Executive Summary

Mozambique has immense agricultural potential. Unfortunately, despite favorable weather and soil conditions, land resources, and an available workforce, the country remains a net food importer with rates of agricultural productivity well below international standards. Further, Mozambique is among the world’s most vulnerable countries in light of climate change:* the use of drought resistant seeds and irrigation are rare, the majority of rural producers are focused on subsistence, and a dry year can lead to serious food security challenges.

Financing for measures that reduce risk and increase productivity, such as improved seeds and irrigation, could help address some of these issues. However, ensuring adequate food and water into the future also depends on the promotion of the long-term, productive potential of natural resources and the maintenance of their environmental functions. By implementing efficient and sustainable land use, Mozambique can align natural resources protection, reforestation, and avoidance of degradation with increased agricultural yields and food security.

While the government, private sector, and civil society in Mozambique have made progress toward solving some of the institutional and operational challenges of investing in these types of measures—in particular though the Comprehensive Africa Agricultural Development Program (CAADP) and government institutions like CEPGRI, IPEME, IPEX, CPI, IIAM, and CEPPAG—many gaps remain.

Within this institutional and operational context, researchers at Climate Policy Initiative—as part of the New Climate Economy project—examined the challenges and opportunities for investing in agriculture and natural resources management, with the goal of laying out next steps toward more efficient and sustainable land use in Mozambique.

Focusing on low-cost policy modifications, we found four ways to improve agricultural productivity and natural resource management:

1. Simplify government tax and fee administration, with an aim to reduce the costs imposed by bureaucratic time-delays.
2. Develop public financial incentives and public private partnerships (PPPs) capable of providing the tools to mitigate risk and allow investment.
3. Prioritize key infrastructure projects needed to stimulate investment in agriculture, including energy and irrigation systems.
4. Increase revenue-sharing mechanisms to incentivize natural resource protection.

1. Simplify government tax and fee administration

Tax rates for the agricultural sector are competitive, but bureaucratic delays impose high costs on trade

The government implemented important reforms in the last decade, with a major one being the creation of the Revenue Authority in 2006. However, tax system administration is still the primary problem affecting tax compliance by businesses. Concerns about arbitrary practices by tax officials, difficulty in accessing information on the tax system, and lack of online taxpayer services are larger concerns than the tax rates themselves. Since delays and tax system complexity impose significant costs on businesses operating in the agriculture sector, they discourage investment, including investment in productivity-increasing technology or long-term sustainability measures.

Income tax breaks are available and VAT is lower for agriculture compared to other sectors, although issues accessing these benefits impose high costs for many companies.

Agriculture has a special income tax that is considerably lower than for other sectors (10%, while the general rate is 32%). The rate can be even lower for big producers when they can access the Code of Fiscal Benefits. Moreover, there are opportunities for VAT exemption in the agricultural sector. However, the VAT system is not achieving its potential in terms of reducing tax barriers to investment in the agriculture sector. VAT refund processing can be very slow, which is especially costly for exporting companies or those investing in capital goods. VAT registration rules also add a barrier for enterprises interested in doing business with small producers.

Some port fees are high, but the more important trade issue is the time spent to conclude a transaction.

Imports of agricultural inputs still face many challenges. For example, poor infrastructure and the restriction on re-exports has led to low volumes of fertilizers getting into the country, which has translated to high costs for fertilizers for small producers. Businesses seeking to invest in export-oriented agribusinesses also face challenges including a lack of convenient warehousing, inability to support larger ships, unusual requirements as the Pre-Shipment Inspection, and the rule of obligating every ship to pay a scanning fee, even if it is not scanned. These issues can lead to significant border delays, which are costly in themselves and can impose further costs if perishable agricultural goods spoil. Streamlining export and import processes have the potential to make trade—both importing inputs and exporting products – more feasible for farmers.

Overall, we find that administrative delays in import-export and tax processes are likely more detrimental to the agriculture sector than the tax and fee rates themselves. These type of costs are additionally pernicious because the cost on farmers and agricultural businesses do not translate into revenue for the government. Streamlining processes in these areas could go far in increasing investor confidence and improving outcomes for farmers.

