Costs of Compliance: Principal Constraints to Investment in Mozambique

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1 Costs of Compliance: Principal Constraints to Investment in Mozambique JUNE 2016 This publication was produced for review by the United States Agency for International Development. It was prepared by DAI and Nathan Associates.

2 Costs of Compliance: Principal Constraints to Investment In Mozambique Program Title: Sponsor: Contract Number: Contractor: Mozambique Support Program for Economic and Enterprise Development (SPEED) USAID/Mozambique EDH-I /13 DAI and Nathan Associates Date of Publication: June 2016 Author: L. Patrick Hanemann The author s views expressed in this publication do not necessarily reflect the views of the United States Agency for International Development or of the United States Government. ii

3 C O S T S O F C O M P L IANCE: C O N S T R A I N T S T O I N V E S T M E N T I N M O Z A M B I Q U E Table of Contents i Acknowledgements ii Acronyms 5 Executive Summary 6 Introduction 6 Table 1: LOI Company Investment, Actual vs. Committed, Table 2: Mozambique Agricultural Trade, A. Financing Constraints 10 B. Land Constraints 12 Exhibit 1: Mozambique Project Application and Land Acquisition Processes (CEPAGRI) 13 C. Tax Constraints 14 D. Regulatory Constraints 16 E. Macroeconomic Constraints 16 Exhibit 2: Five-Year Exchange Rate History, US$: Mts, F. Security Constraints 18 G. Other Constraints 21 H. Recommendations 23 Appendix I: Mozambique Rank, Enabling the Business of Agriculture, Appendix II: Ease of Doing Business Rankings 31 Appendix III: Mozambique s Ease of Doing Business Ranks by Category 32 Appendix IV: Time and Costs of Starting a Business in Mozambique 33

4 Appendix V: Summary of Findings AgCLIR Mozambique 36 Appendix VI: What are the Main Constraints You Have Faced? 41 Appendix VII: Bibliography 43 Acknowledgements This report was prepared for the Business Advisory Working Group (BAWG) of the Grow Africa/New Alliance LOI companies and the Confederação das Associações Económicas de Moçambique(CTA) by USAID/Mozambique s Support Program for Economic and Enterprise Development (SPEED). The author wishes to thank all representatives of the Mozambican government, and private sector communities who took the time to share information with him regarding constraints to agribusiness investment in Mozambique. He thanks Shaun Cawood of BAWG and Alekhine Veloso of Grow Africa for their guidance and support throughout this study. Finally, he thanks Honorata Sulila for her invaluable role in collecting data, verifying information, and organizing key meetings with stakeholders, as well as her solid research support. ii

5 C O S T S O F C O M P L IANCE: C O N S T R A I N T S T O I N V E S T M E N T I N M O Z A M B I Q U E Acronyms AMPU APIX AU BAWG CDN CEPAGRI CPI CTA DMML DFID DPA DUAT EIA IFC IMF ISPC LOI Mts NBF PEDSA PNISA SADC SME SSA USAID USD VAT Autonomous mobile processing unit Investment Promotion and Major Projects Agency (Senegal) African Union Business Advisory Working Group Corridor de Desenvolvimento do Norte Centro de Promocao da Agricultura Centro de Promocao de Investimentos Confederação das Associações Económicas de Moçambique DADTCO Mandioca Mocambique Ltd Department for International Development (UK) Direcção Provincial de Agricultura Dereito de Uso e Aproveitamento dos Terras Environmental Impact Assessment International Finance Corporation International Monetary Fund Imposto Simplificado para Pequenos Contribuintes Letter of Intent Mozambican Metical Nippon Biodiesel Fuel Strategic Plan for Agricultural Development National Agriculture Investment Plan Southern African Development Community Small/Medium Enterprise Sub-Saharan Africa United States Agency for International Development United States Dollar Value Added Tax

6 Executive Summary Despite an abundance of arable land, an adequate supply of manpower, and generally good access to water resources (notwithstanding droughts in portions of the country), recent levels of new agribusiness investment in Mozambique have been disappointing. Based on interviews with a wide range of agribusiness companies in Mozambique, and drawing on survey data recently collected by the Grow Africa/New Alliance group on agribusiness companies which have signed letters of intent with the Government of Mozambique to undertake or increase their investments in the country, this report itemizes a series of constraints which have contributed to this investment under-performance in the agribusiness sector. This constraint analysis covers ground which will be familiar to students of agribusiness in Mozambique; advocacy groups such as CTA, ACIS and the Business Advisory Working Group have been working for several years now to reduce the impact of these constraints on the conduct of daily business. In several cases, including land and regulatory issues, meaningful progress has been made in reducing the administrative complexities of the process, although further improvement remains needed. In other cases, however, such as tax treatment and access to finance, there have been few positive developments. These investment disincentives have been compounded in recent months by disruptions in the macroeconomic and security conditions in the country. This report presents a rapid appraisal of the ways in which these adverse developments have affected current operations and investment prospects in the agribusiness, tourism and transportation sector. It then offers a series of recommendations designed to mitigate the negative effects of these different constraints on the investment climate in Mozambique. Data shows that Mozambique has had years of robust GDP growth, averaging 7%, but due to various factors, including the decline in the prices of major export commodities, coal, gas and aluminum, the country has seen a decline that is estimated to be at 5.3% this year 1. Introduction For many agribusiness investors in Mozambique, these are difficult times. They are unable to attract new investment capital or to secure bank financing for their operating requirements. They face long delays and complicated regulations in order to obtain the land they need for their activities. They face long repayment periods before recovering the VAT payments from which they are officially exempt. They must deal with a long list of regulations with which they are expected to comply, and divergent 1 IMF Reports 2016

