The US$110m Skikda seawater desalination project in Algeria stands out as the first ever PPP in the country to be financed by a local bank and demonstrates the extent of the Algerian government’s commitment to desal in the parched country

The speed at which the Algerian desal scheme advances stands testament to the urgency the government has allocated to finding a solution to shortages of both drinking and irrigation water.

To this end, the Algerian government has committed itself to tackling the problem with international partners through PPPs - and now also with local funding.

The Skikda desal project is the second such BOO scheme ever to close in the north African country – following swiftly after Hamma in Algiers (see previous case study) – and is part of a scheme that will see up to six other plants awarded over the next three years.

The Algerian Energy Company (AEC) awarded the project in April 2004 to the Spanish Geida consortium and financial close was reached on 31 July 2005. The consortium is formed in equal parts by

• Befesa
• Codesa
• Cobra-Tedagua
• Sadyt

The desal plant is part of the first four to be tendered almost simultaneously in the country – in Alger Est, Skikda, Alger Ouest, Oran – and the first of the three that would eventually fall to Spanish companies by October 2005.

‘The Algerian government has an ambitious desalination plan to tackle the lack of water in the country’ says Befesa’s president Javier Molina. ‘Its short-term goal is to reach a million cubic metres a day in desalised water.’

Molina adds: ‘The Skikda project – as with all the desal schemes in Algeria – is of strategic importance for the social and economic development of the country, as the presence of its president Buteflika in the ground-breaking ceremony in August 2005 demonstrates.’

The foremost significance of this project, though, lies in its financing. It is the first to be financed through a local bank, the Banque Nationale d’Algerie (BNA). This makes this deal a path-finding experience that will have to be imitated in most – if not all – future desal project in the country.

Carlos de Cevallos, project finance director at Expansion Exterior – a state company that supports Spanish overseas investors which acted as financial adviser on this deal – explains: ‘The project was financed with a local bank because of a governmental decision, motivated by the excess of money in Algeria due to high energy prices.

‘It was a decision of the highest level to support such projects,’ he adds. 'A decision assuming that good interest rates and financing could be found in Algeria.’

This was a decision that came as a surprise when the financing was nearing completion, and one that GE - in the first project in Hamma - escaped from by the skin of the teeth.

It was a decision, also, that may be seen as a kind of grant - but that will develop invaluable expertise in project finance across the banking and legal systems in the country.

The parties

The Geida consortium includes Cobra-Tedagua, Sadyt, Befesa and Codesa - subsidiaries of Spanish construction and engineering companies ACS (the largest construction group in the country), Sacyr Vallermoso (the fourth largest) and engineering leader Abengoa, respectively

All four subsidiaries each have a 25 per cent stake - ACS's Cobra-Tedagua; Sacyr's Sadyt; Befesa and Codesa - which both make Abengoa sum up a 50 per cent stake.

The consortium was a bidder in all four initial desal tenders and a winner in Skikda and the US$160m project in Beni Saf, closed later in September 2005 also with a local bank – the Banque Exterieur d´Algérie (BEA).

The SPV for the project, Aguas de Skika (ADS) was created on 12 July 2004, two weeks after the contract signing and three months after the award. It was set up by the Geida consortium, the Algerian Energy Corporation (AEC) – also the procuring authority – and Algerienne des Eaux (AdE).

Geida has 60 per cent of the capital and the two Algerian companies take the remaining 40 per cent.

The procuring authority is a company created in 2001 by the Algerian government to seek private sector involvement in water management and as promoter for desalination plants – and energy projects – as PPPs.

The company is owned on a 50:50 basis by state energy companies Sonatrach – the Algerian national oil company – and Sonelgaz, the national gas company, with Sonatrach providing professional experience in the negotiation of international contracts.

The off-takers for the project will be Sonatrach and AdE, which will buy the water.

The financing was provided by the Banque Nationale d’Algerie (BNA). Financial advisers on the deal were Expansion Exterior, a state company that supports Spanish overseas investors, and is supported by ICEX – the Spanish foreign credit institute – and BBVA.

The legal adviser for the consortium is Barcelona-based legal firm Cuatrecasas and local lawyers advised the Algerian side.

Expansion Exterior’s Carlos de Cevallos points out: ‘We managed to get the banks to use the same lawyers that acted in GE’s Hamma deal which was really helpful.’

The project

The Projet de Dessalement d’Eau de Mer de Skikda consists of the design, construction, financing, ownership and exploitation of a sea water desal plant producing 100,000m³ of water per day using the Reverse Osmosis procedure.

The BOO concession contract will run for a 25-year period, which may be extended by mutual agreement.

The opening of commercial offers for the project took place on 31 March 2004 in Algiers. Geida submitted a low bid of $0.74/m³, which narrowly beat an offer of $0.765/m³ proposed by a group of Spain’s Barna Investment and Lemna International of the US.

A third bid from a pairing of Ionics and SNC-Lavalin was off the pace with a US$1.33/m³ bid. A fourth consortium of Lebanon’s EBD Group and CAT, Black & Veatch of the US and UK’s Severn Trent Services had also submitted a technical offer for the project in December 2003 but it was disqualified as AEC was not satisfied with the group’s financial position.

Befesa’s president Javier Molina says: ‘Our consortium demonstrated a technical solvency endorsed by our experience developing the desal projects in Carboneras, Atabal and Almería – all in Spain – which combined to our good knowledge of the country translated into the most competitive price.’

