+

The Costs and Benefits of a $3 Billion Factory:

Should Development Aid be used to expand the MOZAL
Mega-Project?
4 Ks
Supervisor: Professor Antonio Ciccone
+
Mozal and Mozambique
+
Mozambique and Mozal
Decimating 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 Aid
Mozal 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

Source: Project Finance January 1999 & August 2001

International Financial Corporation Source: BHP Billiton

US$120 million – MOZAL I Organized Finance

US$25 million – MOZAL II Organized Finance

+
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

Source: Castel-Branco 2003

 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.
+
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 Mozlink
 The 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.