Derba Midroc Cement Plant Project


Overview

  • Reference: P-ET-BB0-001
  • Approval date: 16/04/2008
  • Start date: 03/03/2011
  • Appraisal Date: 02/11/2007
  • Status: OngoingOnGo
  • Implementing Agency: DMC DERBA MIDROC CEMENT PRIVATE LIMITED COMPANY
  • Location: DERBA

Description

2.THE PROJECT Project Description

2.1 The Derba MIDROC Cement (DMC) plant project consists of the mining of the Derba-Mugher limestone deposit located 70 km north of Addis Ababa and its treatment in a cement plant with capacity to recover 5,600 tonnes per day (tpd) clinker and 7,000 tpd cement as a finished product. In 2007, DMC secured a Prospecting license for limestone and marl (the main components) for a total area of 125 km2 from Oromiya Regional State Mines Development Agency for the plant location in Becho. Detailed geological studies are under way in a 2 km2 area to confirm estimated reserves of 165 million tonnes of limestone, giving an estimated project life of 60 years. DMC will receive its Mining License following submission of the detailed geological study to the Ministry of Mines.

2.2 A belt conveyor system will transport the crushed material to the plant site; a distance of about 7 km with an estimated altitude of 800 m. The final finished products will be Ordinary Portland Cement (OPC) and Pozzolana Portland Cement (PPC). The maximum annual capacity will be around 2.5 million tonnes per annum (tpa) of cement with the OPC/PPC ratio at 30/70 (2.7 million tpa if PPC only).

2.3 The project includes the development and upgrade of supporting infrastructure including the access roads, the conveyor belt from the mines to the plant, the power transmission lines, the water pipelines and social amenities. Two new roads will be constructed (roughly 7 km each), one from Derba to the plant site and another from the plant site to the quarry. Power consumption for the plant and facilities is estimated at 45 MW, and DMC would become the single largest power c onsumer in the country. The main feeder line passes close to Chancho, about 20 km from the plant. A substation will be constructed and a power line will link it to the plant. In addition, a 5 MW plant will be built by the sponsor at the plant location during the construction phase. Around 60% of the energy produced will be used for the project construction, while 40% will benefit local communities. Once the plant is linked to the main grid, the plant will remain as back up and keep benefiting local communities. The water needed for the project and auxiliary facilities will be pumped from the Mugher River and underground sources. Hydrological studies confirm that the site has very good water reserves and catchment areas. Two boreholes have been drilled so far for the construction period and 4 to 5 boreholes will be added for operations. No waste water will be generated from process and cooling as the total water undergoes evaporation. A sewage treatment plant will cater for the plant and the community and will have a 300 m3/day capacity.

2.4 As part of the project, a housing development with all basic amenities (housing, school, recreation center, market, health center, etc.) will be constructed onsite for the benefit of DMC employees. In addition, DMC will set up a Community Development Fund to support small scale businesses for the local communities . As detailed in the resettlement action plan, DMC will contribute Birr 2.5 million to the fund and a committee comprising local community representatives and DMC will oversee the implementation of this Fund. The Sponsors

2.5 The project company is Derba MIDROC Cement plc (DMC), a subsidiary company of MIDROC Ethiopia. DMC is a private limited company incorporated under Ethiopian law in February 2006 with a capital of Birr 500 million (USD 57 million). DMC is owned by Sheikh Mohammed Ali Al-Amoudi (SMAA), 80% directly, and 20% through his wife Mrs. Safia Salah Al-Amoudi.

2.6 The project sponsor is SMAA. Born in Ethiopia and now a Saudi citizen, SMAA made his fortune in construction and real estate before investing in the oil and gas sector; his net worth is estimated at USD 6.9 billion (Forbes 2006). The Midroc Oil & Gas Sector group of companies (MOGS) are wholly or majority-owned by SMAA, and include: NAFT Services Company Limited, Preem Petroleum AB, Svenska Petroleum Exploration AB, Soci


Rationale

Analysis of Additionality and Complementarity

3.28 As a part of its private sector project selection strategy, the Bank seeks to ensure that its participation in each project adds specific value that cannot be provided from other sources. The Bank's additionality can be seen from three main perspectives:

(i) risk mitigation,

(ii) capacity building, and

(iii) improving the enabling environment for private sector development.

3.29 Risk MitigationMIDROC is an experienced investor in Ethiopia and therefore it is difficult to argue that the Bank's presence was required to attract their investment in this project. However, the Bank played a key role to attract the debt financing needed to realize the project and to convince all financiers to provide the 10 year funding needed to ensure a solid cash flow structure for the project. The Bank convinced DBE to participate in the project and to provide local currency financing that reduces the asset-liability mismatches created by foreign currency funding. However, given current credit conditions in the capital markets, the Bank tried but was unable to attract commercial banks to participate in the project financing.

3.30 Capacity BuildingThe Bank was able to leverage its strategic partnership with MIDROC to become the mandated lead arranger for the project. In this capacity the Bank developed the detailed financial, economic and stakeholder models that were shared with the sponsors, the lenders, and the central bank. The Bank assisted DMC to undertake the environmental assessment for the project and to prepare an environmental management and resettlement action plan. Thus the Bank was able to assist all stakeholders to understand the likely impacts of the project and to implement standards in line with industry best practices. The Bank is assisting DMC to establish the community development fund that will support local MSMEs. Though this project, the ADB team helped DBE staff to learn to appraise a large scale project finance transaction. This interaction should be the springboard for future collaborations with DBE.

