Natural Gas, Public Investment and Debt Sustainability in Mozambique

Transcription

1 WP/3/26 aural Gas Publc Invesmen and Deb Susanably n Mozambque Govann Melna and Y Xong

2 23 Inernaonal Moneary Fund WP/3/26 IMF Workng Paper Afrcan Deparmen and Research Deparmen aural Gas Publc Invesmen and Deb Susanably n Mozambque Prepared by Govann Melna and Y Xong Auhorzed for dsrbuon by Andrew Berg aherne Pallo and Dors. Ross ovember 23 hs Workng Paper should no be repored as represenng he vews of he IMF. he vews expressed n hs Workng Paper are hose of he auhor(s) and do no necessarly represen hose of he IMF IMF polcy or of DFID. Workng Papers descrbe research n progress by he auhor(s) and are publshed o elc commens and o furher debae. Absrac Mozambque has grea poenal n naural gas reserves and f lquefed/commercalzed he sum of axes and oher fscal revenue from naural gas wll a s peak reach roughly one hrd of oal fscal revenue. Recen developmens n he naural resource secor have rggered a fresh round of much needed nfrasrucure nvesmen. hs paper uses he DIGAR model o smulae alernave publc nvesmen scalng-up plans n alernave LG marke scenaros. Resuls show ha whle a conservave approach whch smply awas LG revenues would mss sgnfcan curren growh opporunes an aggressve approach would lkely mee absorpve capacy consrans and mply a much bgger (and n an adverse scenaro unsusanable) buld-up of publc deb. A gradual scalng up approach represens ndeed a desrable pah as allows ancpang some hough no all of he LG revenue and even n an adverse scenaro keepng publc deb a susanable levels. Srucural reforms affecng selecon governance and execuon of publc nvesmen projecs would sgnfcanly enhance he exen o whch publc capal s accumulaed and mpac non-resource growh and ulmaely deb susanably. JEL lassfcaon umbers: E6; Q32 Keywords: aural resources; Deb susanably Publc nvesmen Mozambque DIGAR Auhor s E-Mal Addresses: govann.melna.@cy.ac.uk; yxong@mf.org ommens and suggesons by Andy Berg Iyabo Masha ahy Pallo Dors Ross Andrea Presbero Sergo Sola Susan Yang Felpe Zanna and semnar parcpans a he Afrcan Deparmen of he IMF and a he Mnsry of Fnance of he Republc of Mozambque are graefully acknowledged. hs workng paper s par of a research projec on macroeconomc polcy n low-ncome counres suppored by U.K. s Deparmen for Inernaonal Developmen. All vews and errors are he auhors.

3 onens Page Absrac... I. Inroducon...3 II. aural Gas Secor n Mozamque: An Overvew...4 III. Predcng LG Revenue: he FARI model...6 IV. Publc Invesmen n Mozambque...8 V. he Macroeconomc Effecs of Invesmen Scalng-Ups...9 A. he DIGAR Model...9 B. Scenaros of LG producon.... Smulaon resuls...2 D. Srucural reforms: he mpac of governance and projec selecon...5 VI. oncluson...6 References...9 Appendces ables A. DIGAR model deals...2 Households...2 Frms...23 Governmen...25 Idenes and marke clearng condons...3 B. Frs-order condons...3 Demand funcons for radable and non-radable goods...3 Labour supply n he radable and non-radable secor...3 Opmzng households decsons...3 Rule-of-humb households decsons...32 on-radable secor s decsons...32 radable secor s decsons albraon...33 able. ounres wh World s Larges Proven aural Gas Reserves...5 able 2. Represenave EP Parameers...7 able 3. albraon...33 Fgures Fgure. LG Secor onrbuon o GDP and Fscal Revenue...8 Fgure 2. Mozambque: Publc apal Expendure Fgure 3. LG Revenue Smulaons n he Baselne and Adverse Scenaros....2 Fgure 4. Publc Invesmen Scalng-Ups and Growh Oucomes....3 Fgure 5. Fscal onsequences of Publc Invesmen Scalng-Ups....4 Fgure 6. he Effecs of Improvemens n Projec Selecon and Beer Governance and Execuon...6

4 3 I. IRODUIO Mozambque s expeced o become a major naural gas producer and lquefed naural gas (LG) exporer n Sub-Saharan Afrca. Ol companes have dscovered remendous naural gas reserves n he Rovuma Basn off he norhern coas of he counry. Accordng o he busness plans lquefacon and ransporaon facles are o be bul and by md-22s Mozambque would be exporng ens of mllon ons of LG o he res of he world n urn brngng n bllons of dollars of revenue back o he counry each year. As s shown n hs paper developmens n he naural gas secor wll ransform he landscape of he Mozambcan economy. Accordng o he resuls of he Fscal Analyss of Resource Indusres (FARI) model f he LG projecs maeralze as planned LG wll become Mozambque s sngle larges exporng secor and conrbue up o around one hrd of fscal revenue. Alhough LG producon s no projeced o sar unl around 22 Mozambque would see he mpac of he LG secor on he economy much sooner. In ancpaon of fuure LG revenues he governmen expecs o have easer access o fnancng and o be able o expand s publc nvesmen program before LG producon sars. Publc nvesmen can help close he nfrasrucure gaps posvely mpacng producvy and hence non-lg oupu and growh. hs n prncple should allow he res of he economy o benef from he LG secor boom. However nvesmen scalng-up has s lms. he level of publc deb ncreases along wh nvesmen scalng-up. As a resul f publc nvesmen s scaled up oo quckly deb levels wll skyrocke o he exen ha may desablze he economy. Moreover f publc nvesmen ncreases oo quckly he degree of neffcency s lkely o ncrease as nvesmen wll more lkely bump no absorpve capacy consrans and hence a bgger par of nvesmen expendures would be wased. hs would also mpac deb susanably. We analyze hese ssues and evaluae he coss and benefs of publc nvesmen scalng-up hrough he lens of he Deb Invesmen Growh and aural Resources (DIGAR) model. hs model s desgned o analyze he publc nvesmen and growh nexus ogeher wh deb susanably and naural resource revenue managemen n developng counres. he framework s based on a Dynamc Sochasc General Equlbrum (DSGE) model developed by Melna e al. (23) a he Research Deparmen of he IMF. DIGAR merges he model for deb susanably analyss n Buffe e al. (22) wh ha for naural resource revenue managemen n Berg e al. (23) and Inernaonal Moneary Fund (22) and nroduces some addonal feaures such as a publc nvesmen pah ha can poenally exhb fronloadng he degree of whch can be parameerzed and fscal buffers he lower bound of whch represens a polcy choce. As he analyss of he Mozambcan case has a medum- o long-run horzon we calbrae he model a an annual frequency. Model parameers are calbraed o f he conex of Mozambque. We use he model o smulae oupu and publc deb pahs under dfferen publc nvesmen sraeges. hese sraeges nclude a conservave approach n whch publc nvesmen does no ncrease a all before LG producon sars; a gradual approach n whch publc nvesmen rses gradually before LG producon sars; and an aggressve approach n whch nvesmen ncreases massvely early on.

