Beyond the behemoth projects in Mozambique

Last week, provide an insightful opportunity to revisit the investment capacity and mobilisation of capital in Mozambique, while moderating the panel; “Financing Opportunities for Large Capital Projects in Mozambique” at the UK-Mozambique Business Forum. Held in balmy city of Maputo, the conference was hosted and sponsored by the UK Department of Business and Trade (DBT) and I was joined by an experienced panel including: Martha Humbane (ABSA), Marla Mandlate Chade (DLA Piper SAL & Caldeira Advogados), Romulo Correa (African Development Banks), and Thithi Kuhlase-Maseko (British International Investment). They all shared their direct first-hand experience of investing and operating in in Mozambique, as the session focussed on a granular but urgent discussion regarding the lack of private sector funding for socially important infrastructure i.e., roads, intercity modality, ports and other key logistical components necessary for economic growth – essentially all outside of the market’s current focus. ?As a Gen-Xer, I felt a certain sense of déjà vu, in terms of macroeconomic challenges faced today compared to when I started working on infrastructure deals in the early 2000’s – blighted then by collapse of the Enron, AES’s divestment from Africa and most of continent labouring under HIPC status (to name but a few).

A key threat to the Mozambican economy is the government’s lack of capacity to invest (and entice private sector finance it) in infrastructure (beyond its hydrocarbon projects) and resulting in uneven development. Much focus presently seems centred on, what I term ‘behemoth hydrocarbon projects’ on account of the billions of US dollars required to bring these projects to fruition. While Mozambique aims to become a net exporter of liquefied natural gas (LNG) commencing with Eni's 3.4mpta Coral South floating LNG project, with BP as sole offtaker for 20 years and benefits directly from 1% to its GDP from the construction industry - this will decline after ~2024 (depending on hydrocarbon project delays). This tapering will occur when little private capital is supporting social infrastructure and while Mozambican population continues to grow, vast lags in development such as intercity modality, housing, schooling and medical facilities too grow. This forces us to consider:

·??????Where will financing for this integral social infrastructure come from?

·??????How will banks optimise their balance sheets (especially when lending to the hydrocarbon projects)?

·??????What form of a uplift i.e. secondary market should be created and

·??????How can more private capital be mobilised with the help of structuring experts?

An approach that focuses on the entire finance value chain is integral to mobilise capital efficiently, accompanied by granular trade policy particular to financial support and structuring. Assurances and incentives are needed to entice investors and creates economic growth (beyond the hydrocarbon projects). ?Recent World Bank funded e.g., demonstrating the type/quantity of funding are:

·??????US$ 400mn grant to fund the rehabilitation of 508km N1 road connecting Cabo Delgado with Maputo and

·??????US$ 250mn grant to support urban mobility in the greater Maputo metropolitan area.

What will follow on from these grants, as the needs of the Mozambican populous continues to grow? Essentially an integrated combination of all of these stakeholders has a role to play both in terms of actual capital invested and support for the wider ecosystem, as explored during the session, including:

·??????Robust multilateral funding products and policy guidance, the African Development Bank, referenced the launch of their latest strategy, integral to providing much needed concessional finance as a cornerstone and addressing topical matters such as climate products and debt swaps.

·??????Development Financing Institutions (DFIs) need to bolster the concessional funding provided by multilaterals. The UK DFI, British International Investment (BII) reaffirmed its contribution to climate-focussed-finance and clarified the role of the UK Government’s development institution, to direct equity, debt and mezzanine as well as bespoke pockets of technical assistance.

·??????While not in attendance at the event, the contribution from the UK’s bespoke infra-fund-vehicles such as the UK’s Public Infrastructure Development Group (PIDG) is vitally important. The Emerging Africa Infrastructure Fund has been actively investing in Mozambique for over 15 years – and my thanks to Roland Janssens Director of EAIF who shared meaningful insights about his experience. EAIF is adeptly managed by of the foremost UK emerging market asset managers NinetyOne. Their support continues to add value and amplify the finance value chain.

·??????Regional and local banks are going to require uplift to their balance sheets, to create capacity especially for construction risk. Working with DFIs will be key for partial risk sharing agreements – confirmed Martha Humbane - however as will segmented funding profiles and even a better mapping the ecosystem to help banks better manage their risk profiles, and support faster/better due diligence.

·??????Finally, the important learnings from the award winning Temane Project confirmed why ‘not-reinventing-the-wheel’ as articulately spelt by Marla Mandlate Chade, is the way forward. She referenced the need to ‘templatise’ legal agreements, relying on expert advisors and engaging local governments as early as possible – all of which cannot be underscored enough. This follows on from prior discussions with DLA Partner Dr. Sharon Fitzgerald, founded on her focus and principle of ‘early investor engagement’ pioneered when working on DLA’s Model law procurement strategy in Africa.

·???While the conversation did not fully explore (but acknowledged) the contribution necessary form the likes of specialist alternative investors e.g., Globeleq (already prolifically active in Mozambique) and peer infrastructure funds. This contribution warrants further urgent discussion, with the multilaterals and the DFIs both as ecosystem-enhancers and as co-investors. As it is important to the UK DBT Africa team, it is one I look forward to helping to support.

In conclusion, perhaps the most fitting component to compliment this session and the entire Forum was the visit to the impressive Port of Maputo . Aside from an informative tour (and thanks to the ever-engaging Vanessa Santos), the visit provided practical evidence, of highly functional private sector engagement, as the envisaged expansion is set to cost over ~US$ 800m in the immediate future, particularly as the Port seeks to diversity its operating model.

My thanks to the Mozambican DBT team headed by Paulo Luis Chachine Chachine for organising such a successful main event and supporting set of side-events. I look forward to following up on the proactive energy and commitment shared during the session.