TIPS Seminar 1 June 2012 Glen Robbins & Dave Perkins

1. Mining and infrastructure: reflecting on the experiences of Tanzania and MozambiqueDrawing on research conducted for the Making the Most of Commodities Project: UCT & Open Universityhttp://www.commodities.open.ac.uk/discussionpapers and Robbins and Perkins (forthcoming 2012) Journal of International Development TIPS Seminar 1 June 2012 Glen Robbins & Dave Perkins

2. Infrastructure and Mining Investment • How infrastructure influences investment choices (in the mining activity) • Impact on scale of pre-production set-up costs and thus delay profitability point (potentially raising costs of borrowing or risk profile of project). Note – transport less of an issue • Feasibilities will also look closely at supply chain risks & logistics costs as these cannot be ignored – higher levels of uncertainty in predicting delivery times and costs are a concern. • In some cases are a prerequisite

3. Infrastructure and Mining Investment • How infrastructure issues in mining influences investment choices by states • Governments with stressed expenditure systems generally struggle to provide up-front commitments at scale • Donor funds and World Bank/ADB loans are key but limited when scale of projects is considered (base of systems in place, topography, distance, user classes) • Other options include deals with Chinese companies/state or some form of PPP arrangement • Maintenance budgets tend to be limited or non-existent (a washed away bridge or a blown sub-station might take a year or more to get fixed) – although in Tanzania, with donor and loan support, the past five years have seen steady improvement • Mining activity can be seen as a revenue source for infrastructure provision via fiscal allocations enabled because of tax/royal flows or through users charges • Revenue flows attached with mining consumers can be used to raise funds by states or to use in PPP deals of one sort or another (limited track record of success and politically uncomfortable, unattractive terms due to risk perceptions) • Often a reliance on investors in mining projects to fund infrastructure connections (access roads, rail-heads, connections to grid, water pipes) in full at no consumption charge discount (attractive to states as it adds to next coverage of infrastructure and might allow previously un-served communities access to some services with no significant diversion of state resources)

4. Tanzania and Mozambique Tanzania and Mozambique are in the upper-middle ranking of African countries in terms of FDI, with its FDI stock doubling in the first half of the 2000s and again in the second half. Both have been among the best African FDI performers outside countries with oil and gas (with exception of RSA) These countries have overtaken traditional stronger performers in FDI growth (Kenya, Botswana etc) Two thirds of growth in FDI stock since 2000 is accounted for by mining investments (Source: UNCTAD and ICMM) 4

6. Road infrastructure I

7. Road Infrastructure II

8. Investing in infrastructure

9. Tanzania’s central corridor

10. Nickel Sulphide Deposits Nickel Laterite Deposits Gold Deposits Cassiterite/Tungsten Deposits

11. Tanzania’s infrastructure “Despite its geographic advantages as a potential entrepôt to its landlocked neighbors Burundi, Rwanda, Uganda and Zambia, as well as the D.R. Congo, there is clear evidence to suggest that Tanzania’s lack of infrastructure is acting as a constraint on the expansion of trade and economic activity in both the country and the region.” (Ter-Minassian et al, 2008: 8) The World Bank’s Logistics Performance Index (World Bank 2007a) ranked Tanzania’s transport infrastructure well below the average of other sub-Saharan African and low-income countries. In the power sector losses from power failure amount to 10 percent of sales for the median Tanzanian firm compared to only 1 percent for the median Chinese firm. (Eifert, Gelb & Ramachandran, 2005) Pedersen quotes Mwase as saying that the passability of Tranzania roads declined from 70 pecent in 1970 to 30 percent in 1991 (Mwase in Pedersen, 2001: 12). These empirical findings are corroborated by evidence from business surveys: Global Competitiveness Report (2007-08) UNCTAD WIR (various) Enterprise survey (WB) and Investment climate survey (WB) There have been some improvements but quite limited in terms of scale of backlog/needs 11

12. The growing gap between mining investment and infrastructure spend • Historic synergies between developing infrastructure platforms and enabling mining extraction that also yielded a measure of linkages (synergies not just in terms of supply and demand but also in terms of capabilities) • Slight recovery (in historical terms) of infrastructure spend in SSA (excl RSA) largely driven by donor commitment post SAPs but growing gap as no country fiscal capability, limited ODA and lack of private take up in PPPs. (not including mobile telecommunications) Tanzania conceptual image & timeline 1967 Arusha Declaration: 60% of all production in hands of state 1975: Basic Industrial Strategy: Capitalist activities outlawed Capital invest-ment 1973: Oil crisis 1980s: SAP & marketisation 1997: Mining Bill & HIPIC Mining investment 1993: Restructuring & reform Infrastructure investment 1940s 1980s 2000s 1960s

13. Tete Coal Basin Mozambique

14. Background • Lower Zambezi River basin paradox: • one of world’s poorest regions • endowed with vast natural resource, energy and industrial development potential • Tete Province • world’s largest unexploited coking coal deposits (rival Bowen Basin in N. Australia) in part due to disruption of civil war • commissioning of two new mines (Vale and Riversdale/Rio Tinto) with others to follow (82 coal exploration licenses held by 33 companies) • potential for inexpensive power & presence of complementary mineral deposits raises prospect for in-situ or in-country mineral processing/industrial development • But area is hopelessly under-serviced by transport, energy and ICT infrastructure that has not only limited the pace of mining developments but also the realisation of the linkage opportunities that could arise from them

