ChrisRam.net

Introduction
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%!

Construction
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.

Conclusion
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.

Introduction
Today’s column continues this series on the award of a US$15.4 million contract made by the government to Synergy Holdings Inc. for the construction of a road leading to the Amaila Falls, the site identified for the hydro-electricity project (AFHEP). Let us start with what we know: Mr Fip Motilall was given a licence by the President to develop the Amaila hydro project; the contract to construct the road to the project site flies in the face of common sense, economic logic and the Procurement Act; there are conflicting estimates of the cost and consequences to electricity consumers of the cost of power when the hydro-electricity facility comes into commercial operation. Beyond these basic pieces of information, there is a huge void. While the public pleads in vain with the government for details, columnists and letter writers seek to fill the void by undertaking extensive research to help the public understand what is being done in their name and for which they will bear the costs and receive the benefits.

The opposition PNCR a couple of weeks ago asked for the tabling of the Amaila Falls arrangements in the National Assembly. Nothing has been heard about that request but the leadership of that party was given a wonderful opportunity earlier this past week to pursue it when President Jagdeo invited them to meet him over local government elections. It was an opportune time to remind the President that under item 6 of the May 6, 2003 Communiqué he had committed to lay in the National Assembly “all existing and future agreements for GPL and the rest of the electricity sector.”

They could have gone further and reminded President Jagdeo that he had said to President Carter in August 2004 that “the government stands by all the commitments made in this agreement between him and PNC Chairman [sic] Corbin.”

Broken promises
Broken promises from President Jagdeo are nothing new but what is new and painful is that we are left with huge and frightening information gaps on critical aspects of what could be the largest project ever to be undertaken in the country. We cannot forget the President’s record on the largest to date – the Skeldon Factory in which he played the deciding role and which leaves the country in a big financial hole. The Skeldon project has so far been an embarrassing and costly burden – perhaps even bigger than critics had warned – and the demands on the taxpayers keep rising while budget targets made by the corporation’s dream team one year become useless the next.

As Skeldon has shown, the bigger and grander the project, the higher the risks and the greater the consequences of failure. Unfortunately caution is not a virtue associated with this government, and we seem to run blindly into disaster. The parallels between GuySuCo’s Skeldon Project and the Amaila project are frightening.

Conflicting numbers
There are essentially two projects involved with Amaila – the road and the hydro-electricity project itself. That the road project will cost taxpayers only the face value of the contract (US$15.4 million) cannot be assumed. The Request for Proposal said nothing about duty and tax concessions borne by the taxpayers but which could have made a huge difference to the bid price if one bidder was given exclusive assurance about tax concessions, disguised subsidies, or overruns.

The engineer’s estimate of the cost of the road project including bridges is in excess of US$20 million so we have to prepare ourselves for some major cost overruns. Dr Luncheon who was the first to defend the contract process now says that Synergy is behind the eight ball, which in billiards means in a losing position. If translated that means that Synergy cannot deliver on the contract, then the government will have no option but to throw more money into the road contract.

Dr Luncheon should have been more direct and tell us what the failure by Synergy to deliver the road project on time and on budget will mean, which is what the public needs to know. Instead it is another layer of confusion, coming just a couple of days ago after the government sought to contradict its own project manager/sponsor over the cost of the hydro project. In a letter to the local press Mr Rafael Herz, Sithe’s designated Project Manager said the estimated cost of the dam, powerhouse, transmission line and substations was US$650 million (including an estimated US$190 million for the transmission line and other supporting infrastructure). Two days later the government disputed the number, placing the figure at $495 million inclusive of the transmission line. And if we go back one year ago, the President had announced that “final studies” on the project would have been completed in August 2009 and that the bid for the project was US$600M. The final studies have clearly not been done, or costs determined.

Assuming there is a cost number, somewhere in this range, someone should say what it is. The difference between the two most recent numbers is 31% of what the government is now saying the figure should be. Hopefully, the press will seek an explanation from Mr Herz. Amid all the confusion then there is a project of at best uncertain cost. The reality is that there may be no actual number because there is as yet no contract for the construction of the hydro project itself. We know that Mr Motilall has the licence but whether that allows him to decide who will build the hydro-electricity project is not known, or what the guaranteed/ ceiling price which GPL, the project’s customer will have to pay. The terms of the licence could help but that too is top secret.