2. Develop public financial incentives and public private partnerships

Most farmers do not have access to credit at appealing rates, and while public-private partnerships can help streamline investment, they still face challenges and require further development

Ninety nine percent of Mozambican farmers are small producers cultivating less than 10 ha. Although access to credit is positively associated with increased productivity, data from the 2010 Agricultural Census show that only 2.3% of small farms borrowed money, while 7.0% of medium and 15.2% of large farms did so. This may be explained by several factors:

High interest rates of over 20% for agricultural producers are standard. This is unsurprising in a context where collateral is unavailable due to non-transferability of land, currency risk is substantial, and risk management tools are lacking. However, high interest rates mean investment is costly for those who need a loan to increase production, impeding improvements in agricultural productivity.

Low levels of financial literacy lead to few transactions between traditional financial institutions and small producers. Limited management skills and financial literacy mean that production records are generally poor or nonexistent, so evaluating the risk associated with an individual farmer is difficult.

Banks are often physically absent in rural areas, and there is a lack of other financial tools, such as insurance instruments adapted to agricultural risks as droughts, floods, and infestations.

Public financial incentives such as rural credit and crop insurance are limited in Mozambique, and given very high commercial rates of credit, investment is often simply infeasible given typical farmer risk preferences. A system of incentives designed to minimize risk for farmers, perhaps by combination with insurance against (or repayment conditional upon the absence of) extreme weather events could go far in making investment feasible for small farmers.

Public-private partnerships (PPPs) have recently been emphasized as a potential strategy for supporting larger agricultural enterprises that may in turn provide support for contract farmers via supply chain linkages, contract farming arrangements, or revenue sharing agreements (described in more detail in Section ES4). However, the government’s credit status and transaction costs associated with these PPPs are currently limiting their impact. Each public private partnership requires a public tender and extensive administrative process to be initiated. Unlike alternative programs, such as credit or input subsidies, this means that each deal must be customized, reducing the rate at which projects can emerge, and potentially increasing the risk of corruption.

Overall, developing new public financial incentives for small farmers while streamlining PPPs for larger farmers could enable greater private investment in climate resilient and productive agriculture practices.

3. Prioritize key infrastructure projects

While infrastructure in general is expanding, irrigation and access to electricity are still very limited. Providing incentives for the private sector to invest in these key sectors may help expand access.

While there is evidence suggesting that improvements in road infrastructure could facilitate a substantial increase in agricultural production (Dorosh et al 2012), investments in other key sectors for agriculture, including irrigation and energy, are not keeping pace with the need.

Irrigation access is growing, but to date has reached only a very small fraction of irrigable land.

Irrigation expansion is driven by donor projects, which focus on a few key basins where flooding and droughts have been major problems. Additional policy to enable irrigation investment in other areas would help it spread to places with less urgent need but significant potential for productivity improvement. Policies to support smaller-scale projects where government and PPP’s are not the principal actors may help enable more water access faster.

Energy expansion is limited by trade policies and excessive centralization

Energy is a critical factor for the agricultural sector: it is required to operate machinery and irrigation systems, and it is essential for processing, conserving, transporting and storing agricultural products. Mozambique has a low national electrification rate (20%, World Bank 2012) and there are large disparities between urban and rural areas – while electricity has reached 21% of urban households, less than 7% of the rural population has access to electricity (WHO, UNDP 2009).

Energy investment decisions are dominated by the central government through Eletricidade de Moçambique (EdM). The electric utility EdM has indicated plans to grow energy access through renewable energy—take for instance the approval of the creation of Mozambique’s feed-in tariff, which applies to biomass, wind, small hydro and solar projects. While recent progress has been made, barriers remain to greater private investment in this key sector:

There are no incentives available for off-grid energy;

Large import tariffs of 17% are levied on all components of wind, solar, or other renewable energy systems;

Skills needed for renewable energy deployment are limited.