7 interpretations of the same regulations depending upon which local, provincial or national authorities are responsible for enforcement. They face a national economy which is beset with liquidity problems, and a currency which has lost more than 50% of its value over the past 24 months. Their activities are hindered by civil commotion which has placed Mozambique on the International Crisis Group s conflict risk alert and has led to repeated road closures and attacks against commercial transportation, engendering a partial paralysis in the circulation of agricultural goods, and the flight of thousands of refugees including many smallholder farmers to neighboring countries in order to escape the threat of this ongoing conflict. In short, these external factors, added to the normal uncertainties of agriculture, combine to constitute the sort of high-risk environment which investors are typically eager to avoid. By way of example, in its 2015 stocktaking report, the Grow Africa/New Alliance project surveyed the 41 agribusiness companies in Mozambique that had signed Letters of Intent (LOI) with the government, in order to track the progress these companies had been able to make over the past three years in meeting their investment commitments. The results were as follows: Table 1: LOI Company Investment, Actual vs. Committed, (all numbers in 000) Total LOI Invested Invested Invested Cumulative % LOI Commitment Investment Commitment Invested $612,526 $90,846 $23,199 $39,665 $153,710 25% Source: Grow Africa-2015 LOI Stocktaking Results Based on the LOI program s models correlating investment with job creation and smallholder inclusion, the 75% of investment (amounting to $459 million) 2 which remains to be made by the 41 LOI companies equates to over 23,000 jobs not yet created, and sales opportunities for 8.2 million smallholders not yet realized. At this pace, and assuming that all of the LOI companies remain in business and meet their full commitments for investment moving forward, full investment will not be achieved until Even more discouraging is the fact that some agribusiness investors are forecasting that 50-60% of current small- and medium-size agribusiness investors will withdraw from Mozambique as a result of exchange rate fluctuations, declines in the national economy, civil unrest and other external risk factors. Were this to occur, within the context of the LOI companies alone (who represent only a small fraction of the entire SME agribusiness population), Mozambique would stand to suffer a net disinvestment in its agribusiness sector of more than $90 million, with a loss of 4,500 jobs and lost sales opportunities for 1.6 million 2 Grow Africa 2015 Stocktaking results 7

8 smallholders 3. Meanwhile, as agribusiness investments lag behind initial commitments, Mozambique s balance of agricultural trade continues to deteriorate. In 2011, Mozambique s agricultural exports amounted to $560 million, while agricultural imports stood at $779 million, leading to a trade deficit of $219 million 4. By 2015, imports had grown to $940 million, while exports had fallen to $348 million, Table 2: Mozambique Agricultural Trade, CAGR Exports $559,878,000 $344,624,144 $415,990,430 $454,066,115 $347,988,583-11% Imports $779,317,000 $801,806,980 $1,055,793,500 $1,093,274,860 $940,124,022 5% Balance of Trade ($219,439,000) ($457,182,836) ($639,803,070) ($639,208,745) ($592,135,439) 28% Source: COMTRADE (UNITC/GENEVA) resulting in a 250% increase in Mozambique s negative balance of trade in agricultural goods. While the trade deficits were even higher in 2013 and 2014, the dramatic decline in the value of the Metical beginning in early 2014 should have served to make Mozambique s exports (including agricultural exports) more attractive to external buyers, while simultaneously increasing the Mts cost of imports for Mozambican consumers. Instead, agricultural imports fell by only 14% year-on-year, while exports declined by 23% over the same period. At a time when current agribusinesses in Mozambique are clearly unable to take advantage of exchange rate movements to increase their export and domestic market shares, the importance of new investment in agribusiness takes on heightened importance. But the basic question remains unanswered: Why are current investors proceeding so slowly, and why is it so difficult to attract new investors into the sector? The principal objective of this report, funded by USAID and implemented by the Mozambique Support Program for Economic and Enterprise Development (SPEED), is to evaluate the obstacles faced by selected private sector companies who have committed themselves to increasing their investments in Mozambican agribusiness, including several of the companies who have responded to the efforts of Grow Africa and the New Alliance in Mozambique. This report will focus on the principal obstacles, constraints and costs which these companies have encountered as they try to achieve their goals of increased investment in Mozambique s agribusiness sector. In some cases these obstacles stem from legal, regulatory and administrative hurdles which agribusinesses in Mozambique must overcome in order to establish and develop their activities. In other cases, a lack of official policies to support agribusiness formation and development, or inadequate implementation of such policies, was found to discourage incremental investment in the agribusiness sector. Beyond the role of government, there exist still other factors which are felt to limit the effectiveness of pro-agribusiness policies. These 3 Calculations of lost investment values, job losses and lost sales opportunities for smallholders are based on the Grow Africa 2015 LoI Stocktaking Results across 12 SSA countries, where one new job was created for every $20,000 of incremental investment, and a new smallholder sales opportunity resulted from every $55 of incremental investment. 4 Source: Comtrade (UNITC/GENEVA) 8

