Financing the Mozal Project Harvard Case Solution & Analysis

Question3. ) Is a smelter vulnerable to sovereign interference? Is this smelter vulnerable? How have the sponsors tried to mitigate sovereign risk?

Answer:

Since the project involves an investment in a foreign country and the project will be exposed to the government act of privatizing the Mozal project and this was the reason why Gencor elected to finance the project in the form of the project and financing and did not opt for the corporate financing option. Meanwhile, the exemption of custom duties and income taxes have been awarded by the Mozambican government, which can be withdrawn, hence, leading to sovereign interference. Additionally, the decided sales tax of 1% may be changed by the government in future, which will lead to the increase in prices of output caused by the sovereign interference.

However, due the privatization risk the project was financed through venture capital instead of corporate financing. Additionally, since the raw material would be imported Australia and electricity will be imported from Eskom of South Africa and the government action to privatize the Mozal project will jeopardize its relationship with these countries. Further, the sponsors have noticed that the previously the expropriation have been led because of the inappropriate policies and excessive emphasis on profit extractions. Therefore, along with the objective of earning profit sponsors will support the government through increasing the exports of its output by $430 million, meanwhile, the Mozal project will contribute to the increase of gross domestic product by $157 million (by 9%), additionally, the Mozambique foreign reserves will also be increased by $161 million per year. Further, the Mozal project will generate 5,000 construction jobs and 873 permanent jobs in Mozambique, hence, contributing to the creation of employment opportunities for the local residents.

Moreover, the Mozal project will use the expert managers and skilled staff in the initial phase of the project, which will help in the development of the local staff, hence, the project will develop the human capital of Mozambique. In the meantime, the initiation of AIDS awareness programs will also help government in providing the health awareness issues for the local residents. In addition to this, the commercial interaction of the Mozal project with local entities will boost the Mozambique economy. Therefore, with the provision of these support for the development of the nation and the economy of Mozambique country, Mozal project will not be exposed to sovereign interference by the Mozambican government.

Question4. ) Why do the sponsors and the banks want IFC involved with the deal? What does IFC bring to the deal? Will IFC and the sponsors (Alusaf and IDC) share similar objectives? Should IFC play only an advisory role only or should it also invest in the Mozal Project.

Answer:

International Finance Corporation (IFC) is the largest multilateral source for the provision of debt and equity finance to the private sector projects. Additionally, IFC provides loan which are not backed by sovereign guarantees, further, the capital provided by the IFC is not callable on demand instead it is paid in. Meanwhile, IFC also plays a key in promoting the private sector investments in the developing countries. Therefore, sponsors and the banks want IFC to be involved in the Mozal project so that the project can be supported by the IFC in order to achieve its objectives.

In addition to this, IFC will bring many benefits into the Mozal project such as the project appraisal facilities, an assessment of environmental and social impact of the project and due diligence services, which will provide the assurance to the potential lenders of Mozal projects regarding the feasibility and suitability of the project. Meanwhile, IFC is known for being an “Honest Broker” because it works in the best and balanced interest of all the affected parties, hence, the involvement of the IFC will ensure that the project will lead to the satisfaction of all the parties involved in the project. Further, the involvement of the IFC will enable the Mozal project to adhere to the legal system in Mozambique because IFC also helps in integration of legal systems in Mozambique and other parts of the world. In addition to this, IFC will also help in finalization of the contractual terms in order to define the financial and technical enactment of the deal.

However, IDC’s objective is to promote the private entities so that the sustainable development can be achieved in South Africa, which is a developing country, meanwhile, the prime objective of Alusaf if to earn returns from the Mozal project, which are similar to its previous project, Hillside smelter, and to acquire the ore inputs at an attractive rate for the extraction of aluminium. On the other hand, the objective of IFC is to promote the investment in the private sector of the developing countries so that the poverty levels can be controlled and the peoples live in developing countries can be improved....................................

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