Africa can’t miss the opportunity of mining – related infrastructure !

May 2014 – Beijing

Perrine Toledano @ CCSI – SDSN Extractives Thematic Group

Can China help ?

1 Source Reverse the curse: Maximizing the potential of resource-driven economies, McKinsey Global Institute, December 2013 : !

!!!

!

!

!

$1.3  tn  /  year  Resource-driven countries need!

$2tn  (cumulated)  Extractive industries will invest !

Resource - driven countries have a huge funding gap that extractives industries can help fill

By  2030:  

Closer look to SSA: Funding gap at $31bn / year….

US $ billion annually

Source: World Bank

….While in the context of iron-ore mining alone, private investment expected: $45 bn

, 2013

“Shared-use” can result in a win-win situation

Infrastructure gap in a resource-driven

country

Onerous infrastructure

development for mines

Shared use allows parallel

development of both the

mine and the host country

Opportunities for:

u  Economies of scale

u  Economies of Scope

u  Developmental impacts

Whereas the traditional enclave model is costly for all

Country

Example: Power self-supply is a loss for all

Adequacy of National Supply

Reliability of Supply

Cost of Grid Power

Extent of Trans. Infrastructure

Mines investment in self –supply power infrastructure

2000-2012: $1.3 billion 2013-2020: $1.4 - $ 3.3 billion

13

Utility

Loss of large customers Loss of an opportunity to use the mines as anchor customers exhibiting economies of scale

Mines Direct cost of self-supply is generally much higher (offset by continuous supply and consistent product quality)

Country

Weak utility Loss of exports and tax revenues Negative impact on GDP, and reduced employment opportunities

SELF-SUPPLY IS A LOSS TO UTILITY, MINES—AND THE COUNTRY

The Power of the Mine 1/24/2014

In Africa:

Source: WB- VCC

Of course nuances are needed: costs for sharing infrastructure vary

Costs/benefits of a range of shared infrastructure projects

1= low, 2= medium, 3= high

While sharing is generally beneficial, the associated costs vary substantially between projects

SOURCE: Vale Columbia Center; McKinsey Global Institute analysis

3,0

2,0

0

1,5

2,5

Inf. class Rail Port Pipelines Water Power Power Power

Type of industry Bulk Bulk Gas Bulk Bulk Base Precious

Number of projects assessed 7 4 1 1 2 2 2

Range of costAverage cost

Range of benefitAverage benefit

Of course nuances are needed: not all commodities present the same opportunities

!

1 Source Reverse the curse: Maximizing the potential of resource-driven economies, McKinsey Global Institute, December 2013 : !

!!!

!

!

!

70% shareable between operators

30% shareable between mining industry and other users

Taking all those nuances into account, the potential for shared use is tremendous !

Extractive industries will invest !

$2tn  (cumulated)  by  2030  

10

CASE STUDIES!

11

Rail and Port Case Study: Northern Mozambique - Nacala Corridor

S  Vale, main concessionaire to finance: S  US$3.4bn railway

investment

S  US$1bn port investment

S  Corridor is already open access and will continue to be under Vale: S  4mtpa of 22mpta capacity

believed to be reserved for general cargo

S  Passenger services to continue running

S  Reportedly, corridor design allows capacity expansion (up to 30 mtpa)

MOÇAMBIQUE*

MALAWI*

Nacala*

504,2km(

Entre

(Lagos((

Moa4ze( Cuam

ba(

Lichinga(

Nacala*Velha*

Branch(Off(

~(262km(

79,1km(

98,6km(

138,5km(

62,5km(

2*

3*

4*

1* CLN(

CDN(

CEAR(

VLL(

Name Shareholders Construction/Rehabilitation

80%(Vale(20%(CFM(

51%(SDCN((49%(CFM(

100%(Vale(

91,8((/((0((km(

0(((/(845,3(km(

0((/(98,6(km(

138,5(/(0(km(

Total Distance

91,8((km(

911,3((Km(

138,5((Km(

797(((Km(

Nakaya(

Cambulatsissi(

29,3km(

(~66km((

~400km(

~298((km(

Fronteira(

Makhanga(

Port

Coal(Terminal(Exis4ng(Port(

51%(SDCN((49%(CFM(

Corridor Distance

91,8(km(

583,3(Km(

98,6Km(

138,5((Km(

U(

U( !Source: Vale

Rail and Port Case Study: Mozambique - Nacala Corridor

From a logistic corridor, Nacala can become a development corridor…

Resource-based African Development Strategy

RADSRADSAnchor & “cluster”