The project licence
If anyone knows anything about the licence for the big deal that person is not letting on. Under the Hydro Electric Power Act (HEP), any licence has to be applied for to the Chief Works and Hydraulics Officer and is issued by the President. The application would contain critical technical and financial information evidencing vital capacity to fund, build and operate a hydro-electricity project. Since Synergy does not now possess those virtues, it was unlikely to have had them at the time the licence was issued to it in July 2002. It should therefore consider itself lucky that the President issued it with a licence in 2002 and then extended it first in October 2004, and then in 2006 for one year, even as its inadequacy became increasingly obvious. Section 7 of the HEP requires the payment of rent and royalties about which nothing has been heard, including whether Synergy has met such payment obligations. This is all very forgiving, considering the Financial Management and Accountability Act which requires special legislative authority.

A May 2006 MOU referred to in the third part of this series provided that the extended licence “shall be terminable by the government at any time during the one year extension” if Synergy failed to complete certain targets. The one year came and went, targets were set and missed, while Synergy committed to but never supplied a 25 MW thermal generating plant, because it never found the money to do so. Surely very few other than the President would entrust a 154 MW hydro-electricity project to a person who could not deliver a 25 MW of thermal power which can be bought on the internet.

But when it comes to Synergy all we have had from the government is grandstanding. In early 2008 the President threatened that if financial closure did not take place soon, the company would lose the “franchise” to build and operate the hydro facility. More than two years later, instead of terminating the licence and seeking a more reputable licensee, the government is now planning to put more taxpayers’ money into Synergy’s hands.

Scale of the project
Uncertainty also arises over the scale of the project and whether it is a single phase project or whether the 154 MW is just for starters. In August 2009 it was reported that Phase I would involve the installation of 154 MW capacity, Phase II 410MW and in Phase III, it would reach a further 1060 MW. If this is anywhere close to serious, we have to ask whether the Amaila Falls area has that volume of water, whether the second and third phases of the project go automatically to Synergy, who will buy this extra capacity, who will finance the later phases, and when does the BOOT kick in.

The Russians with their bauxite and the Brazilians have already indicated that they have their own ideas and ambitions about hydro-electric power in Guyana, which suggests that they are not interested in doing business with Synergy or Amaila. So the expansion may be a dream, a distraction or idle talk. Whichever it is, the public needs to know.

Start date
For starters, Synergy was under an obligation to begin construction of the hydro-electricity project in 2007 with commercial operation taking place in 2010. It failed miserably. The project manager-designate now says that construction will begin in early 2011 but with two caveats. The first is the completion of the road to enable the transportation of equipment and machinery and the second, obtaining debt financing. Now those are major caveats.

There is a lot of cynicism around and many even doubted that the AFHEP would get started. I think that with the single-mined obstinacy of the President and his adventurous way of committing state funds, the project will get going. But the President is returning from Oslo empty handed and with growing uncertainty about the timing of the inflow from Norway. The Budget already has a huge hole and his expressed impatience in Oslo when he realised the Norwegians and other donors were not sending him back with a bagful of money was his recognition of a potentially major setback. Maybe there is a link between human rights, extra-judicial killings and Amaila. On the positive side, the East Bank Demerara schoolchildren are spared the need to line the road for the President’s return which will be contrastingly low key.

Next week we look at cost, sources of funding and their implications for rates.

Introduction
Last week I addressed the process by which Synergy was awarded the contract with a price tag of US$15.4 million for road and transmission line construction in connection with the Amaila Falls Hydro Electricity Project (AFHEP). The process was led by the government-owned private company NICIL, identified as the agency responsible for coordinating the project. The Request for Proposals was in the name of the Government of Guyana through NICIL. Now it must be remembered that in 2003 the National Assembly passed a Procurement Act which requires the government to comply with the provisions of the act in relation to all procurements. With a contract price of over G$3 billion, the contract comes easily under the National Tender Board. It seems, however, that the government was unwilling to take the legally mandatory route, choosing instead NICIL, seen as a pliant and useful vehicle by which the Procurement Act could be bypassed, without anyone noticing or complaining, and with complete impunity.

Of the seventeen firms originally registering an interest in the project, only the following four submitted tenders which, given the scope and challenges inherent in the work to be done, should have excited some concern at the governmental level. An obvious problem was the short time frame for putting together a proposal requiring considerable details which because of its involvement in the project over several years, gave Synergy a distinct edge.

1. Synergy Holdings Inc – USD15,400,000

2. A consortium comprising, B&J Civil Works, Ivor Allen & Dynamic Engineering Co Ltd – USD16,650,000

3. BK International Inc – USD21,037,500

4. Mr. Roopan Ramotar – USD26,000,000.

No right to complain
By virtue of their submission, only those four – or rather three, since the successful bidder is not expected to complain – enjoyed a right to challenge any perceived wrongdoing in the tender process. The law allows complaints only from a supplier or contractor who claims to have suffered, or who may suffer loss or damage due to a breach of a duty imposed on a procuring entity by the act and its subsidiary legislation. It also gives them the right to ask for information relating to the qualification, or lack thereof, of suppliers or contractors that submitted tenders.

