Former Mozambique Minister of Mineral Resources and Energy Castigo Langa is chairman of the board of directors of Gigawatt Moçambique. In this article, part of a series of discussions about the big energy questions facing Sub-Saharan Africa, Minister Langa discusses the challenges and opportunities from the perspective of his southeastern African nation.
I don’t bring any recipe to respond to the challenge posed to us. I am simply proposing to invite those present to accompany me in a brief reflection on the theme “Participation by Mozambicans in Energy Projects”. It is a very wide-ranging theme, both in terms of the nature of the projects, and the type of participation, which can range from the supply of goods and services during the various phases of the projects to the position of shareholder, a matter on which I shall focus my presentation. Perhaps I am taking too long, because, instead of describing the knife with which a cake can be divided, it seemed more intelligent to me to give my opinion about how to make a cake with the ingredients we have available.
Taking the market as the backdrop, perhaps we can begin with the very definition of energy. To avoid a complex scientific definition, we can resort to what is taught in secondary school, according to which, “energy is the capacity to do work”. This definition raises the question of knowing what work is done with energy in Mozambique?
The Profile of the Market
In the case of electrical energy, statistical data from Electricidade de Moçambique (EDM)[i] from 2013 indicate that of its about 1.3 million clients, only 142, I repeat 142, were agricultural (although agriculture is the sector in which the greater part of the Mozambican population works), consuming a derisory 0.82% of the energy distributed. This is even lower than the amount consumed by public lighting which was 1.7%.
Clients on the residential tariff constitute 92% of the total, consuming about 46.1% of the energy. About 8% are clients on the general tariff, namely shops, offices, and small workshops, consuming approximately 11% of the energy distributed. Although without a statistical basis, we can state without risk of falling into serious error that these shops, including informal stalls, mostly sell imported goods, and hence the energy they consume does not contribute much towards generating value by stimulating national production.
We could assume that the 1.2 million residential clients of EDM reproduce value indirectly by recovering their strength in the domestic comfort offered by electrical energy to invest in other activities, but reality forces us to recognise that the majority of these people invest their time in businesses that are not very competitive and have a limited capacity to generate income.
The remaining 40% of the energy is absorbed by the large low voltage consumers and medium voltage consumers which are, in principle, eminently dedicated to activity which generates wealth. However, because this type of undertaking is, in general, owned by foreign investors, the respective profits are exported, and thus the impact which the energy they consume might have on the reproduction of national wealth fades away.
Of the 850MW of peak consumption (excluding MOZAL)[ii], 90% are purchased from Hidroeléctrica de Cahora Bassa (HCB)[iii] at a preferential price, lower than the export price, and placed on the market at a regulated price for most clients. On the other hand, the vast size of the national territory, and the dispersed nature of the population, implies very long transmission and distribution lines. This results in a very unfavourable ratio between the number of clients per kilometre of line, or of kWh per kilometre of line.
As a corollary of this profile of the national electricity market, and in the light of our initial secondary school definition, we can conclude that “the work that electrical energy does” results in a volume of national wealth for Mozambican society much below what is desirable and possible.
I assume, however, that implementation of the various initiatives enunciated by the government will contribute to a continual increase in the purchasing power of Mozambicans and in the general competitiveness of the economy, thus levering the growth of domestic consumption of energy and the capacity of our society to remunerate investments in this sector.
Main Challenges for Development of a Generation Project
This introduction is relevant to what I believe are the main challenges for the development of new generation capacities, namely:
- The capacity to finance the technical, economic and environmental viability studies;
- The existence of a buyer with financial muscle acceptable to the banks – that is, with the capacity to sign an energy purchase and sale contract, known in English as a PPA (Power Purchase Agreement), generally on the basis of the so-called Take or Pay, under which the buyer is obliged to pay even if, for any reason, he does not take the energy available.
- Guarantees of financing, particularly during the construction phase, since after construction the guarantees can be replaced, in part or in whole, by the object itself, based on what are known as Step In Rights which grant the financing agency the right to take the undertaking in the event of non-compliance.
- Capacity to mobilise own capital for equity participation;
- Capacity to finance consultancies to draft and negotiate the various contracts needed to reach financial closure. It is important to mention that, in part, the guarantees of financing consist of building a web of contracts between the various parties interested in the project, which result in a harmonious series of obligations and rights of the parties, including penalty clauses in cases of non-compliance and insurance against all types of risk. This tangle of agreements, memorandums of understanding and contracts, covering such materials as obligations to the grantor, including fiscal material, sales tariffs, the mandate of the so-called owner’s engineer, the building contractor, the power station operator, which ensures maintenance, the supplier of fuel or the regulator of the river, depending on the case, the distribution of the energy, the readings and criteria of loss assessment, just to cite some examples, can involve more than 60 legal and financial instruments, for a single project, with thousands of pages and clauses and a vast number of definitions, figures and deadlines.
