NEW PRO-REFORM FINANCE MINISTER MOVING QUICKLY ON

C O N F I D E N T I A L SECTION 01 OF 03 ALGIERS 001233

SIPDIS

E.O. 12958: DECL: 06/14/2015
TAGS: ECON EFIN EINV AG
SUBJECT: NEW PRO-REFORM FINANCE MINISTER MOVING QUICKLY ON
BANK PRIVATIZATION

REF: A. ALGIERS 883


B. ALGIERS 491

Classified By: Ambassador Richard W. Erdman, reason 1.4(b).

SUMMARY
--------------


1. Ambassador called on Finance Minister Mourad Medelci to
extend congratulations and discuss the Minister's financial
and economic vision for the country after his first five
weeks in office. Medelci was bullish on the need for reform;
announced the imminent privatization of three state-owned
banks, with majority ownership to be made available to
interested foreign firms; and said the bank payment system
would become electronically automated by the end of 2005 and
the bank market completely opened by the end of 2006.
Medelci approved of the sovereign financing approach for the
East-West Highway project, saying it would stimulate other
transportation-related infrastructure development, including
rail line extensions and electrification. Medelci eagerly
sought foreign investment in the tourism sector. He
expressed the need to send positive signals to foreign
investors, acknowledging with a shrug of the shoulders that
the September 2004 banking directive had negatively affected
Algeria's image. Medelci intended to focus on three reforms:
banking, budget, and land ownership. Algeria sought budget
management training and was drafting land reform laws to
create a national property market. (End Summary.)

MEDELCI ON EAST-WEST HIGHWAY
AND TOURISM DEVELOPMENT
--------------


2. (C) In a June 13 courtesy call to newly-installed Finance
Minister Mourad Medelci, Ambassador discussed Algeria's
approach to the East-West Highway project, highlighting some
of what he had learned during the Ministry of Public Works'
June 11 highway seminar. If the project was to be completed
by the 2009 deadline set by President Bouteflika, Ambassador
noted, Algeria could not afford to waste more time in
selecting contractors for the three highway segments. The
current approach could push a contracting decision into
October, ensuring construction would not begin until well
into 2006 and making it impossible for even a world-class
firm like Becthel to meet the deadlines. Given the magnitude
of this project ($6-7 billion) and the fact that detailed
designs did not exist, in selecting a contractor (or
contractors) the GOA should be looking for a strategic
partnership in which trust and proven capacity for quality
were paramount.


3. (C) Medelci acknowledged that Algeria had little
experience in highway construction and that the project's
plans were unfinished. However, Algeria was fortunate to
have attracted a pool of interested candidates. The
Ambassador was correct, Medelci said, in encouraging Algeria
to opt for a sovereign financing approach rather than a
consortium, which would have been more complex, more costly,
and prone to delays. Absent that choice, the number of
partners in the project would have been unmanageable. The
prospect of a limited pool of candidates also appeared to
captivate the imaginations of the project's directors. Other
future projects of large scale were now being planned,
including the extension of east-west rail links and the
electrification of Algeria's rail lines. Experience on the
highway project would give Algeria a point of reference for
these infrastructure improvements. Medelci invited
Ambassador to maintain the same close-working relationship
with him that Ambassador had with Benachenhou, who also
happened to be Medelci's long-time friend and high-school
classmate.

SEEKING NON-HYDROCARBONS
INVESTMENT: TOURISM TARGETED
--------------


4. (C) Ambassador said U.S.-Algerian relations had been
growing in recent years, and that mutual interests would
continue to bring the countries together. Medelci replied
that Algeria really wanted U.S. firms to invest in areas
outside hydrocarbons. Tourism was the one sector in which
Algeria expected to see significant developments, Algeria
being the last unexplored tourist destination on the
Mediterranean. Tourism was an important link in greater
regional integration and globalization, which, Medelci
argued, prevented war between countries. Algerians needed to
develop the proper mentality to promote tourism and create a
positive investment climate for it. Ambassador said it would
be important to aim for quality tourism more than mass
tourism.

ON BANKING REFORM AND THE IMMINENT
PRIVATIZATION OF THREE BANKS
--------------


5. (C) Asked what he thought about the reform process,
Medelci said reform was a means to attain an objective. The
banking system, his priority for reform, needed to grow in
transparency, efficiency, and security. The means to this
end would be through better organization, not legislation.
Algerian banks were not yet modernized, but Algeria sought to
convert them fully to an electronic payments system by the
end of 2005. By the end of 2006, the banking market would be
fully open to competition. However, Medelci acknowledged it
would not be the mechanical improvements that would increase
Algeria's experience in banking; the analytical work,
customer contact, and service promotion had greater roles to
play in developing the sector. Algeria was still in the
process of opening this market and would create a draft law
on banking reform.