5 4 he modelng framework also allows us o assess he mpac on oupu and deb of unceranes ha ypcally surround LG markes. We compare beween wo scenaros: a baselne scenaro n whch LG producon s on rack and LG prces follow a pah observable n normal mes and an adverse scenaro n whch average LG producon s down by 2 percen and here are negave LG prce shocks of a sze ypcally observable n ol and gas marke crses. Our man resuls sugges ha publc nvesmen has a grea poenal of urnng LG wealh no hgher non-resource growh n Mozambque. More specfcally a gradual publc nvesmen scalng-up ancpang some bu no all fuure LG revenue would be approprae n order o balance Mozambque s remendous nfrasrucure nvesmen needs wh he uncerany regardng LG producon/revenue. In conras due o absorpve capacy consrans an aggressve approach s no lkely o yeld angbly beer growh oucomes and poses hreas o deb susanably. he remander of he paper s srucured as follows. Secon II provdes an overvew of LG developmens n Mozambque. Secon III presens he resuls of he FARI model n projecng LG revenue. Secon IV provdes some background on Mozambcan publc nvesmen. Secon V presens he DIGAR model and s predcons on he macroeconomc effecs of publc nvesmen scalng-ups. Secon VI concludes. he model equlbrum condons and calbraon are appended o he paper. II. AURAL GAS SEOR I MOZAMIQUE: A OVERVIEW Mozambque has long been recognzed o have poenal n hydrocarbon resources. he Pande and emane gas felds were dscovered n he 96s bu cvl unres n he 97s and 98s haled n gas exploraon acves. Exploraon resumed slowly n he 99s parly reflecng low ol prces. Acvy acceleraed n he early 2s as ol and naural gas prces rose globally. In 23 Sasol a Souh Afrcan ol company carred ou exensve exploraon n he Pande/emane onshore blocks n he Souh of he counry ncreasng gas reserves o 5½ rllon cubc fee (F). Mozambque sared o expor gas o Souh Afrca hrough ppelnes n 24. Alhough he early gas dscoveres and commercal acves were concenraed n he Souh he fuure of naural gas secor n Mozambque les n he norhern regon. Geographc survey resuls show ha he Rovuma basn offshore close o he Mozambque-anzana border has grea poenal n hydrocarbon reserves. he Mozambcan governmen has conraced exploraon and producon agreemens wh a number of nernaonal parners snce 26. Exploraons o dae revealed enormous amoun of recoverable naural gas reserves n offshore Areas (operaons led by he US-based ol company Anadarko) and 4 (operaons led by he Ialan ol company EI). oal gas reserves dscoveres n he wo areas combned reach 2 F and are expeced o ncrease furher. he dscoveres hus far have made Mozambque s naural gas reserves he second larges among all sub-saharan Afrcan counres comparable o gera s (able ). he naural gas dscoveres n he Rovuma basn creaed he possbly for Mozambque o become a major naural gas exporer. he offshore naure and geographc locaon of he gas reserves made economcally feasble o lquefy and ranspor naural gas o Souh and Eas

6 5 Asa where he demand for naural gas has been growng fas. he sze of confrmed reserves can suppor large-scale LG producon over a long me horzon. able. ounres wh World s Larges Proven aural Gas Reserves* (n rllons of cubc fee) ounry Reserves Iran 87 Russa 63 Qaar 885 urkmensan 68 Uned Saes 3 Saud Araba 29 Uned Arab Emraes 25 Mozambque 2 Venezuela 95 gera 8 Algera 59 Ausrala 33 Iraq 27 hna 8 Indonesa 5 * As of end-22 excep for Mozambque. Sources: BP Sascal Revew of World Energy June 23 Mozambcan auhores and IMF saff calculaons. he curren plan of Anadarko and EI s o jonly develop an onshore LG manufacurng se whch s near Areas and 4 and buld four LG plans ( rans ) o produce LG. LG can be drecly shpped o he desnaons from he manufacurng se. We assumed ha each ran wll have he capacy of producng 5 mllon ons of LG per year and ha he consrucon of one ran akes approxmaely fve years. Gven he scale of he consrucon work and logscal consrans s no possble o buld he four rans smulaneously. onsrucon of he frs ran s expeced o begn n 24-5 and he frs ran s expeced o sar producon before 22. onsrucon of he second ran would sar one year afer ha of he frs ran and producon would begn one year laer as well. onsrucon of he hrd and fourh rans could sar 2 years afer he second ran. Maxmum capacy would be 2 mllon ons per year once all four rans become operaonal. 2 he producon plan descrbed above s used as he workng assumpon for he analyss of hs paper. he planned four LG rans are expeced o consume only a small fracon 2-24 F of he proven naural gas reserves n he Rovuma Basn. echncally he naural gas reserve can suppor a much larger scale of LG producon n he Rovuma basn. However he realzaon of LG producon wll depend on a lo of facors such as world prces movemens fndng nvesors and cusomers securng fnancng and consrucon 2 Source: IMF (23) Saff Repor for he 23 Arcle IV onsulaon IMF ounry Repor o. 3/2.