Stranded investment

Stranded investment

Anchor & “cluster”

Agri-node & “cluster”

feede

r

“TRUNK” Infrastructure: PPP

Idealised DC ConfigurationIdealised DC Configuration

Problem feeder

Problem feeder

“DENSIFICATIONDENSIFICATION””Feeders often need Feeders often need to be funded thruto be funded thru’’

fiscus/grantfiscus/grant

DC logistics “catchment”

Source: P. Jourdan

…but it is not easy to implement shared use on the strategic rail – port logistic chain

•  Who will bear the capital of extra-capacity / capacity-expansion?

•  Who will be bear the cost of coordination and logistic efficiency loss?

•  Can the government afford the costs of building the capacity of a regulatory body to supervise shared use?

•  Can the government afford subsidies for less-profitable services?

•  Will the multi-purpose project be bankable?

The “Power” problem – insufficient demand leading to insufficient supply

0 20 40 60 80

100 120 140

1P Gas Reserves (bcm)

0

10000

20000

30000

40000

50000

Hyrdo Power Potentials (MWe) •  33   out   of   48   countries   in   Sub-­‐Saharan   Africa  have  national  power  systems  of   less  than  500  MW  

 •  11   countries   have   national   power   systems   of  less  than  100  MW.    

•  Few countries have had enough demand to justify power plants large enough to exploit economies of scale whereas cheap and clean energy reserves are plentiful !

•  Results: Reliance on expensive imports of fuel for power generation

•  Let’s use the Power of the Mines: Mines’ anchor demand can unlock the stalemate !

Source: World Bank

Power case Study: DRC’s Copper Belt - Inga Dam and Katanga Mining

•  DRC Inga 2 – Hydro Dam and transmission lines in disrepair

•  If copper mines could source from the hydro-based grid : cost 0.18$/kwh but instead incur cost of diesel generation – 0.30$/kwh

•  Katanga Mining (Glencore) : $283.5 million loan to DRC’s utility to upgrade Inga 2’s electricity generation and transmission networks

•  Katanga Mining : reimbursed through utility bill credits + utility pays interest

•  Utility gains an upgraded network : future clients, backbone for distribution lines

•  Mining co gains access to cheap reliable supply Win – Win!

Water case studies: Mine provides excess water to community

•  Mine operations require to drain mining pit •  eMalahleni municipality in South Africa - a water reclamation plant

from 5 mines pumpint out 40-50 million liters/day of excess ground water. After water treatment, around 80,000 people are supplied with water.

•  Mines required to construct a desalination plant for its operations in the desert

•  Namibia: Areva uranium mine’s desalination plant has 30% excess capacity about to serve half of the region’s water requirements.

•  Use treated waste water from mine or neighboring communities •  The Cerro Verde copper mine in Peru about to build a water treatment

plant for the wastewater of Arequipa city to meet its water needs and improve the water quality for downstream communities.

How do you incentivize that? : “0 water discharge”, “Restricted access to water rights “ !

ICT case studies: Exploit economies of scope to install the fiber optics

1. Mine builds own

infrastructure

2. Mine does not build own infrastructure

a) Telecom adds capacity.

b) Mine adds telecommunication capacity and leases to Telecom.

b) Mine provides anchor demand for

Telecom.

a) Telecommunication capacity is added to required mining infrastructure at a lower cost (e.g. power, pipeline and

railways).

Ownership model Service Arrangement

c) Government, Telecom and mining companies coordinate efforts and

investments.

Example: Malaysia

§  Celcom and Petronas build fiber optic network along gas pipeline with spare capacity.

Example: Brazil

§  In 2001 Vale wanted to partner with railroad partners and install fiber optic along 10,000km of rail lines and lease to Telecoms.

Example: Mozambique: •  Ncondezi Coal as an anchor customer for

service provider Vodacom. •  Expansion of coverage to 10km around

tower (3,000 contracts).

Credible Utility

Necessary pre-conditions to make shared use & resource corridors work

Strong Planning

Framework

Independent Regulator

Sound and Clear Legal Framework

Maximise Infrastructure - Mine Synergies

Thank you!

ptoled@law.columbia.edu

CCSI’s Framework for Shared – Use:

http://www.vcc.columbia.edu/content/leveraging-infrastructure-investments-

development