International Finance Corporation

Financing the Mozal Project Executive summary We have assessed the several(a) dangers involved in the Mozal project. The construction risk, operating risk and financing risk are relatively small but the governmental risk is actually high. Creeping expropriation and moral hazard are realistic threats to the project. The high monarch butterfly risk is reflected in the hurdle rate. The hurdle rate amounts to a frequently higher value than the internal rate of return. Therefore, it is non feasible for the sponsors to commence 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 amour. IFC involvement could be really beneficial for the project but the IFCs board should not go through and through with the recommended investment of $120m as the high sovereign risk does not relieve making the IFCs largest investment yet. Summary of facts The Mozal project, a $1. 4b aluminum smelter in Mozambique, is a joint venture between Alusaf, the aluminum adjunct of the Gencor group, and the industrial Development Corporation (IDC) of South-Africa, a government have goted phylogenesis bank.Mozambique is one of the poorest countries in the world and only tardily emerged from a 17-year well-behaved war that had destroyed the countrys infra twist. Both parties would each own 25% of Mozal by an integrity investment of $125m. Ownership of the remaining equity stake of $250m is still to be determined. To be able to attract supernumerary funding, the sponsors require require to involve the outside(a) Finance Corporation (IFC), a member of the World Bank Group. The IFC has a good reputation and unfaltering experience in structuring deals in emerging markets.The IFC board has received a pass by its team to participate in the project with a $55m senior debt and $65m subordinated debt investment. http//www. slideshare. net/prafful16/financing-t he-mozal-project http//www. scribd. com/doc/105379331/The-Mozal-Project Financing the Mozal Project Benjamin Esty Harvard tune School Finance Unit February 18, 2000 Case No. 200-005 didactics circular 5-200-025 Abstract SUBJECT AREAS project finance, emerging markets, sovereign risk, valuation analysis, Africa, International Finance Corporation, multi-lateral agencyCASE 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 adore 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 IFCs largest investment in the world and by far its largest investment in Sub-Saharan Africa. Second, the project was enormous by Mozambican standardsit was not much smaller than the countrys 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 undecided 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 teaching 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 projects commercial viability and development impact, the IFC team is recommending the investment. The board must decide whether it is the compensate time and the right project to make such a large i nvestment. The case has tetrad 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 operation Unit, and The PRS Group attempt to analyze it for prospective investors.2) It illustrate the modern form of political risk management through project selection, structuring, and insurance, and contrasts this approach with the older, financial hyphen 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 IFCs 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 IFCs performance in these various activities. stipulation these objectives, the case is appropriate for business/government, strategy, international business, and finance courses. Case and Teaching Paper Series