Financing the Mozal Project

The IFC should immediately seize the opportunity presented in the financing of Mozal. Investment in the project on the part of the IFC would generate valuable social, financial, and economic benefits, not only for the people and government of Mozambique but on a more global level as well, allowing the international investors, suppliers, distributors, and sponsors involved in the deal to enjoy the catalytic effects spurred by the project and the investment itself. The Mozal Project is the perfect trigger to boost the economy of the emerging market, post-conflict Mozambique and improve the quality of life for its people on every level. While such an investment, which would be the largest single FDI project for this debt-ridden country, may be intimidating, it has strong sponsors and promising financial prospects.

Approval of the financing of Mozal by the IFC is in perfect accordance with the IFC’s mission, as it would be promoting sustainable private sector investment in the developing country of Mozambique while at the same time helping to reduce poverty and improve people’s lives. There are various sources for the viability of this project. Firstly, the aluminum industry demand is strong and is expected to grow at 2% to 3% per year; combined with the efficiency and low cost advantages that Mozal would have to offer, revenues would far outweigh costs, thus generating positive cash flows within a short amount of time. Secondly, a plethora of opportunities for Mozambican businesses would be created through the policy of outsourcing all non-core activities to local companies. Not only will this provide jobs and valuable training for Mozambicans, but it may also encourage the establishment of joint ventures between international and local contractors.

Furthermore, sponsors of the project will launch extensive education, prevention, and treatment programs for AIDS, the main epidemic of Mozambique. Thirdly, investment by the IFC will act as a catalyst to economic development in the area by strengthening trade, investment, and industrial relations between sub-Saharan countries. As demonstrated by Exhibit 12, IFC project investment causes a country’s Institutional Investor Country Risk scores to improve. Combined with the attractive tax regime in the surrounding industrial free zone, it will give Mozambique credibility as a feasible investment destination while at the same time improving the host government’s capacity for the development of a more responsive regulatory framework and investment climate. In addition, the Mozal project will stimulate trade in the sub-Saharan region through the import of inputs from South Africa to Mozambique. Furthermore, the economies of Australia and Swaziland would also enjoy a boost, as they would be part of the supply chain. These countless benefits will improve the standard of living of the inhabitants of the post-conflict developing nation of Mozambique on all levels.

The Mozal Project is, of course, an extremely risky investment for the accredited IFC. To begin with, Mozambique is a poor, debt-ridden country that had been ravaged by civil war for two decades, and much of the country’s infrastructure was destroyed. Consequently, the cost of the plant is approximately equal to half of the country’s GDP (Exhibit 7). There is much uncertainty and risk involved in the project to begin with, and this could be further complicated by the fact that there would be various different parties involved in its financing; default would not only create huge losses for the IFC but would also damage its good reputation (Exhibit 4). In addition, the actual rates of return for IFC projects are shown to be lower than expected (Exhibit 11). A possible alternative to the aforementioned strategy could be for the IFC to wait for conditions in Mozambique to improve further still, and then assist in the financing of the project. This route may then allow for the developing nation to improve its economic, financial, and social conditions more, thus lending some reassurance to the IFC and other investors. From 1994 to 1997 there has been economic liberalization, mining sector reform, increased reception to private investors, and an increase in international investment in African mining; advanced progress and stability might come with more time, and this could reduce risks and uncertainty.

The optimal time to invest, however, is at the present. Since the country’s massive economic reform and privatization program in 1987, there has been a huge increase in peace and political stability. The Human Development Index, all types of risk ratings, FDI, and GDP have all increased, and inflation has decreased, since the reforms; the outlook for the country is good and welcomes foreign investment (Exhibit 7). While Mozal will require high leverage to mitigate sovereign and expropriation risks, the expertise of the IFC will assist in quality financial and operational structuring. The use of the South African power supply, the obtaining of alumina from 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.

In addition, the Mozal Project has qualified sponsors: at $78 billion, Mitsubishi Corporation is a strong candidate with infinitesimal chance of default, and it can be seen from the financial statements of Gencor and Alusaf that these firms have adequate capacity to fund their parts of the project (Exhibits 1a, b). To date, sub-Saharan Africa has received the smallest amount of IFC investments as compared to all other regions worldwide (Exhibit 9b). Investment in Mozal on behalf of the IFC would pave the way for improvements in investment legislation in the region and create incentive regimes for related industries (Exhibit 12). Jobs will be created directly as well as indirectly, thus improving Mozambicans’ quality of life, and fulfilling the mission of the IFC. Finally, successful completion of the Mozal Project will further contribute to the IFC’s superior standing as a quality lender.