After years of wrangling over the ownership of the plant and an associated power purchase agreement (PPA), the fate of the Cahora Bassa hydroelectric plant on the river Zambezi in Mozambique has finally been settled. Disagreements over ownership and the tariffs paid by South African power giant Eskom, plus doubts over the fairness of contracts drawn up during the colonial era, prevented a resolution of the scheme’s fate during the 1990s. Now, however, a final agreement between the governments of Mozambique and Portugal could trigger the development of other hydro schemes in a region that is becoming increasingly power hungry.

The project was originally constructed in the 1960s by a consortium of South African and European investors, at a time when white minority governments controlled much of southern Africa. The 2075MW plant was completed in the western province of Tete in 1974 just before independence. The main aim of the venture was to export electricity to neighbouring South Africa. Equity in the scheme’s operating company, Hidroelectrica de Cahora Bassa (HCB), was held by the Portuguese state (82%) and Mozambique’s state owned power utility Electricidade de Moçambique (EDM) (18%). The five turbines have nameplate capacity of 415MW but the facility has not operated at full capacity for some time.

At the start of November, the government of Mozambique signed a memorandum of understanding (MoU) with Portugal transferring ownership of Cahora Bassa to the southern African country. Under the new deal, Portugal will retain only a 15% stake in HCB, with Mozambique taking the remaining 85% equity. Maputo is required to pay Lisbon US$950M in compensation for the reconstruction of the dam and power plant, which Portugal financed at the end of the Mozambican civil war, although some sources estimate that the Portuguese government actually invested much more than this during the 1990s. One third of each holding can be sold to third parties if the Mozambican government decides to attract additional private sector investment. Reports in some African newspapers suggest that Eskom could be a likely buyer. Despite the conclusion of the deal, some details have still to be determined, including the fate of the Portuguese staff employed at the plant.

Emerging from several days of talks, Mozambique’s President Armando Guebuza said that the deal ‘reveals the good level of understanding and relationship between the two governments and peoples’ and ‘projects a future based on mutual trust for a better relationship’. He added: ‘This agreement will allow Cahora Bassa to be returned to the hands of Mozambique in a short period of time.’ Portuguese Prime Minister Jose Socrates responded: ‘It closes a chapter of the past and it opens up a future of mutual trust and with the potential of bilateral cooperation.’ The South African government also backs the deal. Guebuza commented: ‘South Africans support in a very special way the positions taken in that memorandum and South Africa’s expectations coincide with our intentions. We will continue to ensure that South Africa gets the power at the current levels.’

The Mozambican government had hoped to take over HCB shortly after the country’s devastating civil war ended in 1992 but the financial difficulties afflicting the scheme made this difficult. The opposition Renamo group had attacked the transmission lines connecting Cahora Bassa with South Africa, preventing electricity exports for 14 years. As a result, HCB was unable to earn enough income to service its construction debt, with the result that the company’s debt to the Portuguese government rocketed to US$2B. However, years of work rebuilding or replacing thousands of pylons allowed HCB to resume its power exports and the company now makes an operational profit.

Portugal originally offered to transfer its shares in HCB to Mozambique when the company began to gradually reduce the US$2B, but the eventual size of the debt made this impossible. Previous negotiations have also faltered because of regular changes of government in Portugal and even the latest round of negotiations looked destined to fail – when they began Portugal was still claiming US$2.3B. The Portuguese decision to greatly reduce the price tag on the project seems to have been prompted by Lisbon’s desire to promote good relations with Mozambique. Portugal’s influence in its former African colonies has waned somewhat in recent years and Mozambique’s decision to join the British Commonwealth was seen as a further threat to lusophone culture in Africa.

Details of the deal

HCB will be required to pay the Portuguese government US$250M in two installments in 2006, while the outstanding payment must be handed over within a year of signing the final agreement. The signing ceremony was due at the start of 2006, although the deal allows for a six month extension for part of the debt. In addition, the US$300M that Mozambique owes directly to Portugal may be written off as part of the wider European Union (EU) debt agreement with heavily indebted countries in Sub-Saharan Africa.

The Mozambican government insists that it will be able to pay the agreed sum. A government spokesperson said: ‘The Mozambican economy is operating fully and recording very satisfactory levels of growth. Citizens contribute through payment of taxes and the country exports some products at a considerable volume. All this leads us to believe that we have the capacity to meet our undertakings.’

The Cahora Bassa facility now supplies electricity across the Southern African Power Pool (SAPP), bringing much needed export revenues into the country and promoting economic integration across the Southern African Development Community (SADC) region. Although the Grand Inga hydro proposal in Democratic Republic of Congo (DR Congo) would be by far the biggest hydro venture in the SADC region, Cahora Bassa is currently the most important source of electricity exports within the SAPP.

Eskom currently purchases 60% of the plant’s output, although it is not operating at maximum capacity. Under the long term deal, Eskom is contracted to purchase 1400MW from HCB, although in recent years much of this has been sold on to Zimbabwe. In 2002, HCB cut the amount of electricity supplied to South Africa because of a dispute over the level of payment. Electricity is sold at a very low rate, even by South African standards, where Eskom offers the lowest tariffs in the world.

Prospects for new hydro?

