Financing the Mozal Project - Essay Example

?Case: Financing the Mozal Project Sub-Sahara Africa is one of the poorest regions in the world. Absolute poverty grew in the region from 42% to 47% from 1981 to 2001 (Bbc). A way to help the region out of poverty is through foreign investment and capital projects that provide jobs. Mozambique is one of the countries that is struggling the most in Africa. The Mozal Project is a business venture that can help improve the economy of Mozambique. Some of the benefits of the project include the creation of 5,000 construction jobs, 873 permanent jobs, $430 million in exports, $157 million GPD growth, and $161 million net foreign exchange. Along with the great benefits of the project there are also risks factors associated with its implementation. Some of the risk factors that must be considered in the business plan of a project are recurring revenue, economic uncertainty, and liquidity (Bizkanal). Mozambique is a high risk country due to a variety of factors. Among 20 African nations the country ranks last in road infrastructure, completion of secondary school, and legal effectiveness. It also ranks second to last in openness to trade and time spent to obtain permits. These factors make the country a difficult sell to foreign investors. Another major risk in the region is the political factor. The country is recovering from the effects of a civil war that lasted 17 years. There are still political tensions and bitterness between the Frelimo and Renamo parties. A risk that can inhibit the profitability and success of the project is a decline in the market price of aluminum in the future. The price of electricity is a determinant of the plant’s competitive position. Some of the key partners of the Mozal project are Alusaf, the government of Mozambique, Eskom, Electricidade de Mucambique (EdM), trustee responsible for the administrative duties, lenders, and the International Monetary Fund (IMF). Alusaf is the company that will own and administer the project. The company is a subsidiary of the Gencor Group. In 1996 Alusaf generated net income of $41.7 million. The company has the vision of expanding the firm through the Mozal project. The risk of acquiring its primary raw material, alumina, will be naturally hedged by fixing the prices based on LME. Eskom and Electricidade de Mucambique will supply the project with all the electricity it needs for production. The government of Mozambique is an important partner that must invest in improving the infrastructure of the country as well as honor the economic incentives and tariff exemptions available in the Industrial Free Zones. These factors will provide the company with a competitive advantage. The risk of the government bailing out and breaking the agreements is low because the government desperately needs the income and jobs the project generates. The trustee will be responsible of collecting sales proceeds, paying debt, remitting expenses, and paying dividends. The International Monetary Fund is a key partner because it has the capacity to provide large funds of money. Getting its approval would help the company obtain more financing from the private sector. The risk of the IMF are minimized by performing a throughout evaluation of projects to ensure its sustainability and that it provides an economic benefit for the community. There are several key factors to the success of the Mozal project. One of those factors is the ability of the company to develop and manage its human resources adequately. The management of human resources starts in the construction phase of the project. The company plans to bring experienced managers and skilled workers from South America during the initial phases of the project. It is imperative to properly manage the construction phase of the project. The firm is responsible for the work performance of a construction crew composed of 5,000 workers. The timeliness and the ability of the firm of completing the project within budget are highly dependent on being able to motivate the workers to perform at a high level. A second factor that is important towards the success of the project is to be able to secure a constant supply of energy to meet the needs of the aluminum smelter. Electricity is a cost driver that accounts for 25% of the total costs of Mozal. A third factor that is essential for the success of Mozal is the ability of the firm to secure the necessary financing for the project. Alusaf and IDC plan to invest $125 million each and they will secure another $250 million from equity partners. The next $150 million will come from subordinated debt of which $65 would come from IMF and the other $85 million from development institutions. Senior debt holders would provide $680 million. Case: Vladimir Investment Dispute Companies sometimes do not adequately assess the business risks associated with expansion into foreign markets. One of the business risks of expansion into foreign markets is the legal risk. Sawyer Corporation did not properly assess the legal and political variables in Vladimir. The corrupt government and inadequate legal system of Vladimir conspired to overtake Sawyer and invalidate the 25-year lease agreement Sawyer signed three years earlier. The business climate of the region was not researched properly and Sawyer was too naive in its business dealings. A good estimation of the political environment at the time was not performed. The presence of corruption and collusion violated the intellectual and property rights of Sawyer. If Sawyer wanted to continue to do business in Russia in the future they would have to do things much differently. The first step before investing any money in a foreign location is to perform a through evaluation of the location. In Russia the company would have to perform a microanalysis of the legal system of the province in Russia considered for expansion. The company would have to evaluate both the labor and environmental laws of the region. A good strategy for the company is to have a local lawyer on retainer. A team of professionals will perform an analysis of the location. The team will be composed of lawyers, economists, engineers, marketing specialists, among other professionals. The recommendation of the team will be voted on by the board of directors of the company. Another major strategic change that Sawyer must implement if it continues to do business is Russia is its public relations. Sawyer has to invest money in advertising to get the word out in the community about the company and its intention to invest in the community. Gaining the trust and support of the community will help Sawyer build power and improve its relations with different interest groups. The use of primary research would be beneficial for the company. “Primary research involves collecting data about a given subject directly from the real world” (Purdue). The use of surveys is an effective, cost effective, and quick way to collect feedback from the community. A major mistake that Sawyer made in Vladimir was to finance a rental agreement with a high ratio of upfront money. The company assumed a lot of financial responsibilities that was not theirs in the bankruptcy agreement in an effort to help the company maintain its liquidity. Prior to the hostile takeover the company was operating effectively. In the future instead of negotiating front loaded deals the company should seek back loaded financial contracts. The firm should avoid doing business with companies running out of business. These types of companies have higher business risks. The company should also protect its intellectual property better. Intellectual property was used in a masterful way by digital age companies to build their businesses (Elliot). Work Cited Page Bbc.co. 20 July 2004. “Sub-Sahara Africa Poverty Grows.” BBC News. 11 June 2012. Bizkanal.net. 2012. “Risk Factors.” 11 June 2012. Elliot, M. 21 May 2008.”What is the value of Intellectual Property?” 11 June 2012. Purdue.edu. 2012. “What is Primary Research and How do I Get Started?” 11 June 2012. Read More