IFC and Mozal Alusaf/Gencor Should Term Paper

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Will the sponsors be able to finance the deal?

The timing of this investment is important, and it is not covered in any depth in the case. That is because there is a significant increase in the number of countries where political risk is declining, but several countries (such as Argentina) provided negative surprises that made banks less willing to lend.

The case deals primarily with banks, but does not cover strategic investors, or banks aligned with strategic investors. This author believes that the economics of the deal can appeal to banks on a global basis, and the deal will therefore be financed.

In the managers' stead at Alusaf/Gencor, it would help to line up investors with more than a purely financial incentive to do the deal. These sources may include one or more of the following:

South African banks which are tied to Alusaf and Gencor, understand the management of those companies, and are personally invested in the success of the South African neighborhood (Simon).

French banks affiliated with Pechiney or the French government which have an interest in working with the project in order to secure the business for Pechiney (Vander Vennet).

Portuguese banks which would like to reestablish their relationships with their former colony. At this point, Portugal was one of the fastest-growing members of the EU, a participant in the Euro, and its banks were known to be reestablishing contacts with former colonial partners.

Countries and industries which would like to have an assured, long-term supply of aluminum. These countries (such as Japan and China) may regard secured supply (when political risk is covered) as more important than trying to meet their needs on the spot market. Given the high savings rates in Japan, Taiwan and China, there may be capital which is freely available and seeking the high potential returns that Mozal may provide.

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IFC should invest in the deal for three reasons: (1) Mozambique represents a poster-child for the types of investments that fit IFC's charter. With a country risk ranking below "commercial grade" of 25, there are nevertheless encouraging signs that Mozambique will improve its business climate; the IFC can use this as a demonstration project which may trigger other investment, (2) the deal has most of the business risks reduced: as a low-cost producer in a global industry, Mozal has the ability to survive and continue operations even during a downturn in the global aluminum market, and (3) IFC's investment will leverage investments from at least three others: Pechiney, Alusaf and Gencor. Thus IFC has some assurance that management, industry knowledge and regional strength are assured.

As an IFC board member, I would therefore vote to invest in this project.

IFC must balance against this the risk that Mozambique may sink again into a crippling civil war. Part of this risk is covered by insurance, which should increase the risk of the overall deal above the 25 "commercial grade."

IFC's competitive advantage in a deal like this is that it can take political risks that normal commercial lenders cannot. The quality of IFC's basic knowledge and research in newly-emerging economies provides assurance to commercial investors that the investment is worthwhile. In short, IFC's USP (unique selling proposition) includes respected research and understanding of the local terrain, the ability to co-invest, and the ability to convince commercial investors to join in.

IFC's success is demonstrated by its substantial cash flow from ongoing loans. Its USP has allowed IFC to triple its overall loans outstanding while retaining significant returns on its loans with relatively little fall-out......

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