COUNTRY PRIVATE SECTOR DIAGNOSTIC CREATING MARKETS IN MOZAMBIQUE A study conducted by the World Bank Group in partnership with SIDA June 2021 About IFC IFC—a sister organization of the World Bank and member of the World Bank Group—is the largest global development institution focused on the private sector in emerging markets. We work with more than 2,000 businesses worldwide, using our capital, expertise, and influence to create markets and opportunities where they are needed most. In fiscal year 2019, we delivered more than $19 billion in long-term financing for developing countries, leveraging the power of the private sector to end extreme poverty and boost shared prosperity. For more information, visit www.ifc.org © International Finance Corporation 2021. All rights reserved. 2121 Pennsylvania Avenue, N.W. Washington, D.C. 20433 www.ifc.org The material in this work is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law. IFC does not guarantee the accuracy, reliability or completeness of the content included in this work, or for the conclusions or judgments described herein, and accepts no responsibility or liability for any omissions or errors (including, without limitation, typographical errors and technical errors) in the content whatsoever or for reliance thereon. The findings, interpretations, views, and conclusions expressed herein are those of the authors and do not necessarily reflect the views of the Executive Directors of the International Finance Corporation or of the International Bank for Reconstruction and Development (the World Bank) or the governments they represent. Cover Photos: FNDS-Mozbio ACKNOWLEDGMENTS The Mozambique Country Private Sector Diagnostic (CPSD) was prepared by a team led by Francisco Campos, Denny Lewis-Bynoe, and Michélle Souto. The team included Ruben Barreto, Mario Brataj, Amy Jane Chamberlain, Adriana Conconi, Rachita Daga, Philippe De Bonneval, Jakob Engel, Guilherme Falco, Elena Gaffurini, Federico Guido Lavalle, Luciana Harrington, Ulla Heher, Ianifa Imbate, Simeão Lopes, Zeferino Martins, Ana Ruth Menezes, Sneha Mehta, João Moura, Vasco Nunes, Ivan Remane, Federica Ricaldi, Natsuko Toba, Bradley Weiss, Eva Clemente Miranda, Celine Jialing Lim, and Anne Ytreland. Administrative support was provided by Adelia Chebeia and Brigida Tchamo. The team gratefully acknowledges the leadership and guidance of Mona Haddad, Kevin Njiraini, Mark Lundell, Asad Alam, Hector Gomez Ang, Katia Daude, Carolin Geginat, Raymond Bourdeaux, Lisa Kaestner, Sebastian Molineus, Douglas Pearce, Sebastien Dessus, and Dahlia Khalifa. The team is grateful for the comments provided by the peer reviewers: Mazen Bouri, John Gabriel Goddard, Shireen Mahdi, Ganesh Rasagam, and Markus Scheuermaier. The team benefited from suggestions and comments from various colleagues, including Pedro Arlindo, Aniceto Bila, Michel Botzung, Sandra Boumah, Thomas Buckley, Julian Casal, Fernanda Chivulele, Pierre di Borgo, Anna Carlotta Massingue, Eva Clemente Miranda, Samuel Dzotefe, Ankur Huria, Ricardo Mota, Kenneth Osei, Maria João Pateguana, Norman Piccioni, Tiago Peixoto, Albert Pijuan, Zayra Romo, Heba Shamseldin, Samuel Taffesse, Neelam Verjee, and Fred Zake. The team would like to express gratitude for the excellent contributions of the Mozambique public and private sector representatives met during the preparation of this report. The team would also like to thank other development partners for their insights to the study. iii iv CONTENTS ABBREVIATIONS VIII EXECUTIVE SUMMARY 1 1. COUNTRY CONTEXT 17 2. STATE OF THE PRIVATE SECTOR 25 3. DRIVERS OF PRIVATE SECTOR–LED GROWTH 31 3.1. Upstream Linkages to Megaprojects 32 Extractive Industries with Planned Megaprojects in Mozambique 33 Realistic Supplier Development Opportunities 34 Potential Sectors in Mozambique and Their Current Status 35 Constraints 39 Lessons from Local and International Experiences 44 Recommendations 48 3.2. Agribusiness 50 Approaches to Develop the Sector 51 Main Value Chains 57 Constraints 64 Recommendations 67 3.3. Tourism 69 Economic Contribution of Tourism 69 Opportunities for Growth 71 Constraints on Investment and Growth 73 Recommendations 77 3.4. Housing Construction 80 Sector Performance and Issues 80 Opportunities 87 Recommendations 89 3.5. Connectivity: Transport and Logistics 91 Trends 91 Market Structure and Opportunities 96 Constraints 101 Recommendations 106 3.6. Energy 108 Trends and Opportunity 108 Constraints 112 Recommendations 115 v 4. CROSS-CUTTING CONSTRAINTS TO PRIVATE SECTOR GROWTH 117 4.1. Skills 118 Current Situation: Firm-Level Practices Regarding Employees’ Skills 118 Demand for Extractives 122 Supply of Human Resources 124 Recommendations 131 4.2. Investment Policy and Promotion 