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IFC and Construction Materials: Helping Expand Infrastructure Enhancing Economic Growth in Emerging Markets

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IFC and Construction Materials: Helping Expand Infrastructure

IFC and Construction Materials: Helping Expand Infrastructure Developing countries cannot make progress on their poverty reduction and economic growth strategies without roads, ports, schools, hospitals, and other community institutions. And without an affordable and ready supply of the basic building blocks of infrastructure and housing – cement, metals, glass, and other materials – even the most well-intentioned infrastructure development policies will fall short. IFC has invested almost $6 billion in the construction materials sector. This has helped increase the availability of affordable local sources, which are critical to developing a thriving construction sector and to building the physical infrastructure that countries need for economic growth and poverty reduction. Better infrastructure, in turn, drives GDP growth, creates jobs, and encourages additional foreign investment. IFC’s worldclass sustainability standards also help client companies reduce their environmental footprint, enhance their social responsibility efforts, and improve governance, all of which contribute to a strong triple bottom line.

What We Offer IFC, a member of the World Bank Group, is the largest multilateral source of loans and equity finance for private enterprises in emerging markets. We offer clients the strength of our own $18.3 billion net worth, global focus, local presence, and industry expertise. • T  ailored solutions that respond to client needs. These include long-term debt, quasi-equity, and equity financing products; local currency financing in a growing number of cases; and tenors of up to 12 years. IFC offers construction materials and country expertise across multiple subsectors and can support financial restructuring efficiencies. • A  strong track record. IFC’s commitments span the globe. Our $2.3 billion construction materials portfolio represents 100 investments in 77 companies and 42 countries.

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• L eadership in sustainability: IFC can help clients improve their environmental profile, reduce waste, strengthen corporate governance, and build stronger relationships with local communities. For an industry with a significant environmental footprint – for example, cement plants produce 5 percent, and metals 4 percent of man-made carbon dioxide worldwide – sustainability is an increasingly critical issue. IFC’s guidance can help companies interested in elevating their environmental and social standards beyond compliance, which can enhance their brand and improve their public image.

Development and Economic Impact IFC is a development institution, with a mission to promote growth in private enterprise and create jobs in the developing world. We help clients understand the business case for social and environmental responsibility: lower costs, less political risk, higher productivity, and brand enhancement. In 2008 IFC’s construction materials projects have created:

Supporting the Construction Industry in Developing Countries Cement, metals, and glass are usually consumed close to where they are manufactured because of the high relative cost of transporting such goods over long distances. But these industries are capital-intensive and require long-term funding, which is not always available in developing countries. Through long-term investments in cement, metals and glass industries in emerging markets, IFC is increasing the availability – and affordability – of locally produced construction materials.

• 2  6,200 direct jobs and thousands of indirect jobs  ur client companies contributed to • O $547 million in taxes, and purchased local goods and supplies totalling $1.2 billion • B  etter local infrastructure, including roads, schools, hospital and community centers that meet basic needs in developing countries • M  ore residential and commercial construction, which contributes to the growth of the middle class through broader access to homeownership and helps countries become more attractive locations for foreign direct investment  etter environmental management systems, • B which lower ozone emissions and improve energy efficiency • E  nhanced community development, which reduce client companies’ reputational and business risks

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IFC and Construction Materials: Helping Expand Infrastructure

IFC’s Environmental Leadership: IFC’s involvement and expertise in environmental and social management brings value to construction materials companies that have recognized the benefit of investing in strong sustainable development programs. IFC’s partnership with clients extends beyond environmental, health, and safety management systems to encompass energy efficiency, control of gas and dust emissions, quarry rehabilitation, resource recovery, and local community development programs. IFC has consistently found a strong business case for environmental and social sustainability. Benefits to the environment and local communities enhance worker productivity and often improve a company’s bottom line. IFC investments often add a “seal of approval” to a company’s operations, giving investors and consumers confidence in the company’s integrity.

