed by the Prime Minister – which gives it a relatively high political profile.
The approach is market oriented and inspired by the Doing Business reports of the World Bank Group (see Section 3.3). One Government motivation to implement this strategy was 27 Interview with Nuno Maposse (Table A4).
to raise Mozambique’s position in the Doing Business ranking. The strategy is functional (that is, non-specific) in the sense that it does not contain any measures targeted to specific regions or sectors. Its main objective is to level the playing field for businesses in general, and to reduce transaction costs.
The strategy comprises four main lines of action: (i) to cut red tape and deregulate in many areas (import–export, the tax system, inspection, licensing and registering, and labour law); (ii) to reform businesses taxes and ease access to credit; (iii) to improve the energy infrastructure; and (iv) to strengthen property and investors’ rights (MIC 2008b). There are important links to the SME strategy presented above. Among the more than 100 specific activities still to be implemented under the SME strategy are the following: creation of a unified, simplified and non-punitive inspection system; simplification of the tax system for SMEs; ongoing implementation and improvement of the programme for the creation of one-stop shops28 (for an empirical investigation of the effects of Doing-Businessstyle reform on the formalisation and development of small enterprises in Mozambique, see Krause et al. 2010).
There are several challenges to successfully putting the measures foreseen in the Business Climate Strategy into practice. The low capacity and weakness of the public administration is a handicap for the implementation of legal and regulatory reforms, especially outside Maputo.29 Another challenge is funding the reform measures: Some reforms are not very cost-intensive (e.g., a new decree that simplifies business registration), while others are (investments in the energy infrastructure). Another major challenge is the coordination and management of cross-sector tasks. Since many of the envisaged reforms concern more than one ministry and there will be winners and losers, success will depend on political will and management to push the reforms. For example, the new inspection system will redirect budgets, authority and manpower away from line ministries: one objective of the reforms is to reduce corruption through a more centralised and transparent inspection system that applies an educational approach (instead of a punitive approach based exclusively on fines). Strong resistance from the line ministries to the reform project was visible early on.
The MIC is currently elaborating an implementation strategy and a monitoring system for the Business Climate Strategy with the help of a donor (see Borowczak 2008/2009).
But the coordinating inter-ministerial working group has not been working effectively;
its members apparently do not have the necessary support from their line ministries.
Rules and means for the private sector to participate in the monitoring and implementation process still need to be developed. Experiences in Government – private-sector dialogue forums, such as the annual private-sector conference and the CTA working groups, have shown that the follow-up of reforms and the attribution of responsibilities are not always successful.