While post-conflict Mozambique has been very successful at attracting multi-billion dollar investment in a number of sectors, including aluminium and gas, it has so far been unable to attract foreign investors to commit themselves to new hydro projects. Mozambique has several sites for potential for new dam projects and both domestic and regional demand for electricity are rising steadily. However, potential investors seem to have been deterred by the impasse over the future of Cahora Bassa and problems over the contract between HCB and Eskom.

Improvements in transmission infrastructure across Southern Africa and 33% average annual growth in the amount of electricity traded within the SAPP could trigger further investment in Mozambique’s hydro sector. DR Congo possesses the most hydro potential in the region but there are still major doubts over the security situation in that country, while Mozambique is now regarded as one of the most stable countries in Africa. It is also well placed to supply South Africa and other states within the SAPP.

From a political point of view, the deal gives Maputo far more control over its own economic resources and one of Africa’s biggest dams. As a symbol of national reconstruction, the Cahora Bassa dam and the deal with Portugal could encourage the development of other hydro schemes that have been on the drawing board for some time.

One option, which is favoured by the government, is to expand capacity at Cahora Bassa and an addition of 550MW capacity has been mooted. Now that Maputo holds a controlling stake in the venture, it can attempt to secure funding for an expansion programme. As a particular favourite of multilaterals such as the IMF, financial support could be forthcoming.

The most likely alternative or additional project is the Mepanda Ncua scheme, which would be located on the River Zambezi 70km downstream from Cahora Bassa. The government first approached investors with a view to developing the project in 2002. Investment of around US$1.3B would produce generating capacity of between 2000MW and 2400MW. No contract was signed at that time but Maputo is hopeful that the required investment can be secured over the next one to two years.

About 100km2 of land would be covered by the new reservoir, although only 1000 people would lose their homes and there is relatively little farming land in the area. Construction is expected to take eight years. A preliminary environmental impact assessment (EIA) and a social impact survey have already been carried out by the government’s Technical Unit for the Implementation of Hydroelectric Projects (UTIP).

Other projects have also been discussed. In September, the United States Trade and Development Agency (USTDA) agreed to fund a US$600,000 feasibility study by Mozambican Electricity Company (EDM) into the development of two hydroelectric projects on the river Lurio in the north of Mozambique. In addition, consultancy firm Norconsult of Norway has also been commissioned to carry out a feasibility study into the construction of a dam on the river Incomati in Maputo Province. However, most new capacity is likely to be developed on the river Zambezi – it is the biggest river in eastern Africa and accounts for two-thirds of Mozambique’s river discharge.

There is certainly enough demand within Mozambique and the wider southern African region to justify further hydro investment. Successful developments elsewhere within the Mozambican economy should also provide a boost to demand. For example, production capacity at the Mozal aluminium plant near Maputo is to be expanded as long as there is sufficient generating capacity to supply the plant, while the US$500M Corridor Sands Mineral Mining scheme will also increase the strain on existing supplies.

At present, just 5% of the Mozambican population has access to electricity, but following the completion of repairs to the transmission link with South Africa, the government now hopes to fund an electrification programme in a concerted effort to provide power to a far greater proportion of the population. The African Development Fund (ADF) and the OPEC Fund are already part financing separate electrification schemes.

The South African role

Now that the Cahora Bassa deal has been concluded, it is likely that the Mozambican government will redouble its efforts to attract foreign interest in its hydro sector. As its constant interest in expanding the DR Congo’s Inga facilities has demonstrated, Eskom is particularly interested in importing a greater proportion of its requirements from hydroelectric producers in other SAPP member states. Until recently, the company and South Africa as a whole have largely relied upon traditional six pack coal fired plants to generate electricity, but the situation has changed markedly over the past year.

While rising demand for electricity within Mozambique could increase the likelihood of further hydro projects in the country, the South African market is of most importance. The country consumes more power than the rest of the continent put together and after a decade long lull in developing new generating capacity, Eskom is now bringing mothballed coal fired plants back on stream and securing new supplies from domestic and foreign plants. It is developing two gas fired facilities of its own and a tender is to be held for the contract to develop two additional gas plants as independent power producers (IPPs).

The government and Eskom have shown their willingness to increase the country’s reliance on electricity imports by agreeing a PPA to buy electricity from a new 800MW power plant in Namibia that is to be fed by the offshore Kudu gas field. Apart from an understandable desire to make the most of its own energy natural resources, two factors motivate the South African government’s energy policy: minimising its greenhouse gas emissions and boosting regional cooperation, particularly through cross-border power and gas transmission projects.

While the new target of generating 5% of the country’s electricity requirements by renewable means would certainly help with the former, importing power from hydroelectric plants in other SAPP countries would support both aims, while also providing much needed generating capacity for the entire region. As a result, it would not be surprising if state-owned Eskom was to lend its support for further major hydro schemes in Mozambique.

Indeed, Eskom’s backing for any further hydro ventures in Mozambique is almost a prerequisite for their development. As the most likely potential partner, both in terms of a lucrative marketing opportunity and as an investor, the company’s interest in the country is vital. The SAPP is expected to run out of surplus generating capacity sometime between 2007 and 2010, so the demand is certainly already in place.

Existing dams in Mozambique have been blamed for exacerbating the impact of the flooding that devastated many regions in 2000 but Maputo is eager to speed up the industrialisation of the country so any objections are likely to be overcome. As with DR Congo, power sector integration and rising demand look set to trigger new dam construction in the near future.