Plainly Business continues my writing on accounting, finance and economic issues previously appearing as Business Page in the Sunday Stabroek. Readers’ comments and discussions are welcome.
President Donald Ramotar’s description of the rejection by the parliamentary opposition of a bill and motion dealing with the Amaila Falls Hydroelectricity Project as an act of terrorism is serious stuff indeed. It makes the earlier statement by Prime Minister Sam Hinds about the vote being the funeral of the project seem modest if not jocular by comparison. President Ramotar’s anger is understandable. His exaggerated description of the rejection and his incredible claim that Amaila will save us G$40 billion per year are not. The matters have to be placed in the context of the events in the National Assembly that evening but which are not entirely appropriate to this column.
President Ramotar’s administration inherited and pursued the prestige projects conceived by former President Jagdeo with evangelical enthusiasm. Jagdeo conjured up the Kingston Casino and Hotel Project and everyone followed him. He dreamt about the Airport Runway Extension and Expansion Project and no one questioned or cautioned him, about need, concept or cost. Someone must have told him about health tourism and he decided on a specialty hospital – no explanations sought or offered. But Amaila stands out as the big project; one that Jagdeo might still hope will cause the name Jagdeo to live in perpetuity, not for Pradoville 2 but for vision, not for corruption but for grandeur. Nothing is wrong with having vision and even grandeur, if they take into account that schools are failing and medical services are still Third World-ish.
There is no indication that like many successor presidents and administrations, that President Ramotar even thought it necessary to have a second look at the project, assuming that in his role as General Secretary of the ruling party he would have paid it some attention. I believe that after the country’s experiences with prestige projects and the financial and economic implications of the Amaila Project, such a review would have been eminently sensible. The cost of this project has kept climbing and climbing, having started at around US$300 for a project with a capacity of 75% of what is now proposed, compared with US$834 million for a capacity that we are unlikely to require for several years. The President says that all the questions the joint opposition has asked have been answered. I have not heard or seen any study that gives any indication when Guyana Power & Light Inc. will be able to sell the more than 150 MW of power which it will be committed to purchase from the Hydro-electricity project. Perhaps President Ramotar can have one of his Ministers release this information.
More fundamentally, no one seems to know how much consumers will have to pay for electricity when the project comes on stream. Perhaps the joint opposition has not asked that question. But many other persons have, and their questions have been met with a troubling silence. Indeed the Government has so far not acknowledged, as Sithe Global has, that with interest and other charges, the project will cost over US$2.1 billion.
Oft-times what the Government says is terribly misleading. It says for example that Amaila is a BOOT operation and that at the end of the license period of twenty years the ownership of the project will vest in the state. With the benefit of hindsight it is fair to say that Fip Motilall and Synergy used the BOOT concept to make it more attractive to Jagdeo and the Government of Guyana. In a typical BOOT project, a central or state government or authority agrees with a private sector entity that the entity will design and build some usually infrastructural project and to operate and maintain these facilities for a certain period. The responsibility for the raising of finance is strictly that of the private sector entity which may or may not be required to pay a royalty for the use of whatever resource or concession it enjoys under the Agreement. Indeed, under Guyana’s Hydroelectricity Act such a royalty is explicitly contemplated. The Amaila project seems to ignore that provision. With Government being responsible for injecting and or raising US$684 million in the company and guaranteeing the sale of the entire production of Amaila, the Agreement has moved a long way from being a BOOT. THIS IS A GOVERNMENT-OWNED PROJECT for which the people of Guyana will have to wait 20 years before the country assumes ownership.
Moreover, what the Government is not telling us is that Sithe Global will invest at a maximum some US$150 million, or 18% of the project cost. Available information is that some portion of the US$150 million is for notional rather than actual expenditure by Sithe. Yet, Sithe will receive 60% of the equity in the company which gives it control. On the other hand, the Government of Guyana which will provide, by way of cash injection or guarantees, 82% of the funds required, will receive 40% of the equity in the company.
No one appears to have asked, and the Government has not informed the people of the country that US$33.3 million (G$7,000 million) will go to Lenders Fees and Advisory Costs, or who is providing the services worth this huge sum. Or that this entire amount will be paid free of tax so that the true cost to the state is over G$8,750 million, when grossed up for withholding tax to be given away.
No one appears to have asked, and the Government has not informed the people of the country why US$57.7 million (G$12,175 million) has to be paid for Political Debt Risk Insurance when the Government is guaranteeing the entire project and the sale of the company’s entire production. This is a heavy premium to be paying and suggests that the lenders – China Development Bank – rate the risk of lending to Guyana extremely high. One might have thought that the rate of interest recognises and reflects the level of risk, but China Development Bank needs a double dip.
