Amaila Falls: Deals within a deal

Correction and apology
In an earlier piece, relying on section 25 of the Hydro Electricity Act Cap 56:03 which provided that the assignment or transfer of a licence without the consent of the President, I had questioned the authority of the Prime Minister Mr Samuel Hinds to transfer the Interim Licence from Synergy to Amaila Falls Hydro Inc (AFHEP). While that section was not explicitly amended, there were two later Acts – The Guyana Energy Authority Act and the Energy Sector (Harmonisation of Laws) Act 2002 – that transferred the functions from the President to the Minister who in this case would be the Prime Minister. I extend apologies to the Prime Minister and to readers for this. Without offering any qualification to this apology, I can state that the Prime Minister has failed to exercise his duties and responsibilities under the Act in relation to Mr Fip Motilall and his company Synergy Holdings Inc.

Last week’s column concluded with a restatement of the obligations of a licensee under the Hydro Electricity Act. The tenth supplementary AFHEP licence is scheduled to expire this year and that means that the current licensee Sithe Global has about seven months to complete the development works set out in the Licence, a pre-condition for the application for a final licence. Sithe has a lot of work to do and from their own public utterances it seems that they are far from prepared for any serious and public criticism of their plans, clearly more comfortable with dealing with our Prime Minister. That is understandable after having been stung and embarrassed by their performance on what has been a near disastrous Bujagali Hydro Electric Plant in Uganda.

From all appearances and from the Prime Minister’s utterances, Sithe was chosen not by the government but by Mr Motilall whose competence, judgment, marketing skills and political connections have been on public display with regard to the Amaila Falls Road Project awarded to his company by the government against all informed advice. Incidentally my information is that work on the road project has been practically halted and that Mr Motilall is out of the country. There must now be doubts whether Mr Motilall will be in a position to complete the road, a fear that was expressed in a court challenge to the award of the contract to Motilall and by everyone else except the government. Already parallels are being drawn between Burnham and Jagdeo’s adventures with hydro.

‘Bigging up’
But back to Sithe which is expected to be around for some time, although for how long is another matter. Readers will recall that Business Page of May 29 sought to deal with issues raised by Mr Rafael Herz who has been identified as the Project Manager of the Amaila Falls Hydro project. Naturally he and the company want to ‘big up’ themselves but sometimes the results are not what they intend. Here are some claims made by Sithe Global on its website:

1. That it strives to be “among the best in the world at implementing large scale, socially responsible power generation projects, often in places where success has proven challenging.” If that is indeed the case then Guyana should consider whether Sithe is the most appropriate fit for us with our small-scale Amaila and whether the project’s price tag means that Guyanese have to pay Sithe for its name and reputation.

2. Its award of the 2007 EuroMoney Africa Power Deal of the Year for the Bujagali Project. Its website does not state that in 2009 the World Bank recommended a 5 per cent increase in tariffs that year and a similar percentage increase in 2010 in order to avoid “shocking” Ugandans with the inevitable price increase that was expected once the Bujagali dam was completed, despite earlier claims that power tariffs would decrease once the project became operational.

3. That its projects currently total nearly 7000 megawatts with a total capital investment potential of $15 billion. That works out at US$2.142 million per mega watt, or half the cost of Amaila.

On the Bujagali project, Sithe “partnered” with a division of the Aga Khan Fund for Economic Development and formed a company called Bujagali Energy Company Limited to develop the project of which the lead contractor was Salini, an Italian construction company. With Sithe’s most recent experience bordering on a disaster, it would be the most compelling thing in the world for any serious government to do serious due diligence of the Bujagali experience and Sithe’s role in it. They would want to know why the key players in the project including Sithe could have got a major element in the project so wrong; whether the problem was with the contractor or Sithe; whether there was adequate and appropriate consultations; the role and responsibility of the government; the supervision by the regulator, if any, and the scale of the project cost overrun and whose judgment and estimates were at fault.

For Sithe to simply change contractors for the Amaila project is not enough. It must be challenged and must show that it was not culpable in the debacle of Bujagali. Civil society and the press must get answers before the Amaila project gets the green light. Glib talking and throwing around numbers and self-praise are not acceptable. We are suffering from that type of behaviour in connection with the road project in which one name is common.

China Railways
Now that Business Page has revealed that China Railways’ own website shows no expertise in hydro projects, we are told that real expertise resides in China Railway’s partner, Northwest Hydro Consulting Engineers (NWH), described by Mr Herz as “one of the pre-eminent hydro firms in China.” Interestingly Mr Motilall had once described Synergy in similar terms and my research indicates that Northwest is a hydropower consulting company which carries out various levels of engineering studies of hydropower schemes and helps carry out techno-financial analyses of medium and large hydropower projects.

Mr Herz rejected a suggestion in these columns that the debt interest rate could be as high as 30% and volunteered that “in addition to the several million dollars in cash which Sithe Global has already contributed to developing this project, the company expected to invest approximately $200 million of equity towards the total project cost.” Such generalizations are not a substitute for solid information. At December 31, 2009 Sithe had advanced to AFHEP about US$800,000 which was spent on the project development expenses (US$325,000) and general and administrative expenses (US$480,000). What Mr Herz needs to do is not tell us what is not so, he should tell us the facts.

To be fair to Mr Herz he did not say that Sithe’s equity is in the form of cash and it now seems that the project is already being charged for Sithe’s time and expenses on Amaila. Does this include any payment to Mr Motilall who for several years breached practically every condition of the interim licence he was carrying around in his briefcase looking for a buyer?

Guyanese have a right to know how much cash Sithe will be investing in the project and Mr Herz might care to tell us why the company which will carry out and own the project has been capitalised with a mere US$2,500! We expect too to know the nature of the expenditure of “several million dollars in cash” spent by Sithe in developing the project and whether and how much was paid to Mr Motilall. Mr Hinds and the PUC would be discharging their duty to consumers and taxpayers by letting them in on all the costs they will eventually have to bear in electricity rates.

On the question of the cost of the AFHEP, Mr Herz had stated its “the cost per kilowatt for the construction of the hydro facility will be comparable to the cost of other hydro facilities of similar scope.” I have done a survey of the cost of projects and have come up with the information set out below, with the caveat that some of the costs are budgeted rather than actual. There are savings in terms of capacity but the relationship is not as direct or linear as might seem logical. Every project is different and where there is a displacement of persons that can be a major cost. For Amaila, population displacement is not likely to be significant.

What makes the Jirau and San Antonio plants so much more expensive than the proposed Belo Monte Dam is substantial expenditure on technically complex and expensive ship locks, as well as environmental remediation. If we exclude those expenditures the remaining cost of construction and transmission falls more within the range of the Belo Monte Dam. Sithe’s most recent Bujagali project has been described as one of the most expensive hydro electricity projects in the world. Amaila will now surpass that.

Back next week with a discussion of the request by the Minister of Finance for more money.

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