Melrose was founded in 1997 and was listed on the London Stock Exchange in 1999. Melrose’s largest shareholder is the Adair family (52%) through the Adair Trusts and Skye Investments Ltd; Robert Adair is currently Chairman of the Board. Other large shareholders include Caledonia Investments plc (9%), Fidelity International Ltd (4%) and Framlington Group Ltd (4%). The company’s current market capitalization is approximately $700 million.

The project comprises:

- approximately $220 million projected capital expenditures related to Egypt and Bulgaria over the next 18 months (representing 83% of Melrose’s total planned capex of $265 million for the period);
- $265 million for the acquisition financing of Merlon; and
- approximately $116 million for repayment of Melrose’s existing debt.

The $220 million capital expenditure will support Melrose’s aggressive exploration and development plans, particularly for Egypt. Melrose has already launched successful exploration efforts in Egypt, and as a result two recent discoveries, West Khilala and West Dikirnis, are at the forefront of Melrose’s development plans. Melrose also has four exploration licenses in Bulgaria where it will also be targeting funds.

IFC has been requested to provide up to $50 million as part of a larger six year senior corporate revolving credit facility of $290 million, to help finance the project. The utilization of the IFC funds will target investments in Bulgaria and Egypt.

50.0 million (USD)

Product Line	IFC Investment (million USD)
Risk Management
Guarantee
Loan	50.0
Equity

* These investment figures are indicative

- Egypt

The Qantara, El Mansoura and South East El Mansoura concessions are located in the onshore Nile Delta in the Arab Republic of Egypt.

- Bulgaria

The Galata field is a relatively small field located in the Black Sea off the eastern coast of Bulgaria.

Fit with World Bank Group Strategy

In Egypt the World Bank Group (WBG) Strategy is to:

- facilitate private sector development;
- enhance the provision of selected public goods; and
- promote social and economic equity.

IFC’s strategic objective outlined in the WBG strategy is to focus on:

- supporting PPI initiatives;
- assisting the development of new financial sector institutions and instruments for the private sector;
- catalyzing new private sector investment in manufacturing, petrochemicals, oil and gas, as well as the social sectors; and
- supporting SME initiatives.

In Bulgaria the objectives of WBG are to:

- address productivity and employment;
- implement fiscal sustainability and proper absorption of EU funds; and
- target poverty reduction through social inclusion.

IFC’s strategic objective outlined in the WBG strategy is to support Bulgaria’s EU integration by helping Bulgaria improve its competitiveness through supporting domestic companies and attracting foreign private investors in the country.
The proposed project is consistent with WBG’s overall strategic priorities in these countries by developing its natural resources, attracting foreign investment and providing training and jobs, while helping the company to operate in an environmentally and socially responsible manner.

- Development Impact

The project is expected to contribute to the benefits provided by Melrose’s continued operations as follows:

- Promoting Natural Gas Development and Use

The project will contribute to increased natural gas production in Egypt; production is expected to increase from an average 70 mmcf/d in 2005 to 200mmcf/d by year-end 2007. Natural gas is believed to be the primary growth driver in the Egyptian energy sector. Melrose’s operations support both the development of gas for domestic use and the government’s strategy of promoting gas as a domestic fuel of choice. Bulgaria has limited indigenous gas production and its domestic market for natural gas is still at an early stage of development. The Galata field development, the first upstream oil and gas development undertaken by the private sector in Bulgaria, has supported the government’s objectives to include the private sector and develop a competitive gas market. In 2005, the company provided 16% of the natural gas consumed domestically. The project will contribute to sustaining this positive impact on the country’s gas sector. Moreover, it is expected that the Galata field, upon depletion, will be used as a gas storage facility, thus strengthening Bulgaria''s role as a gas transit country with its corresponding revenue generating benefits.

- Creation and Preservation of Direct and Indirect Employment

The project will help sustain employment in both countries. In Egypt, the operating company currently employs approximately 47 personnel and an average of 300 contractors per annum, of which more than 95% and 100%, respectively are locals. In addition, given the large development program envisioned over the next couple of years, the project is expected generate additional employment of about 200/300 contractors per annum. In its Bulgarian operations, Melrose employs 43 people directly and an average of 300 contracted staff per annum. 100% of direct personnel and 70% of the contracted employees are locals.