Taxpayers who bear all costs, including the cost of corruption and inefficiencies should these occur, are not the suppliers or contractors and so they have to stand on the sidelines as passive victims, unable to challenge any substantive or procedural legal improprieties, however egregious or unlawful.

The law provides that where a contract has already been awarded, a complaint can be made to the Bid Protest Committee required under the act, but this is yet to be appointed. Not surprisingly the Finance Ministry does not seem to be aware of the rules governing the establishment of this committee, or maybe it suspects that no one would dare protest.

Despite the misgivings about the project award, none of the bidders is willing to challenge the propriety of the process or to ask for information presumably because they all benefit from other government contracts and would fear jeopardising their chances with other contracts. In their own way, the contractors contribute to the lawlessness and boldness that underlie this bid process and award.

Synergy’s qualifications
The Procurement Act sets out the criteria which a contractor must meet to qualify for a particular contract. These are essentially but not identically set out on page 8 of the RFP issued by NICIL. Information is widely available that Synergy did not meet any of these tests, but owing to sloppy background checks or self-delusion, the Ministry of Finance (MoF), NICIL and the government seem to think otherwise. For example, the MoF claims that Synergy has expertise and experience in building roads through forests, a claim that even Synergy does not make, and which is not supported by readily available information.

Synergy is a company in which Mr Fip Motilall is the sole director and secretary. Its total authorised capital is US$25,000 but because it has never filed an annual return it is not possible to know whether it has issued any shares or whether it has ever had its books audited. In other words, for all we know Synergy may be a paper company with no shareholders, no money, no audit and no other statutory compliance. Clearly, compliance with basic law is not seen as an impediment for the award of a government contract worth US$15.4 million. Co-incidentally, Synergy shares this disregard for the law with NICIL, the project co-ordinator.

Fact, fiction and fantasy
Synergy’s greatest strength seems to lie in its luck and the salesmanship of Mr Motilall, a Guyanese who migrated to the US several years ago. He successfully persuaded the US government to provide him with funds to do a study of the Amaila Falls hydro-project, and the Guyana government to enter into an agreement for his company to develop that project into an operational entity.

On its website, Synergy describes itself as the developer to design, build, own and operate a hydroelectric plant in Guyana. One immediately notes the absence of any obligation to transfer the plant to the government and wonders whether this is another attempt to mislead potential investors. The company claims that in 1997, it identified a dire need for electrical power generation in Guyana and sought to fill this need by harnessing the hydro potential of the country. In 1998, it joint-ventured with Harza Engineering Company to fund and perform a detailed feasibility study and Environmental Impact Assessment (EIA) for which it wrongly claims that it took a loan from the US Trade Development Agency (US TDA). In fact it was a grant.

The dissimulation continued with the assertion that the project had attracted equity investors and multi-lateral banks to finance the construction. Synergy is now looking for financing, even as Sithe describes itself as the project sponsor. What is true is that the company has been granted a licence to undertake the AFHEP although the particulars of that licence are not a matter of public information. Under the 2003 Jagdeo-Corbin agreement such matters are required to be tabled in the National Assembly.

Broken promises
On May 23, 2006, an MOU was signed between the developers and government and Guyana Power and Light Inc (GPL) for the development of the project. Here is a schedule of commitments and dates contained in Section 3 of the Schedule to the May 2006 MOU. Notice that Synergy has breached every one of its obligations under the MOU, most of which should have led to the immediate termination of licence, MOU and dealings.

Hydro by Christmas 2010
Emboldened by the brazen complicity of the government, Mr Motilall seems completely unmoved by his otherwise embarrassing incapacity to meet his obligations even within an unreasonable time. In fact, despite his failure his company’s website continues to tell the world that “the schedule that was agreed upon has the start of construction of AFHEP in August 2007 with commercial operation on the last quarter 2010. In the interim, Synergy and its partners agreed to supply a thermal power plant of 25 MW (to be operational in March 2007) as a way to meet GPL’s demand for power until the hydro-power plant can be built.

The hydro project will assimilate the thermal plant upon its commissioning and the 25 MW thermal power plant will most likely operate in a back-up capacity after 2010.” As my twelve year old would say, “Yeah, right.”

Next week we will look at the financial provisions of the several disparate documents and statements made on the project.