As the economy accelerates in Pakistan, cement producers such as Power Cement are facing a stark choice: move quickly to retain a solid foothold in a growing market, or leave it to others. The ability to access the right financing and cement production know-how is crucial to their ability to grab the opportunity.
Economic development in Pakistan has accelerated in recent years. In addition to an ever-larger population, development is largely fuelled by greater political stability and, not least, foreign investments, in particular a notable USD 56 billion investment by China over the medium term.
Mr Tahir Iqbal, CFO of Power Cement, explains the impact on the cement market, in which the demand for cement has increased by around eight percent annually over the last decade. “There is a shortfall of around seven million housing units and a growing need for better infrastructure, including roads and water reservoirs for power stations. It all adds up to a greater need for cement.”
Power Cement is part of the Arif Habib Group, a conglomerate with major interests in infrastructure projects and an important role in the regional development of Pakistan. In early 2015, the group reviewed its business activities and identified several development opportunities, including an expansion of its cement production capacity at Power Cement, located in Nooriabad, north-east of Karachi. The company decided to increase capacity from 3,000 tonnes per day delivered by the existing two lines, to 10,700 tonnes by adding a new production line.
“The choice facing cement producers is either to stay in the game by expanding capacity and improving productivity – or to leave it up to other producers. We chose to stay, not just because of the economic opportunity, but also because we have a responsibility to contribute to our region’s development.” - Tahir Iqbal, CFO, Power Cement
Such initiatives resonate well with the Pakistani government’s drive for development and investment, which have been aided by tax incentives to ensure speedy implementation of growth initiatives.
“Power Cement’s intention is to operate at full capacity, where we serve the domestic market, and any excess capacity will be exported,” says Kashif Shah, Advisor to the Arif Habib Group.
Preparing for international expansion
Major expansions need major financing. Even though the Arif Habib Group has good relationships with financial institutions in Pakistan, this project was a good opportunity to establish relationships with other international financial institutions. This supports the group's business internationally, so management decided to pursue financial partners outside of the country. This was one of the reasons FLSmidth was invited to bid for the project, explains Kashif Shah.
Tahir Iqbal, Gregers Schmidt and Kashif Shah(standing, left to right). Tine Bremholm Kokfelt and Zainab Muhammed (seated).
Not only would FLSmidth bring its industry-leading cement plant equipment and expertise to the table, but FLSmidth would also be able to support the group’s objectives by structuring an international financing package through its strong connections with financial institutions.
FLSmidth has helped facilitate financing for many large-scale development projects in developing regions over many years. Strong relationships have been established by FLSmidth with several international financial institutions, and it has a history of working with Denmark’s official finance institutions providing international financing, in particular the Investment Fund for Developing Countries (IFU).
Kashif Shah says: “We are pleased with the partnership with IFU. As we look to expand our operations internationally into areas such as Africa and the Middle East, we are convinced partnerships of this kind will help us in our future projects.”
A solid financial partnership
In addition to acquiring an ownership stake in the cement plant, FLSmidth secured the participation of IFU, supported by a Danish pension fund. Together, the Danish consortium holds a 9.8 percent of the share capital after expansion.
Tine Bremholm Kokfelt, Global Project & Export Finance at FLSmidth, helped facilitate discussions between Arif Habib Group and IFU from the outset. She comments: “Cement plant projects are attractive to pension funds, because of the consistent, long-term expected returns. Another benefit has been the already listing of Power Cement on the Pakistani stock exchange.”
Although Pakistan is not new investment territory to IFU, there have been none in the last few years. “IFU’s participation provides a vote of confidence in the local growth opportunities,” says Kashif Shah.
The master plan for the project financing is based on four pillars – in which one of Power Cement’s internal resources, Abdul Rahim Butt, has also contributed. The mix of the four pillars – local equity, local debt, foreign equity and foreign debt – provides the optimum solution of minimum financial cost and foreign exchange coverage.
The construction of the plant is progressing. The clinker silo will have a storage capacity of 110, 000 tonnes.
Choosing the right supplier
For such a flagship project, Arif Habib Group wanted the market’s leading equipment. A strict evaluation procedure of several vendors managed by Power Cement’s team of highly qualified advisors led to FLSmidth being chosen as the equipment supplier.
According to Kashif Shah, Power Cement was aware of FLSmidth’s track record and longstanding reputation, so it was natural to consider the company’s offering. The major factors evaluated were not only the capital cost per tonnes of produced cement, but also all factors contributing to running a productive operation: equipment efficiency, energy consumption, emissions control and ease of maintenance. The evaluation concluded that FLSmidth’s proposition provided the lowest total cost of ownership.
The evaluation was not just down to economic and operational factors, however. With a dedication to providing the highest quality cement, Arif Habib Group wanted a supplier whose brand was built on quality.
“It was quite clear to us,” says Kashif Shah. “We want to be a quality player, so we need quality equipment, and one of the key reasons for choosing FLSmidth was that the FLSmidth brand will help Power Cement build its own brand. “Having FLSmidth involved in this project gives us peace of mind. Whatever they commit to, they go out of their way to ensure it happens, overcoming any challenges along the way.”
Committed to a successful project
Now that the commitment has been made, there is of course an expectation that all parties will deliver. According to Kashif Shah, the importance of this project cannot be overstated, as the government is offering significant tax exemptions for such infrastructure development projects – if deadlines are met. The deadline for Power Cement’s new commercial operation is 30 June 2019, but operations are expected to begin well before.
And the early signs are good. “Most of the equipment has already been ordered, the initial design plans have already been completed, and we are confident that our project team and FLSmidth will work well together,” says Kashif Shah.
Tine Bremholm Kokfelt
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