International Finance Corporation

Financing the Mozal Project Executive unofficial We earn assessed the diverse chances composite in the Mozal send. The construction take a chance, operating danger and finance risk ar relatively blue but the political risk is genuinely high. Creeping expropriation and moral hazard are realistic threats to the puke. The high sovereign risk is reflected in the burial vault aim. The hurdle rate amounts to a much higher honour than the internal rate of return. Therefore, it is non possible for the sponsors to undertake the proposed enthronisation in the project.Regarding the financial support gap of $250m participation of the IFC is quintessential as commercial bankers refuse to provide living without its involvement. IFC involvement could be truly unspoilt for the project but the IFCs bill should not go through with the recommended coronation of $120m as the high sovereign risk does not justify making the IFCs strikingst investment yet. Summary of facts The Moz al project, a $1. 4b atomic number 13 smelter in Mozambique, is a joint menace between Alusaf, the aluminum subsidiary of the Gencor group, and the industrial Development skunk (IDC) of South-Africa, a political sympathies consumeed ripening 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 nations infrastructure. Both parties would each own 25% of Mozal by an candour investment of $125m. Ownership of the remaining equity transfix of $250m is still to be determined. To be adequate to(p) to attract additional funding, the sponsors require needful to involve the International pay Corporation (IFC), a member of the World vernacular Group. The IFC has a good reputation and significant experience in structuring grants in emerge markets.The IFC board has received a good word by its team to insert in the project with a $55m senior debt and $65m subordinated debt investment. http//www. sl ideshare. wage/prafful16/financing-the-mozal-project http//www. scribd. com/doc/105379331/The-Mozal-Project Financing the Mozal Project genus Benzoin Esty Harvard Business School Finance unit of measurement February 18, 2000 Case No. 200-005 instruct rase 5-200-025 Abstract SUBJECT AREAS project finance, rising markets, sovereign risk, valuation analysis, Africa, International Finance Corporation, multi-lateral agencyCASE SETTING June 1997, Mozambique, aluminum smelter, $1. billion investment, $700 trillion revenue, 750 employees In June 1997, a project team from the International Finance Corporation (IFC) was recommending that the board approve a $120 one thousand 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 standar dsit was not much smaller than the countrys 1996 earn domestic project (GDP).Third, Mozambique was a very poor country at the term (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 apostrophizeed the IFC about participation. After reviewing the projects commercial viability and development impact, the IFC team is recommending the investment. The board must def ine 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 extremum example of political risk in a developing country condition and shows how organizations like Institutional Investor, the Economist intelligence operation Unit, and The PRS Group attempt to analyze it for future 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 IFCs involvement in appraising, structuring, monitoring, and financing projects, and shows how these activities create value by resolving costly market imperf ections including information, distress, agency, and transactions costs. It also explores the IFCs performance in these various activities. Given these objectives, the case is appropriate for trading/government, strategy, international business, and finance courses. Case and Teaching Paper Series