9 factors include, inter alia, inadequate sectoral organization at grower level in order to successfully aggregate and deliver product to processors, limited access to skilled labor, lack of transparency along agricultural value chains and poor visibility regarding potential investment and operating partners to spur further enterprise growth. With the publication of the Strategic Plan for Agricultural Development, (PEDSA) in October of 2010, the Government of Mozambique set out to incorporate a vision that is shared by key actors within the sector, creating a harmonized framework that will guide decisions, deal with issues that affect investor confidence and speed up agricultural competitiveness in a sustainable way by systematizing the wide range of strategic guidelines for agriculture. In order to encourage the private sector investments that would be needed in order to effect these improvements in agricultural competitiveness and efficiency, the Government released the National Agriculture Investment Plan, (PNISA) in April of 2012 as the central instrument to attract investments to the agriculture, fisheries and livestock sectors, to agriculture extension and research of simple processing technologies, to food conservation, and to the trade of domestic production within the country and with the members states of SADC, the AU and the world. In recent years, the enabling environment within Mozambique for agribusiness formation and development has received increasing attention, as evidenced by the following publications: a. Enabling the Business of Agriculture (World Bank, 2016), where Mozambique is compared against 39 other countries on the enabling environment for six key agribusiness variables (seed, fertilizer, machinery, finance, markets, transport). Mozambique scored well in the seed category, significantly exceeding the Sub- Saharan Africa (SSA) and global averages with a score of The same applied to Mozambique s ranking in the markets category, with a score of At 60.7, its score in the transport category was marginally below global and SSA averages. In the fertilizer category, with a score of 46.1, Mozambique stood significantly below both the global and SSA averages, while its score of 42.5 in the machinery category put it below the global average, but slightly above the SSA average. In the finance category, a score of 29.8 put it significantly below both the global average and the SSA average. Mozambique s scorecard can be seen as Exhibit I. b. Doing Business 2016: Measuring Regulatory Quality and Efficiency (IFC, 2016), where Mozambique ranked 133 out of a total of 189 countries in the study. Mozambique ranked well in the issuance of construction permits (31 st ), resolving insolvency (66 th ) and protecting minority investors (99 th ). It performed less well on registering property (105 th ), paying taxes (120 th ) and trading across borders (129 th ). It was seen as weakest in getting credit (152 nd ), getting electricity (164 th ) and enforcing contracts (184 th ). The overall rankings, and Mozambique s individual scores, can be seen in Exhibits II, III and IV. c. AgCLIR Mozambique (USAID, 2011), which set out to address the legal and institutional environment for doing business in Mozambique s agriculture sector with a view toward identifying opportunities for inclusive economic development and strengthened food security. A summary of the findings of this report on each of its eight focus areas (Dealing with Licenses, Employing Workers, Getting 9

10 Credit, Paying Taxes, Accessing Market Infrastructure, Trading across Borders, Enforcing Contracts and Closing a Business) appears as Appendix V. While these methodologies provide valuable insights into the legal and regulatory frameworks governing the conduct of agribusiness in Mozambique, they are generally high-level assessments of the official laws and regulations which reflect the intentions of the national government with regard to agribusiness investments. Despite the information they contain, there is a tendency in these studies to focus on the language of the laws and regulations, rather than how these laws and regulations are interpreted and applied at the provincial and local levels of administration. Changing laws and regulations, without changing the processes through which they are implemented, often fails to provide relief from the unexpected delays and expenses which investors dread, and investors indicate is common within the Mozambican environment. These methodologies share a tendency to understate the differences between national intention and local and provincial implementation, differences which based on interviews with a cross-section of agribusiness companies in Mozambique, including several which have signed Letters of Intent with the Government of Mozambique under the Grow Africa/New Alliance materially affect the ability of agribusiness investors to put their business plans into practice, and to generate the financial returns which would be needed in order to justify further investment. This report focuses on these practical impediments to agribusiness success in Mozambique, as described by these agribusiness companies. In preparation for the 2016 Grow Africa/New Alliance Annual Report, Mozambique's LOI companies were surveyed with regard to the status of their programs, near-term investment plans, and principal constraints they had encountered since signing their letters of intent. This Cost of Compliance project then interviewed 15 of the 41 LOI companies, together with several non-loi agribusinesses, during the course of a two-week mission in Mozambique from 17 April through 30 April. Based on information derived from the Grow Africa/New Alliance survey and these interviews, this report is divided into the following seven constraint areas: 1. Financing Constraints 2. Land Constraints 3. Tax Constraints 4. Regulatory Constraints 5. Macroeconomic Constraints 6. Security Constraints 7. Other Constraints By way of reference, the complete list of responses to the Grow Africa/New Alliance question: "What are the main constraints you have faced?" can be found In Appendix VI. A. Financing Constraints Investors need financing both for their initial investments and to meet their subsequent cash flow requirements for on-going operations. Investors indicate that Mozambique is a difficult place to operate 10