16. Magnitude of the Infrastructure Challenge • Two mines about to commence production & export • Moatize Mine (Vale) - $1.5 billion investment • 2003/4: IFC/GoMZ secured developer & signed Framework Agreement • 2007: Feasibility & licensing 2008: construction commences • 2011: First production & 2012: first exports • Originally 11mtpa by 2014/15 • 2011 approval of $6bn expansion to 22 mtpa • Benga (Riversdale/Rio Tinto with Tata) - $ 800 m investment • 2009: Construction commences • 2011: Rio Tinto acquires Riversdale ($4+bn takeover includes Benga and Zambeze projects) • 2012: first coal shipments • Production to ramp up from 2 mtpa to 12 mtpa by 2015

17. Magnitude of the Infrastructure Challenge (cont’d) • Despite long mine development lead times, necessary investment in rail and port infrastructure has not taken place • Sena railway (600km) linking Moatize to Port of Beira has insufficient capacity (max 6 mtpa) to handle projected exports even in short-term (2012) • By 2015 need capacity of at least 30-45 mtpa! Sena line constrained and cannot be developed to requisite capacity • Until recently, identification of necessary solutions and planning for expanded capacity bedeviled by lack of coordinated planning and underperforming rail concessionaire • But GoMZ and private sector have, albeit belatedly, come around to the need for urgent action • Key is for GoMZ though is to avoid perpetuation of enclave development and ensure integrated mineral and other economic development in tandem with new infrastructure development

18. Solutions… • In short-term (2-3 years) Vale & Riversdale (with CFM) planning for expansion of capacity of Sena line from 6 to 12 mtpa and a concomitant expansion of Port of Beira coal terminal; • Vale: 3-year project to enable exports through Port of Nacala • plan to invest $1bn to develop 138km railway linking Moatize on Sena line through Malawi to Nacala line • With rehab’ of 98km of existing Nacala line and development of coal terminal will enable 30-35 mtpa exports through Port of Nacala • Acquired 51% stake SDCN the Nacala port & rail concessionaire to secure operational control • Riversdale/Rio Tinto • Investigating feasibility of tug & barge transportation of coal from Tete down Zambezi River to offshore loading platforms at river mouth • Third parties investigating other coal transport options such as a new dedicated railway line from Tete to the coast at Savane (with development of new coal terminal and port facilities

19. Response of Government of Mozambique • Ministry of Transport & Communications recognises need to find ST solutions while simultaneously determining a longer-term minerals transport & logistics master plan. • In the short-term the MTC has: • Terminated the CCFB concession agreement on the Sena line • Sanctioned agreement between Vale & Riversdale/Rio Tinto on the use, sharing and operation of the Sena Line and Port of Nacala coal terminal • Considered a number of unsolicited proposals i.r.o. development of new coal transportation capacity • Established a new surface transport regulator to provide a more equitable regulatory framework • Lent support to a Coal Industry Export Initiative Study in conjunction with the Moz Coal Development Association

20. Response of Government of Mozambique • Based on two key policy positions namely, that: • MZ needs to use its comparative adv’ in natural resources as a catalyst for diversified economic growth and development • Any strategy to promote infrastructure development must be informed by its economic context • …the MTC has adopted a “Strategy for the Integrated Development of the Transport Sector” that: • Recognises the role of the transport sector as a key determinant of economic competitiveness, social & territorial cohesion and levels of regional integration • Aims to develop an integrated transport system that facilitates investment & growth of the national and regional economies • Advocates adoption of development corridor planning methodologies focused on integrated planning and management of transport, energy and ICT infrastructure development with linked anchor investments (mainly in the natural resource sectors) by the private sector

21. Observations and Lessons… • In Moz there is a heightened awareness of the need to avoid enclave development as a result of large-scale mineral investments • A progressive Minister has motivated a shift in national transport policy to a point where strategies to promote infrastructure development must be informed by the range of inter-related economic development opportunities that they may facilitate and in turn be sustained by. • As a result: • levels of political will appear to be enhanced • levels of inter-agency cooperation in the MZ public sector have been enhanced (through an Inter Ministerial Coordinating Committee co-chaired by the Minister of Planning and the Minister of Transport & Communication) • there is an increasingly closer alignment of transport infrastructure development commitments by government and the needs of private sector investors; and • Prospects for natural resource based sustainable economic development in the Zambezi Valley are enhanced

22. Observations & Lessons (cont’d) • Long lead times of large-scale mining projects does not guarantee timeous delivery of requisite enabling infrastructure by the public sector; • MZ experience has highlighted the need for • progressive infrastructure development policy and strategies that recognise the economic function that infrastructure performs; • formalised public sector inter-agency cooperation on large-scale, high impact investment projects; • While some large-scale natural resource investments may themselves be able to sustain the capital cost of their enabling infrastructure, care must be taken to ensure patterns of infrastructure development that do not sterilise other adjacent economic development opportunities;

23. Observations & Lessons (cont’d) • In Tanzania the combination of government policy and the character of the commodity being mined as not enabled opportunities in infrastructure to be exploited. • The entrance of new Chinese mining companies in Iron ore, Nickel and Coal is likely to change this. • Almost exclusive donor focus on regulatory reform misses the issue about the scale of investments needed to help infrastructure function in support of sustainable economic growth.