The Amaila Falls Road Project: Whose Synergy? – part 5

In Oslo, Norway two Fridays ago, speaking to a reporter from Stabroek News, President Jagdeo added to the growing confusion about the Amaila Falls Hydro-Electricity Project in what was intended to be a clarification. He gave costs, he gave details about the contract, he addressed the country’s exposure to Synergy and he enthused about the huge benefits which will accrue to electricity consumers from the hydro-electricity project not only after it becomes public property, but in its first twenty years of privately-owned operation. If the President was correct, what he said would have been welcome and great news indeed. But he was amazingly wrong. He confused – conflated would be too nice a word – the road project with that of the hydro-electricity project. And in the process what he did not seem to know he was rather casual about.

Unfortunately he was either not properly informed before he spoke, or he was unclear in his own mind. Part of the difficulty faced by Guyanese trying to understand this high finance and low politics is that there has been no single voice or messenger of tidings about the project. On the government side we heard – often more than once – from the President, the Prime Minister, the head of the Presidential Secretariat, the Minister of Finance, and from Mr Winston Brassington, the head of NICIL. We heard lots from Mr Fip Motilall and recently from Mr Rafael Herz of Sithe Global, the designated project manager of the Falls project. Instead of the message being consistent it has often been contradictory.

It is perhaps true that the press did not pay enough attention to the evolution of the project during which the signs and seeds of confusion were first sown by the President and the Prime Minister as far back as July 24, 2006 at a press conference at the Tower Hotel, and later fuelled by persons like the Head of the Presidential Secretariat, the Minster of Finance, the Head of NICIL, Mr Motilall from Synergy and Sithe Global.

The first bit of confusion arose at that July 24 press conference when President Jagdeo and Prime Minister Hinds were announcing the Memorandum of Understanding which was being sold to the public as a done deal. There were two elements to the MOU – the supply of thermal power to GPL and the hydro-electric project. Under the first, Mr Fip Motilall was required to supply a second hand 25 MW thermal plant to the Guyana Power and Light Inc for a handsome reward. Even that he was unable to capitalise on. Things must have been really bad with him.

The misrepresented process
The clear message that the President intended in speaking with the reporter in Oslo was that the cost of the hydro-electric project was known as a result of the award of a contract. Clearly referring to the hydropower project in his Norway statement, the President said that the “project cost is, after public tender where you saw 20 companies pick up the bid documents and five companies sent in bids, the final cost for the hydro will be US$306 million, the transmission line US$145 million through a public tender and US$150 million is there for contingency and interest cost.”

He explained the “transparent process” the government has to follow as including the assessment by a technical team of the bid’s capability and price, followed by a recommendation to the national tender board and finally to cabinet which can exercise a veto. But in the case of the road project bid, this did not happen. To be precise, for the road project contract, there were 17 expressions of interest and only four bids, all local. Secondly, the contractor selection process was controlled by the state-owned company NICIL in clear violation of the Procurement Act prompting Dr Roger Luncheon to say, unusually carefully for him, that the contract was awarded “within the framework of the [Procurement] Act.”

The Memorandum of Understanding (MOU)
I have a copy of an MOU between the Government, GPL and Synergy signed on May 23, 2006. The discerning or sceptical reader may find what may appear to be inconsistencies between the information that has been made public and the provisions of the MOU. These may have arisen from subsequent amendments and agreements, although that does not seem to be the case. Here are some of the key provisions of the MOU which for the sake of brevity I have summarised but as far as possible using the wording from the MOU.

Date and parties: May 23, 2006. The parties are Guyana Power and Light Inc represented by its Chairman Mr Ronald Alli; the Government of Guyana represented by Prime Minister Samuel Hinds; and Synergy Holdings Limited represented by its President Mr Fip Motilall.

Status: The MOU is what is called a “subject to contract” arrangement that sets out the framework but not the finer details of the rights, responsibilities and obligations of the parties. Section 8 provides that the MOU constitutes an expression of principles and binds the parties to negotiate in good faith in accordance with those principles. The section goes on to specify that the MOU and any obligation of the parties with regard to the project are subject to contract.

The projects: There are, or were intended to be two projects under the MOU for which separate contracts would have had to be negotiated. They are a Thermal Project for the supply by Synergy of a 25 MW thermal plant then located in Cozumel, Mexico; and second, the Amaila Falls Hydro-Electric Project (AFHEP)

The purpose and initial matters: The MOU sets forth in a schedule the principles under which the parties would negotiate in good faith towards consummating development, financing and implementation of the two projects.

