The debate on the Amaila Falls Hydropower project continues to rage two weeks after Sithe Global, the project sponsor, declared that it had pulled out. Cabinet Secretary Dr Roger Luncheon later pronounced the project dead, but then dismissed calls for the revocation of the licence to Sithe by seeming to joke about the value of a licence of a dead project.
Dr Luncheon knows that it is in Guyana’s interest and power to revoke the licence and that once the licence remains valid and unrevoked the government has no control of the designated project site. He must know too that Sithe’s notification to the government of its decision to walk constitutes more than enough grounds for the revocation of the licence.
Dr Luncheon’s apparent throw-away remark raises the question whether Sithe is waiting to walk back in, given the prospective profits it planned on earning from the project. Even by Sithe’s own standard of high returns on private equity capital, the Amaila project represented a dream deal. The public might have been led to believe that Sithe is an equity investor. In fact Sithe was allowed to design the project documents so that the repayment of its cash and in-kind investment would be effected through the monthly all-in charge to be paid by GPL. Sithe then is not an equity shareholder but the holder of redeemable preference shares enjoying total control of all aspects of a project, the prohibitive price tag of which stands at US$858 million. A closer examination reveals that a not insignificant part of this amount includes payments to or payments contracted by Sithe.
Sithe effectively wrote all the project documents – the shareholders’ Term Sheet, the Implementation Agreement, the Power Purchase Agreement and the Assignment of Receivables Agreement. It was surprising enough to learn that Sithe would be receiving a tax-free 19% return on its investment. But worse was learning that the 19% is paid each year calculated on the original sum deemed to have been invested, rather than the reducing balance after each repayment. In the last five years of the project when Sithe’s investment would have been substantially repaid, it would receive interest at rates ranging from 76% in year 16 to 380% in year 20.
Can you imagine any bank in which you deposit $100,000 and then withdraw $90,000 continuing to pay you interest for twenty years on the $100,000? That is what our negotiating team agreed to. And that is not all. Sithe also insisted on being paid an equity participation fee of 2% of the total project cost, or more than US$17 million. In effect, from Sithe’s point of view, the higher the cost, the higher the fees it would be paid. Sithe also got Guyana to agree to pay them for services to oversee the project construction, a fee of US$60,000 per month, in addition to being reimbursed for the cost it would actually incur.
When all the transactions are taken into account, it becomes clear that Sithe planned to invest considerably less in the project than $150 million but would be paid interest as if it did. And on top of all of that, the government agreed that Sithe would set up its own operations and maintenance company to run the project, no doubt with a hefty markup. Finally, Sithe would be in charge of the money and the books while government was given limited or no voting rights in the proposed company.
One defender of the Sithe project asked me whether I wanted the Chinese to come in and take over the project from the Americans. Another asked me whether I preferred a Guyanese mismanaged company like GPL – the Chairman of which incidentally is the person heading Guyana’s negotiations with Sithe – to replace Sithe as the project manager.
My answer is that what I want is the best alternative energy deal for Guyana (including hydroelectric power), one that meets certain criteria: the longer term interest of the country; transparency; the best value for money; economic viability; reliability of supply; tariff reduction now rather than some years into an uncertain future; and adequate but not excessive returns to investors. And of course, I want a better-managed GPL.
Having read the terms sheet between Sithe and the government, the drafts of the Implementation Agreement, Power Purchase Agreement and the Assignment of Receivables Agreement, the two studies on Amaila conducted for the government by Guyana Kaehne Consulting Ltd of Canada and Mercados Energeticos Consultores of Argentina, and having met with Mr Brassington and his two advisors to pore over his numbers, I am more convinced than ever that the deal which Sithe sought to strike with Guyana did not meet those criteria. Mercados in particular raises the troubling possibility that Amaila cannot be relied on to provide year round power and that GPL will have to operate on a dual system of thermal and hydroelectric power. Until that document came into the public domain, the extent of that danger had not been an issue, except as one of the six types of outages with which consumers could be faced as a direct result of the project.
These documents are useful to any discussion on Amaila and the way forward.