3.31 Improving the Enabling EnvironmentThe project provided an opportunity to examine in greater detail the investment climate in Ethiopia including the foreign exchange regime implemented by the central bank. Although the investment climate was deemed sufficiently conducive to enable the project to proceed, a number of suggestions have been made to the Bank's country team for Ethiopia to improve the investment climate, including market liberalization, which will feed back into the Bank's country assistance planning process.

3.32 The Bank also aims to demonstrate that it is not duplicating efforts of other development partners and that its assistance is complementary. The Debra project is a good example of the Bank playing a lead role to collaborate with both international and local partners and to harmonize approaches by sharing models and information.


Benefits

3.JUSTIFICATIONS FOR THE BANK'S INVOLVEMENT Analysis of Development Impact and Alignment with Bank Strategy

3.1 Development Impact?? The Derba Midroc cement project will have a broad range of developmental effects. First, the project will have a positive impact on other infrastructure projects in the country by reducing input costs and shortening implementation times. The availability of cement at a competitive cost is critical for physical and social infrastructure projects such as roads, dams, and bridges as well housing development projects. Second, it will increase competition and reduce the country's dependence on cement imports, thereby helping to redress the current account deficit and easing pressure on foreign reserves. Studies show that an efficient construction sector can add up to 2% to GDP growth in developing countries.

3.2 In terms of the direct economic impact, the project is estimated to generate an economic Net Present Value (NPV) of about USD 509 million in constant 2007 prices (discounted by 12% real), and an Economic Rate of Return of 22.3%. As illustrated in Table 4 below, these economic benefits will accrue to 5 main stakeholders:

(i) the Government of Ethiopia (GOE);

(ii) local labor;

(iii) local SMEs;

(iv) investors; and

(v) lenders. The combined direct cash contribution to the Ethiopian economy from the project represents about 78% of the total benefits, while investors retain about 17% of the estimated benefits.

Table 4: Stakeholder Analysis (USD millions, constant 2007 prices) StakeholderPV@12% Government of Ethiopia330 Local Labor10 Local SMEs53 Investors89 Lenders27 Total509

3.3 For the Government, the project will contribute an estimated USD 330 million in NPV terms during the first 15 years (discounted at 12%). Sales and value-added tax will account for USD 147 million, while corporate taxes will add about USD 70 million and land lease for USD 4 millions. Finally, indirect taxes will amount to USD 109 million, derived from all new businesses that will be created and savings from the foreign exchange premium.

3.4 For the local population, the project will create substantial direct and indirect job opportunities with an estimated NPV of USD 10 million. During the construction phase about 2,000 construction workers will be employed as well as additional jobs for subcontractors, suppliers, etc. During operations, about 474 staff will be employed, with some 20-30% of these jobs going to women. These employment-generating opportunities will directly benefit the local population, improve living standards, and help to reduce poverty. From a human capacity development perspective, DMC will provide training programs developed with the contractor CNBM as part of the EPC contract signed between both parties. The sponsor is also committed to establishing a school, health center (for emergencies) and mobile dispensary for the local population, in addition to other social benefits. DMC has already budgeted Birr 700,000 for setting up two health care facilities, one at plant site and the other at the quarry site, and Birr 750,000 were budgeted for the education facilities. Details are included in the Socio-Economic Development Plan, part of the Resettlement Action Plan. Finally, DMC will commit Birr 224,000 for the establishment of Vocational (Health Extension Workers and Farmers Training) Centre.

3.5 A major development feature of the project is the way it will create indirect opportunities for local enterprises, including SMEs for goods, works, and services. It is estimated that the project will create more than 1,000 indirect jobs through the establishment of SME/SMI. A Socio-Economic Development Plan will be developed to optimize job creation, including vocational training centres. During construction and operation, construction materials will be sourced within Ethiopia. It is estimated that the project will contribute USD 53 million in NPV terms during the first 15 years (discounted at 12%). In addition, the boost of the construction sector has a huge potential for jobs creation as the sector is well known as labor intensive and will be instrumental for SMEs creation and development.

3.6 The project investors will earn an estimated USD 89 million in NPV terms during the first 15 years, composed mainly of dividends earnings for the sponsors.

3.7 Strategic alignment ? The project is well aligned with the Government's industrialization objective of increasing the share of the industrial sector in GDP from 14 to 17% by 2009/10 as articulated in the Plan for Accelerated and Sustained Development to End Poverty (PASDEP). DMC is the first major private sector cement plant and is therefore an important step in the Government's objective to privatize the downstream industry subsectors in an effort to increase market competition, improve efficiency and accelerate economic growth. Through its involvement in the project, the AfDB will help Ethiopia to demonstrate that it is a sound FDI destination, particularly for private sector infrastructure development.

3.8 The project is in line with the Bank's CSP for Ethiopia for the period 2006-2009, with its particular focus on infrastructure development and promotion of private sector development. The project will support the backbone sectors of the economy (construction, infrastructure, industry, and housing). The Derba MIDROC project is also perfectly aligned with the Bank's PSO strategy for leveraging Bank resources through strategic partnerships with "world-class" sponsors: this will be the third project that the Bank has undertaken with SMAA in Africa. The Bank is also playing a major resources mobilization role and harmonizing its efforts through partnerships with EIB, IFC and DBE.


Key contacts

NGANDU Willy Budibunene - OPSD4


Costs

Finance source Amount
ADBUSD 34,924,183
DeltaUSD 187,322,317
TotalUSD 222,246,500