The PPA is of particular importance, since it is a fundamental piece, even for investors with sufficient resources to finance all the items listed above. Thus, in the case of Mozambique, the ideal would be for EDM to be able to guarantee the PPAs, which is not the case given the size of most of the projects. Sometimes reference is made to energy-intensive projects such as MOZAL, as possible anchor buyers. I do not possess up-to-date information, but, for example, at the time when MOZAL emerged, it was not accepted that the electricity supply contract should be with HCB, because the proposed tariff was far below what would have been satisfactory, and probably would not have permitted HCB to pass into Mozambican ownership[iv], as happened later.
The Role of the State
Our debate is taking place at a very opportune moment, when the country has just begun a new cycle of governance. In this regard, I would like to stress the words of President Filipe Jacinto Nyusi when, in his inaugural speech, he expressed his decision to make the State the main partner of the national business class and, more recently, when he mentioned his intention to govern on the basis of science, rather than cunning.
I believe that one of the first priorities should be training, at three levels:
- First, of the agents of the State and of the public companies who should interact with the private sector in establishing new power generation undertakings, so that they understand exactly the technical, environmental, commercial legal and financial details of the business, particularly from the perspective of applicable financing models such as the case of Project Finance, thus avoiding the risk of wasting a lot of time and of windows of opportunity closing, during what is commonly called a dialogue of the deaf.
- Secondly, of the national consultants in the various relevant specialisms, so that they are prepared to assist national business people and investors in preparing and negotiating the various instruments necessary so that the projects reach financial closure and later, in their implementation;
- Thirdly, the economic education of society in this field, in the sense of developing a broadly shared national vision, that can favour implementation of the policies necessary to this end, and preventing the risk that opposition will be generated based on ignorance.
Since, in the short term, internal capacity to guarantee PPAs acceptable to the banks, is not available, it is fundamental that our government should conclude the pertinent political undertakings with the relevant counterparts of the SADC region in order to safeguard the necessary immediate and strategic reciprocal advantages so that, under the protocols of the Southern Africa Power Pool (SAPP), commercial agreements at business level may be concluded with the speed that this type of business demands. The deficit of energy facing countries such as South Africa, Botswana, Namibia, Malawi and Zimbabwe is well known.
The Business Model and Inclusion
As for the participation of Mozambicans as shareholders, let me begin by mentioning two examples:
- First, the model used in the Pande gas project, where the State, through the Mozambican Hydrocarbon Company (CMH) reserved a percentage of shares that were later sold to Mozambican citizens through the Mozambique Stock Exchange.
- Second, the path which led to the creation of MozaBanco whereby a group of more than 300 Mozambicans, regardless of party political colours, ethnicity or race, entrusted their savings to a compatriot well known as capable and honest, and set up Moçambique Capitais. This money gave the group the muscle to do all the homework necessary to have a consistent project and to present it with authority to potential strategic partners. As is known, MozaBanco is the only private bank where the majority of the capital is Mozambican.
My opinion is that we should explore better this second example – but, since society should not be held hostage to the lucky arrival of a capable and honest friend to whom they can entrust their savings privately, as happened in the case of Moçambique Capitais, the Stock Exchange should be called upon to play a more active role. One of the requirements would be to change the law[v] so as to allow the listing of companies without invoicing, but with potentially solid projects. As a fiduciary mechanism, it could be made obligatory that an institution in the confidence of the State, on the lines of the Institute for the Management of State Holdings (IGEPE), participate in the project.
Let us imagine that we want to build an electrical power station with a cost assessed at 400 million dollars and that to finance the technical and economic viability studies and the environmental impact study, including the legal and financial consultancies needed to conclude the various contracts, particularly the concession contract with the government and the PPA minute, seven million dollars are needed.
With the alteration suggested here and with good marketing of the project, it would be possible, through the Stock Exchange to mobilise seven million dollars. Once this money has been used according to the purpose defined, we would have a consistent project – that is, a firm business case, able to impress one or more Equity Partners willing to put on the table the 100 to 120 million dollars of co-funding demanded by the banks to complete the 400 million dollars, against the necessary guarantees of financing.
Strategic Importance of the Type of Guarantees
The guarantees of financing are probably the area where the strategic partnership between the state and the national private sector would have to be at its most prominent. Sovereign guarantees from the Treasury are generally more attractive for the financers, but their implications are often insurmountable for the national accounts – hence the habitual reluctance of the Government to accept this path.
