ALGERIAN BANKS WILL FINANCE DESALINIZATION PLANTS

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
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
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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
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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
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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
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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