Tuesday, 7 June 2011

White elephants, up close... real close

As part of our series on ITFD student policy projects, here is the summary of another one I learned a lot from: Kristin Keohan, Kevin McEvilly, Kevin Timoney and Kristoff Potgieter (supervised by fellow ITFD steering committee member Antonio Ciccone) analyse expansion plans for the giant MOZAL aluminum smelter in Mozambique. The IFC, the lending arm of the World Bank, got them of the ground. MOZAL is already huge... accounting for 66% of Mozambique exports. Phase III would now build on the earlier success, and add a lot of capacity. To that end, there would need to be fresh investment in dams to generate hydroelectric power, etc. Is this a good idea? You would think so. Mozambique was a basket case before MOZAL came along; nobody from the rest of the world wanted to invest there. Once the aluminium plant was up and running, the perception of investors changed; FDI started to flow.

Despite all this, the 4 K's make a (to me) convincing case that this is a bad idea. First of all, there is no longer any need to subsidize expansion - the project risk is low, and giant firms like BHP which own the majority of MOZAL can shoulder the costs if they are economically viable. Their key argument why neither the IFC nor the Mozambique government should subsidize is that the externalities seem very small. There are few backward linkages: MOZAL is producing aluminum from bauxite mined in Australia, using cheap energy from South Africa.  South Africa now increasingly needs its own electricity, and MOZAL III is largely an attempt to strong-arm the local government into providing subsidized energy. Crucially, the spilloves are tiny -- very few people are employed at MOZAL, and fewer are from Mozambique. In our urge to do "something" for development, it is tempting to bet on a project that seems like a winner... but it may be better  to do so elsewhere.


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