The SWRO facility will be among the largest of its kind in the world, supplying drinking water to over 500,000 people in the eastern coastal area of the country near Tunis. Most facilities in the Algerian scheme will have this same capacity, with the exception of Hamma and Beni Saf with around a 50 per cent more.

Befesa’s president Javier Molina says: ‘While based on SWRO technology, the Skikda desal plant incorporates an innovative system that allows for a significant reduction in the amount of water needed to be pumped at high pressure, thus increasing efficiency and reducing energy needs in comparison with systems with other kinds of turbines.’

Construction works are due to start in November 2005 and are expected to last 24 months. The plant is scheduled to be operational in the last quarter of 2007.

Financing

The financing for the US$110m project originally ran almost in parallel to the Hamma project, also with international banks and export credit agencies involved.

In Skikda’s case, the negotiations advanced for almost a year between the SPV and Spanish bank CajaMadrid, with the participation of ICO, Spain’s state financial agency.

Negotiations started on 3 April 2004, just two days after the award, and a year later they had to be drastically changed.

Befesa’s Javier Molina says: ‘Initially we had the offer to finance the project from CajaMadrid, but later the Algerian government took the strategic decision to involve the local banking system in the financing of this kind of project.’

Carlos de Cevallos explains: ‘We had worked for almost a year, had most of the documentation completed and were about to close with CajaMadrid and ICO when we received a letter from our Algerian partners and the finance ministry telling us that the financing should be local.’

‘At first we reacted against it, as Algerian banks had no experience whatsoever in project finance.’ he says. ‘There was no financial scheme that could provide us with security and even less a long term non-recourse loan with a variable rate.’

The decision also affected all other desal projects, but the first one in Hamma was eventually treated as an exception - allegedly because it was more advanced and was finally financed by OPIC.

‘We also had problems with the legislation and we argued to the ministry that the deal could not be done in this way,’ Cevallos says. ‘They eventually presented us with a non-recourse financial offer with a local bank with very good conditions, as they financed the local banks from the state with a very low interest rate and offered us a fixed rate for 17 years in local currency.’

The deal for the US$110.6m project was agreed with the Banque Nationale d’Algerie (BNA) and eventually took the form of 80 per cent debt and 20 equity instead of the originally expected 70:30 ratio.

The 17-year term loan is equivalent to US$88.5m and equity is around US$22.1m.

The Geida consortium will provide 60 per cent of the equity, while AEC contributes the remaining stake, shared in equal parts with AdE.

Carlos Cevallos says: ‘The pricing was around 400bp, which allowed us to increase the debt cover ratio to 1.45 and also increase debt up to an 80 per cent. This allowed us to diminish our investment and also eliminate foreign exchange rate risk as it is a fixed-rate loan’

'The dollar-dinar – the local currency – risk is covered’ he adds. ‘If there is devaluation during the construction period, for example, the Algerian side has to assume it.’

He says: ‘At first we preferred the security of working with international banks, but the Algerian side was fast to resolve vital points such as the fixed-rate interest and that allowed them to have a project in dinars. They did well, as with a long-term dollar loan they would have exchange risk.'

The Skikda desal plant is expected to generate the equivalent of more than US$540m over the course of the 25-year concession period.

After the three to four months of intense works to adapt the financing to the new situation, the major challenge is now to make sure it works correctly. Cevallos says: ’Now we are working on the pre-conditions to be able to get the loan money and put in place the security package that banks demand, all of which is very innovative in Algeria.’

The consortium now hopes to receive the first payment around November 2005 and start proper construction works before the year-end.

Conclusion

Skikda is a pathfinder deal as it was the first to be affected by the Algerian government’s decision to ask for local funding in desal PPPs. A decision that will most probably be initially evaluated based on how the Skikda deal unfolds and which affects the numerous projects to come – and they are following as at least five SWROs were awarded by early October 2005.

If the local funding condition will continue indefinitely and expand into other sectors such as power, it is yet unclear - but it seems most likely.

The government is bringing in a different local bank into each deal – in Geida’s also closed Beni Saf deal, for instance, it is the Banque Exterieur d´Algérie (BEA) – and in doing so it is spreading expertise and project finance know-how around the finance and advisory sector.

By distributing PPP projects in different local banks, the Algerian government is also spreading the risks – and in its turn making the task of a consortium such as Geida with several projects more complex, having to work with different teams.

Expansion Exterior’s Carlos de Cevallos comments: ‘It is a very interesting process, as Algerian banks are developing expertise in project finance deals.

‘Algeria is investing heavily infrastructures such as water, and it is also going to invest a lot in power projects under project finance terms. The local private banks are preparing for these upcoming deals and for those like us - who are on the side of infrastructure construction - it is good that they do so.’

The country’s new national water policy will certainly contribute to infrastructure development, as the budget committed for it comes third only after defence and education. The water resources ministry is said to have plans for the construction of up to 28 large-scale desal plants along the 1,300km coast line of Algeria before 2020. All of these are expected to be procured under BOT contracts.

That means a lot of business in the near future. If not currently for international banks, certainly it is the case for international engineering and construction companies.

Those expected to benefit most are the Spanish companies which are among the world’s largest specialists in concession projects and have the added advantage of a huge parallel desal programme in their own country just across the Mediterranean.

The project at a glance