11 for both of these forms of financing. The World Bank s Enabling the Business of Agriculture 2016 report appears to concur with this opinion, giving Mozambique a low score of 29.8 points (out of a possible 100 points), based on limited availability and effectiveness of credit unions, agent banking, e-money and warehouse receipts. In surveys of agribusiness companies which asked how important a role financing constraints in Mozambique played in discouraging new or additional investment, 18% of respondents indicated this was the principal factor in a negative investment decision. Within the context of the LOI companies, this represents a negative decision on $83 million of potential investments, equivalent to the loss of 4,000 new jobs and lost sales opportunities for 1.5 million smallholders. With respect to initial investments, there is little, if any, government support for investors who are seeking local or overseas partners interested in investing in Mozambican agribusiness. This service is routinely provided by government agencies in other African countries, such as the Investment Promotion and Major Projects Agency (APIX) in Senegal, which maintain databases of potential investors who have expressed interest in particular forms of investment or in particular sectors. These agencies assume an active role in bringing together investment capital and investment ideas in order to encourage the development of entrepreneurial activities in their countries. While this is the stated objective of the Centro de Promoção de Investimentos (CPI), CPI does not typically provide identification of partners for local entrepreneurs or overseas investors, outside of the extractive sectors. Moreover, with its limited budget (~US$2.5 million/year) CPI appears to have little to provide entrepreneurs with effective matchmaking services. With respect to investor access to working capital financing within the Mozambican agricultural economy, the situation is, if anything, even bleaker than that faced by investors seeking partners with capital to invest. There is no agricultural bank in Mozambique: Banco Terra, (now Banco Terra Moçambique) was initially supposed to be the agricultural bank, but sources cite that great losses for lending to agriculture, forced it to change direction, and be more restrictive in its lending in the sector. There appears to be no tradition among the country's financial institutions of lending to agriculture or to agribusinesses on a routine and competitive basis. CEPAGRI has lines of credit in some commercial banks to specific value chains, but adherence to these loans has been low. Even with these credit lines banks have little incentive to lend; without changing their requirements for approval, such as 100% collateral at times, the loan becomes unattractive to the borrower even at lower interest rates. Land obtained under the DUAT system is not considered to be acceptable as collateral, despite the length of the concessions, since the land is still owned by the State, and the DUAT holder only has the rights to use the land. Several LOI companies report that banks are either reluctant to loan to them even at Metical rates in the range of 25-30%, or unwilling to loan under any conditions, since they consider the risks within the agriculture sector to be too high. It should be mentioned here that there are exceptions within the LOI group. A few of the larger companies with multi-year histories of successful economic performance are able to borrow from local banks at competitive rates; one such company commented that banks were" fighting over one another" to get his business. For LOI startups and companies that do not fit this profile, however, the conventional banking sector tends to look upon them with the same disdain it reserves for smallholders and other high-risk agricultural activities. In the absence of affordable working capital loans, agribusiness SMEs generally forego alternative sources of working capital loans, and tailor their working capital expenditures to the cash flows they are able to generate internally. In most instances, this implies little or no growth for the companies, and leads to further delays in the generation of revenues and employment and in the expansion of purchases from smallholders. Donor programs in other African countries have experienced some success with programs tailored to stimulate commercial bank confidence and interest in making loans to the agricultural sector. It is surprising, then, to see the relative absence of such programs in Mozambique. While there have been some halting initiatives (e.g.: USAID s GAPI program, DFID s Catalytic Fund) over the past twenty 11