Private investment in renewables should be facilitated

At present, the national strategy seems to assume that national energy fund (Fundo de Energía, FUNAE) will itself deploy the bulk of renewables in Mozambique. However, given appropriate incentives, agricultural businesses throughout the country could begin installing at much higher rates, and these power sources would also likely benefit local communities. Additional spending on training in, for example, solar installation, would make use of solar for agricultural cooling or powering irrigation systems much more practical. Given transport costs, these technologies are potentially competitive with diesel fuel if incentives are aligned, and if the human capital exists to deploy them at low cost.

4. Increase revenue-sharing mechanisms for projects that protect natural resources

Public and private revenue transfers are key to guarantee the approval and involvement of communities on rural development projects

Effective natural resource protection policy becomes even more important as policies to enable agricultural investment are pursued. Making investment easier increases the opportunity cost of leaving natural resources intact, and without effective policies to preserve natural resources for the benefit of communities near them, the incentive to convert land to agricultural use may well increase.

CPI’s Production-Protection framework focuses on two elements on the natural resource protection front. First, an effective cap on natural resource use, usually through the establishment of protected areas, is critical to protecting these resources over the long term. Second, protection initiatives, both public and private, need to share the benefits of protection with local communities. In the case of protected areas that generate revenue today, such as game reserves and buffer zones for forest plantations, benefit-sharing can simply mean distributing a share of revenues to neighboring communities who are permitting use of their land. In the case of protected areas established for long-term benefit and without immediate revenue, it falls to the government to compensate communities for contributing to the long-run benefit of the country.

The Mozambican government presently has two main revenue-sharing initiatives in place. The first is a revenue-sharing scheme by which 2.75% of the royalties of natural gas and mining activities must be allocated to the communities where these activities are being operated, which is extremely low by international standards. The second is a law in the Forestry and Wildlife Law that returns 20% of collected licensing fees to the community from projects such as private forest and game reserves, which can earn revenue from tourism and sustainable natural resource harvest. Unfortunately, revenue-sharing rules are not being consistently implemented: the resources returning to the community are still low—in the first case because the licensing fees themselves are low, and in the second because in some cases funds designated for return to communities are not, in fact, returned.

The private sector also has some interesting schemes aimed at local community development, and, when these transfers are well designed and implemented, they result in communities engaged for the success of the project. For example, the New Forests Company in Niassa manages over 9,000 hectares of conservation land, and has established a revolving fund for community projects in neighboring communities. Other companies in the region (perhaps most notably the Chikweti company in the same province) have been forced out due to poor relations with neighboring communities, showing that revenue sharing is a critical business practice as well as an important part of an effective natural resource protection program.

Improving the implementation and size of these revenue transfer systems may be a promising path forward to promote high-productivity agriculture while protecting natural resources. To this end, we make three primary recommendations:

Shares from extractive projects, most notably the prospective gas development in Cabo Delgado, should be revisited to more closely match international standards—Uganda, Cameroon, and the Democratic Republic in the Congo, for example, have rates between 10 and 25%. Moreover, higher rates on revenue-sharing back to communities are a way to make investors incorporate the environmental costs on their extractive projects.

Rules regarding community shares from protected areas should be consistently applied.

Guidelines for businesses on effective benefit-sharing arrangements based on success stories such as the New Forests company could assist new businesses in avoiding past mistakes.

Next Steps

The work described in this papers focuses on a small subset of the issues affecting agricultural development and natural resource protection. This work has led to new questions, and other important questions remain. Moving forward, we hope to examine opportunities for public finance and agricultural risk mitigation in greater detail. Further, more detailed work is needed on best practices, successes, and failures on the natural resource protection front. Finally and perhaps most importantly, the recommendations in this document are preliminary—more detailed analysis is required to precise measures that will alleviate the general issues we identify.

*Mozambique ranks 31st out of 192 countries regarding the Food Score of the Notre Dame University Global Adaptation Index (ND-GAIN), which captures a country’s vulnerability to climate change, in terms of food production, food demand, nutrition, and rural population.