7 6 capacy consrans. Because of hese unceranes we ake he four-ran LG producon scenaro as he baselne for our analyss. III. PREDIIG LG REVEUE: HE FARI MODEL We projeced he conrbuon of he LG secor o GDP and revenue usng he Fscal Analyss of Resource Indusres (FARI) model developed by he IMF Fscal Affars Deparmen (FAD) he deals of whch can be found n IMF (22). he FARI model forecass he conrbuons of specfc mnng and/or peroleum projecs o fscal revenue balance of paymen and naonal accouns. Inpus o he model nclude producon expors cos srucure and prces assumpons as well as fscal regme parameers. albraon of he FARI model o f he conex of he Mozambcan LG projecs was done by wo FAD echncal asssance mssons o Mozambque n 22 and 23. Based on her resuls we updaed he producon and cos assumpons n he model o reflec he planned four-ran projec as descrbed n he prevous secon. he key assumpons for he LG projecs are as follows: LG producon s projeced o sar n 22. Producon n he frs year s projeced o be 5 mllon ons or a quarer of he full capacy because only one of he four rans s expeced o be operaonal n he frs year. A second ran wll become operaonal by end-22 boosng producon o mllon ons n 22 and 222. LG producon wll reach he maxmum capacy of 2 mllon ons per year n 223. oal nvesmen s projeced a $4 bllon over he projec horzon roughly half-half spl beween he upsream (naural gas exracon and nal processng) and he mdsream (lquefacon). On he upsream sde he cos of upfron exploraon and developmen s expeced o reach $5 bllon by 22 and anoher $5 bllon wll be nvesed n drllng over he projec horzon o manan gas producon levels. On he mdsream he consrucon of he LG plans and supporng nfrasrucure s projeced o cos $2 bllon beween 24 and 222. Fnancng for he nvesmen wll be 3 percen n equy and 7 percen n deb. Deb fnancng s assumed o be on commercal erms. Separaon of upsream (naural gas mnng) and mdsream (lquefacon). Gas lquefacon wll be under a separae eny from he upsream. he upsream gas mnng company wll have naural gas lquefed by he LG plans and pay servce fees o he mdsream company. he nernal rae of reurn (IRR) for he mdsream projec s assumed a 8 percen for he purpose of deermnng he cos of gas lquefacon. LG prces wll follow ol prce movemens over he medum erm. We obaned ol prce projecons from he IMF Aprl 23 World Economc Oulook. A slope coeffcen of.4 s appled o oban medum erm naural gas prce projecons. he LG prce s assumed o be consan n real erms over he long run from 28 onwards.

8 7 Fscal regme. he fscal regme for he naural gas acves comprses hree man elemens: a producon ax (royaly) a producon sharng agreemen and a corporae ncome ax leved on he profs of he conracors. Dealed fscal rules are se ou n he Exploraon and Producon oncesson onracs (EPs) negoaed beween he governmen and he conracors. he EPs for Anadarko and EI s exploraons have boh been sgned n 26. Represenave parameers from exsng EPs are used o calbrae he FARI model (able 2). he erms of he wo specfc EPs reman confdenal. he R-facor s a cos recovery parameer ha deermnes he share of prof gas earned by he governmen. I s calculaed as he rao of he concessonare s cumulave cash nflows ne of operang coss and ax o s cumulave capal expendures. Accordng o he represenave seng he governmen s producon share sars a percen and wll gradually ncrease o 6 percen as he R-facor ncreases. able 2. Represenave EP Parameers ax ax Rae Royaly 2% os recovery lm 65% R-Facor Share Prof Peroleum / Gas. % 2. 2% 3. 3% 4. 5% > 4. 6% orporae Income ax In frs 8 years from producon sar 24% Afer frs 8 years 32% Dvdend whholdng ax % Subconracor whholdng ax 2% Source: aonal Peroleum Insue of Mozambque (IP). FARI model resuls show ha he naural gas projecs would brng n sgnfcan economc benefs o Mozambque. Expors peak a 3 percen of non-ol GDP and he sum of axes and oher fscal revenue from naural gas a s peak reach 9 percen of non-ol GDP or roughly one hrd of oal fscal revenue (Fgure ). he governmen s share s projeced o be small n he frs few years when gas producon volume s small and he bulk of he revenue s used o cover coss. Revenue s expeced o surge n 223 when all four LG rans become operaonal and would gradually ncrease aferwards. he composon of revenue also changes over he projec horzon. A frs he man source of revenue s subconracor whholdng ax. orporae ncome ax and payoff from publc enerprse parcpaon wll pck up a few years afer he projecs sar. Revenue from EP producon sharng wll be small a he begnnng bu he share of prof gas wll ncrease gradually along wh he R-

9 8 facor. Evenually prof gas wll become he man source of revenue accounng for more han half of oal LG-relaed fscal revenue. Resuls from he FARI model are used o calbrae he narual resource revenue n he DIGAR model (see Secon V). Fgure. LG Secor onrbuon o GDP and Fscal Revenue (n percen of non-coal non-lg GDP) Sae Parcpaon orporae Income ax Royaly Whholdng ax Prof Gas LG Expors (rgh scale) Sources: Mozambcan auhores and IMF saff esmaes from he FARI model. IV. PUBLI IVESME I MOZAMBIQUE Mozambque has had relavely hgh publc nvesmen levels hroughou s pos-conflc hsory. Publc capal expendure exceeded percen of GDP n 6 ou of he pas 2 years (Fgure 2). he hgh level of nvesmen has been suppored by foregn gran and deb fnancng and ncreasngly by domesc fnancng n recen years. Publc nvesmen wen largely no nfrasrucure: roads pors power plans and elecrcy waer and sanaon schools and hospals. he need for nfrasrucure nvesmen was sgnfcan: exsng nfrasrucure was eher desroyed or poorly mananed f a all durng he long-lasng cvl war. However s cosly o buld and manan nfrasrucure n a hnly populaed counry (populaon of abou 25 mllon wh.8 mllon square klomeers of land--wce he sze of alforna). weny years afer he end of conflc nfrasrucure gaps reman one of he major consrans o growh and developmen (Domnguez-orres and Brceno-Garmenda 2). Recen developmens n he naural resources secor have rggered furher nfrasrucure nvesmen. owns and ces are expandng near he coal mnes n ee provnce. Ralways and pors need o be expanded o shp coal from he landlocked mnes overseas. Mapuo he

10 9 capal of Mozambque s becomng ncreasngly densely populaed and requres upgrades n roads elecrcy and oher urban nfrasrucure. he governmen s ryng o address hese needs by expandng publc nvesmens. In he process he publc deb sock s rsng. Wha are he radeoffs here? How can hey srke he rgh balance beween developmen needs nvesmen effcency and preservng fscal susanably? he res of he paper res o answer hese quesons by applyng he DIGAR model calbraed o f he conex of Mozambque. Fgure 2. Mozambque: Publc apal Expendure Foregn fnanced Domescally fnanced Source: Mozambcan auhores. V. HE MAROEOOMI EFFES OF IVESME SALIG-UPS A. he DIGAR Model he Deb Invesmen Growh and aural Resources (DIGAR) model s desgned o analyze he publc nvesmen and growh nexus ogeher wh deb susanably and naural resource revenue managemen n developng counres. In parcular he framework s a small-economy model wh lmed asse marke parcpaon o capure he presence of agens ha do no have access o fnancal markes n developng counres. he producon sde of he model exhbs () a raded goods secor feaurng learnng-by-dong exernales o capure he effecs of he Duch dsease ha may arse due o naural resource booms; () a non-raded goods secor; () and a naural resource secor. A ypcal frm n he raded ( ) and non-raded ( ) good secors produces oupu j accordng o echnology y k L k G j j = z j j j j y j ()

