US embassy cable - 05ALGIERS1328

UNCLAS SECTION 01 OF 02 ALGIERS 001328 
 
SIPDIS 
 
SENSITIVE 
 
E.O. 12958:   N/A 
TAGS: ECON, EINV, SENV, AG, OPIC, Economic Reform 
SUBJECT: ALGERIA SIGNS ITS FIRST-EVER PROJECT FINANCE DEAL 
TO EXPAND DESALINATION CAPACITY 
 
REF: ALGIERS 1164 
 
SUMMARY 
------- 
 
1. (U) Hamma desalination plant negotiators signed contracts 
June 25 committing to a loan for the first reverse-osmosis 
desalination plant in Algeria, one of the largest such 
plants in the world.  OPIC is loaning up to $200 million for 
the plant, which is expected to be completed in 2007, 24 
months from the anticipated start of construction.  Hamma 
will provide 200,000 cubic meters per day of drinking water 
to the greater Algiers area to mitigate the effects of 
periodic, debilitating water shortages.  The primary 
negotiators were G.E. Ionics, Algerian Energy Company (AEC), 
the project company Hamma Water Desalination, Sonatrach, 
Algerienne des Eaux, and OPIC.  Energy Minister Khelil, 
Water Minister Sellal, and Finance Minister Medelci, whose 
ministries shaped the project, also attended the ceremony. 
 
ALGERIA'S FIRST PROJECT FINANCE DEAL 
------------------------------------ 
 
2. (U) Hamma desalination plant project partners signed 
contracts June 25 committing to a loan for the first reverse- 
osmosis desalination plant in Algeria, for which OPIC is 
loaning up to $200 million.  The plant, which will be 
completed in 2007, 24 months from the anticipated start of 
construction, will produce 200,000 cubic meters per day of 
potable water for the greater Algiers region.  The contract 
signing represents a significant milestone in Algeria's 
ability to negotiate complex project financing agreements 
and is a positive development following the launch of a five- 
year, $55 billion infrastructure spending plan.  The Hamma 
negotiations were completed 9 months after formal 
discussions began September 2004 in Algiers between the 
project partners (G.E. Ionics, Algerian Energy Company 
(AEC), the project company Hamma Water Desalination, 
Sonatrach, Algerienne des Eaux, and OPIC).  According to 
OPIC, this deal took less time than anticipated, considering 
that many large project finance deals take up to two years 
to complete.  Despite difficulty negotiating and structuring 
to meet OPIC's need for exchange rate fluctuation 
protection, the final arrangements conformed to 
international project financing standards.  The model for 
the Hamma deal could be replicated for Algeria's future 
desalination and other infrastructure projects. 
 
CONCERNS ABOUT GOA DECISION 
TO FORGO FUTURE LOANS 
--------------------------- 
 
3. (SBU) Project participants and other potential foreign 
investors remain concerned about Energy Minister Khelil's 
recent announcement, reiterated in his speech at the Hamma 
signing ceremony, that Algeria would henceforth seek local 
financing through state-owned banks for future desalination 
projects, of which eleven are planned (reftel).  (Note: The 
decision was actually President Bouteflika's, and was 
motivated by excess liquidity in the Algerian banking system 
due to high energy prices and a significant increase in 
energy revenues. End Note.)  Algeria is eager to stem the 
growth of its foreign debt and put the country's excess 
liquidity to work, including an estimated $10 billion plus 
in stationary capital in state-owned banks.  Several 
analysts believe that without the involvement of a 
heavyweight international lending institution, the risk 
profile of such projects will substantially change, 
discouraging foreign debt investors and project partners 
from participating.  With this in mind, Ambassador, in his 
public remarks at the signing ceremony, pointedly noted that 
one of the benefits of OPIC participation was that it would 
increase the confidence levels of other potential investors 
and partners to participate in such projects. 
 
TOO MUCH STATE INVOLVEMENT 
INCREASES POLITICAL RISK 
-------------------------- 
 
4. (SBU) In a private meeting with Khelil following the 
ceremony, OPIC Structured Finance Director Nancy Rivera 
expressed OPIC's concerns about the GOA's shift in financing 
strategy.  Rivera said that foreign debt investors and 
project partners will hesitate to participate in projects 
where the state is the primary lender because state 
involvement at the lender level -- particularly when there 
is already state involvement at the shareholder and offtaker 
levels -- significantly increases the political risk.  Some 
investors have already indicated to OPIC that state-owned 
bank financing would deter them from investing.  Rivera also 
expressed concern that the equity arrangements for future 
deals (51% foreign, 49% local, i.e. state) constituted a 
material change from the 70%/30% ratio of Hamma.  This 
change is significant because, at the 51% level, foreign 
investors would be unable to have shareholder control over 
the project company, which would also increase the foreign 
investor's risk. 
 
THE MARKET WILL DECIDE 
---------------------- 
 
5. (SBU) Khelil acknowledged Rivera's concerns, but argued 
that, in the big picture, it should not matter whether the 
project loans were from a public source or a private one. 
Algeria would be bearing all the financial risk, not the 
foreign investors.  Besides, he said, Algeria had plenty of 
money to fund projects and wanted to stem its debt growth 
and reduce its over-liquidity problems.  From this 
perspective, local financing was an attractive alternative. 
Khelil suggested that an OPIC guaranty for the state bank's 
project loan could resolve some of the investors' concerns. 
Khelil said the market, in the end, would decide if the 
GOA's local financing approach was the right choice. 
 
6. This message was cleared by OPIC Structured Finance 
Director Nancy Rivera. 
 
ERDMAN