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Financing the Mozal Project
Group 4: Shruti Gupta, Achal Mittal, Rudranil Ghosh, Arnab Malik, Jitendra Jidewar, Chinmay Gothi
About International Finance Corporation (IFC)
A member of world bank group founded in the year 1956 and owned by 184 member countries
Mission Statement To promote private sector investment in development countries as a way to reduce poverty and improve peoples lives. Most of the investment in particularly Greenfield projects and in risky country environment. 77% - Institutional Investor rating <45. 23%- Institutional Investor rating <25.
Severe pressure for chances of downgrade from its AAA rating due to high riskiness of its investments
Eligibility criteria for IFC funds
MOZAMBIQUE MOZAL Inexpensive Hydroelectricity facility on Zambezi river Mozambique Aluminum (Mozal) Project Ownership : Alusaf, IDC, Mistubishi GDP by $175 m Export by $430 m Foreign Ex. by $161 m 5000 construction job 873 permanent jobs AIDS awareness program IFC OBJECTIVES Environmentally Sound Projects
Rebuild countries Damaged Electricity Infrastructure Initiate Mega Project Encourage private Sector projects Develop countrys economy
Commercially viable Project
Private Ownership
Significant development Of local economy Significant development Of local community
Fight Poverty
Role of IFC in Mozal Project
Appraising the project
To help uncover the information about the project, as well as sponsors and governments involved, which may not be readily available to lenders To act as a mediator between the governments and sponsors to ensure all issues are addressed and handled properly
Structuring the legal/Financing documents
To mediate large and diverse groups and resolving complex legal issues To create harmony in the legal structures of Mozambique and South Africa to create an agreed-upon basis for dispute resolutions
Providing long term capital
To lend senior debt and subordinated debt, and also equity Empirical evidence suggests IFC involvement increases the country credit ratings, encouraging future investment in high-risk countries
Deterring sovereign interference
To pay attention to structure fair deals that would benefit the governments and then monitor them to preclude short-term opportunistic behaviour.
IFCs Competitive Advantages
IFC was the worlds largest multilateral source of debt and equity. Ready to give loans not backed by sovereign guarantees Better qualified to do sovereign risk analysis given its development experience and relationships with governments. Significant experience in mediating large and diverse groups and resolving complex legal issues. Instrumental in facilitating creation of common legal terms for critical issues like completion guarantees, which all parties agree to abide by Compared to commercial banks, willingness to bear higher risks for the same return because of the developmental aims it attaches to projects
IFCs Competitive Advantages Cont.
IFC pays attention to structure fair deals that would benefit the governments and then monitor them to preclude short-term opportunistic behaviour.
It consisted of a multi-disciplinary team to do initial review: Investment officers, Economists, Lawyers, Industrial experts
Synergies exist across the WBG, and enhances IFCs convening power on critical development challenges
Combinations of three aligned lines of business - Investment Services, Advisory Services and the IFC Asset Management Company
Ever greening of Loans :Rescheduling and Restructuring
As an IFC board member, would you approve the recommended investment in Mozal?
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Private Ownership
Investment Parameters of IFC
Environmentally Sound
Local Benefits
Commercially Viable
STAKEHOLDERS
Alusaf (Subsidiary of Gencor)
IDC
Mitsubishi (probable)
ECA including Coface and CGIC
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Private Ownership
Investment Parameters of IFC
Environmentally Sound
Local Benefits
Commercially Viable
Issues involved air emissions, solid waste management, and socio-economic impact Air emissions to fall within WB guidelines Process will not result in solid waste in first few years; to have waste storage facility in future
Environment Assessment report consists of Traffic Impact, Vehicle Emission Impact, Noise Impact, Social Impact and Economic Impact
A change of the site to limit relocation needs to approximately ten families
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Private Ownership
Investment Parameters of IFC
Environmentally Sound
Local Benefits
Commercially Viable
The project would increase exports by $ 430 million
The GDP of the country would increase by 9% or $157 Million
Mozal would also expected to generate 5000 construction & 873 permanent jobs
This project would also build the much needed infrastructure & create further investment inflows in the country
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Private Ownership
Investment Parameters of IFC
Environmentally Sound
Local Benefits
Commercially Viable
Financials
Project IRR for equity holders is 12.23%
The IRR for the project is 11.2% (for all stakeholders)
Cost of equity for the project is 11.54%
Hence the project has minimal margin of safety.