12 years, the impact of these programs has been limited, and sustainable access by agribusinesses or smallholders to credit with commercial lenders has not been achieved. This is particularly unusual in light of the potential role of the LOI companies, since the use of such companies as hubs for the channeling of credit facilities to smallholders is commonplace elsewhere in the developing world. In its commitments under the New Alliance framework, the government of Mozambique indicated a readiness to work toward easing access to credit for agribusinesses by modifying financial regulations to permit the establishment of private credit ranking agencies, and by enacting mobile finance regulations that would be risk-based and allow for experimentation and innovation. While the original timeline for completion of these tasks was set as March of 2013, to date there has been progress in that the private credit bureau law has been passed, and the government is now working on the regulation, but little progress on mobile financing regulations. Meanwhile, cash flow problems within the Mozambican economy have grown particularly acute with regards to convertibility of foreign currency, both inbound originating from export sales transactions, and outbound destined to meet payables obligations. These constraints will be discussed in greater detail in the macroeconomic issues section, but need to be mentioned here as a serious complicating factor for agribusiness entrepreneurs in need of assistance with short-term liquidity requirements. In surveys of agribusiness companies which asked how important a role financing constraints in Mozambique played in discouraging new or additional investment, 18% of respondents indicated this was the principal factor in a negative investment decision. Within the context of the LOI companies, this represents a negative decision on $83 million of potential investments, equivalent to 4,000 new jobs and lost sales opportunities for 1.5 million smallholders. B. Land Constraints CPI and the Centro de Promoção da Agricultura (CEPAGRI), the Ministry of Agriculture s Agribusiness Promotion Center, have worked to clarify and streamline the steps involved in obtaining the DUAT. As part of this effort, CEPAGRI distributes the flowchart shown as Exhibit 1 below to potential agribusiness investors. The issuing of land is now no longer the responsibility of the Ministry of Agriculture and Food Security, but of the newly (2015) formed Ministry of Land, Environment and Rural Development. Although currently the same rules for obtaining land still apply, there seems to be some inclination toward easing the burden currently experienced for obtaining land, and possibly in the future, the possibility of making land an economic asset. As illustrated, the process appears to be clear and straightforward. Investors embark simultaneously to obtain investment approval from CPI, and to obtain the land they need for their investments. These two approvals proceed in parallel, resulting in CPI approval and provisional DUAT approval in straightforward fashion. Again, the DUAT is not issued by CPI, but it provides the support to the investor as far as directing them to the appropriate entity through which the investor will begin the process. As described by one CPI executive, the timeline for obtaining the provisional DUAT can take as little as three months, but should not in any event take longer than twelve months. Unfortunately, this does not appear to be the case in practice. One of the main issues is that in this multiple step process, there is too much opportunity for independent interpretation of the land law, giving each level discretionary power, and consequently opportunity for rent seeking. In surveys of agribusiness companies which asked how 12

13 important a role land constraints in Mozambique played in discouraging new or additional investment, 7% of respondents indicated this was the principal factor in a negative investment decision. Within the context of the LOI companies, this represents a negative decision on $32 million of potential investments, equivalent to the loss of 1,600 new jobs and lost sales opportunities for 582,000 smallholders. Exhibit 1: Mozambique Project Application and Land Acquisition Processes (CEPAGRI) Agricola do Rio Sabie, for example, set out in 2013 with a plan for a 2500 ha dairy cattle and banana production operation in Maputo Province. Since then Rio Sabie estimates it has spent some $200,000 in the DUAT process, but four years after project launch has seen its request reduced to 473 ha, and has still not received its provisional DUAT. Despite support from CEPAGRI, community consultations alone 13

14 took two years to conclude. In the face of these delays, Rio Sabie has, not surprisingly, seen its original investor group disband, and will now need to develop new sources of investment capital in order to proceed with the project. Nippon Biodiesel Fuel, which purchases Jatropha seeds from smallholders in Cabo Delgado and extracts the oil for use as a biofuel, has encountered a series of problems with its DUATs over the past several years. In one case the land assigned to NBF was later determined by local officials not to have sufficient clearance from the road to permit construction of a warehouse. NBF was informed of this problem only after the company had made payments of 22,500 Mts stemming from community consultation, and 165,000 Mts had been expended in labor and materials for the construction of the warehouse. This problem was raised in a letter to the administrator of Muidumbe district and director of Direcção Provincial de Agricultura (DPA), Pemba in February of NBF still awaits a response with regard to this dispute. This theme of vulnerability to individual interpretation of DUAT rules by local officials was cited as a problem by several agribusiness companies in the course of their interviews. C. Tax Constraints The foremost tax problems for entrepreneurs in Mozambique center on the value-added tax (VAT). Although agricultural goods and foodstuffs are considered to be exempt from VAT, regulations in Mozambique require that virtually all goods pay VAT on their transactions, and then seek reimbursement from the government tax authority subsequently. Smallholders are expected to participate in this system, either as formally registered businesses or under the provisions of the Simplified Tax for Small Producers (ISPC). Anecdotal evidence indicates, however, that most of the country's smallholders remain in the informal economy, without tax status or the ability to provide commercial invoices or ID. For agribusinesses which purchase raw product from smallholder farmers, either for sale within the country s domestic markets or for export, VAT thus represents a double problem. In surveys of agribusiness companies which asked how important a role tax constraints in Mozambique played in discouraging new or additional investment, 2% of respondents indicated this was the principal factor in a negative investment decision. Within the context of the LOI companies, this represents a negative decision on $9 million of potential investments, equivalent to the loss of 460 new jobs and lost sales opportunities for 164,000 smallholders. In the first place, on the purchase side of transactions, buyers cannot document their terms of purchase, including the collection of 17% of the raw product purchase price which should be submitted to the government by smallholders. Officially, this defect can only be cured by legalization of these transactions through payment by the buyers of the 20% Taxa Liberatoria, a penalty which would make the goods prohibitively expensive at resale. While a number of buyers apply the 3% ISPC rate as though their smallholder suppliers were actually registered under the ISPC system (which they are almost certainly not), this practice is not sanctioned by Mozambique's tax authorities, and leaves agribusinesses vulnerable to fines and penalties for misrepresentation and underpayment of tax obligations. Only in the case of concession crops cotton and tobacco are buyers authorized to create their own invoices on 14

