Should development aid be used to expand the MOZAL mega-project?

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The Costs and Benefits of a $3 Billion Factory:Should Development Aid be used to expand the MOZAL

Mega-Project?

4 KsSupervisor: Professor Antonio Ciccone

+Mozal and Mozambique

+Mozambique and MozalDecimating civil war ends in 1992.

1997 Mozal Investment: US$1.4 billion.1997 Mozambican GDP: US$3.5 billion.

Mozal's annual output:• 66% of exports• 3% of GDP

Expansion smelter "Mozal II" constructed in 2002.

New “Mozal III” expansion proposed, would increase output by 45% from 551,000 to 800,000 tonnes p.a.

• US$850 million investment in smelter• US$2.3 billion investment in electricity infrastructure

+Mozal and Development AidMozal I and II received financing from the World

Bank via the International Finance Corporation (IFC).

For the Mozal III expansion to succeed, access to more electricity is necessary.

More development aid has been requested for Mozal III and the electricity infrastructure it requires.

We investigate the costs and benefits of Mozal III.

We find that no further development aid should be used for Mozal.

+Financing and Ownership of Mozal

International Financial Corporation

US$120 million – MOZAL I Organized Finance

US$25 million – MOZAL II Organized Finance

Source: Project Finance January 1999 & August 2001

Source: BHP Billiton

+Employment Creation at Mozal

Wages at the plant are 6 times that of the legal minimum wage (World Bank, 2005)

Projected Employment for Mozal III:

464 Operations

4,658 Construction

1,305 Indirect Linkages

Investment per Worker

Mozal I and II: US$1 million

Mozal III: US$1.5 million

Source: Southern African Development Community: Development Finance Resource Center. April 2005.

+Tax Revenue from Mozal

Mozal contributes under 1% of Mozambican revenue, while its share of Mozambican GDP is 3%.

Fiscal incentives granted to Mozal include a 1% sales tax and exemptions from customs and corporate repatriation taxes.

Mozal III would increase annual Mozambican revenue by approximately US$9 million.

Source: Castel-Branco 2003

+Forward and Backward Linkages

Initially very limited local business linkages Low skill level and business know-how Bundled contracts written in English

Most upstream linkages with SA and Australia 2001: 70% of suppliers to Mozal from SA

Most downstream linkages with SA and Europe Low aluminium demand

+SMEELP and MozlinkThe SMEELP (Small and medium-sized enterprise

empowerment and linkage programme, 2001) was introduced during construction of Mozal II

“Mozlink” (2003) was introduced to build on the successes of SMEELP.

Aimed at identifying specific tasks that can be completed by Mozambican firms.

2002-2007: Monthly spending on Mozambican firms increased from US$5 million to US$17 million

Assuming spending on local SMEs increases proportionally to production, Mozal III will add US$7.7 million per month

+Indirect Economic Linkages The success of large risky investments during the early

stages of economic development can play a significant role in inducing higher levels of investment and diversification in an economy (Acemoglu and Zillibotti, 1994).

The success of Mozal I was followed by investments in other projects related to Mozambique's other natural resources.

Source: The World Bank

+Mozal and the Investment Climate

Economist Intelligence Unit “the country is a long way from being truly calm or

stable” (1996)“the economic outlook is bright, and will be

underpinned by buoyant international investment” (1997)

The Mozal Project also led to marked improvements in investment risk ratings for Mozambique while building up a core of competent bureaucrats capable of managing large scale investment projects

+Electricity Costs of Mozal I & II

(2005 prices) Source: IEA, EDM, ESKOM

+Expanding Electricity for Mozal

• Estimates of the electricity requirements for Mozal III range from 500MW to 650MW per annum.

• BHP Billiton have stated that expansions of the project are reliant on accessing domestic electricity sources from Tete Province.

Source: The World Bank

+The Cost of Electricity in Mozambique

Source: Bacuane and Mulder (2007)

+Mphanda Nkuwa Dam Generally it has been accepted that the proposed expansion

at Mozal would be supplied by the planned Mphanda Nkuwa Hydroelectric Dam on the Zambezi River.

The proposed Dam would generate 1,300MW at a net investment cost of US$2.3 billion.

This dam would make use of newly created electricity infrastructure to supply electricity to Mozal.

Mphanda Nkuwa dam would displace as many as 1,400 people while simultaneously threatening the livelihoods of the approximate 200,000 farmers and fishermen living downstream (International Rivers Organization Pottinger, 2006).

+Some Other World Bank Development Projects

HIV AIDS and health care

Agricultural sector development

Development and maintenance of transport infrastructure

Educational support programmes

Expansion of electricity distribution infrastructure

Improvement of water quality and access

Support programmes for Government institutions

+Conclusions I: Benefits of Mozal III

Though limited Mozal III will have some effect on employment and government revenue.

More significantly the project will contribute to expanding revenue earned by Mozambican firms servicing the plant. Such effects are likely to hold for any Mozambican mega-project.

Notable the Lighthouse effects of Mozal I and II are unlikely to be replicated with any further expansion of the Mozal plant.

+Conclusion II: Costs of Mozal III

More than US$3 billion are required for the Mozal III expansion.

Where this money is sourced from development aid, this implies a large opportunity cost in terms of other development programmes foregone in Mozambique.

The required expansion in electricity generation for Mozal III would require substantial capital investment, and therefore development aid, while simultaneously risking the livelihoods of thousands.

+Conclusions III: Policy Recommendation

We conclude that the potential benefits of a proposed expansion at the Mozal mega-project do not justify large amounts of development aid.