6. (C) Ambassador asked where opening three state banks to
private capital stood. Medelci said privatization of three
banks (CPA, BNA, and BDL) was imminent. The tenders for the
banks would be released "within a few weeks." As a result of
recent decisions, the GOA had dropped its earlier limits on
private participation (first 30%, then 47%) and would now
permit foreign 51-percent private majority ownership of the
Algerian banks, and maybe more. Until now, Medelci said, not
many U.S. banks had expressed interest in acquiring state
banks. Requiring foreigners to hold minority stakes would
lead to the degredation of the foreign banks, when the real
goal was to bring in best-practices from abroad. (Comment:
The decision to proceed with three bank privatizations at
once, instead of piecemeal, is significant in that the
Ministry of Finance succeeded in establishing that there
would be no foreign buyers if only minority stakes were
offered. End Comment.) Ambassador said this decision would
enable foreign private banks to train a new generation of
Algerian bankers in modern banking methods.


7. (C) Turning to the September 2004 banking directive
requiring public companies to hold accounts in public banks
(leading to a 25% loss in business at Citibank Algeria),
Ambassador emphasized it was important for Algeria to send
positive signals to foreign investors. The banking directive
did the opposite. Medelci, noting this had been a high level
decision that he had to live with for now, said he understood
"very well" this outcome and that his Ministry would
progressively try to send positive messages to counteract the
negative effects of the directive. Ambassador also mentioned
that during Temmar's late 2004 visit to the U.S., Paul
Volcker had offered to review Algeria's banking reform plans.
Medelci said he would talk to Temmar to see if the plan was
ready for review.

MEDELCI'S TOP THREE PRIORITIES
AND VIEWS ON THE INFORMAL MARKET
--------------


8. (C) Algeria's top three reform priorities from Medelci's
perspective were banking reform, budget reform, and land
reform. With regard to budget reform, Algeria did not have
good action plans to improve budget forecasting and
management. The execution of financial plans needed to be
more transparent; Algeria had already sought World Bank
assistance in this area. On land reform, Medelci said
Algeria needed to clarify land ownership, which was a source
of many legal problems, and create a property market.
Algeria was putting together a draft law to accelerate this
transition. The government was the sole authority for
approving private land purchases, a process that needed to
change. Inter-ministerial talks would address this issue.


9. (C) The most complex economic question, Medelci admitted,
was that of the informal economy, which was "nourished by bad
economic policies." If the informal market was caused by
people fleeing taxes, he wondered aloud, then perhaps the
government needed to ask itself if the tax rates were too
high. Part of the motivation for the informal economy
stemmed from a desire for mobility. Algeria countered this
by taking steps making it easier to apply for legitimate
business licenses, reducing the number of approvals required
to three. The ANSEJ (youth employment agency) loans-to-youth
program was expected to encourage the development of 150,000
small businesses over three years. This could have the
effect of reducing the size of the informal market -- a
market that already existed 15 years ago and was now
three-times larger because of terrorism's intervening effects
on the economy. Algeria needed to catch-up and better
control the informal market.

10. (C) In closing, Ambassador suggested that the GOA and
private sector needed to communicate better and see each
other as strategic partners. The government provided the
playing field and the private sector provided the players,
but both were necessary to score goals. In this regard, he
recalled a recent conversation with a leading Algerian
business owner, who said the government should be making his
life easier, not more difficult, because he paid over $100
million a year in taxes and the government was thus in effect
his largest share-holder. GOA officials, continued
Ambassador, in turn complained that the private sector still
treated the government as an adversary despite the fact it
has made clear its commitment to privatization and an open
market system dominated by the private sector. Medelci
agreed with the need for dialogue and noted that he had
invited members of business-owners organizations to attend
lunch at the Ministry that same day. It was the first time
they had ever set foot in the Ministry! (Comment: Ambassador
gave a public speech June 4 in which he urged better
government-private sector communication.)

COMMENT
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11. (C) Medelci is part of the same pro-reform class as his
predecessor. With three bank privatizations to be announced
during his first few months in office, he will be overseeing
a critical phase of Algeria's transition to a market economy.
His comments indicate he has a strong grasp of Algeria's
economic weaknesses, and he has clearly prioritized his plan
of action. His focus on the tourism sector seems, from our
perspective, to be astray; Algeria's plans for rapid
development of tourism seem overly optimistic. The country
lacks the proper infrastructure, the services, and the
mindset (as Medelci admitted) for tourism to flourish.

ERDMAN