Dr. Rosalind H. Thomas CEO: SADC-DFRC

1. 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

2. 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 • 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

3. 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

4. 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!

5. 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: N4 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!

6. Development Corridors & SDIs in SADC

7. 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 GoM 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%).

8. Linkages … • Mozal – Development Impact (ctd) … • 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.

9. 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. 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)