15 behalf of their informal suppliers, and thus able to regularize their transactions in full compliance with current tax regulations. For all other buyers of raw agricultural commodities, the inability to document purchases from informal vendors other than through payment of the prohibitive Taxa Liberatoria represents a significant risk of being judged noncompliant with Mozambican tax law which could, according to a 2012 study of this issue funded by SPEED, result in fines that increase costs by 67%. In its commitments under the New Alliance framework, the government of Mozambique agreed to develop and approve invoices that can be issued by purchasing firms on behalf of suppliers (i.e.: smallholder producers) that are not registered taxpayers, and to develop and approve monitoring and control procedures to make this invoice system functional 5. Although initial agreement called for a completion date of March 2013, the accommodations which investors seek have not yet been adopted. On the sale side of their transactions, agribusinesses are expected to pay 17% on the differential between their costs to acquire the inputs, and the price at which they sell the product on to their customers. In the case of traders, this base added value is the difference between what they paid their suppliers, and what they receive from their customers. In the case of producers of agricultural products, the base is interpreted as the overall value which they receive from their customers. In either case, the agribusiness is expected to increase its base selling price by the VAT rate of 17%, credit whatever it has already paid to its supplier(s) in VAT payments on its inputs, and remit the difference to the government. If the goods being sold are exempt from VAT, as is generally the case for agricultural products, the agribusiness then files for a refund of its VAT payments to the government tax authority. Many businesses have spoken of extended delays in the processing by the Government of Mozambique of these refunds. A meeting with authorities from the Tax Authority confirmed that the timeline for refund of VAT payments is often a function of the economic condition of the central government. While the International Monetary Fund has encouraged the government to set aside a protected fund for VAT obligations, it has not been possible to comply with this request as of now. Meanwhile, agribusiness producers, traders and exporters in Mozambique are left holding IOUs representing hundreds of millions of Meticais of VAT refunds due from the government, occasionally for periods of up to five years. Though less consequential than the VAT issues discussed above, another tax issue concerns the five-year corporate income tax holiday which CPI can extend to agribusinesses and other entrepreneurial investors. While this exemption could serve as a useful incentive to investors, the fact that the five-year timeline begins with the initial CPI contact reduces its attractiveness considerably. Given that 3-4 years may pass before DUAT formalities have been met and enterprise operations can begin in earnest, agribusiness investors point out that this benefit, at best, may only cover months of revenue-generating activities, significantly less than the intent of the regulation. Consideration should be given either to extending the length of the tax holiday, or delaying the start of the coverage period until the enterprise is fully operational. 5 Source: Joint New Alliance and Grow Africa Progress Report 15

16 D. Regulatory Constraints Mention has already been made of the amount of time agribusiness entrepreneurs spend on issues of regulatory compliance. In surveys of agribusiness companies which asked how important a role regulatory constraints in Mozambique played in discouraging new or additional investment, 10% of respondents indicated this was the principal factor in a negative investment decision. Within the context of the LOI companies, this represents a negative decision on $46 million of potential investments, equivalent to the loss of 2,300 new jobs and lost sales opportunities for 836,000 smallholders. While some of the longer-established firms indicate that the impact of compliance on their schedules is minimal, others contend that such issues take up 30-40% of their managerial attention. Others go so far as to staff full departments to deal with compliance matters, or hire consultants to guide them through the compliance process. This last approach is the one that has been adopted by Chicoa Fish Farm, which is establishing a commercial tilapia farm in Cahora Bassa. Chicoa's advisers prepared a checklist to assist Chicoa in monitoring its compliance with all government procedures. There are 69 separate steps listed on this checklist. Aside from 7 items relating to management accounting and 4 items under the heading of logistics, the remaining 58 items all relate to compliance issues at the local, provincial or national levels of government. Were this administrative burden simply a nuisance which agribusinesses must tolerate in order to conduct business in Mozambique, it would be a cause for some concern. More worrisome, however, is the opportunity loss which such a burden entails. Management time spent on administrative compliance issues represents time which cannot be spent conceiving of ways to maximize profit, to increase employment, to grow topline revenues or to expand into other complementary areas of activity. Rather than focus full attention on building a business or increasing an investment, agribusiness managers find themselves, in the American vernacular, too busy killing alligators to drain the swamp." This diversion reduces prospects for additional investment, for expanded employment, and for greater rural prosperity as represented by increased purchase of raw product from smallholders. On the one hand, the government of Mozambique has a sovereign responsibility to ensure that all economic actors, including agribusiness investors, comply with the laws and regulations of the land. If the government's objectives also include the expansion of agribusiness investment in the country, however, as evidenced by the PEDSA and PNISA documents, then a careful review of administrative requirements would seem to be in order. In addition to the amount of time which investors say they must dedicate the compliance issues, many of the complaints regarding the regulatory framework are directed at the lack of clarity and transparency with which laws and regulations are written, and to an even greater extent the idiosyncratic and confusing interpretation which these laws and regulations are frequently given by local officials. E. Macroeconomic Constraints Effecting meaningful changes to the ways in which the government of Mozambique manages its macroeconomic issues is certainly beyond the scope of this report. At the same time it would be illogical to discuss constraints to agribusiness investment without mentioning the two major macroeconomic issues which Mozambique faces today. In surveys of agribusiness companies which asked how important a role macroeconomic constraints in Mozambique played in discouraging new or additional investment, 16