- Supporting Local Communities and Suppliers

The company is committed to the local communities in which it operates, recognizing that engagement with the communities in the area of its operations is integral to the long-term success of its investments. In Egypt, Melrose and its partner Merlon have contributed to schools, mosques and the construction of roads and other infrastructure within the concession areas. In Bulgaria, the company sponsors a daycare center for children with disabilities by providing heating fuel during the winter months and is presently rebuilding a local church. In addition, with the exception of specialized equipment Melrose aims to procure approximately 70% and 70% of its purchases locally in Egypt and Bulgaria, respectively.

- Benefits to Government

The project benefits to Egypt and Bulgaria include continued revenues that will accrue to these governments in the form of production share, royalties and corporate taxes. The estimated net present value of future aggregate revenues to the Government of Egypt (GoE) and Government of Bulgaria (GoB) is expected to be about $300 million and $5million, respectively, over the life of the proposed IFC investment, representing less than 0.09% and 0.01% of annual federal government revenues. (nb 2005 revenues - $9.9bn Bulgaria & $32.9bn Egypt)

IFC plans to monitor the following development impacts for both Bulgaria and Egypt during the life of the IFC investment:

- employment levels;
- local/national purchasing;
- production sharing and fiscal payments accruing to the governments of Egypt and Bulgaria; and
- investments in community programs.

IFC has several important roles to play in the proposed investment:

- funding mobilization: IFC was the first bank to support Melrose in emerging markets through the financing of the Galata field development, followed by IFC’s financing of Melrose’s Egyptian operations soon thereafter. The majority of Melrose''s assets are located in emerging markets, which remain the focus of the company''s growth strategy. Melrose recognizes that emerging markets are volatile, as evidenced by the recent apprehension exhibited by the financial markets. IFC''s continued presence as a lender of record therefore provides significant comfort both to the company and the commercial lenders. IFC’s participation and de facto political risk mitigation are considered key to the successful raising of the facility, not least by providing debt with a tenor that will be 3 years longer than that of the commercial lenders;
- assistance with the development of the company''s Environmental and Social Management Systems: IFC will work closely with the company on enhancing health, safety, environmental and social management capacity at the country level and will play a key role in helping Melrose develop a corporate Social and Environmental Management System (SEMS) in line with IFC’s new Performance Standards; and
- enhancing local benefits: IFC is reviewing the possibility of whether it can add value and enhance the company''s ongoing efforts to support local communities by leveraging IFC’s expertise and international experience in this area.

This is a Category B project because a limited number of specific environmental and social impacts may result which can be avoided by adhering to generally recognized performance standards, guidelines and the corrective action plan.

At the parent company, Melrose has committed to develop and implement an integrated Health, Safety, Environment and Corporate Social Responsibility Management System (HSEMS). The HSEMS will address the requirements of IFC’s new Performance Standards and in particular issues relating to labor, community engagement and community development. At the country level (Egypt and Bulgaria), the company will review their existing management systems to identify any gaps in relation to the Performance Standards. As part of the new corporate and revised country level HSEMS the company will prepare specific corporate and local level Public Consultation and Disclosure Plans.

A Corrective Action Plan (CAP) has been agreed with the company to address the issues identify during the appraisal of this project.

The benefits of the project come in a number of forms as outlined above, including revenues to the governments in the form of taxes, royalties and other payments. In the case of Egypt, the government’s share of hydrocarbon revenues partly accrues to the Ministry of Petroleum (EGPC/GPC), and for income taxes to the Ministry of Finance (MOF). In Bulgaria, revenues accrue to the municipality of Varna and to the central government.

In coming to a view of whether to support this project, the IFC considered the value of the project’s benefits, and governance and other risks to these benefits. In this respect it considered a range of indicators of governance, as well as the current relationship between the host countries and the World Bank Group. These indicators reveal a mixed picture in the case of Egypt, and an improving situation in the case of Bulgaria. The World Bank is currently engaged with the Egyptian Government on governance-related initiatives, including the introduction of performance monitoring and evaluation frameworks, and requiring a higher level of information disclosure to the public. In Bulgaria, governance and the strengthening of institutions are at the forefront of the government’s policies. The World Bank is involved with the Bulgarian Government to further strengthen public administration capacity, improve the quality of service delivery, reduce corruption, strengthen accountability and transparency, and, importantly, increase the efficiency and effectiveness of the judicial system.

To ensure transparency Melrose has agreed to publicly disclose all revenues paid to government authorities on an annual basis.