11 where z j s a oal facor producvy scale parameer k j s end-of-perod prvae capal k j s end-of-perod publc capal s he labor share of secoral ncome and G represens he oupu elascy wh respec o publc capal. he model also feaures neffcences and absorpve capacy consrans for publc nvesmen and a me-varyng deprecaon rae of publc capal o capure lack of manenance n lne wh he emprcal leraure for developng economes (see Gupa e al. 2 among ohers). Domnguez-orres and Brceno-Garmenda (2) esmaed ha ou of Mozambque s $664 mllon expendure per year on nfrasrucure durng he lae 2s as much as $24 mllon was los o neffcences annually. I I GI o reflec hs effecve nvesmen g~ GI g where s he percen devaon g I I of publc nvesmen from s nal seady sae g s gven by I g f GI GI g I (2) GI g I GI GI GI g I f GI > GI GI where represens seady-sae effcency and (] governs he effcency of he poron of publc nvesmen exceedng hreshold n erms of percen devaon I from he nal seady sae. In parcular we assume ha g akes he followng specfcaon: I g =exp GI GI (3). In oher words f governmen nvesmen expendure devaes from he nal seady sae GI more han he effcency of he addonal nvesmen decreases o an exen proporonal o he sze of he devaon. hs mechansm capures absorpve capacy consrans n developng counres. he severy of absorpve capacy consrans s measured by parameer. he law of moon of publc capal s k ~ G = G kg g (4) where G s a me-varyng deprecaon rae of publc capal whch capures he dea ha lack of manenance shorens he lfe of exsng capal. Deals on how G s modeled are provded n Appendx A. he pah of publc nvesmen scalng-ups s chosen accordng o he counry s plans and/or o assess alernave scenaros. Publc nvesmen can be fronloaded and he degree of he fronloadng s lnked o he degree of nvesmen neffcency. GI

12 As far as fscal polcy s concerned he model has a fund where any posve dfference beween nflows (ncludng naural resource revenue) and ouflows (ncludng nvesmen expendures) are saved and he lower bound of hs fund s a polcy choce. he fund s drawn down when such a dfference s negave. However when he fund reaches a chosen lower bound hen one or more fscal nsrumens reac o close eher nsananeously or by emporarly allowng accumulaon of publc deb and sasfyng he governmen neremporal budge consran n he long run. In he case of Mozambque where naural resource exploaon s a recen phenomenon and vrually no fscal buffers have been ye accumulaed we se a lower bound of zero for he fund whch effecvely becomes a nonnegavy consran for governmen asses. he model allows four fscal nsrumens o close he fscal gap (consumpon ax labor ncome ax governmen consumpon and governmen ransfers). For smplcy where needed we allow only he consumpon ax o sablze deb n he long run and leave he oher nsrumens a her nal seady sae. Alhough he use of oher nsrumens combned or n solaon mply somewha dfferen macroeconomc dynamcs he boom-lne of he resuls oulned below s robus o such choces. For full deals of he model he dervaon of equlbrum condons and calbraon see he Appendx. B. Scenaros of LG producon aural resource markes are ypcally surrounded by subsanal uncerany. One bg source of uncerany s he prce volaly whch characerzes commody markes. However nonrenewable naural resources are also subjec o exhausbly.e. o he fac ha he endowmen of a parcular naural resource wll be wped ou compleely a a ceran pon n he fuure. In addon here may be cases n whch whle he endowmen of a naural resource has no been exhaused marke condons may make s exracon and dsrbuon unfeasble or un-economcal and as a consequence s producon sops or consderably dmnshes. hs uncerany s refleced n he revenue ha he governmen may rase from naural resources. Alhough n many cases naural resource secor oupu s also dependen on publc nvesmen s no he case for Mozambque because he LG secor s mosly offshore and does no depend on any publc nfrasrucure. In order o show he consequences of shocks o LG revenue n he Mozambcan case we analyze wo scenaros ha we depc n Fgure 3:

13 2 Fgure 3. LG Revenue Smulaons n he Baselne and Adverse Scenaros. Baselne Scenaro LG producon (MMF) 5 5 Adverse scenaro LG producon (MMF) LG prce (USD per MMBU) 2 5 LG prce (USD per MMBU) a. resource revenue (% of o. rev.) 4 a. resource revenue (% of o. rev.) a baselne scenaro n whch he LG producon s n lne wh ha used for he revenue projecons obaned from he FARI model (as dscussed n Secon III) and a prce pah observable n normal mes. In parcular producon sars n 22 and reaches a level of bllon cubc fee by 223. In hs scenaro LG revenue rses o a peak of 4 percen of oal fscal revenues. 2. an adverse scenaro n whch average LG producon s smaller (8 percen of he level n he baselne scenaro) here are negave LG prce shocks of a sze ypcally observable n ol and gas marke crses as well as an earler exhauson of gas reserves. Hence hs scenaro feaures negave shocks boh o producon and prces. In hs scenaro LG revenues reach a peak of 2 percen of fscal revenues.. Smulaon resuls In hs secon we smulae he effecs of alernave publc nvesmen scalng-up plans n Mozambque. hese plans represen alernave polcy decsons ha governmen may ake and are se exogenously o he model. DIGAR represens a ool o assess he macro-fscal mplcaons of such plans. In parcular he effecs of he alernave nvesmen plans on non-lg growh and her fscal consequences are repored n Fgures 4 and 5 respecvely. In he fgures publc nvesmen publc capal and non-lg GDP are repored n real

14 3 erms as percenage devaons from he rend growh pah whou addonal resource revenue from he 22 level he nal seady sae for he smulaons. he smulaons ake no accoun projecons or assumpons of he LG prce LG producon publc nvesmen ad and he endogenous response of he macroeconomy o hese shocks. As a resul hey absrac from oher shocks ha may lkely affec macroeconomc oucomes. Smlarly addonal non-lg GDP growh refers o he componen of non-lg growh o be ascrbed o publc nvesmen scalng-ups. We focus on hree alernave approaches o publc nvesmen scalng-ups.. Under a conservave approach no addonal publc nvesmen s made unl LG producon sars n 22 hen gradually ncreases up a level 5% hgher han 22 n real erms. 2. Under a gradual approach publc nvesmen s gradually ncreased n ancpaon of LG producon and revenue and reaches s new level by he me producon s n place. 3. Under an aggressve approach publc nvesmen s massvely fronloaded and exhbs subsanal overshoong (up o 8 pons of GDP). Fgure 4. Publc Invesmen Scalng-Ups and Growh Oucomes. Publc nvesmen (% dev from 22 level) Average publc nvesmen effcency (%) on-lg GDP (% dev from 22 level) Prvae nvesmen (% dev from 22 level) Publc nvesmen (% of GDP) Publc capal (% dev from 22 level) Addonal non-lg GDP growh (%) Domesc real neres rae (%) onservave Gradual Aggressve