17 7% of respondents indicated this was the principal factor in a negative investment decision. Within the context of the LOI companies, this represents a negative decision on $32 million of potential investments, equivalent to the loss of 1,600 new jobs and lost sales opportunities for 582,000 smallholders. The first of these concerns recent volatility in the value of the Metical. As shown in Exhibit 2 above, the Metical experienced a period of relative stability, generally trading around the 30:1 level from 2012 through Beginning in January of 2015, however, the Metical has seen its value progressively Exhibit 2: Five-Year Exchange Rate History, US$: Mts, Source: OANDA.com eroded, ultimately arriving near the 55:1 level of in early June 2016 (n.b.: by mid-june, banks were already trading at 62:1). Within the context of an agricultural sector which inherently carries a relatively high level of risk and unpredictability, each additional element of risk tends to have a disproportionately discouraging effect on incremental investment. There are those within the LOI group of companies who believes that 50-60% of SME agribusinesses will fail in the face of these unexpected currency fluctuations. At the least, investors have seen the value of their Metical-denominated investments and local profits virtually cut in half. Over time, export-oriented agribusinesses should find that this devaluation will work in their favor, and domestic-oriented entrepreneurs will seek out ways to reduce their dependence on dollar-denominated inputs. At present, however, this volatility and unpredictability preclude any sort of planned response, and appear to generate more anxiety over current investments than resolve as regards future investments. It is unlikely that any significant incremental investments will be made in the agribusiness sector until this volatility is brought back under control. The second major macroeconomic issue of concern in Mozambique relates to the recent decision by the International Monetary Fund, the World Bank and the G14 Countries (the 14 countries which provide direct budget support to the Mozambican government, amounting to approximately 12% of the state budget.) to suspend financial support to Mozambique after determining that Mozambique had violated 17

18 terms of its borrowing agreement with the IMF by failing to disclose more than $1 billion in loans to the country by Credit Suisse and Russia s VTB Group. The United States, which is not part of the G14 but is Mozambique s biggest donor, supports the country through programs, but has decided to suspend its support as well. While it is hoped that this suspension will be temporary in nature, resumption of financial support will surely be contingent upon full disclosure of all outstanding obligations, together with a plan to bring the country s indebtedness down to what is considered an acceptable level over the course of the coming years. While the exact dimensions of this plan cannot be known at this time, investors have every reason to believe that it will include reductions in expenditures for infrastructure and other investorfavored activities, along with an increased appetite for collections in order to meet the debt reduction targets which the plan will certainly include. In brief, the situation is designed to heighten investor insecurity over the near-term, and to discourage incremental investment until such time as the terms of the resumption negotiations become public. This public debt issue further aggravates the currency situation as the country is increasingly seen as likely to default on its debt. Debt payments are putting pressure on the foreign currency available in the market, and more recent revelations of other debts have led to Mozambique s credit rating being drastically reduced to CCC by S&P, under negative watch. The implications of these factors are tremendously negative for the economy, and extremely unattractive to investments in a country that has for years been a poster child as a target for investment in the developing world. F. Security Constraints The General Peace Accord, signed by the Government of Mozambique and Renamo in Rome in 1992, brought to an end 16 years of civil war which had seen the country s agro-economy brought to its knees. Elections since 1992 have seen the majority party, Frelimo, maintain control of the Presidency and steadily increase its majority in the country s parliament. Despite its waning electoral successes in national polls, however, Renamo has continued to demand broader participation in the government, and to protest what it believes to be non-fulfillment by the government of commitments made in the negotiations leading up to the 1992 agreement, most particularly concerning the integration of Renamo s military forces into the national armed service. These resentments have generally simmered in the background of Mozambican politics, with occasional flare-ups of armed violence, usually in conjunction with the results of elections further solidifying Frelimo s hold on national power, accompanied by claims of electoral fraud by Renamo. Such a flare-up came after the elections of October 2014, where Frelimo won the presidential election and increased its share of parliamentary delegates, but where Renamo managed to win majorities in six provinces of central and northern Mozambique, including Nampula, Tete, Zambezia, Sofala and Manica. Unsuccessful in leveraging these successes at the provincial level into political power at the national level, Renamo took up arms in June of 2015, and threatened to seize control of the six provinces where it had gained a majority. Media 6 from outside of Mozambique indicate that there have 6 Daily Nation (Kenya), 18 March