Under the MOU, the GoG granted Synergy the continued rights to develop AFHEP under the terms of a hydropower licence issued in July 2002 and extended in October 2004 and which at the date of the MOU would have expired in July 2006. The MOU extended the hydropower licence on July 27, 2006 for an additional one (1) year period…

Synergy agreed to proceed with the implementation of both the projects on an “Open-Book” basis, ie, it would disclose to the government and the GPL all costs associated with each of the projects. In turn, the government and the GPL agreed that the equity investor(s) in the projects – presumably Synergy and others it brought in – would be entitled to an internal rate of return of 25%, and certain tax and duty concessions.

Since Synergy practically abandoned the thermal plant project, only the particulars of the hydroelectric project are set out below. There is no indication that either GPL or the government sought any form of redress for Synergy’s failure or indeed felt it worthwhile to do so because of the status of the MOU.

The hydro-electric project
The parties agreed to pursue hydro on a Build, Own, Operate and Transfer basis under the July 2002 licence. The period specified in the MOU for a power purchase agreement (PPA) under which GPL would buy all the power generated by the hydro project Synergy is 25 years from the date of commercial operation, which was stated then as running from December 31, 2010 to December 31, 2035. The MOU provides for an automatic extension for an additional 10 years, at the conclusion of the original PPA term. So where the 20 years free transfer from Synergy to the government comes from is not clear. That in fact is supposed to be the major selling point of the deal with Mr Motilall but a reading of the MOU suggests that we may have been misled. Indeed Synergy’s ownership can extend indefinitely since the MOU provides that if AFHEP’s installed capacity is expanded, “changes to the BOOT structure would be necessary.” The MOU is emphatic – transfer to government only arises if there is no expansion by the end of the 35-year period.

Cost and revenue
Under Schedule A which deals with the hydro-electric project, the return is specified as “a minimum cash-on-cash leveraged (U.S. Dollar) internal rate of return of twenty five percent, after tax and duty concessions.” This is even higher that the rate which the government criticised in the telephone company agreement.

The MOU provides that the cost for power of 775 GWH delivered to Sophia, Georgetown shall not exceed US$0.075/kwh. Failure of the parties to agree upon, and of Synergy or any other participant in the AFHEP to guarantee, such US$0.075/kwh cost for delivered power are stated as grounds for the government, in its sole discretion, to terminate the AFHEP and any related agreements. Such US$0.075/kwh price is stated as being subject only to adjustment after construction is completed, and then only to the extent necessary to reflect inflation associated with O&M costs.

But here is what the President told Stabroek News in Norway: “We will buy the power on average at [US] 10.9 cents per kilowatt hour here and that includes all the costs.” So before the project is even started, the price per kilowatt hour has gone up by 45.8%!

The MOU provides that bidding for the construction work for the AFHEP would be pursued on the basis of full international bidding through advertising “for interest” in the international media and, through subsequent joint selection, identification of a short list of qualified bidders, subject to Guyana law and any requirements of the financiers for the AFHEP. Only such short-listed bidders shall be sent the bidding documents and requested to submit proposals. With G0G’s input, Synergy shall have the exclusive final right to select the EPC contractor.

There is no information or evidence out there that suggests that any bidding has been done – locally or internationally. If it were, someone would have said so by now. This means that capital costs for the project and its operating costs are yet to be determined.

What is interesting is that there was no mention of a road in the MOU. The closest the MOU came to this is in the recital or preamble in which it is stated that “Synergy proposes to construct… approximately 300 km of associated double-circuit 230 KVA line to transmit the power from the project site to Georgetown.” That those who conceptualised as well as those who prepared the MOU would have overlooked such a basic matter is a real cause for concern.

The provisions set out in the MOU contradict in significant ways what the public has been fed since the road contract came under scrutiny. What is clear is the President needs to advise himself better of the MOU and related matters before he speaks on the issue. There are several issues which need further consideration but which require more detailed and accurate information. These are serious and I believe enough has been revealed to justify a review of this entire fiasco. I am sure Business Page will return to this subject, sooner rather than later.

Meanwhile, from next week will see Business Page turning its attention to other matters.

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