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Expertise across the Subsectors IFC’s sectoral expertise, regional knowledge, and leadership in sustainability offer significant value to our clients, in addition to the full suite of financial products we offer. We invest in the following subsectors: cement, metals, glass, and other construction materials, such as ceramic tiles, sanitary ware, and glass fiber. IFC’s portfolio features projects in Sub-Saharan Africa, the Middle East, Asia, Southern and Eastern Europe, and Latin America. IFC helps global and regional players such as Lafarge, Vicat, Holcim, Taiheiyo, Titan, Mabati and Industrial Union of Donbass establish or expand their presence in emerging markets by offering flexible financing instruments. We focus on cultivating long-term partnerships with market leaders, recognizing that healthy companies grow in stages and often need multiple rounds of financing to support their continued growth. We also support local players, either within their countries of operations or in their plans to expand to other emerging markets. For example, IFC has teamed with Orascom Construction Industries, a leading Egyptian construction materials and construction company, whose cement activities are now a part of Lafarge, to support its growth and strategic development through several expansion projects within Egypt and elsewhere in the region, including Algeria. We also cultivate partnerships between local and global clients – not only at the origination stage but also at the exit stage. For example, IFC can explore selling its equity stake in one cement client to another cement company.

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Italcementi: Long-term Partnerships with a Global and Regional Player With IFC’s help, Italcementi, the world’s fifth-largest cement producer, is implementing an aggressive strategy to expand into emerging markets. With 2006 revenues of $8.45 billion and total cement capacity of 70 million tons in 19 countries, the company saw an opportunity to expand its footprint where demand for cement is growing fastest. With new operations in India and Kazakhstan and the recent purchase of a Chinese cement company, Italcementi has positioned itself to compete in important emerging markets.

IFC’s flexible financing and efficient structure have enabled Italcementi to act rapidly as acquisition opportunities arise. This is critical to successful implementation of the company’s strategy. The agreement allows Italcementi to mobilize financing rapidly on a cost-and resource-effective basis within pre-agreed parameters. IFC’s $200 million debt and equity facility will finance Italcementi’s expansion in several emerging markets over the next three years . Italcementi has also elevated sustainability to a strategic level. It is listed on the Dow Jones Sustainability Index and a member of the World Sustainability Council. With a strong revenue outlook and growth strategy, the company is demonstrating the business case for sustainability.

The company has turned to IFC for emerging market experience and knowledge of local companies and conditions, as it seeks to intensify its investments in places where demand for cement is booming.

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IFC and Construction Materials: Helping Expand Infrastructure

Cement: Supporting Local Construction Sector Growth Cement is critical for the construction sector, the world’s largest industry, and a shortage of supply could hinder the industry’s growth. For developing countries, construction offers tremendous potential for job creation, infrastructure, housing development, and revenue growth. The strong economic performance of emerging economies has fueled recent industry expansion, elevating the importance of an uninterrupted supply and local availability of raw materials.

Yemen’s Construction Boom Middle Eastern investors have started to take notice of opportunities in Yemen, one of the region’s poorest countries, and this has fueled a small boom in construction. But with little local industry, builders have been importing more than 60 percent of the cement they use. With IFC’s help, the situation is changing. Arabian Yemen Cement Company Limited, sponsored by a Saudi businessman and his Yemeni and Saudi partners, recently received $70 million in longterm IFC financing for the company’s integrated greenfield cement plant. IFC also mobilized $55 million from commercial banks; our first syndication in Yemen is expected to establish a demonstration effect in a country where business risks are perceived as high.

“As it is difficult to obtain long-term financing for such a large project in Yemen, IFC’s support is a critical component of this project. IFC has also been instrumental in advising on the project’s technical, environmental, and social aspects.” Abdullah Ahmed Said Bugshan. AYCC chairman

IFC is supporting cement investments in: • T  urkey: IFC provided a $175 million financing package to Sanko Group and its cement subsidiary to acquire an existing plant and build a new one capable of producing 3.1 million tons of cement each year. • Albania: IFC’s proposed investment in Antea Cement, an Albanian subsidiary of Titan, will support construction of a cement plant with an annual capacity of 1.4 million tons. This would help stimulate FDI, generate employment, reduce the country’s dependence on imports, and strengthen the regional export market. • S  enegal: IFC’s $26 million long-term loan to Vicat will help the French company expand its Senegalese subsidiary Sococim. IFC also issued the first local currency bond in West Africa as non resident issuer, with $42 million of the bond proceeds directed to this expansion project. Sococim plans to install a new cement line with the capacity of 1.4 million tons per year. It will also build a 24-megawatt power plant and carry out environmental and equipment upgrades.

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The landmark project – a first for eastern Yemen – is a major step forward for the country and its construction industry. Located near Mukalla, the capital of Hadramout Governorate, the plant will generate employment in one of the country’s least-developed regions while reducing reliance on more costly imports. It will run on state-ofthe-art, energy-efficient technology with an annual production capacity of 1.54 million tons. Because construction has so much potential to enhance economic growth, create jobs, and reduce poverty in Yemen, IFC’s support is not limited to one company here. National Cement Company Limited, sponsored by Hayel Saeed Anam Group of Yemen, has also received IFC’s assistance through long-term financing and an interest rate swap to hedge the company’s interest rate risk. NCC’s plant will have capacity of about 1.4 million tons per year and will be the first privately owned plant operating in Yemen.