15 4 Fgure 5. Fscal and Real Exchange Rae onsequences of Publc Invesmen Scalng-Ups. Across he hree approaches oal publc nvesmen expendures over he smulaon horzon dffer. Hence by comparng oucomes he model allows choosng boh he level and degree of fronloadng approprae o he counry s characerscs and goals. A conservave approach smply awas he LG revenues. Spendng on growh-enhancng nvesmen projecs would ncrease only n he years when LG producon sars. Publc deb does no rse as a share of GDP and declnes over he longer erm hus no fscal adjusmen s requred and hence no reducon n prvae consumpon s generaed. he sar of LG producon would allow buldng srong fscal buffers n he form of governmen savngs (up o 6 percen of GDP n he baselne scenaro of he LG marke). he gradual approach allows ancpang some of he LG revenue. Publc deb rses gradually o a peak of 5 percen of GDP n 29-2 hen declnes over he longer erm o more susanable levels hus he requred fscal adjusmen (e.g. n erms of ax ncreases) s small and hs s refleced n a smaller nal fall n prvae consumpon. Unless a conservave approach s adoped n he case of Mozambque where naural resource exploaon s a recen phenomenon and vrually no fscal buffers have been ye accumulaed -- deb accumulaon and/or fscal adjusmens ake place as soon as he nvesmen plan sars. In he baselne scenaro he full roll-ou of LG producon would allow buldng fscal buffers n he form of governmen savngs from 223 on. Boh n he baselne and n he adverse scenaro n he long run he level of prvae consumpon s

16 5 hghes under he gradual approach. Prvae nvesmen s crowded n by publc nvesmen. In fac he ncrease n publc capal ncreases he producvy of prvae capal and hs ranslaes no a hgher level prvae nvesmen and an ncrease n he domesc real neres rae. An aggressve approach would fully ancpae fuure LG revenues and ncrease publc nvesmen spendng massvely early on. However due o absorpve capacy consrans he hgher nvesmen spendng delvers a smlar buld-up n he publc capal sock as under he gradual approach. In fac he fall n he effcency on he addonal publc nvesmen makes average effcency fall by 6 percen pons. he effec on he addonal non-lg growh and on he ncrease n prvae nvesmen and consumpon generaed s dampened smlarly. In fac only for wo years non-lg growh would be hgher n wh he aggressve approach; n he medum o long run he addonal growh generaed s smlar o he gradual approach. An aggressve approach mples a much bgger buld-up of publc deb o 7 % of GDP n 29-2 and would requre a panful fscal adjusmen n order o servce he accumulaed deb leadng o a more pronounced fall n prvae consumpon. In addon he aggressve approach alhough he calbraon assumes a mld home bas for he addonal governmen nvesmen (due o he fac ha much of he nvesmen goods are mpored n low-ncome counres) leads o a relavely more pronounced apprecaon of he real exchange rae (a downward movemen n he chars mples an apprecaon). hs feeds no a relavely lower oupu n he raded secor exacerbaed by he presence of he learnng-by-dong exernaly n ha secor. Hence Duch dsease effecs are more lkely wh an aggressve approach han wh a gradual one. In an adverse scenaro wh lower LG producon lower LG prces and an earler exhauson of gas reserves here would be no room o buld up sgnfcan fscal buffers. Publc deb would () no rse under he conservave approach () rse faser under a gradual approach han n he baselne; () rse explosvely under an aggressve approach requrng panful and susaned fscal adjusmen whou soppng he accumulaon of deb. As repored n he calbraon secon hese smulaons assume ha a leas half of recurren nfrasrucure coss are covered by user fees. Falure o collec fees would exacerbae deb susanably rsks. D. Srucural reforms: he mpac of governance and projec selecon We also use DIGAR o smulae he effecs of srucural reforms n he Mozambcan economy. For example f over me nsuons governance managemen pracces are mproved publc nvesmen becomes on average more effcen hs can be capured as an ncrease n he value of. In oher words he proporon of publc nvesmen expendure ha effecvely augmens he sock of publc nfrasrucure becomes larger. If nvesmen projecs are beer desgned seleced and mplemened he average real reurn of nvesmen G ncreases. hs can be capured by he value of whch n urn deermnes he value of he ne reurn of publc capal n he nal seady sae. In Fgure 5 we repor he non-lg growh effec of such expermens. Gven lack of hsory on he Mozambcan experence n nvesng naural resource revenue n publc nfrasrucure s dffcul o conjecure plausble mprovemens along hese wo dmensons. herefore we op for showng one among many possble examples of good polcy n whch he counry s able o amelorae he

17 6 qualy of s nsuons and he fac ha polces affecng he effcency of publc nvesmen expendures and he producvy of nfrasrucure projecs are powerful nsrumens for achevng superor macroeconomc performances. In parcular we le ncrease from 6% o almos 7% over 8 years. hs posvely affecs he accumulaon of he capal sock relave o he baselne scenaro. Moreover we smulae an mprovemen n projec selecon capacy/process by rasng he annual ne economc reurn on publc nvesmen a he nal seady sae from 5 o 2 percen. Over me hese wo ses of srucural reforms enhance he exen o whch publc capal affecs he producvy of prvae facors for producon wh a more posve mpac on growh and ncomes. In he example provded he combned effec of he wo measures s an ncrease n he addonal non-lg GDP growh rae (relave o baselne) of more han half percenage pon over a perod of more han 5 years. More modes (bgger) mprovemens n nsuonal arrangemens would clearly delver a more moderae (superor) addonal non-lg GDP growh. Fgure 6. he Effecs of Improvemens n Projec Selecon and Beer Governance and Execuon 6 Publc nvesmen (% dev. from 22 level) Average publc nvesmen effcency (%) Publc capal (% dev. from 22 level) on-lg GDP (% dev. from 22 level) Addonal non-lg GDP growh (%) Baselne scenaro (Eff. 6% Re. 5%) Beer governance and execuon (Eff. Re. 5%) do + beer projec selecon (Eff. Re. 2%) VI. OLUSIO he Rovuma basn locaed off he norhern coas of Mozambque and close o he Mozambque-anzana border has grea poenal n naural gas reserves. FARI model

