1. Improving the Domestic Impact of Mega-Projects
Global Experience and Options for Mozambique
Antonio Nucifora, Peter Nicholas, and Boris Utria
World Bank
March 2010 Namaacha

2. Improving the Domestic Impact of Mega-Projects
The context: Opportunities and challenges
Improving the project preparation cycle
How to ensure domestic participation: Funding from the budget?
Macroeconomic impacts and how to manage them
Natural resource ‘curse’ and policies to avoid it
Concluding questions
Mozambique

3. Rovuma Basin – Gas (and Oil?) Maputo Metallurgical Complex
Moatize Power
Cahora Bassa
Mpanda Nkuwa
Moatize Coal
Benga Coal
Benga Power
Refinery
Forestry Potential
Petroline
Moma - Titanium
Gas Fields
Refinery
Chibuto - Titanium
Moamba Power Station
Mozal
Maputo Metallurgical Complex
Mozambique
Mozambique 3

4. Mega-projects: Opportunities and challenges
Mozambique has gained strong reputation as investor friendly, and S&P and Fitch have given a stable outlook on their B+ credit ratings
Increasing investor interest in Mozambique is translating in multi-billion dollar investments
Mega-projects contributions to budget can be cash-cow to finance infrastructure investments
Looking ahead: Need to balance reputation as investor-friendly destination with maximizing domestic fiscal, ownership, employment, social and environmental benefits of mega-projects
Mozambique

5. Improving the project preparation cycle
Mozambique

6. Improving the project cycle: current status
Weaknesses in current project cycle set up
Gaps exist in legal and regulatory framework (e.g. length of concessions, electricity royalties, etc.)
Ad hoc process of inter-ministerial coordination
MOF often called in when discussions are advanced
Large investors report that GOM delegations are often not adequately prepared/staffed
Mozambique

7. Improving the project cycle: Legal & Regulatory Framework
Lack of a comprehensive framework law for mega-projects, concessions and PPPs to provide guidelines for project selection and risk allocation
who is the contracting authority
maximum timescales for approval of contracts
which bodies need to provide approvals and at what stage
how concession and other agreements might be regulated and/or monitored
different procurement options which are available
Mozambique

8. Improving the project cycle: Institutional process
Need to develop a clearly structured process for mega-project screening, tendering, negotiations and post-implementation monitoring
Clear demarcation of responsibilities between ministries
Guarantee key role of MOF in negotiation and monitoring of mega-projects, concessions and PPPs
Assess and prioritize key human resource needs, such as financing expertise
Role of MOF:
to ensure that fiscal regime conforms to relevant fiscal laws and regulations
no direct or indirect fiscal risks, or financial damages/losses accruing to the State
analysis of fiscal impact of mega-project/PPP proposals to be included in package going to Council of Ministers for approval
adequate monitoring mechanisms to avoid the unauthorized use of funds so as to avoid conflicts of interest
preparation of baseline data that will allow the monitoring of the fiscal impact of mega-projects and PPPs
periodic collection of information on the fiscal, economic and financial contribution of those megaprojects and PPPs
the roles played by the different institutions are key in terms of ensuring that project cycle activities take place in a timely manner
Mozambique

9. Improving the project cycle: Institutional process
Need to facilitate private sector participation
Strengthen capacity to respond to big investors
Develop greater in-house GOM capacity to initiate projects and respond robustly to unsolicited proposals
Need instrument to provide financial support for project development and transaction activities to line ministries
Need to develop a framework for assessing:
the overall benefits of proposed investments
financing options
if a broader tendering process would be beneficial for unsolicited bids (for example, a 'Bonus System’ or 'Swiss Challenge System' of competitive bidding)
Mozambique

10. Improving the project cycle: Institutional process
Would it be better to have a dedicated and adequately staffed unit?
Should responsibility for specific project cycle activities continue to be decentralized, or should it be moved to a centralized ‘Mega-project, PPPs and Concessions Unit’?
Is it better to develop needed skills within each interested ministry or would a specialist centralized unit be an appropriate institutional solution?
Mozambique

11. How to ensure domestic participation in megaprojects?
Mozambique

12. Should there be any domestic participation in mega-projects?
It is essential that domestic private interest be invited competitively and transparently
Avoid concerns regarding Politically Exposed Persons
It will take time for Mozambican individuals, corporate and institutional investors to build up the financial resources to invest in M-P
GOM has expressed interest in financial participation in a number of upcoming projects
Protect national interest: control of strategic assets
Socio-political: wider domestic share ownership
International investor see local participation as extremely important risk mitigant
Mozambique

