Project cost and funding mix
According to Clifford (2020), the project’s US dollar volume amounts to a total of $1.4 billion. The financing structure consists of 38% equity, 50% senior debt, and 12% subordinated debt. The equity participation of $520 million is shared between Billiton (47%), Mitsubishi (25%), IDC (24%), and the Moçambican government. The Moçambican part is 4% or $20 million, financed through the European Investment Bank loan. The IFC and four other major international funding agencies are providing quasi-equity worth $150 million. A senior debt of $670 million is mainly in export credit from South Africa ($400 million). An additional $190 million is from the same group of international funding agencies, which provide the subordinated debt, and $80 million are export credits from other countries. Annual debt service (interest plus amortization) is estimated at $80 million. The list of agencies that provided loans to the Mozal project includes IFC, PROPARCO (France), the Development Bank of Southern Africa, the Commonwealth Development Corporation, The Credit Guarantee Insurance Corporation, and the European Investment Bank.
Demand, supply, and risks
Alden and Hirano (2019) assert that supply and demand for aluminum are paramount in manufacturing. At the time of the project implementation, the uncertainty with the demand created many problems for the enterprise since it was constantly growing from 2% to 3%. Even a minor disruption could lead to enormous losses for the enterprise because supply and demand determine the product’s price.
Furthermore, Clifford (2020) notes that the Mozal project was associated with many technological, operational, economic, and political risks. First, since the project involved using high technology, Mozal’s success depended mainly on the technology used. Second, the Mozal project was subject to operational risk because 33% of total production costs were alumina, and its prices frequently fluctuated, resulting in high production cost volatility. Third, the project was massive by Mozambique’s standards, not much less than the country’s gross domestic project (GDP) in 1996, which was $ 1.7 billion. Fourth, after the recent five-year civil war, the land still belonged to one of the most volatile and risky countries, which was also a risk factor for obtaining investment.
Initial problems with the project and final restructuring
According to Alden and Hirano (2019), the main initial problems with the Mozal project included:
- The existence of complex bureaucratic procedures in Mozambique to comply with all legal and regulatory requirements of the state. Thus, the company had to seek prior government approval to issue a building permit.
- Lack of adequate infrastructure to support the construction and long-term sustainability of an operating plant.
- Unskilled workforce requiring extensive safety training and instruction.
- Logistic problems and establishment of procedures for air, sea, and road import of materials with customs authorities.
- Language barriers.
- The requirement to apply world quality and safety standards on environmental protection issues to the project. In many ways, they are more demanding than commonly found in South Africa.
Jha and Yeros (2018) affirm that production started in June 2000, and total capacity was reached in December 2001. The Mozal Project is an outstanding example of successful investment in a frontier country. Mozal also has become a leader in employee management and community development. As the first significant foreign direct investment in Moçambique, Mozal has been crucial in many ways. First of all, the project has become a showcase for investment possibilities in Moçambique. It has increased international awareness of Moçambique in the business community and reduced perceptions of the risk of investing here. Second, the government has been using the project to deal with many problems of red tape. Third, the project’s development stimulated many improvements in the infrastructure of the south of the country. Fourth, the Moçambican workers have received training and skills development.
Alden, C. & Hirano, K. (2019). Japan and South Africa in a globalising world: A distant mirror. Taylor & Francis
Clifford, P. (2020). Project finance: Applications and insights to emerging markets infrastructure. Wiley.
Jha, P. & Yeros, P. (2018). Reclaiming Africa: Scramble and resistance in the 21st century. Springer Singapore.