IDRC Private Sector Development Task Force Conference 7

IDRC Private Sector Development Task Force Conference – 7 & 8 April 2005 Ottawa Canada “FDI & SME Linkages – the case of Mozal I and II” Dr. Rosalind H. Thomas CEO: SADC-DFRC

Structure of Presentation Introduction: FDI in Southern Africa The rationale for SDIs Prioritizing SMEs Why are DFIs interested in SMEs? FDI & Linkages: The Maputo Development Corridor & the case of Mozal I and II Linkages with the Local Economy What lessons can be learnt from Mozal I and II The MDC – PPI and SMEs Concluding Remarks 10/20/2021 2

Introduction FDI in Southern Africa Project related Resource based Benefits seldom spill over to rest of economy Rationale for SDIs RSA leading strategy on SDIs To attract more efficiency seeking/ market related FDI Address structural problems which inhibit investment & trade Allow clustering Develop complementarities & enhance dynamic competitive advantage & allow exploitation of export opportunities Nurture private sector development 10/20/2021 3

Prioritising SMEs Support for SMEs a critical strategy of NEPAD & RISDP Significant development impact Promote backward & forward linkages in economy Have a high capacity to generate employment Key to poverty eradication Contribute to vibrant middle class = essential for generating domestic savings & therefore increasing domestic investment in SADC Why are DFIs interested in SMEs? DFIs engaged in supporting SMEs across all sectors Provision of Finance Business Support Services NEPAD & RISDP – clear prioritization Facilitating BSS = stronger SME client base = stronger DFIs! 10/20/2021 4

FDI & Linkages? The Maputo Development Corridor (MDC) & Mozal? MDC & Mozal an interesting case study because a successful export-oriented FDI project & allows analysis of lessons of failure/success Need to look at MDC from 2 perspectives: • Fostering links between Big Business and SMEs; • Fostering links between PPI and SMEs MDC: through restoration of historic transport routes - regional trade reviving & new investments Successes include: N 4 Toll Road; Maputo Port upgrade; rail links RSA to Mozambique under one management (Spoornet); Nelspruit - regional service centre; expanded use of Maputo Port by RSA businesses; RSA & Mozambique - electricity & telecoms upgraded; Tourism; Maputo industrializing and Mozal is lead development! 10/20/2021 5

Development Corridors & SDIs in SADC 10/20/2021 6

Linkages with the Local Economy? Mozal I & II – Development Impact? First major FDI project in Mozambique (US$2. 2 bn) Project sponsors: Billiton; IDC; Mitsubishi Corp. ; Govt. of Moz. . Financiers: IFC; DBSA; Private Banks Mozal I: completed 6 months ahead of schedule & under budget; production began earlier than anticipated (June 2000) - set world record Contributed: • US$160 m/an to GDP; Export earnings US$430 m/an; US$ 4 m/an in tax revenues; dividend for Go. M US$ 5 m/an; • First rate infrastructure: roads; bridges; telecoms networks; water & sewerage systems; upgraded harbour & electricity supply Mozal II: doubled capacity of the plant for smaller investment, also completed ahead of schedule & under budget. Contributed: • US$170 m/an to GDP; tax revenues of US$ 4. 1 m/an Mozal is Mozambique’s largest foreign exchange earner (54%). 10/20/2021 7

Mozal – Development Impact (ctd) … Linkages … Mozal I: 745 direct jobs (88% Moz) & 2, 500 indirect; during construction 9, 000 temporary jobs (65% Moz); 5, 000 trained during construction phase; Mozal II: 376 additional jobs (90% Moz); during construction 6, 000 temporary jobs (4, 500 to locals); Smelter contracted SMEs for variety of services (transport, catering, cleaning, security) – 400 jobs on site – contracts valued at US$35 m/an. IFC/APDF supported Programs: • SMEELP for construction – 15 SMEs – contracts worth US$5 m; • Mozlink for Mozal operations – 2 yr program – SMEs win contracts to service Mozal – targets supply chains - 25 SMEs - so far contracts worth US$11 m. Develops SMEs to competitiveness allowing repeat contracting; • 1 SME developed to point supplying Mozal sister company in Richard’s Bay (US$2 m contract); • Capacity Building for 2 local financial institutions; • Mozal Community Development Trust; • Mozambique Business Network; • SECOP – new 3 year program – increase supply chain activities with big industries. 10/20/2021 8

Linkages … What Lessons to learn from Mozal? Failure of Mozal I to develop effective links for 2 reasons: • Contracts “bundled” - components too large & complex • Contracts in English – local SMEs could not understand Successes emanate mostly from Mozal II mainly because of SMEELP Specialized program for supply chain support • identified contracts for local sourcing; • Trained local SMEs on tendering; • Follow-up training for SMEs which won bids; • One-on-one mentoring to firms winning contracts; and • Capacity building of local DFI/ PFI providing technical assistance grants. PPI & SMEs: Maputo Port (? ) Maputo Port under development by Consortium (US$70 m); Linkages program in pipeline (SEPCO) & yet to be developed; IFC/APDF office in Maputo & Capacity Building Facility will inform results of current evaluation of programs. 10/20/2021 9

FDI & SMEs? Concluding Remarks Clear need to develop real linkages between FDI & local economy MDC experiences & success especially with Mozal is noteworthy Latter has had substantial development impact on Mozambique’s economy Challenge: derive lessons of experience & explore potential to replicate in other SDIs Warrants in-depth case-study examination of development impact & reasons for success Support for SME activities in SADC a strategic priority for SADC DFIs & DFRC keen to explore this issue further with support from donor community DFRC convinced that this is an important approach to private sector development & addressing challenges of job creation & poverty eradication (i. e. Millennium Development Goals) 10/20/2021 10