The opportunities for project finance in Algeria to date have been limited. But this is starting to change. In recent weeks, the two largest deals in the country’s history have been finalised, and in the coming months, a series of major infrastructure projects worth more than $20bn are expected to be seeking finance.

Two fertiliser deals dwarf all those done previously in Algiers. A joint venture of Egypt’s Orascom Construction Industries and state energy company Sonatrach raised $1.7bn for an ammonia/urea plant at Arzew in the northwest, while a consortium of Sonatrach and Oman’s Bahwan group raised a similar amount for its $2.4bn urea facility in the same area.

Until these deals were signed, Algeria’s largest project financing deal was the $578m financing of Hadjret Ennous power station, completed in 2007, and before that the $490m raised by Kuwait’s Wataniya Telecom for the launch of its Algerian subsidiary, Nedjma.

Oil earnings

A combination of the end of Algeria’s 10-year civil war earlier in the decade, the windfall of its recent oil earnings, and its economic diversification plans, means that large-scale project finance deals will become increasingly common. “There are some major project finance opportunities coming up in the downstream oil and gas sector, and in industry,” says Philippe Barbe, commercial manager of HSBC Algeria.

The country’s $20bn petrochemicals master plan is finally starting to make progress, following its 2005 launch. Financing options are being discussed by Sonatrach and France’s Total to build a $3bn ethane cracker also in Arzew, while Sonatrach and international consortium Almet are considering financing alternatives for an estimated $1bn methanol plant, also in the north.

In the oil and gas sector, Canada’s First Calgary Petroleums is looking to raise about $1bn over the coming months to develop its Berkine Basin gas discovery. Financial close is expected in mid-2009 on the estimated $3-5bn Galsi project to transport gas from Algeria to Italy via Sardinia. Sonatrach is also expected to make a decision soon on the future of a proposed project to build a 300,000-barrel-a-day grassroots refinery at Tiaret.

In the industrial sector, financing for an estimated $5bn aluminium smelter being developed by a team of Sonatrach, Dubai Aluminium and Mubadala Development Company is expected to come to market soon, and Egypt’s El-Ezz Steel will also be seeking financing for a steel plant expected to cost about $700m.

An ambitious expansion of the country’s power generation is also under way. State power company Sonelgaz plans to increase generation capacity by 1,200-1,300 MW a year, and financing is currently being sought for two power plants, each set to cost more than $2bn.

Foreign banks are queuing up in the hope of taking a share of the market. Since the first foreign bank opened in Algiers in 2001, the number of international banks in Algiers has reached double figures, and in the next two-three years, the total could double.

Removing regulations

HSBC will begin operating in June and up to a dozen other foreign banks are understood to have requested authorisation to begin operations. These include Morocco’s Banque Marocaine du Commerce Exterieure and Attijari Wafabank, Lebanon’s Byblos Bank and Bank Audi, and Germany’s Deutsche Bank.

In late 2007, Algiers reversed a measure introduced in mid-2005 stipulating that state-owned companies had to use state-owned banks. The lifting of the regulation - put in place after a scandal in 2003 when the head of a private bank allegedly used funds from his banking operations to finance other businesses - means there are no longer any legal restrictions on the full involvement of international institutions in Algeria’s banking sector.

But the role of foreign banks in the project finance market is limited by a Finance Ministry policy directive instructing state companies to raise finance through local banks. Several reasons for this move have been given by those in the industry, including the unwillingness of Algiers to accept foreign banking conditions on international arbitration and compensation in the case of project failure.

But the overwhelming reason is Algiers’ need to absorb the excess liquidity in the local banking market accrued from its massive oil and gas earnings. The country’s hydrocarbons revenues are deposited in local banks, and the limited development of local retail and corporate banking services means the economy is struggling to absorb these earnings.

International banks, like their local counterparts, are also restricted by the stipulation that they cannot lend more than the equivalent of 25 per cent of their equity holdings. For local banks flush with cash, this is not such a problem. But for international banks, whose overseas assets are not taken into account, it can be a barrier. “It is not easy for international banks to get involved in project finance in Algeria,” says Bruno Repussard, Calyon’s director of project finance. “We are waiting for the sector to open up more. It is challenging, but we are looking for opportunities in the future.”

One side effect of the use of local banks is that the classic project financing model - limited recourse financing - is not being used. Under limited recourse financing, debt is not guaranteed by the shareholders of the project company, but is raised against expected cash flow from the project. Recourse can be made to the assets of the project company, but not to its shareholders.

Shifting risk

“It is not typical project finance,” says Francois Krotoff, an advocate at French law firm Gide Loyrette Nouel. “While global banks using limited recourse financing require guarantees from the public authorities, the local banks, using the corporate finance model, do not. It shifts all the risk to shareholders, even though it is ultimately benefiting the state.”

International banks are still able to carry out advisory roles on financing deals, however. In November, HSBC signed a co-operation agreement with Banque Exterieur d’Algerie, the banking partner of Sonatrach, to develop the local bank’s project finance expertise.

There is hope among international banks that such opportunities will come their way. “I believe at some stage in the next year, global banks will participate in project finance,” says Barbe. “There is about $16-17bn in liquidity in the local market, but more than $20bn worth of projects on the table. Unless hydrocarbons prices continue to be high enough to generate sufficient local revenues, the sector will have to open up to international banks.”

“We hope that one day projects will raise finance from international banks,” says Repussard. “I think it will happen. My understanding is that local banks will not be able to fund all the projects themselves.”

There could also be pressure to use international banks from Algeria’s international partners on specific projects. “Most of our clients would prefer to raise finance overseas than in Algeria,” says one senior representative of a Paris-based law firm acting on behalf of several major international companies.

There is speculation that disagreement over the financing is contributing to a long delay between the award of the contract for the ethane cracker project to Total and its signing, which is yet to be completed. “Total wants to use international project finance, but Algiers wants to use local finance,” says one senior international banker in Algiers.

There is another potential alternative for international banks wanting to take a greater role in Algeria’s project finance market. Six banks are shortlisted to take a 51 per cent stake in the country’s fifth-largest state-owned bank, Credit Populaire d’Algerie (CPA), and other local banks are being lined up for privatisation.

If a foreign bank does successfully take a stake in CPA, it will create an interesting situation. Although it would technically no longer be a local bank, the bank’s history of involvement in project finance in Algeria would mean that its state financing role would be likely to continue. If the privatisation of the country’s banking sector goes ahead, it could be the quickest route for an international bank to take advantage of the huge project finance opportunities on the horizon.