International Finance Corporation
Financing the Mozal Project Executive summary We have assessed the various risks involved in the Mozal project. The construction risk, operating risk and financing risk are relatively small but the political risk is very high. Creeping expropriation and moral hazard are realistic threats to the project.
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The high sovereign risk is reflected in the hurdle rate. The hurdle rate amounts to a much higher value than the internal rate of return. Therefore, it is not feasible for the sponsors to undertake the proposed investment in the project.
Regarding the financing gap of $250m; participation of the IFC is quintessential as commercial bankers refuse to provide funding without its involvement. IFC involvement could be very beneficial for the project but the IFC’s board should not go through with the recommended investment of $120m as the high sovereign risk does not justify making the IFC’s largest investment yet. Summary of facts The Mozal project, a $1. 4b aluminum smelter in Mozambique, is a joint venture between Alusaf, the aluminum subsidiary of the Gencor group, and the Industrial Development Corporation (IDC) of South-Africa, a government owned development bank.
Mozambique is one of the poorest countries in the world and only recently emerged from a 17-year civil war that had destroyed the country’s infrastructure. Both parties would each own 25% of Mozal by an equity investment of $125m. Ownership of the remaining equity stake of $250m is still to be determined. To be able to attract additional funding, the sponsors require needed to involve the International Finance Corporation (IFC), a member of the World Bank Group. The IFC has a good reputation and solid experience in structuring deals in emerging markets.
The IFC board has received a recommendation by its team to participate in the project with a $55m senior debt and $65m subordinated debt investment. http://www. slideshare. net/prafful16/financing-the-mozal-project http://www. scribd. com/doc/105379331/The-Mozal-Project | Financing the Mozal Project Benjamin Esty Harvard Business School – Finance Unit February 18, 2000 Case No. : 200-005; Teaching Note: 5-200-025 Abstract: SUBJECT AREAS: project finance, emerging markets, sovereign risk, valuation analysis, Africa, International Finance Corporation, multi-lateral agency
CASE SETTING: June 1997, Mozambique, aluminum smelter, $1. billion investment, $700 million revenue, 750 employees In June 1997, a project team from the International Finance Corporation (IFC) was recommending that the board approve a $120 million investment in the Mozal project, a $1. 4 billion aluminum smelter in Mozambique. Four factors made this recommendation controversial. First, it would be the IFC’s largest investment in the world and by far its largest investment in Sub-Saharan Africa. Second, the project was enormous by Mozambican standards–it was not much smaller than the country’s 1996 gross domestic project (GDP).
Third, Mozambique was a very poor country at the time (per capita GDP of $90) and had only recently emerged from 20 years of civil war. Fourth, many aspects of the deal remain undetermined such as who was going to provide half the equity needed to finance the project. Despite these concerns, the sponsors, Alusaf (the aluminum subsidiary of the South African minerals company, Gencor) and Industrial Development Corporation of South Africa (IDC is a development bank), want to structure a limited-recourse deal to finance the smelter; it will be non-recourse to the sponsors after completion.
Commercial bankers have refused to participate unless the International Finance Corporation gets involved in the deal and so the sponsors have approached the IFC about participation. After reviewing the project’s commercial viability and development impact, the IFC team is recommending the investment. The board must decide whether it is the right time and the right project to make such a large investment. The case has four pedagogical objectives. ) It presents an extreme example of political risk in a developing country setting and shows how organizations like Institutional Investor, the Economist Intelligence Unit, and The PRS Group attempt to analyze it for prospective investors.
2) It illustrates the modern form of political risk management through project selection, structuring, and insurance, and contrasts this approach with the older, financial style of political risk management whereby sponsors simply increased hurdle rates to ensure sufficient project returns. ) It highlights the various roles multilateral development institutions, in general, and the IFC, in particular, can play in financing major projects. 4) It analyzes IFC’s involvement in appraising, structuring, monitoring, and financing projects, and shows how these activities create value by resolving costly market imperfections including information, distress, agency, and transactions costs. It also explores the IFC’s performance in these various activities. Given these objectives, the case is appropriate for business/government, strategy, international business, and finance courses. Case and Teaching Paper Series