18 7 resuls show ha he naural gas projecs can brng sgnfcan economc benefs o Mozambque and he sum of axes and oher fscal revenue from naural gas could a s peak reach 9 percen of non-ol GDP or roughly one hrd of oal fscal revenue. Recen developmens n he naural resources secor have rggered a fresh round of nfrasrucure nvesmen. Indeed he need for nfrasrucure nvesmen s sgnfcan. Publc nvesmen scalng-up can help unlock Mozambque s growh poenal. However f debfnanced publc nvesmen scaled up oo rapdly may also lead o hgh deb raos or bump no effcency consrans. In hs sudy we used he DIGAR model o smulae alernave publc nvesmen scalngup plans n alernave LG marke scenaros. We consdered hree dfferen approaches owards publc nvesmen scalng-up: a gradual approach a conservave approach and an aggressve approach. In sum a gradual publc nvesmen scalng-up ancpang some bu no all fuure LG revenue would be approprae gven Mozambque s nfrasrucure nvesmen needs and he uncerany regardng LG producon/revenue. he gradual approach ouperforms he oher wo approaches under boh he baselne scenaro n whch he LG projec maeralzes as planned and he adverse scenaro n whch Mozambque suffers negave shocks o boh producon and prces. Under he gradual approach publc deb rses gradually n preparaon of LG producon bu hen declnes over he longer erm o more susanable levels even n an adverse scenaro. In comparson a conservave approach ha smply awas LG revenues s no desrable because pospones poenal addonal growh benefs by almos a decade. A he same me an aggressve approach whch fully ancpaes fuure LG revenues and ncreases publc nvesmen spendng massvely early on s no desrable eher. In fac he hgher nvesmen spendng delvers a smlar buld-up n he publc capal sock as under a more gradual approach. In addon an aggressve approach mples a much bgger buld-up of publc deb whch would become unsusanable n an adverse scenaro wh lower-hanplanned LG producon and lower LG prces. Why s publc nvesmen no he more he merrer? Gven ha LG revenues wll evenually come why no sar nvesng mmedaely so ha he economy can mmedaely benef? he smulaon resuls from he model envsage wo specfc consrans facng Mozambque n lgh of he upcomng LG revenue: Frsly publc nvesmen scalng-up nevably runs no he rule of dmnshng rae of reurn. Invesmen neffcences may arse from many frons: poor plannng hgher-hanexpeced coss bad governance corrupon supply bolenecks and lack of complemenary nfrasrucure. he more nvesmen projecs ha are sarng a he same me he more lkely ha some of hem would be poorly seleced msmanaged or run no supply bolenecks. A some pon he cos of neffcences would ouwegh he benefs from brngng he nvesmen upfron. Secondly here are rsks o he realzaon of naural resources wealh. Hsory of LG prces and experences from oher counres show ha unceranes are large n boh producon volume and prces of LG. An aggressve nvesmen scalng-up ha ancpaes all fuure LG revenue would fully expose Mozambque o he downsde

19 8 rsks leadng o unsusanable deb pah under he adverse scenaro of negave shocks o LG producon and prces. he polcy mplcaons from hs sudy are sraghforward. Mozambque needs o srke he rgh balance beween publc nvesmen and deb susanably. he auhores need o have an negraed nvesmen plan o rack and coordnae nvesmen projecs underaken n dfferen secors and under dfferen lne mnsres. Deb levels need o be monored closely and deb susanably analyss should be conduced a leas annually o ensure ha he buldup of deb s on a susanable pah. o overcome he rsk of adverse shocks o LG producon and prces he publc nvesmen sraegy should ancpae only a poron of projeced revenue from he LG secor. he ncrease n deb-fnanced nvesmen should be moderae such ha he deb pah would reman susanable even under he adverse scenaro. Mozambque should no follow he aggressve approach o publc nvesmen under whch deb sock would explode under he adverse scenaro. he paper also shows he mporance of srucural reforms o mprove nvesmen effcency. In he conex of Mozambque such srucural reforms nclude he preparaon and mplemenaon of an Inegraed Invesmen Program ha srenghens he projec selecon process and coordnaon; capacy buldng for projec apprasal and evaluaon capacy; and mprovng governance and execuon of publc nvesmen projecs. If Mozambque could mprove on hese frons n parcular reducng nvesmen neffcency and mprovng he reurn of publc capal he publc capal sock would buld up more rapdly and would become more conducve o prvae secor growh. he end-resul would be an even hgher posve mpac on growh ncomes and deb susanably.

20 9 REFEREES Berg A. Porllo R. Yang S. S. and L. F. Zanna (23). Publc Invesmen In Resource- Abundan Developng ounres IMF Economc Revew 6() Buffe E. Berg A. Pallo. Porllo R. and L.F. Zanna (22). Publc Invesmen Growh and Deb Susanably: Pung ogeher he Peces IMF Workng Paper 2/44 Washngon D: Inernaonal Moneary Fund. Dalgaard. and H. Hansen (25). he Reurn o Foregn Ad. Dscusson Paper o. 5-4 Insue of Economcs Unversy of openhagen. Domnguez-orres. and. Brceno-Garmenda (2). Mozambque s Infrasrucure: A onnenal Perspecve Polcy Research Workng Paper 5885 Washngon D: he World Bank. Goldberg J. (2). Kwacha Gonna Do? Expermenal Evdence abou Labor Supply n Rural Malaw. Manuscrp Economcs Deparmen Unversy of Maryland. Gros D. and. Mayer (22). A Sovergn Wealh Fund o Lf Germany s urse of Excess Savngs). EPS Polcy Bref o. 28 Augus 28 enre for European Polcy Sudes. Gupa S. Kangur A. Papageorgou. and A. Wane. (2). Effcency-Adjused Publc apal and Growh. IMF Workng Paper WP//27. Hamlon J. D. (29). Undersandng rude Ol Prces Energy Journal Vol. 3 o. 2 pp Horvah M. (2). Secoral Schoks and Aggregae Flucuaons. Journal of Moneary Economcs Vol. 45 o. pp IMF (22). Macroeconomc Polcy Frameworks for Resource-Rch Developng ounres Washngon D: Inernaonal Moneary Fund. IMF (23). Saff Repor for he 23 Arcle IV onsulaon Sxh Revew Under he Polcy Suppor Insrumen Reques for a hree-year Polcy Suppor Insrumen and ancelaon of urren Polcy Suppor Insrumen. IMF ounry Repor o. 3/2. Melna G. Yang S. S. and L. F. Zanna (23). Deb Susanably Publc Invesmen and aural Resources n Developng ounres IMF Workng Paper Washngon D: Inernaonal Moneary Fund. Prche L. (2). he yranny of conceps: UDIE (umulaed Deprecaed Invesmen Effor) Is o apal Journal of Economc Growh Vol. 5 o. 4 pp

21 2 Sockman A.. and L. L. esar (995). ases and echnology n a wo-ounry Model of he Busness ycle: Explanng Inernaonal omovemens Amercan Economc Revew Vol. 85 o. pp