19 been daily clashes between government forces and Renamo since February, particularly in the center of the country. Disruption to the normal South-North flow of people and goods has been acute over the past six months, with road attacks occurring on a regular basis, often accompanied by military and civilian casualties. The resulting disruption to normal traffic patterns has been significant, converting sections of the EN1 (the road that connects the South to the North of the country) into what one foreign newspaper report 7 termed a ghost road. Passenger bus traffic has been sharply curtailed. Discussions with bus operators indicate that north-south voyages which normally required 24 hours are now, because of convoy-related delays, taking 72 hours instead. Moreover, occupancy has dropped from an average of passengers per voyage down to an average of 5-10 passengers per voyage. If we assume that there are 20 companies operating bus services, each company providing one bus, and a steady tariff of Mts 2400 for the trip between Maputo and Quelimane, we arrive at an average daily revenue of Mts 2,160,000 under normal circumstances (45 passengers each in 20 busses at Mts. 2400/passenger). At current transit times and occupancy rates, the average daily revenue for the sector has declined to Mts 120,000 (7.5 passengers in each of 20 busses, with each trip taking 3 days instead of 1). Under these assumptions, the cost of the conflict for the passenger bus sector, in terms of actual vs. potential revenues, would amount to Mts 714,000,000 per year or a loss of Mts 35,700,000 per company per year for as long as the conflict lasts. Truckers are increasingly reluctant to face the hardships of hauling goods from Maputo up to the Northern provinces. If they do take on such loads, they are required to travel in convoys; delays in organizing such convoys, and the slow pace at which they move, can mean days, if not weeks, of delays in the shipment of goods from South Africa the principal origin for packing materials and many agricultural inputs to agribusinesses in Nampula or Tete. For certain critical supplies, agribusinesses whose overland shipments have been curtailed must now rely on air freight shipments to pick up the slack. Congestion for cargo space out of Maputo airport can now lead to delays of as much as 2-3 weeks before air cargo space becomes available. Where the goods being shipped are perishable, the disruption is even more severe. In February and March, for example, poultry suppliers in the southern provinces could not ship their day-old chicks to breeders in the north 8. As a result, suppliers were forced to destroy 200,000 chicks per week for a period of eight weeks, at an estimated cost of Mts 5 million per week, or Mts 40 million over the eightweek period. By the time suppliers reached the month of April with no relief in the violence in sight, most suppliers decided to reduce their day-old chick production by 50%, leaving them with insufficient revenues to pay off their loan obligations. Frozen chicken producers in the south have not fared any better. Cut off from their northern markets, suppliers could not sustain efficient levels of slaughter or sale; as a consequence, the poultry association estimates that 30% of poultry processors have been forced to suspend their operations until such time as 7 Daily Mail (UK), 17 March Source: Mozambican Poultry Association 19

20 the situation improves. Similarly, shipments of highly perishable tilapia fingerlings from Vilanaculos to Cahora Bassa now require an additional hours of transit time. This leads to increased mortality rates, and lower productivity per truckload purchased by the fish farm. Another source of disruption from the conflict situation in the north involves its effect on physical safety of smallholders, and their ability to remain in production in the face of increasing levels of violence. One prominent supplier of fresh pre-cut vegetables to northern gas and mining companies has had to endure the disappearance of his outgrower sources of supply, as smallholder farmers with whom he has worked for years have been forced to abandon their fields and move their families to safety. His situation has been further compromised by the decline in exchange rates which make it impossible for him to import fruits and vegetables, or for his customers to pay for them with their reduced metical purchasing power; by armed attacks on his trucks on their way to make deliveries; by the refusal of banks to provide even the most secure of working capital loans; by protracted delays in clearing imports at the borders by the customs service; and by the impossibility of attracting any new FDI into the highly uncertain environment in Northern Mozambique. In short, this operator is actively seeking pathways for reducing his investments in Mozambique and reinvesting to build this same model of business in neighboring countries where overall conditions are more favorable. The loss of this company alone would leave 40 employees without jobs, and more than 300 smallholders without outlets for their production. In surveys of agribusiness companies which asked how important a role security constraints in Mozambique played in discouraging new or additional investment, 4% of respondents indicated this was the principal factor in a negative investment decision. Within the context of the LOI companies, this represents a negative decision on $18 million of potential investments, equivalent to the loss of 900 new jobs and lost sales opportunities for 327,000 smallholders. It should also be noted that these surveys were taken prior to the most recent escalation of the conflict in the north. Given the disruption to the agribusiness sector which the conflict has caused over the past six months, it is reasonable to assume that the weighting which companies would assign to this constraint today would be substantially higher. Sources within the agribusiness sector have estimated that 50-60% of the SME investors in the sector might follow suit by disinvesting in Mozambique and relocating their investments to other countries. If this estimate were to materialize, the loss of agribusiness investment solely within the 41-company LOI group would amount to a withdrawal of $76 92 million of investment capital, carrying with it a loss of 3,800 4,600 jobs and lost sales opportunities for million smallholders. Outside the agribusiness and transportation sectors, this civil commotion is also wreaking havoc with the tourism industry, particularly among hotel and guest house operators along the Inhambane coast. One hotelier located north of Vilanculos reports that his hopes for 100% occupancy during the months of February through April were dashed as guests from Malawi and Zimbabwe were forced to cancel their bookings rather than face violence on the journey to the lodge. The manager indicates that occupancy rates for his sector, which normally run at 30-35% on an annualized basis, will struggle to reach 10% this year. For this particular lodge, that will mean a decline of 72% in revenues compared with last year. The lodge has slashed its payroll by 50%, and lives on the hope that the conflict will be resolved before next year s high season begins. According to statistics compiled by the World Tourism and Travel Council, 20