MOZAMBIQUE: GEOTHERMAL MARKET DEVELOPMENT

UNCLAS SECTION 01 OF 02 MAPUTO 000360

SIPDIS
STATE FOR AF/S, AF/EPS - JHAEN, OES/SAT - FECHAVARRIA
STATE PLEASE PASS TO USAID - GWEYNAND
COMMERCE FOR AHILLIGAS
ENERGY FOR FHODSOLL
E.O. 12958: N/A
TAGS: ECON ENRG EFIN SENV MZ
SUBJECT: MOZAMBIQUE: GEOTHERMAL MARKET DEVELOPMENT

REF: 03 STATE 347715


1. Per reftel, Maputo provides the following information:
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Support to Develop Geothermal Energy in East Africa
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2. Mozambique is rich in hydropower and natural gas
resources and is exploiting the capacity of both sources for
energy production. The GRM is supportive of international
aid to geothermal infrastructure development in the Rift
Valley, but advises that little research has been done in
this field in Mozambique. Additionally, the GRM informs Post
there is no funding to explore geothermal energy development
in Mozambique, as all GRM focus is on developing already-
discovered energy resources such as hydroelectric power,
natural gas, steam coal, and solar power. Post is aware of
projects in the energy sector and believes Mozambique must
first develop production in these areas in which it is well
endowed and has attracted foreign investment, before
pursuing geothermal energy options.


3. Mozambique has immense hydropower and natural gas
resources that currently supply the national market and a
number of consumers in South Africa. The Cahora Bassa Dam,
Africa's second largest in terms of hydropower production,
supplies electricity to South Africa (which is then sold
back to Southern Mozambique at a higher price) and to the
northern and central regions of Mozambique. The South
African Chemical and Fuel Company, SASOL, has embarked on a
mega-project in the province of Inhambane to extract natural
gas from Mozambique and export it to South Africa. The first
exportation of natural gas under the SASOL project occurred
in February 2004. Aside from these two sources of energy,
Mozambique has steam coal deposits located in the Tete
Province (yet to be explored for energy production),the
beginning of solar panel installation in certain areas, and
mini-hydro projects. If/when the GRM selects a firm to
reconstruct the Sena Railway line (decision pending),
linking Tete's coalmines to the coast, exploration of a
steam coal project will move forward. There are already
several foreign investors interested in exploring this
opportunity. The GRM is also looking into further hydropower
projects on the Zambezi River such as Cahora Bossa North
(which would install generators along the north side of the
Cahora Bossa Dam, roughly doubling current capacity) and the
Mepanda Uncua Dam (1300 MW),downstream from the Cahora
Bassa. A feasibility study has been completed on the dam's
hydropower potential, but the GRM is still seeking potential
investors.


4. In a meeting at the National Directorate of Energy,
Ministry of Mining and Energy Resources, National Director
Pascoal Bacela described the GRM's energy policy as "the
willingness to explore every energy resource" available to
Mozambique. The Ministry's first priority is to increase
the population's access to energy. The Ministry is also
concerned with finding clean and efficient methods of energy
production that do not harm the environment. On geothermal
energy infrastructure development Bacela said, "Mozambique
would need significant financing" to move forward in this
area of exploration. "This (exploration) opens a good
possibility for Mozambique" and the GRM "would be willing to
cooperate in development of the African Rift Valley
Geothermal Development Facility (ARGEo) if this project
brings development to Mozambique and its resources."

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Barriers to Geothermal Development
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5. In Mozambique, only 7% of the population has access to
electricity. Of this 7%, 80% live in urban areas. Public
investment (GRM and donor-funded) totals $200 million/year
(on average) for the construction of transmission lines to
expand the national electricity network. The GRM, through
the World Bank Energy Reform and Access Project (ERAP),is
working to increase access by encouraging private sector
involvement in the electricity sector. The ERAP project
will include components of technical assistance, electricity
sector restructuring (i.e. privatization of the national
power company, EDM),establishing an independent energy
regulator, and grid expansion through capital subsidies.
The effective date of the project is March 31, 2004.


6. Hidroelectrica Cahora Bassa, an 82% Portuguese-owned and
18% Mozambican owned company, controls Cahora Bassa
hydropower production and sale to Mozambique, South Africa,
and Zimbabwe. Although this company is the second largest
revenue-producing firm in Mozambique (according to KPMG's
annual "Top 100 Companies in Mozambique" Study, 2003),it
operates with an extravagant amount of debt. There are
several reasons for this, some dating back to transmission
line damage during the Civil War, unusually low tariffs paid
by South Africa (Eskom) for hydropower, and Zimbabwe's
recent inability to pay its electric bills. Mozambique
produces more electricity than it can use at Cahora Bassa.
The problem lies in the fact that the national market for
electricity is severely limited due to the lack of
transportation infrastructure and the pure inability of a
majority of Mozambicans to pay for a "luxury" item such as
power.


7. Energy sector aside, there are some basic obstacles for
foreign investment in Mozambique. These obstacles include:
length of time for business registration, the tax
administration system, the labor law, property rights,
operation of customs, bureaucracy, and corruption. The
business registration process in Mozambique operates very
inefficiently and is highly time-consuming, causing
aggravation on the behalf of many foreign investors. The
World Bank recently reported that, on average, 153 days is
the average length of time it takes for a company to achieve
registration in Mozambique. The applicant company must
complete 15 procedures (OECD average is 7) in this process.
Bureaucracy is high and it is common to come across corrupt
officials, whether during a labor inspection or the customs
clearance process. The Ministry of Finance has not yet
formulated an efficient system for repaying VAT promised to
exempted investors and donors. Experience demonstrates that
significant return on this VAT often only happens with
diplomatic intervention at the highest levels. Many
companies have operated with restricted cash flows due to
the amount of time it takes to receive repayments. The labor
law is in the process of revision, but is regarded as highly
pro-worker and investment-unfriendly. There is a severe
paucity of skilled labor in Mozambique and the law makes it
very difficult and costly to employ foreign labor. Property
rights are weakly protected in Mozambique and the judiciary
is largely corrupt. Customs operates inefficiently, and
products spend a significant amount of time stationary at
port. With cognizance of the barriers, the GRM repeats the
theme of needing to attract foreign investment for the
country to develop and grow. Many issues are currently being
discussed within joint GRM, private sector, and donor
circles to lessen the investment-negative impact of these
barriers.


8. Mega-projects originating in Mozambique, such as the
MOZAL aluminum smelter and the SASOL natural gas pipeline,
operate in industrial-free zones. The GRM has been committed
to working with these projects to satisfy investors and
create a smoothly operating business climate. These firms
enjoy various tax incentives and account for a majority of
the country's revenue production and import/export
statistics.

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US Mission Assistance
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9. USAID is involved in the energy sector through support to
the National Energy Council (CNELEC). The goal of the
support is to create an independent regulatory body that
will oversee the electricity sector. Support includes
institutional capacity building, training, and technical
assistance. The GRM is undertaking the steps necessary to
privatize EDM through the World Bank ERAP project. An
independent regulator is both a necessary part of system
privatization, and a condition precedent for the
disbursement of the second tranche of funds under ERAP.
USAID's current priorities in the energy sector do not
include geothermal exploration.
LA LIME