22 2 APPEDIX A. DIGAR model deals Households Le us assume a connuum of nfnely lved households dsrbued over he un nerval. A fracon of households have access o capal markes where hey can rade conngen secures and own frms. hese agens are commonly referred o as fnancally unconsraned opmzng or Rcardan. he remanng fracon of agens are fnancally consraned n ha hey do no own any asse do no have any lables and n each perod hey jus consume all of her ncome. hese agens are commonly labeled as rule-of-humb or hand-o-mouh consumers. Le ndex OP denoe opmzng households and RO denoe rule-of-humb households. Boh ypes of agens consume a compose good c for = OP RO whch n urn s a consan-elascy-of-subsuon (ES) aggregae of he raded good whch can be produced domescally or mpored and he domesc non-raded good consumpon baske reads as c c. hus he c = c c = OP RO (A) where ndcaes he non-raded good bas and > s he nra-emporal elascy of subsuon. Le p and p be he relave prces of goods and relave prce of raded goods o compose consumpon respecvely. Mnmzng oal consumpon expendure subjec o consumpon baske () yelds he demand funcons for each good. Le he compose consumpon be he numerare of he economy and assume ha he law of one prce holds a he level of raded goods hen s p represens also he real exchange rae (defned as he prce of one un of foregn consumpon baske n erms of he domesc consumpon baske). hs mples ha n real erms he prce of one un of consumpon s = p s. Boh ypes of agens provde labor servces and = OP RO o he raded and he non-raded secor respecvely and oal labor effor L has a ES specfcaon o capure he fac ha hours worked n he wo secors are no perfec subsues L = L L = OP RO (A2) where s he seady-sae share of labor n he non-raded secor and > s he nraemporal elascy of subsuon. Le w and w be he real wages pad n secors and respecvely and w be he real wage ndex. Maxmzng he household s oal labor L L

23 22 ncome w L = w L w L each secor and he real wage ndex subjec o aggregae labor (5) yelds he labor supples for w w w. = Opmzng Households A ypcal opmzng household seeks o maxmze s ner-emporal uly funcon OP OP OP OP OP = = = E U c L E c L (A3) subjec o s budge consran expressed n uns of compose consumpon OP OP OP L OP R OP R OP c b sb = w L b sb K K K K r k r k OP srm z kg (A4) where E represens he expecaon a me s he subjecve dscoun facor s he pure rae of me preference s he nverse of he ner-emporal elascy OP OP of subsuon of consumpon U c L s he nsananeous uly funcon s he OP nverse of he nra-emporal elascy of subsuon of labor supply s he dsuly L OP wegh of labor s he ax rae on consumpon s he ax rae on labor ncome b are domesc governmen bonds ha pay R b OP uns of he domesc consumpon compose a me b OP are lables owards he res of he world ha enal repaymen of R b OP uns of he foregn consumpon baske and are frms K K K profs n he raded and he non-raded secor K r k r k s a ax rebae ha opmzng households are assumed o receve on he ax leved on he frms reurn on capal 3 rm are remances from abroad z are governmen ne ransfers are user fees OP OP OP of publc capal k G and 2 b b are porfolo adjusmen coss assocaed 2 OP o foregn lables where s a scalng facor and b s he nal he seady-sae value of prvae foregn lables. Le be he Lagrange mulpler aached o he budge consran (2) hen OP OP households decsons are summarzed by he frs-order condons wh respec o c L OP and OP. In addon we assume ha on s foregn deb he prvae secor pays a b b 3 K he assumpon made s ha because of dsorons n revenue moblzaon fracon of he ax revenue on prvae capal does no ener he governmen flow budge consran. Poor nsuons or corrupon may be he channel hrough whch par of he revenue s los n he process of ax collecon and earned de faco by prvae agens whch we assume o belong o opmzng households. In praccal K erms hs allows us o se a hgh enough ax rae whch n urn allows us o mach he observed low nal prvae nvesmen flow K and capal sock ypcal of LIs whle can be se o mach he acual revenue ha he governmen s able o rase.

24 23 consan premum u over he neres rae ha he governmen pays on exernal commercal deb R dc : R = R u. (A5) dc Rule-of-humb Households Rule-of-humb households have he same nsananeous uly funcon as opmzng households = RO RO RO RO RO U c L c L (A6) and hey are subjec o he budge consran RO L RO c = w L srm z kg (A7) bu hey do no smooh consumpon by solvng an ner-emporal uly maxmzaon problem. hey smply consume all of her ncome perod by perod. Aggregaon Aggregaon across mples ha consumpon and labor are gven by he weghed average of her counerpars n boh ypes of households: OP RO c c c (A8) L L RO L. Smlarly aggregae prvaely-owned governmen bonds and foregn lables read as OP b b OP b OP b. (A9) (A) (A) Frms In he economy here are hree secors: () a non-raded good secor ndexed by ; () a (non-resource) raded good secor ndexed by ; and a naural resource secor ndexed by O. We assume ha he whole resource oupu s expored. on-raded Good Secor A ypcal frm n he non-raded good secor produces oupu echnology y accordng o y = z k L k G G (A2)

25 24 where z s a oal facor producvy scale parameer s end-of-perod prvae capal k G s end-of-perod publc capal s he labor share of secoral ncome and G represens he oupu elascy wh respec o publc capal. here are convex coss of adjusng nvesmen hence prvae capal evolves as k = k 2 (A3) 2 where represens nvesmen expendure s prvae capal deprecaon n secor and s he nvesmen adjusmen cos parameer. he represenave non-raded good frm maxmzes s dscouned lfeme profs weghed by he margnal uly of consumpon of opmzng households K K = E p y w L r k (A4) = K where s a ax on he reurn on prvae capal r K y k = p. Le q k be he Lagrange mulpler assocaed o he law of moon of capal wh q beng he secoral obn s q. hen frms decsons are capured by he frs-order condons wh respec o L k and. k raded Good Secor Analogously o he non-raded good secor a ypcal compeve frm n he nonraded good secor produces oupu accordng o echnology y L k G G. y = z k (A5) In hs secor oal facor producvy z s subjec o learnng by dong exernales dependng on las perod s raded good oupu: z y z z y = (A6) z z y where z are srucural parameers and varables wh no me subscrps are y seady-sae values. he law of moon of secoral prvae capal s perfecly analogous o ha of he nonraded good secor: k = k 2 (A7) 2. Also he represenave raded good frm maxmzes s dscouned lfeme profs weghed by he margnal uly of consumpon of opmzng households

