ALGERIA SIGNS ITS FIRST-EVER PROJECT FINANCE DEAL

UNCLAS SECTION 01 OF 02 ALGIERS 001328 SIPDIS SENSITIVE E.O. 12958: N/A TAGS: ECON EINV SENV AG OPIC 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