US embassy cable - 04MAPUTO360

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, Electricity 
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