US embassy cable - 05ALGIERS1164

C O N F I D E N T I A L ALGIERS 001164 
 
SIPDIS 
 
STATE PASS TO OPIC 
 
E.O. 12958: DECL: 06/07/2015 
TAGS: EFIN, ECON, AG, OPIC, Hydrocarbons, Economic Reform 
SUBJECT: ALGERIAN BANKS WILL FINANCE DESALINIZATION PLANTS 
 
REF: A. RIVERA/PIGNATELLO E-MAIL OF 6/6/05 
 
     B. 04 ALGIERS 02287 
 
Classified By: Ambassador Richard W. Erdman, for 
reasons 1.4 (b) and (d). 
 
SUMMARY 
-------- 
 
1.  (C) Minister of Energy and Mines Khelil made clear in a 
June 6 meeting with Ambassador that the GOA had given careful 
consideration to its plans to finance future desalinization 
plants.  While Algerian state banks did not have much 
experience in project financing, they had to start somewhere. 
 Local financing of the projects was in the Algerian national 
interest, and the Government had issued instructions on this 
basis.  Khelil acknowledged the lack of Algerian expertise in 
the field made delays inevitable.  Nonetheless, Sonatrach and 
the Ministry of Finance had the means to provide technical 
resources and training.  Funding the plants with domestic 
capital was a priority.  In our view, the GOA is unlikely to 
reverse its decision anytime soon.  (End Summary.) 
 
 
LOCAL BANK FINANCING IN THE NATIONAL INTEREST 
--------------------------------------------- 
 
2.  (C) In a June 6 meeting with Minister of Energy and Mines 
Khelil, Ambassador inquired how the GOA intended to finance 
the construction of planned desalinization plants. Khelil, in 
the presence of his staff and POLEC Chief, said the GOA had 
issued instructions to finance the plants from Algerian bank 
reserves.  Asked if the GOA had carefully reflected on this 
course of action, Khelil listed a number of reasons for the 
decision.  First, local bank financing would mitigate the 
exchange rate risk and reduce associated insurance costs. The 
costs of closing deals financed by external funds would also 
be diminished.  Finally, the local banks had "plenty of local 
money (to lend) at competitive rates." 
 
 
OPPORTUNITY TO BUILD EXPERTISE 
------------------------------ 
 
3.  (C)  Ambassador inquired if Algerian banks had the 
expertise necessary to finance the projects.  In response, 
Khelil twice repeated the phrase, "We are going to have to 
teach them."  He added that Algeria had a model from the 
Hamma desalinization project which could be modified and 
applied locally.  Algeria, explained the Minister, had a need 
to improve its banking sector.  Acknowledging Ambassador's 
point that local bank financing would delay the projects, 
Khelil said such delays were inevitable given the lack of 
Algerian expertise.  Nonetheless, Sonatrach's financial 
personnel and the Ministry of Finance would provide technical 
resources and training.  Noting the banking system in Algeria 
was overly liquid, the Minister declared that the local banks 
must be given "the chance to learn" in order to put the 
reserves to good use. 
 
 
COMMENT:  QUICK REVERSAL UNLIKELY 
--------------------------------- 
 
4.  (C) Given the ease with which the Minister listed the 
reasons for which the GOA would fund these projects from 
local bank funds, and his resolve in defending the 
Government's decision, it is unlikely that the decision will 
be reversed in the near term.  The GOA appears ready to 
accept project delays as a trade-off for building local 
banking expertise.  It remains to be seen if pressure for 
building the plants quickly will lead to a reversal of the 
decision sometime down the road. 
 
ERDMAN