Your 500 words analysis of the case study entitled “Financing the Mozal Project” should address the following issues/questions. Investors in the Mozal Project face different types of risks including construction, operating and sovereign risk. Briefly discuss how important you think these three different risks are.
Analysis of the case study entitled “Financing the Mozal Project
Your 500 words analysis of the case study entitled “Financing the Mozal Project “should address the following issues/questions. Investors in the Mozal Project face different types of risks including construction, operating and sovereign risk.
Using details in the case study:
1. Firstly, Briefly discuss how important you think these three different risks are.
2. Discuss how the IFC has constructed their investment to minimize the sovereign risk and provide some suggestions as to how the IFC can further reduce the sovereign risk. When discussing sovereign risk and how it is affected by the strategies of the relevant players: the IFC, Alusaf, Eskom, EdM, the Mozambique government and the South African government. Also, Use game theoretic analysis in your explanation. (You may even want to depict a game tree and relate how your suggestions involve addressing the hold-up issue. Lastly, You need not discuss the roles of all the different players in this game)
[For those who are not familiar with the meaning of sovereign risk, what I think is a good definition can be found at (http://www.businessdictionary.com/definition/sovereign-risk.html ) which states: “Probability that the government of a country (or an agency backed by the government) will refuse to comply with the terms of a loan agreement during economically difficult or politically volatile times. Additionally, although sovereign nations don’t ‘go broke’, they can assert their independence in any manner they choose, and cannot be sued without their assent.”]
International Finance Corporation invests to improve the quality of living and to alleviate poverty in developing countries. It invests in the developing countries which are mostly unable to attract other lenders. IFC employs a multidisciplinary team including economists, industry experts and lawyers etc. who conduct detailed analysis of the prospects of the project. They gather information about the sponsors of the project, risk and rewards of the project and consistency of project with long term plans of the host government.
It also conducts social and environmental assessment of the project. As IFC has profound experience of participating in international deals, it specializes in structuring projects having complex legal issues. Furthermore, IFC has close relations with local governments due to its affiliation with the World Bank. IFC investment in any country reduces the political risk as its loan is paid on a preferred basis. Defaulting with IFC will hamper the country’s growth because then IFC will not take part in future development activities of the country. When IFC does not invest it is exceedingly difficult for the country to attract other investors.