13. How can domestic participation in mega-projects be financed?
Option 1: GOM to invest directly and finance domestic participation in mega-projects
But should GOM use its limited resources (or borrow) to fund shareholdings in mega-projects?
Need to take into account the opportunity cost in terms of other possible uses of public funding
Direct public investment in mega-projects should generally be the least preferred option and driven only by strategic considerations
Precise form of vehicle and appropriate structure for such public investments would depend on Mozambican law
Mozambique

14. How can domestic participation in mega-projects be financed?
Option 2: Reserving shares through ‘a call option’ to buy shares in the future
When issuing concessions, GOM could reserve equity for Mozambicans to buy in the future
Concession agreement could indicate that a given percentage of the shares will have to be divested to Mozambican entities (citizens, companies, stock market, pension funds, etc) at a date in the future at the price then current
This is like a ‘call option’ on a share issue to increase Mozambican private participation in the future
Future sales of shares should be at market value
Mozambique

15. How can domestic participation in mega-projects be financed?
Option 3: ‘Warehousing’ shares until there is sufficient local demand to purchase the shares (at a market rate)
(a) third party private companies might be prepared to undertake the warehousing role
(b) the warehousing role could also be played by one or more development finance institutions (DFIs)
(c) the Mozambican government itself could borrow to finance the warehousing
Private sector or DFI’s to act as the warehouse would avoid need for GOM to use its scarce resources (or borrow) to fund the shareholding
Mozambique

16. Setting up a Multi-Investment Warehousing Facility?
Public ownership would best not be held by the national utility, to ensure good corporate governance and avoid conflict of interest
Keep clear role and objectives of government ownership
If national utility is involved in financing they may become involved in operational / management decisions
There is conflict of interest when the company is both seller and buyer/investor and off-taker
A purely financial vehicle would not have that problem
Better to keep warehousing on case by case basis or to set up specialized vehicle?
Mozambique

17. How a Mozambican Holding Company might be structured
Mozambique

18. The Singapore example: TEMASEK public holding company
Singapore’s State holding company provides a good model of both strategy and governance
Temasek holds full or partial stakes in Singapore’s largest companies, particularly power and utilities
Invests in areas with strong public good features, with occasional participation in catalytic investments outside infrastructure
Managed by independent board and professional and accountable management team
Full disclosure of materials and related party transactions
Publication of audited financial statements
Mozambique

19. Singapore’s Public Holding Company: TEMASEK
Mozambique

20. Macroeconomic and Budgetary Impacts of Mega-Projects
Mozambique

21. Recent Steps to Increase the Fiscal Benefits of Mega-Projects
GOM wants to increase mega-projects domestic benefits, notably fiscal contribution to budget
Given increased confidence of investors, GOM has rightly reduced fiscal incentives and standardized fiscal terms of all new projects
New legal frameworks for the mining and petroleum fiscal regimes in 2007
Revised Fiscal Benefits Code in 2009
Mozambique

22. Next Steps to Increase the Fiscal Benefits of Mega-Projects
Need proper legal framework to minimize fiscal risk and limit quasi-fiscal activities resulting from GOM participation in mega-projects
Need mechanisms to ensure that additional resources are budgeted in an efficient and transparent manner, and properly monitored
Consider reducing fiscal benefits for investment projects, in parallel with reduction in corporate tax rates
Mozambique

23. Are incentives useful to attract investment?
Most of the literature argues against incentives
Survey on impact of incentives in Mozambique (Bolnik, 2009)
Random sample of 60 companies that qualified in 2005, 2006 and 2007 for CIP fiscal benefits
Critical factors influencing investment decision
growing domestic market (38 times)
lack of local competition (16 times)
political stability (14 times)
business environment (12 times)
and access to neighboring markets (9 times)
just one respondent cited “incentives”

24. Are incentives useful to attract investment?
Survey on impact of incentives in Mozambique
Fiscal benefits are not decisive for most investments
85% of investors stated their decision did not depend on receiving income tax breaks, giving 80% redundancy rate
for import duty relief on capital goods the corresponding redundancy rate was 73%
Very few of these projects could be categorized as “footloose”
Only 12 percent of the investors considered locations outside Mozambique—and none of them regarded tax breaks as critical
Fully 90 percent of the investments—and 80 percent of those critically influenced by tax breaks, were driven by domestic market opportunities