Double-dipping may of course cut across Agreements as we note in 12.7.1 of the Draft Power Purchase Agreement which deals with a Political Force Majeure Event. This provision requires that for any day on which the Amaila Falls Hydro Inc. cannot carry out its commercial operations, GPL will have to pay the company what is called the Capacity Tolling Fee. But not taking any chances, the Draft Power Purchase Agreement also requires that the company be compensated for any repairs, modifications, engineering, construction or reconstruction works carried out by the company as a result of a Political Force Majeure Event.
In addition to double-dipping are those expenditures that go into what is referred to as “Project Development Costs”. Here are some of those identified in the Draft Power Purchase Agreement:
(a) Fees and expenses of counsel and other consultants incurred with respect to all project and corporate documents, including the Power Purchase Agreement, Construction Contract, related contracts and the Financing Documents. These will cost a ton.
(b) Out of pocket costs, including travel, and fees and expenses and firms or organisations hired by the hydro company, any sponsor such as Sithe or affiliate.
(c) Costs and expenses incurred for the procurement of the Construction Contracts and related contracts.
(d) Project management costs and expenses.
(e) An equity participation fee excluding any fees related to construction management and operations and maintenance, to Sithe Global Amaila Holdings, Ltd. or its affiliates of two percent of total project cost (about US$16 million) plus expenses to Synergy and Enventure, the original developers, up to a maximum of US$12 million. If you have heard of Enventure, please raise your hand.
We must be insane to agree to these. When all is said and computed, Sithe will hardly put any money into this company but will receive a 19% return tax free. And as noted below it will enjoy exclusive use of (hundreds?) of acres of pristine land for practically nothing.
Tariff is a secret
No one appears to have asked, and the Government has not informed the people of the country of the agreement with China Development Bank. This document is necessary to enable Guyanese to see and hopefully evaluate any annual costs to be recovered in the electricity tariff which consumers will have to pay. And talking about rates, I am sure Guyana would like an explanation for the equations to determine rates that would challenge Einstein and Pythagoras. Here is the formula set out in the Agreement to determine the Monthly Capacity Tolling Fee: CPm = RTDm + ITDm + SERRm + Tm + OMm + MCm + GERRm + CITLm. And the formula to determine the Net Base Project Cost (NBPC) is = BaseEPC+PTC+DC+GCBC+PFM+WC+Consother+CITL, and so it goes throughout the Agreement.
There seems some naieve belief on our part that Hydro will dispense with the need for all the plant currently owned or from which GPL currently obtains all its power. Indeed in President Ramotar’s G$40 billion savings he seems to make the same assumption. Of course that is clearly not the case. Apart from the fact that Amaila-produced electricity will certainly not supply the Essequibo or the hinterland communities, the entire current system, including electricity produced by Wartsila will have to stay ready for the six types of outages envisioned in the Agreement including water flow, force majeure, Scheduled and Emergency Outages. The only way that we can avoid a complete shutdown in the part of the country served by GPL from Amaila would be to retain the existing infrastructure.
Forget the Constitution, forget the laws
Guyanese might find it mind-boggling that the Government has agreed to give Sithe Global exclusive use and closed to the public, of 40 miles of the Access Road from Bartica-Potaro to the hydro project site. The Government has agreed to give this to Sithe at a nominal cost. It is not clear what the landholding involved in this concession will entail.
Despite the laws against monopolies, GPL “shall remain a monopoly for the sale of electricity and a majority controlled enterprise”. And of course, the Power Purchase Agreement makes the PUC redundant, so far as electricity is concerned.
We have also conceded on the currency to be used in the books of accounts: these will be maintained in US Dollars. This means that the consumers will carry any adverse exchange rate movement so that depreciation costs are variable for exchange rates.
We can and should use the opportunity of the rejection to go back to the drawing board. I hope that when President Ramotar’s anger subsides he will recognise that the rejection could be considered a patriotic act. The Amaila Falls Hydroelectric Project as presently designed, instead of being the economy’s salvation, will be its albatross. We have to start by getting rid of Synergy, Sithe and the Chinese who have been pushing us to gouge us. The 250 MW Bujugali Hydro Project, a Sithe sponsored project was completed for US$900 million or US$3.6 million per MW. Guyana is paying US$840 million for 165 MW or US$5.1 million per MW. The Guyana project based on MW is 42% higher.
For what we are putting in, we can have our own hydroelectricity facility.