Gabinete de Estudos Discussion Paper No. 18The impact of the mega projects on the Moambican economyPer-ke Andersson1. IntroductionIn 1997, foreign direct investments (FDI) coming into Moambique amounted to $65million. The following year construction began on a $1,340 million Mozal aluminium smelter. Work on the Mozal project was completed in 2.5 years, ahead of schedule, and the production of aluminium started in June 2000. The Mozal investment has placed Moambique in sixth place in the ranking of FDI recipients in Africa, behind Angola, Egypt, Nigeria, South Africa, and Morocco. This is information for 1999, based on UNCTADs World Investment Report, 2000. The report informs us that Africa saw an increase in FDI from $8billion in 1998 to $10 billion in 1999. This is barely more than 1%, of global FDI flows, which reached $800 billion in 1999. FDI flows to Asia amounted to $106billion, while Latin America received $90 billion. The United States and United Kingdom lead the world both as recipients and investors. Another five mega-projects are at various stages of preparation and highly likely to be implemented. These five projects alone will bring another $7 billion in FDI to Moambique over the next ten years. Since total GDP in Moambique today is approximately $4billion, these mega projects will obviously have a large macroeconomic impact. The purpose of this study is therefore to map out some of the main aspects, namely the impact on GDP, national income, the trade balance, the balance of payment, fiscal revenues, and finally, employment creation. The paper presents a quantitative analysis of the economic effect of Mozal, including a planned expansion to double its capacity, plus Cahora Bassa and the development of a new hydroelectric station at Mepanda Uncua and, the Temane and Pande Natural Gas Project, the Maputo Iron and Steel Project, and the Corridor Sands Project. The analysis is based on information obtained from the project sponsors, combined with various assumptions for estimating other parameters, as explained below. To highlight in advance the main findings, the analysis shows that these five mega-projects will indeed have a large impact on GDP and the trade balance, if all goes according to plan. Their impact on national income and balance of payment is considerable smaller, however, due to the offsetting effect of financing flows, debt service payments, and profit repatriation. Since the mega-projects are highly capital intensive, a substantial part of the factor payments will be channelled for debt service to lenders abroad, as well as remittance of earnings on foreign-held equity. The main local factor of production, labour, is not used intensively. Only about 5,000 jobs will be created directly. Because the wage bill and the impact on national income are relatively small, it is very important for the Government to promote more investment in labour-intensive production activities, particularly for the export market, in addition to pursuing development of mega-projects. The projects may be most important as showcases for investment possibilities in Moambique, giving the country a higher profile for attracting other investments into more labour intensive technologies. Large investments in agriculture, labour-intensive agro-industries and labour-intensive manufactured export industries will be needed to alleviate the underemployment problem in Mozambique in the medium and long run.2. The Mozal aluminium smelter The construction of the first mega-project in Moambique, the Mozal aluminium smelter, was recently completed. Production started in June 2000 and full capacity was reached in December 2001. We present the analysis of this project in detail, because some of the parameters established for Mozal will be used as approximations for other mega projects discussed below. 2.1. Mozal constructionThe construction of Mozal lasted for 2.5 years with a total investment of $1,340million. The investment activity in 1998 ($220 million) was mainly for earthworks and the construction of buildings, while equipment investment was done in 1999 ($875million) and 2000 ($245million). Mozal originally estimated that around 10% of overall inputs during the construction phase should be sourced from Moambique. They based their calculation on a 20% share of the construction and a 5% share of the equipment investment. A recent survey by the company indicates that this objective was not quite achieved. The 200 companies that worked on the construction of Mozal estimate that $75 million were spent on goods and services, including labour, sourced in Moambique We estimate that wages for the Moambican labour force (around 4,500 people at peak level) were at least $7 million, while the training component amounted to $8 million. This corresponds to around 6% of the total construction cost. It should be noted that the figure of $75 million in local