25. Reform Fiscal Policy to Boost Competitiveness of SMEs
Fiscal climate could be significantly improved by reducing simultaneously fiscal incentives and the number and level of tax rates—without compromising government revenues
Enlarge tax base to create level playing field for all potential investors
Considerably simplify tax administration
Allocate investment to their most productive use
Reduce room for discretion and corruption
Improve fiscal regime for investment by small / medium entrepreneurs—the very entrepreneurs that are needed to sustain growth and job creation

26. Potential Further Improvements in Macro-Fiscal Impact of M-P
Enhancing revenue forecasting and the efficiency of spending
Developing and implementing a macro-fiscal model for the mega-projects
Improving the efficiency of spending as part of an effort to avoid Dutch Disease
Strengthening transparency and accountability
Adopting practices to closely monitor the collection and distribution of mega-project fiscal revenues
EITI membership is a great start
Adopt same principles / approach throughout the value chain for all natural resources projects
Mozambique

27. Potential Further Improvements in Macro-Fiscal Impact of M-P
Fine-tuning the monetary policy framework
Tailoring Central Bank intervention policy mix to facilitate absorption of capital inflows from M-P
Improving central bank liquidity management and monetary policy operations to effectively manage surplus liquidity associated with M-P inflows
Developing exchange rate policy with a medium term focus
In the short-term, mitigate appreciation pressures on the exchange rate associated with M-P inflows
What exchange rate policy would optimize the resource flows associated with mega-projects over the medium-to-long term?
Mozambique

28. Revenue Transparency and Good Governance
Mozambique

29. Natural Resource Wealth and Economic Growth: ‘The Curse’
Mozambique

30. The ‘Natural Resource Curse’ What is it?
Many studies find that abundance of natural resource has strong negative impact on growth
For example (Sachs and Warner 1995, 2001)
Cross-section of countries in the period
Ten percentage point increase in the ratio of natural resource exports to GDP associated with 0.4% - 0.7% lower annual per capita GDP growth
Three main explanations for resource curse:
‘Dutch disease’: appreciation of real exchange rate and loss of competitiveness
Rent seeking: Natural resource rents are easily appropriable (bribes, distortions in public policies, …)
Institutional and policy quality deterioration
Mozambique

31. The ‘Natural Resource Curse’: Key Role of Good Governance
Consensus emerging that outcome depends on quality of country’s institutions and policies (Collier and Goderis 2007)
Time series of 130 countries over the
Divide their sample into good and bad governance countries (ICRG rating >than 75 is ‘good’)
Negative impact on growth only in countries with bad governance; positive relationship in countries with good governance
Mozambique

32. Key policy implications for the use of natural resources
Mozambique has so far avoided the resource curse, reflecting ‘enclave nature’ of existing M-Ps
Four types of policy can help Mozambique address the challenges of natural resource based development
Good governance and transparency
Fiscal regime for the natural resources sector
Sound fiscal policy stance
Adopting appropriate fiscal rules for saving enough from natural resource revenues)
Policies to allocate public expenditures to promote long run growth and minimize Dutch disease
Mozambique

33. Conclusions
Mozambique

34. How to maximize benefits from mega-projects
Strengthening the project preparation cycle
Carry out full review of legal framework, institutional and project cycle process?
Would a framework law for PPPs, Concessions and Mega-projects be useful ?
How can the assessment of State liabilities be improved
Should there be a centralized unit?
Ensuring Mozambican participation
Should it be financed from the budget or should alternatives be used (call option, warehousing)?
If from budget, what principles should guide the operation of a Mozambican Holding Company?
Mozambique

35. How to maximize benefits from mega-projects
Macroeconomic and budgetary impacts
Need a macro-fiscal model to forecast fiscal revenues and predict the resource envelope for government spending over the medium-term?
In there need to offer investors fiscal benefits? Should GOM consider a reduction in fiscal benefits, in parallel with reduction in number and level of tax rates?
What exchange rate policy would optimize the resource flows from mega-projects over the medium-to-long term?
Revenue transparency and good governance
Should GOM consider adopting EITI-like principles / approach throughout the value chain for all natural resources projects?
Mozambique

36. World Bank - Mozambique March 2010 Namaacha
Obrigado!
Antonio Nucifora Senior Economist, PREM, World Bank, Mozambique Tel: Fax:
World Bank - Mozambique
March 2010
Namaacha