Improving the domestic impact of mega projects
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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. Improving the Domestic Impact of Mega-Projects. The context: Opportunities and challenges

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Improving the Domestic Impact of Mega-Projects

Global Experience and Options for Mozambique

Antonio Nucifora, Peter Nicholas, and Boris Utria

World Bank

March 2010Namaacha


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


Rovuma Basin – Gas (and Oil?)

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


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


Improving the project preparation cycle

Mozambique


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


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


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

Mozambique


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


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


How to ensure domestic participation in megaprojects?

Mozambique


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


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


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


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


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


How a Mozambican Holding Company might be structured

Mozambique


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


Singapore’s Public Holding Company: TEMASEK

Mozambique


Macroeconomic and Budgetary Impacts of Mega-Projects

Mozambique


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


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


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”


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


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


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


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


Revenue Transparency and Good Governance

Mozambique


Natural Resource Wealth and Economic Growth: ‘The Curse’

Mozambique


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 1970-90

    • 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


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 1963-2003

    • 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


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


Conclusions

Mozambique


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


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


Obrigado!

World Bank - Mozambique

March 2010

Namaacha

Antonio NuciforaSenior Economist, PREM, World Bank, MozambiqueTel: +258-21-48-2371Fax: +258-21-492893Email: [email protected]


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