Mozambique dam deal paves way for new capital
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Emerging Markets

Mozambique dam deal paves way for new capital

The $800 million raised by Mozambique to finalize its acquisition of the Cahora Bassa hydroelectric dam facility could pave the way for fresh commercial money, bankers involved in the deal have told Emerging Markets.

The government’s success in raising money from Portugal, the former colonial power, shows how rapidly Mozambique’s economic star is rising.

The financing was notable for requiring neither multilateral nor export credit agency support. “This is clean, purely commercial 10-year money,” said Ian Stern, Africa director in Calyon’s Global Structured Commodity Finance department.

Syndication of the transaction was completed in late April by France’s Calyon and Portugal’s Banco BPI. It was underwritten in November 2007.

Mozambique has been the fastest growing economy in southern Africa over the past decade. The World Bank is projecting 8% GDP growth in 2008, up from 7.5% last year. But the country needs new money to upgrade its basic infrastructure. This was run down during the 1964-1974 war of independence and the 1975-1992 civil war, which left it as one of the world’s poorest nations.

“This may be a one-off deal, but it has definitely laid down a financing yardstick for other potential transactions in Mozambique,” Stern said.

Standard & Poor’s, the ratings agency, said it is happy with its December 2007 lifting of Mozambique’s long-term sovereign credit rating to B+ from B.

A feature of the dam deal – which lifted Mozambique’s holding in the operating company Hidroelectrica de Cahora Bassa (HCB) to 85% – was its immediate switch into South African rand.

“HCB’s primary offtaker is South Africa’s Eskom, which pays in rand, so this is the most efficient currency hedge,” said Stern: “Mozambique’s government emphasized that various risks had to be managed – this removed one such risk.”

HCB said the deal could be repaid as soon as seven years from the revenues generated by domestic and export power sales, to South Africa and Zimbabwe.

More is needed, however. Antonio Coutinho, managing director at Standard Bank Mozambique said that despite inward foreign direct investment estimated at some $9 billion in 2007, Mozambique remains far behind many other African countries with regard to its infrastructure.

Cahora Bassa – formally aquired last November in a ceremony presided over by president Armando Guebuza – has the potential to generate some 14,000MW of power, about seven times its current 2,075MW capacity.

While Mozambique has a large pool of funds from multiple donors, one issue is the capacity of the country to handle all the investments that come in. Coutinho said: “you have to ask what skill sets are available in Mozambique – at all levels of management, and in specialist areas such as engineering, to manage and ensure the execution of the project, on time and within a set budget.”

Lack of these skills remains a significant problem across the continent, said Coutinho. “It is not unusual to see at year-end budget closure that donor countries repatriate their funds due to a lack of capacity in-country to utilize the money.”

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