Climate change strategy for cement:

Reduce Emissions, Promote Innovation

Cement production is energy-intensive and accounts for 5 percent of total man-made worldwide CO2 emissions. The cement industry faces long-term strategic challenges – particularly in the area of energy efficiency and control of greenhouse gas (GHG) emissions. Our focus is on: • Minimizing harmful GHG impacts from direct and indirect CO2 emissions with investments that: – Reduce the clinker content of cement – Promote energy efficiency in clinker and cement production – Promote use of alternative fuels (such as biomass) Implement waste heat recovery systems for power generation

State-of-the-Art Technology and Waste Heat Recovery: Shanshui Cement Group, China New technology and production process initiatives are helping Shandong market leader Shanshui Cement Group improve its environmental performance. IFC financing is supporting these efforts, with a 2008 investment toward the company’s $682 million project involving the implementation of new cement lines, self-power generation using waste heat recovery generators, and specific cement acquisitions. SCG, one of the top 3 largest cement producers in China, has an annual cement capacity of about 30 million tons. It operates over 10 cement plants and 12 cement grinding units, all of which are located in Shandong and Liaoning provinces except one grinding unit in Tianjin. This recent IFC-supported company initiative will enable upgrades to cement technology to improve quality and reduce emissions. The far-reaching energy efficiency program includes new suspension pre-heater technology as well as the installation of waste heat recovery systems for power generation on all kilns, having a range of 2,500 to 5,000 tpd capacity. After completion of this program, the company will stand out as one of the energy efficient and environmental leaders in China’s massive cement sector, which produces more than 45 percent of the world market. Shanshui is also well-positioned to take advantage of the on-going market consolidation encouraged by the Chinese government in order to rationalize an industry having over 5000 companies. As larger, more technologically-advanced players like Shanshui buy up smaller, local companies, they upgrade processes and promote clean production technology. This means a shift from vertical shaft kilns, which accounted for 55 percent of cement capacity in 2005 and were a considerable source of pollution, to energy efficient, environmentally friendly NSP technology. Estimates suggest that by 2010, companies will produce over 850 million tons of cement – 70 percent of capacity – using this new, cleaner technology.

• Local and second-tier producers to support investments in modern, cost-competitive and environmentally friendly plants, especially in frontier markets.

IFC role and climate change benefits

• Initiatives to promote best practices and innovation, such as carbon-related initiatives and energy efficiency audits.

• Guidance on technology and environmental & social best practices and on sustainability strategy

In addition to structuring appropriate financing, IFC can offer guidance on equipment and technology, and ways to quantify potential efficiency gains based on our track record.

• Reduced reliance on external power sources: waste heat recovery can be replicated in similar investments

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• Two rounds of financing in support of its expansion plans: $57.7 million in 2005; $62.6 million in 2008

• Significant reduction in pollution: all of SSG’s cement plants use clean NSP technology

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IFC and Construction Materials: Helping Expand Infrastructure

METALS: LOW-COST AND ENERGY-EFFICIENT PRODUCTION We support projects that improve environmental standards, including scrap metal recycling, replacement and modernization of equipment. IFC’s metals investments span the globe. We take a regional and country-specific approach to our metals investments, depending on identified needs and unique market conditions.

Reducing Emissions, Achieving Cost Efficiencies: Industrial Union of Donbass Ukraine’s Industrial Union of Donbass cut its operating costs by 5 percent through blast furnace upgrades and a modernization program that improved its energy efficiency. IFC helped the company upgrade its production technologies, reducing particulates by more than 450,000 tons and achieving a 10 percent reduction in carbon dioxide emissions, along with other environmental improvements. The project resulted in positive business outcomes as well-the company upgraded the quality of its products, and expanded its steel product line.