However: Constant dollar returns, Value of real option, management fees
Recommendation to IFC!!!
IFC should immediately seize the opportunity presented in financing the financing of the Mozal
Investment in Mozal Project on the part of the IFC would generate valuable social, financial and economic benefits The use of South African power supply, the obtaining of Alumina from Billiton Australia, the technology from France, and the holding of sales proceeds in a foreign bank account provide an excellent structure that will alleviate sovereign, expropriation, and operating risks The Mozal project has qualified sponsors: at $78 billion and a conglomerate such as Mitsubishi Corporation has signed in as a strong candidate with infinitesimal chance of defaults
To what extent does the IFC do something : Unique
Loans-Longer maturity periods(7-12 years senior debt and 8-15 years on subordinated debt) Lending on a subordinate basis-Exposure to greater losses Plays a role in deterring adverse sovereign actions that could result in either default or reduction in equity value Increases the Likelihood of other lenders participating in the dealDemonstration Effect Halo Effect/Umbrella Effect- The Status of a Preferred CreditorsNever Been included in Sovereign Debt Rescheduling Regular Monitoring and the ability to partner with the govt. on decision making
To what extent does the IFC do something : Sustainable and Valuable
IFC helps sponsors improve corporate governance and become more sustainable IFC helps companies to adopt environmental, social and governance practices and technologies that create a competitive edge and this in turn helps them improve peoples lives Understanding what is not understood by other Lenders- Deep ties with Govt. and extensive experience in development lending. Has representatives in every country and monitors project year after year. IFC helps in reducing country risks and political risks
Creation of both Backward and Forward SME Linkages-Mozlink
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IFC will enable companies to manage risk and broaden their access to foreign and domestic capital markets In Mozal Project the IFC involvement will help to increase GDP by $157 million(9% compared to 6.4%) Exports by $430 million Net foreign exchange by $161 million Generate 5000 construction jobs and 873 Permanent jobs (90% held by local people)
Provide critical infrastructure and investment along with Maputo corridor
Developing human capital among Mozambicans through managerial, health and other skills training Legal System Development by precedent
The Current Scenario?
Not only IFC but also other World bank groups such as International Development Association (IDA), Multilateral Investment Guarantee Agency (MIGA) joined in as partners. Completed six months ahead of schedule and under budget by US$120mn.
Contribution :
3 percent of GDP 5-10 percent of recent economic growth, with strong employment, tax, foreign exchange, and infrastructure contributions created 15,000 jobs, mostly for Mozambicans Trade balance has been a positive US$173 million per year. Roads, ports, power generation, telecommunications, water supply, and drainage systems developed special trust funds- Mozal Community Development Trust (MCDT) and the SME Empowerment Linkage Program (SMEELP)
Source: World Bank (IFC) Site disclosures
The Real Option Executed- Mozal II
Doubling of Capacity @ US$ 860mn ( US$ ~600mn Less than Mozal 1) and completed 7 months ahead of schedule & 20% below initial budget.
The Demonstration Effect Worked Again
Equity -BHP Billiton, IDC, Mitsubishi, and the government of Mozambique
Lead Arrangers of Loans: South African Export Credit Agency, BNP Paribas Guaranteed By: COFACE, IFC, Japan Bank for International Cooperation, Development Bank of Southern Africa, Export Development Corporation, DEG (KFW Group, Germany), PROPARCO and CDC (Commonwealth Development Corporation)