Since this will be a recurrent problem with many projects in the future, particularly in the field of infrastructures, the Government could consider forming an institution with this as its vocation, drawing on revenue from undertakings with sufficient liquidity for this purpose such as Hidroeléctrica de Cahora Bassa – without prejudicing the possibility of resorting, in whole or for particular parts of the financing, to guarantees from private institutions and others dedicated to this sort of business, once all the Government authorisations have been obtained and a client has been identified for signing a reliable PPA. Eventually, the National Investment Bank could be used for this purpose, all the more so since it is a good deal, given that the guarantees are remunerated, and the risk is minimal when the project is packaged observing the best practices required for this type of industry.
In the example mentioned above, in which the Equity Partner places 25 to 30% of the capital, if it does not have to assume the loan guarantees, it would be prepared to keep this slice, leaving the majority for the promoters of the project and the initial investors. Thus, even if the partner is foreign, the greater part of the dividends would remain with the Mozambicans and would surely be reinvested in Mozambique.
The majestic houses which certain of our fellow citizens build, the top-of-the-range cars which they drive, and the size of the wedding and birthday parties which they organise reflect a great liquidity potential which, added to the small savings of more humble citizens, may eventually result in a volume of financial resources sufficient to lever large energy projects.
I do not advocate inundating the Stock Exchange with vague ideas about projects. I assume that the promoters will be people with proven credentials of professionalism, technical capacity and leadership as well as unquestionable moral integrity. For their projects to be accepted they will have to give proof of personal commitment, investing in pre-viability studies that are invulnerable to the sifting of specialist and impartial auditors.
In short, distinguished participants, I believe that the most effective path for participation by Mozambicans in Energy Projects, involves giving practical meaning to the partnership between the state and the national business class; to support resolutely the promoters of projects who demonstrate seriousness and commitment; to promote training of the stakeholders and the economic education of society; to make the Stock Exchange a more dynamic vehicle in the promotion of savings, investment and inclusion, thanks to the open way in which it operates.
I am convinced that, if the strategic partnership between the state and the national business class is to produce significant results, it will need encouragement guided by results and systematic monitoring. I think, for example, that in addition to the national directors, tasked with assisting the Minister in policy definition and in the regulation, licensing and inspection of economic activity, it would be opportune to have one or more high ranking officials in each Ministry, a kind of Business Ombudsman, with the express mandate of developing the national business class in this sector, listening to its concerns and taking the measures necessary to remove obstacles and speed up processes, particularly those which require inter-ministerial intervention. This arrangement would be extremely useful, also for encouraging local content in the supply of goods and services, including in building contracts.
In conclusion, allow me to add one further, no less important detail: Karl Marx identified capitalists as the bad guys for appropriating surplus value from labour. With the fragmentation of capital by countless shareholders, which is happening in the world today, the 21st century academics point the accusing finger at the company executives. Thus strict regulation of the privileges of executives should be considered, in order to assure the investors that their participation will be fairly remunerated.
We need to assume that the situation of our country is specific and thus requires its own, daring solutions which can even be unprecedented, as long as they are legally sound and financially sustainable.
I would like to suggest to MOZEFO[vi] a debate around a theme which seems to me connected to the present one. It is what the economist Hernando de Soto calls Dead Capital, represented by a countless number of properties that are not legally registered and so cannot be transactioned on paper. They thus constitute a capital that is of little use because it is not fungible. Indeed, someone with a house, a shop or a stall, made of brick, was supposed to be able easily to use it as a guarantee with the bank in order to obtain finance to invest in lucrative projects such as those in energy – which is not possible for the majority of Mozambicans because the properties are not registered, either because of the institutional limitations of the state, or because this is outside of people’s cultural paradigm.
Castigo José Correia Langa, was born in Mozambique on the 18th August 1956. He started his career as a teacher at technical school in Maputo in 1977. He holds an electrical engineering degree from Eduardo Mondlane University in Maputo, where he served also as lecturer. In 1994 he joined the Government as Vice-Minister of Mineral Resources and Energy and between 2000 and 2005 served as the full-fledged Minister of the some portfolio. Between 2005 and 2006 he served as Senior Policy Adviser for the Technical and Vocational education, in the scope of the reform implemented by the Government of Mozambique, with the support of the World Bank and other international partners. As a private entrepreneur, is involved in farming, seaport logistics, mining and energy industry. In the power generation sector he is the Chairman of the Board of Directors of GIGAWATT Moçambique SA, an independent power producer with a 350MW concession at Ressano Garcia, next to the border with South Africa. Mr. Langa is a Board Member of the Joaquim Chissano Foundation.
i] The national power utility;
[ii] Aluminum smelter, in Beluluane, next to Maputo;
[i11] A 2075MW Mozambican Hydropower scheme in the Zambezi river;
[iv] As part of the colonial past, the hydropower station was owned by the Portuguese government until 2005;
[v] According to the explanation given by the Mozambique Stoke of Exchange chairperson , the law does allow this, but it requires approval by the reserve Bank of Mozambique;
[vi] Mozambican forum of debate on different development themes, promoted by a private owned TV channel.