The Hamma Water Desalination Project in Algeria stands out as ground-breaking initiative to solve the capital city’s water shortages, while at the same time serving as a showcase for PPP procurement structure in the country

General Electric unit GE Infrastructure Water & Process Technologies joined forces with the Algerian government and the Algerian Energy Company (AEC) to roll out Hamma Water Desalination – Africa's largest seawater desalination plant.

Formed and funded by GE and AEC with a credit guarantee from the Overseas Private Investment Corporation (OPIC), the Hamma project will supply one quarter of the population of Algiers with drinking water.

As countries around the globe increasingly turn to the expensive, though effective, desal option this US$250 million deal will act as a pathfinder for other African countries where the model will undoubtedly be repeated in coming years.

As George Oliver, chief executive of GE Infrastructure Water & Process Technologies, says: ‘Many regions of the world face severe water scarcity, and the issue is getting worse daily.

‘This project that will create new sources of water for the people of Algiers and lessen demands currently placed on their limited supply of fresh, usable water.’

By supplying 200,000 cubic metres – 53 million US gallons – of potable water a day and reducing energy and overall costs, the build own operate (BOO) project will lessen Algeria's water shortage.

Currently, the people of Algeria suffer from a poor water supply infrastructure that results in drinking-water shortages in a country where irregular rainfall has dried up reserves and the creaking infrastructure leaks like a sieve.

Currently the residents of Algiers only receive water one out of every three days.

This single project will have a major impact on this situation and, with word of other similar projects doing the rounds, it could prove to be an important development for project-financed water projects in Algeria as well as for the entire African continent.

As one Overseas Private Investment Corporation (OPIC) spokesman puts it: ‘We look at this entire region as an incredible investment opportunity because of the potential there. We are not just interested in Algeria, though there are great opportunities there.’

Of all the north African countries, the only one that the US has no bilateral agreement with is Libya, though there are plans afoot to have that effective in the near future – however, OPIC can not as yet support any investment in that country.

However, the likes of Algeria, Morocco (which has a free trade agreement with the US), Egypt and Niger are well positioned to receive investment from the US government agency.

This future stream of projects underlines the crucial role Hamma is playing in the roll out of project finance in the region.

The project

Hamma Water Desalination is sponsored by Ionics Incorporated of Watertown, Massachusetts, for the construction and operation of a reverse osmosis seawater desalination facility through a joint venture with the state-owned Algerian Energy Company. GE acquired Ionics in an all-cash US$1.1 billion transaction, plus the assumption of debt, in late 2004.

This buy combined Ionics’ expertise and vision with GE’s power to move the business to a new scale.

OPIC president Dr Peter Watson says: ‘The Algerian government has prioritised the development of reliable and renewable sources of potable water, due to severe shortages and the depletion of limited existing resources.

The Hamma desalination plant is the first large scale private desalination reverse osmosis potable water project in Algeria – has been funded 70 per cent by GE with the remainder coming from AEC.

However, Hamma’s private status is far from being the project’s sole claim to fame, it will also be the largest membrane desalination plant in Africa, as well as one of the largest desalination plants in the entire world.

GE’s advanced membrane and separation solution produces customised, clean, usable water that benefits a wide-range of industries as well as the population at large.

Construction on Hamma is scheduled to start in July 2005 and work is estimated to last 24 months.

Financing

Apart from the US$50 million equity input from GE and AEC, the lion’s share of the cost was provided by an Overseas Private Investment Corporation (OPIC) guaranteed financing of US$200 million.

The US agency signed the loan agreement with the project company for US$200 million, and it is selling participation to capital market investors in the US.

The 18-year bond is guaranteed by OPIC and comes with full faith and credit of the US government, protected by US agency government risk. The pricing on the bond issue is expected to be in the region of 35-50 basis points, but that will be firmed up nearer the time it is brought to market in the US. Citigroup’s main role was financial adviser and as such, the bank is due to place the OPIC bonds in the capital market.

Citigroup’s Alexis Ulens says: ‘This is the first onshore contracted project financing in Algeria with a long-term take-or-pay offtake agreement. There has been just one other onshore non-recourse financing in Algeria to date, which was essentially a merchant cement project and there is a large telecoms financing closing.

‘The off-takers for the Hamma project are Algérienne des Eaux which is a public enterprise and SONATRACH, Algeria’s US$30 billion turnover oil and gas company which is effectively the strong credit behind the off-taker.’

He adds: ‘The financing was signed in less than one year from the time OPIC was mandated in mid-2004, and it is the result of a commendable effort of OPIC – who had to find its way in unchartered project finance territory.

‘It was also a commendable effort from GE and Ionics that had to address transition merger issues in the middle of the financing process.’

Legal

The transaction saw a host of lawyers flock to the deal table, but for all that it was a ground-breaking project – it reached signing with relative ease.

The support of the US government agency and the Algerian government’s enthusiasm to see the desal plant in operation helped it on its way to the signing and close later this summer.

Cathy Marsh, partner at Milbank Tweed’s London-based project finance group, says: ‘We were able to leverage our experience in the Middle East and Africa project finance markets to develop a structure for what is the first non-recourse project and the first PPP in Algeria.

‘The agreement underscores the commitment of all parties involved to work towards providing desperately-needed drinking water throughout Algiers. With water shortages on the rise around the globe, we anticipate continued growth in water desalination projects worldwide.’

Anthony Giustini, partner at the Clifford Chance Paris office, says: ‘These types of infrastructure projects require long-term financing and predictable interest costs.

‘This is a ground-breaking deal for Algeria, in which OPIC, because of its unique function and position, was able to provide very long-term, fixed-rate funding on a set of documents that meet international project standards

‘This was achieved notwithstanding some of the difficulties presented by Algerian law and regulation – exchange controls, for instance.’

Conclusion

As a ground-breaking project in Algeria and north Africa, Hamma sets the scene for other projects to follow – and follow they most certainly will.

OPIC has confirmed its commitment to the region and is looking to back serious projects in north Africa, seeing perhaps Morocco as the most obvious location as it has a free trade agreement with the US.

In the meantime, GE will be looking to invest in other water projects and there is definite hunger for power projects.

Future investments will also see a lot of movement in the housing and tourism sectors in the most stable of the north African countries.

But for the here and now, residents of Algiers can look forward in the near future to vastly improved water supply, something that has long been a priority for the parched capital.

The project at a glance