26 25 K K = E s y w L r k (A8) = where r K = mc y s he secoral reurn on prvae capal. Le be he s q k Lagrange mulpler assocaed o he law of moon of capal wh beng he secoral obn s q. hen frms decsons are capured by he frs-order condons wh respec o L k and. q aural Resource Secor As mos naural resource producon s capal nensve and much of nvesmen n he resource secor s fnanced by foregn drec nvesmen n low ncome counres s far o represen naural resource producon as exogenous process y O y yo O yo exp y O y O (A9) where yo s an auo-regressve coeffcen and s he resource producon shock. We make a small-open-economy assumpon n ha he counry s naural resource producon s small relave o world producon hence he nernaonal commody prce (relave o he foregn consumpon baske) s aken as gven and evolves as po p O p O po = exp p O p O (A2) where po s an auo-regressve coeffcen and s he resource prce shock. Resource GDP n uns of domesc compose consumpon s y ~ O = s po y O. (A2) O Le be he royaly rae on producon. hen he resource revenue colleced each perod s p O O ~ y O = s po O. (A22) We assume ha he resource oupu s no consumed domescally as n low ncome counres almos he enre producon s ypcally expored. Governmen

27 26 Governmen expendure Governmen expendure comprses governmen consumpon g and publc I I nvesmen g. Lke prvae consumpon also governmen expendure g g g s a ES aggregae of he domesc raded good g and he domesc non-raded good g. hus he governmen consumpon baske reads as g = g g (A23) where s he wegh gven o non-radable goods n governmen purchases and > s he nra-emporal elascy of subsuon assumed o be he same as n he prvae consumpon compose. Mnmzng oal governmen expendures p G g = p g p g subjec o he governmen consumpon baske (23) yelds he demand funcons for each good and he governmen consumpon prce ndex n erms of uns of he domesc consumpon compose p G p s. oe ha s me-varyng. As hs paper focuses on he effecs of addonal governmen spendng n he form of governmen nvesmen we allow he wegh gven o non-radable goods for he addonal governmen spendng g o dffer from s seady sae value.e. = pg g p G g p G g g. (A24) p G g Publc nvesmen neffcences absorpve capacy consrans and publc capal deprecaon Publc nvesmen feaures neffcences and absorpve capacy consrans. o I I GI reflec hs effecve nvesmen g~ GI g where s he percen devaon of g I I publc nvesmen from s nal seady sae g s gven by I g f GI GI g I (A25) GI g I GI GI GI g I f GI > GI GI where represens seady-sae effcency and (] governs he effcency of he poron of publc nvesmen exceedng hreshold n erms of percen devaon I from he nal seady sae. In parcular we assume ha g akes he followng specfcaon: GI

28 27 I g =exp GI GI (A26). In oher words f governmen nvesmen expendure devaes from he nal seady sae GI more han he effcency of he addonal nvesmen decreases o an exen proporonal o he sze of he devaon. hs mechansm capures absorpve capacy consrans n developng counres. he severy of absorpve capacy consrans s measured by parameer. he law of moon of publc capal s k ~ G = G kg g (A27) where G s a me-varyng deprecaon rae of publc capal whch capures he dea ha lack of manenance shorens he lfe of exsng capal. hs s operaonalzed by assumng ha he deprecaon rae ncreases proporonally o he exen o whch effecve nvesmen fals o manan exsng capal: G k G G f g G k G G = g (A28) G G f g G k G where G s he seady-sae deprecaon rae parameer deermnes he exen o whch poor manenance produces addonal publc capal deprecaon whle conrols s perssence. Resource wndfalls and publc nvesmen polcy Le a resource wndfall be a resource revenue ha s above s orgnal seady-sae O O level.e. and be a soveregn wealh fund (SWF) where he wndfall s saved f swf swf exernally. Each perod he neres ncome of he SWF s R f where R s he gross real neres rae pad on foregn governmen savngs eners he governmen s flow budge consran and he fund self evolves as fn fou f f = max f floor f f f (A29) s s where f s he nal seady-sae value of he SWF represens he oal fscal nflow f represens he oal fscal ouflow and f s a lower bound for he SWF ha he ou floor governmen chooses o manan. Every perod f he fscal nflow exceeds he fscal ouflow more resources are saved n he SWF. 4 If he soveregn wealh fund s above f any fscal f n floor 4 In order o guaranee ha he SWF s no an explosve process we assume ha n he very long run a small auoregressve coeffcen f () s aached o f f. he model s solved a a yearly frequency for a -perod smulaon horzon and coeffcen s acvaed afer he frs years of smulaons. f

29 28 ouflow ha exceeds he fscal nflow s absorbed by a whdrawal from he fund. Whenever he lower bound consran bnds fscal polcy reacs o cover he gap va domesc and/or exernal commercal borrowng consumpon and/or labor ncome ax adjusmens and/or adjusmens n governmen consumpon and/or governmen ransfers. Below we explcely defne f n and f ou and we explan n greaer deal how he mechansm of closng he fscal gap works. he resource wndfall s managed usng a delnked approach. Under hs approach a scalng-up pah of publc nvesmen s specfed as a second-order delay funcon I g I = exp k 2exp k2 g I nss (A3) g I where g nss s he scalng-up nvesmen arge expressed as percenage devaon from he nal seady sae k > represens he speed of adjusmen of publc nvesmen o he new level and k2 k represens he degree of nvesmen overshoong. In parcular f I I k = k 2 = g = g.e. publc nvesmen remans unchanged. If k publc nvesmen jumps o he new seady sae mmedaely. If k 2 = k publc nvesmen s no oversho; whle ncreasng values of k 2 mply ncreasng degrees of overshoong. Parameer I k k2 and g nss can be chosen n a way commensurae o he economy s profle of resource revenue absorpve capacy resource revenue horzon and developmen objecve n order o make he nvesmen scalng up susanable from a fscal and a more general macroeconomc pon of vew. Governmen s flow budge consran and fscal gap he governmen s flow budge consran s L K K K K c w L O r k r k swf b sd sdc s R f kg G I = p g g z s gr R b srd d s Rdc d c s f (A3) where gr are grans d s concessonal borrowng d c s exernal commercal borrowng G fp G are user fees pad on publc capal (compued as fracon f of recurren coss) and Rd (assumed o be consan) and R dc are he gross real neres raes pad on concessonal borrowng and exernal commercal borrowng respecvely. he laer ncorporaes a rsk premum dependng on he devaons of oal exernal publc deb o GDP rao from s nal seady sae f d dc d d c R = exp dc R dc dc y y (A32) f where R s a (consan) rsk-free world neres rae y s oal GDP and dc and dc are srucural parameers. o capures dsorons relaed o neffcences of revenue K moblzaon n low-ncome counres we allow fracon of capal ax revenue