Improving the Domestic Impact of Mega-Projects

March 2010Namaacha

Global Experience and Options for Mozambique

Antonio Nucifora, Peter Nicholas, and Boris UtriaWorld Bank

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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 3Mozambique 3

Moatize Coal

Cahora Bassa

Mpanda Nkuwa

Rovuma Basin – Gas (and Oil?)

Moma - Titanium

Chibuto - Titanium

Forestry Potential

Mozal

Maputo Metallurgical Complex

Gas Fields

Moamba Power Station

Refinery

Refinery

Petroline

Benga Coal

Moatize Power

Benga Power

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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

Improving the project preparation cycle

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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

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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

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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

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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)

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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?

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How to ensure domestic participation in megaprojects?

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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

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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

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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

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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

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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?

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How a Mozambican Holding Company might be structured

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Project SPV 1

IDA/ IBRD

GOM

Ministry of Finance

Banks

Mozambican

I nvestors

Holding Company

(Mozambique)

DFI s / I FI s

Trust

Sub + senior

debt

Project SPV 2 Future

Project SPV 3

I nvestment portfolio

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

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Singapore’s Public Holding Company: TEMASEK

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Ministry of Finance

(Singapore)

Singapore Telecom

100% ownership

Temasek HoldingsCapital

Markets

Bond finance:

(eg 2005, US$1.75bn

AAA-rate 10 yr note)

Port of Singapore

Authority

Singapore

Power

Keppel

Corporation

100% ownership 100% ownership 100% ownership 21% ownership

I ndependent Board

US$100bn + portfolio

Management Team

Macroeconomic and Budgetary Impacts of Mega-Projects

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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

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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

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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”

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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

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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

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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

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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?

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Revenue Transparency and Good Governance

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Natural Resource Wealth and Economic Growth: ‘The Curse’

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

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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

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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

Conclusions

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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?

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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?

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Obrigado!

World Bank - MozambiqueMarch 2010Namaacha

Antonio NuciforaSenior Economist, PREM, World Bank, MozambiqueTel: +258-21-48-2371Fax: +258-21-492893Email: anucifora@worldbank.org