134 Benchmarking Mozambique’s Legal and Regulatory Framework 134 Overview of the Institutional and Regulatory Framework and Existing Gaps 135 Nationwide Barriers to Investment Entry 137 Barriers to Investment in Mozambique’s Special Economic Zones 140 Gaps in the Investment Protection Framework 141 Recommendations 144 4.3. Market and Competition Policy 146 Lack of Competitive Neutrality between Firms—SOEs in Markets 146 Restrictive Sector Regulations That Prevent Entry, Foster Collusion, and Discriminate 149 Recommendations 153 REFERENCES 155 APPENDIX Appendix A Other Sectors with Potential 165 A.1. Downstream Linkages to Extractive Industries 165 Description of the downstream opportunities 166 Other opportunities to be explored 168 Constraints to development and areas of critical work 170 Other experiences with downstream links in the gas sector 171 Recommendations 172 A.2. Financial Sector 174 Current status 174 Constraints in access to finance by private firms 178 Recommendations 179 A.3. Forestry 181 Why forests and the forestry sector matter 181 Current forestry use and development trends 182 Opportunities 184 Constraints 185 Recommendations 188 A.4. Fisheries 190 Performance and trends 190 Opportunities 192 Constraints 195 Recommendations 198 vi Appendix B Other Cross-Cutting Constraints 199 B.1. Regulatory Environment (and Trade Policy) 199 B.2. Governance 203 B.3. Labor Regulations 206 B.4. Land Policy Constraints 214 B.5. Macrofiscal Constraints 216 Appendix C Other Tables and Figures 218 Appendix D CPSD: Review of Methodology and Selection of Sectors of Focus 226 NOTE 229 vii ABBREVIATIONS ADIN Development Agency for the North (Agência do Desenvolvimento Integrado do Norte) ADVZ Zambezi Valley Development Agency (Agência de Desenvolvimento do Vale do Zambeze) ANAC National Administration of Conservation Areas (Administração Nacional das Áreas de Conservação); ANE National Roads Administration (Administração Nacional de Estradas); APIEX Investment and Exports Promotion Agency (Agência de Promoção de Investimento e Exportações) ASWJ Al Sunna wa Jamma’ah (Cabo Delgado) BIT bilateral investment treaty Btu British thermal unit CA conservation area CAHF Centre for Affordable Housing Finance in Africa CFM Mozambique Railway Company (Caminhos de Ferro de Moçambique) CPSD Country Private Sector Diagnostic CSA Agriculture Services Centers (Centros de Serviços Agrários) CTT Central Térmica de Temane EDM Electricity Utility (Electricidade de Moçambique) EPC engineering, procurement, and construction ESHS environmental, security, and health and safety FDI federal direct investment FFH Housing Promotion Fund (Fundo para o Fomento de Habitação) FID final investment decision fintech financial technology GDP gross domestic product ICT information and communication technology ILO International Labour Organization IMF International Monetary Fund viii ABBREVIATIONS INATUR National Tourism Institute (Instituto Nacional do Turismo) INNOQ National Institute of Standardization and Quality (Instituto Nacional de Normalização e Qualidade) IPEME Institute for Promotion of Small and Medium Enterprises (Instituto para a Promoção das Pequenas e Médias Empresas) IPP independent power producer KPI key performance indicator LCR local contente requirement LNG liquefied natural gas MADER Ministry of Agriculture and Rural Development (Ministério da Agricultura e Desenvolvimento Rural) MCTESEP Ministry of Science and Technology, Higher, Technical and Professional Education (Ministério da Ciência e Tecnologia, Ensino Superior e Técnico Profissional) MEF Ministry of Economy and Finance (Ministério da Economia e Finanças) MIC Ministry of Industry and Commerce (Ministério da Industria e Comércio) MICE meetings, incentives, conferences, and exhibitions MICULTUR Ministry of Culture and Tourism (Ministério da Cultura e Turismo) MINT Ministry of Interior (Ministério do Interior) MINEC Ministry of Foreign Affairs and Cooperation (Ministério dos Negócios Estrangeiros e Cooperação) MIREME Ministry of Mineral Resources and Energy (Ministério dos Recursos Minerais e Energia) MISAU Ministry of Health (Ministério da Saúde) MITA Ministry of Land and Environment (Ministério da Terra e Ambiente) MJCR Ministry of Justice, Constitutional and Religious Affairs (Ministério da Justiça, Assuntos Constitucionais e Religiosos) MOPHRH Ministry of Public Works, Housing and Water Resources (Ministério de Obras Públicas, Habitação e Recursos Hidricos) MTC Ministry of Transport and Communication (Ministério dos Transportes e Comunicações) PPA power purchase agreement PPP public-private partnership ix MOZAMBIQUE COUNTRY PRIVATE SECTOR DIAGNOSTIC SADC Southern Africa Development Community SEJE Secretary of State for Youth and Employment