IFC’s role: • $700 million financing package, including longterm financing that improved the company’s debt structure • Guidance on technology upgrades resulting in environmental efficiencies

Climate Change strategy for metalS: Reduce Emissions, Promote Innovation

The steel industry accounts for nearly 4 percent of the world’s GHG emissions; on average, 1.7 tons of carbon dioxide is emitted for every ton of steel produced. Our focus is on steel operations, since steel investments represent more than 80 percent of IFC’s exposure in the sector, and as crude steel production shifts to emerging market countries. Our focus is on: • Opportunities to improve environmental standards through replacement of open hearth furnaces, modernization of coke production, enhanced energy efficiency, promotion of scrap steel recovery and recycling, blast furnace and converter gas recovery for power generation and others. • Investments that support the industry shift toward highly efficient production platforms, based on the global industry cost curve. • Projects that minimize environmental impacts and enable client companies to adopt best practices and invest in leading-edge technologies to improve energy efficiency and abate pollution. Investments in these areas often result in operational cost savings. • Opportunities to provide additional innovative services and products such as energy efficiency and cleaner production audits, knowledge sharing and guidance on carbon credits. In addition to structuring appropriate financing, IFC can offer guidance on equipment and technology, and ways to quantify potential efficiency gains based on our track record.

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New Cold Rolling Mill for Kenya: Mabati Mabati Rolling Mills Limited is installing a new 6-High Cold Rolling Mill at its Mariakani Complex near Mombasa. The new mill will expand the existing capacity of cold rolling and will enable higher and better production of Aluminium-Zinc coated products. AZ coated steel is more resistant to corrosion and lasts up to six times longer than more traditional 100 percent zinc coated galvanized steel. There is strong customer demand for this steel, which is extensively used in roofing. To date, Mabati is the only producer of AZ coated steel in Africa. The total project cost is estimated at $35.6 million. This is partly being financed by IFC. Mabati is part of SAFAL Group and provides metal roofing solutions across Southern and Eastern African countries.

IFC role and development impact: • $5 million in long-term financing • 200 new indirect jobs • Introducing new technology and new products to local and regional markets • Superior product quality – at affordable prices – will provide better shelter, especially for poor communities that often use galvanized sheets for roofing •G  enerating increased foreign exchange earnings and diversifying the country’s export base

Enhancing the Capacity of Albania’s Construction Industry: Konstruksione Metalike The cost of importing steel structures has impeded construction activity in Albania, a country on the cusp of positive economic change. Gaps in the domestic steel industry have made it harder to improve transportation infrastructure. New commercial and residential developments have been limited. Now, the situation is changing, as the nation’s leading domestic supplier, Konstruksione Metalike, increases its production capacity and upgrades its technological capabilities, with IFC’s help. Using AutoCAD-based design technology, Konstruksione is the only domestic producer that can compete with finished imports, with cutting, welding, painting and finishing capabilities. The company employs 65 people. The $6.9 million project involves construction of a new facility adjacent to its existing plant, technical upgrades and investments in the company’s logistics network.

IFC’s role and development impact: • $2.95 million long term financing • Technical support and training on ISO-2000 through IFC Advisory Services in Southern Europe • Guidance on improving corporate governance and transparency • 40 new jobs when expansion is complete • Reduced reliance on more expensive imports, encouraging increased infrastructure and construction investment

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IFC and Construction Materials: Helping Expand Infrastructure

Glass: Meeting Demand amid Rising Costs Rising costs for energy and raw materials, coupled with higher prices for minerals, metals, and timber, are placing a strain on construction materials’ manufacturers despite the current upturn in demand in most markets. IFC is providing innovative solutions that help manufacturers in this subsector respond to the changing environment.

Climate Change Strategy for glass:

Reduce Emissions, Promote Innovation

Carbon emissions related to glass production result from the melting process itself as well as fuel and energy usage, given the heatintensive nature of the production process. Our focus is on:

Zhejiang Glass: Expanding Float Glass Production With $147 million in revenues last year, Zhejiang Glass is one of China’s largest float glass manufacturers that is listed on the Hong Kong Stock Exchange. The company, which employs 5,800 people, is operationally sound but financially weakened, both because it has relied on short-term debt to finance long-term capital expenditures that support its rapid growth and because the glass market experienced a downturn in 2006. IFC is helping Zhejiang Glass strengthen its balance sheet by reducing and refinancing $220 million of its short-term debt.

IFC’s Role: • Investing $93 million in debt and equity • Rationalizing the company’s capital structure and reducing overall financing risk so that it can continue to grow and weather future cyclical downturns •H  elping retain jobs for workers who might otherwise have been laid off due to downsizing •M  obilizing additional financing sources •G  uiding improvements in energy efficiency, quality management, and corporate governance

• Improvements in raw materials technology, including new raw material delivery systems and increases in cullet (waste glass) collection and use by glass manufacturers. • Support for glass quality standards to improve availability of high quality glass and support for energy efficient glass products (such as solar control and low-E glasses) to help conserve energy and reduce GHG emissions. • Promotion of energy efficiency of glass manufacturing to reduce primary fuel and power consumption. • Implementation of waste heat recovery for power generation in selected cases where cost effective. In addition to structuring appropriate financing, IFC can offer guidance on equipment and technology, and ways to quantify potential efficiency gains based on our track record.

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Pilkington: Partnering with a Global Leader in Russia IFC’s investments have reinforced our partnership with NSG Group (including Pilkington), one of the largest glassmakers in the world, as it entered a new market. IFC financing has helped the company build and outfit a state-of-the-art float glass plant in Russia, creating 250 new jobs. Strategically located in the Moscow region, where demand growing, the plant is close to raw materials suppliers and target markets. The plant’s state-ofthe-art emissions controls raise the bar for other manufacturers in Russia. Now operational, the plant is reducing the country’s reliance on imports and contributing to expansion of the construction industry.

IFC’s Role: • Total financing of 59.5 million euros

Other Construction Materials IFC is also active in other nonstructural construction materials sectors such as ceramic tiles, sanitary ware, and insulation and reinforcement materials. Growth in these subsectors helps improve living conditions, creates jobs, and enhances the tax base. It also increases budgetary support for critical infrastructure improvements and expansion of social and community services.

• Assistance in structuring a financial plan and reducing the project’s overall risk profile

Owens Corning India: Supporting a Market Leader Owens Corning India Ltd is India’s largest fiberglass manufacturer. With IFC’s help, the company is expanding its manufacturing capacity and modernizing its factory to improve energy and production efficiencies. Over the last few years, demand for glass fiber in India has grown by 25 percent a year. Demand is expected to continue to grow at a healthy pace of 18 percent over the medium term, driven by expanding infrastructure and automotive sectors. With OCIL’s expansion, India’s installed glass fiber capacity will increase to 67,000 tons a year by the end of 2007. OCIL is a joint venture between U.S.-based Owens Corning, the world’s largest manufacturer of fiberglass with a 28 percent market share globally, and Mahindra & Mahindra, India’s leading manufacturer of utility vehicles and tractors. OCIL is not only the largest glass fiber producer in India, but is also one of Owens Corning’s most efficient plants worldwide.

IFC’s Role: • $12 million in long-term financing in support of $39 million expansion and modernization project • Guidance on implementing environmentally friendly technologies and processes

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IFC and Construction Materials: Helping Expand Infrastructure

Our Approach IFC seeks to partner with strong, stable firms that understand local and regional markets, with a track record of success and an abiding commitment to transparent corporate governance, social responsibility, and environmental sustainability.

IFC’s Construction Materials Portfolio IFC’s portfolio in construction materials companies totals almost $2.3 billion. We maintain a significant presence in key countries. Our $2.3 billion construction materials portfolio represents 100 investments in 77 companies and 42 countries.

We look for: • Global  players interested in increasing their presence in frontier markets

Construction Materials by Sub-sector

• Local  and regional players that are expanding in their own markets or other emerging market countries • Industry  players looking to enrich their public image through better environmental and social management and performance  in markets with strong demand and • Projects high potential for economic growth • Projects  involving a viable partner of a niche product, such as white cement

Other $154,631

Metals $615,582

Construction Materials by Region

World Sub- $200,000 Saharan Africa $174,131 Cement $1,087,244

Glass $403,284

Southern Europe & Central Asia $351,996

South Asia $254,688

Central & Eastern Europe $376,717

East Asia & Pacific $456,151

Latin America & Middle East Caribbean & North $182,702 Africa $264,356

• Projects with a sound import substitution strategy • Projects  that contribute to privatization or restructuring of the industry

For more information please contact: 1-202-458-9625 or esiew@ifc.org Eric Siew Georges Zahar 1-202-473-7098 or gzahar@ifc.org Rozita Kozar 1-202-473-2820 or rkozar@ifc.org Michel Folliet 1-202-473-4614 or mfolliet@ifc.org Garth Hedley 1-202-473-0640 or ghedley@ifc.org 2121 Pennsylvania Avenue, N.W, Washington, D.C. 20433 U.S.A. Telephone: 1-202-473-1000, Facsimile: 1-202-974-4384

Printed on material that meets international environmental standards and is from sustainably managed commercial forests.

ifc.org

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2008

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Construction Materials Sector Brochure