Introduction
Last week’s column looked at the intrinsic double-dealing and its associated opportunism, which drives the low carbon development strategy (LCDS) and the Memorandum of Understanding (MOU) between the Government of Guyana and Norway signed in 2009. I tried to analyze this in a manner that would encourage readers to form their own judgement as to how much trust, deceit, and/or double-dealing is involved in these arrangements. I ended the column with a brief look at the Amaila Falls Hydropower Project (AFHP).
Indisputably, the AFHP is the flag-carrier project of the LCDS and the MOU as it is expected to contribute to a low carbon-based model of economic development in a truly transformational manner. The impetus for this project derives from two main considerations 1) Guyana’s enormous hydropower potential and 2) the fact that the country’s main energy supplier is Guyana Power and Light Company (GPL).
GPL basket case
GPL is a classic basket case. Its electricity supply is notoriously unreliable, inefficient, and outrageously high cost. Electricity generation is dependent on imported expensive and price-volatile fossil fuels to the tune of about US$100 million annually. Its defective distribution network entails huge technical and commercial losses. These, along with weak financial controls, make the cost of electricity supply per Kilowatt Hour (KWH) as high as 32 US cents. Given these horrible circumstances, the alternative of cheap hydropower is compelling. When completed the AFHP promises to deliver 165 megawatts of power and a reduction in tariffs of between 20 to 40 per cent per KWH, for all classes of consumers.
Unfortunately, given its projected cost of US$835 million for only 165 megawatts plus the guaranteed rates of return on portions of the capital supplied to the project, there is no way that, commercially, the price per KWH can be reduced by 20-40 per cent below the current rate of 32 US cents. This is therefore a massive and insuperable failing for the centrepiece project of the low carbon development strategy.
Worse
In my judgement the dreadful circumstances of this project and its stark commercial reality will get worse as it progresses. Further, I anticipate that the difficulties arising from the scramble for minerals (discussed last week) will intensify. These problems refer not only to the unsustainable economic development elements of the strategy, which I had identified but are associated to those in the social, community and environmental spheres.
Thus, I expect in the course of time, crime and violence in the mining areas will grow. Armed criminal gangs will multiply and operate freely across the effectively unregulated borders we share with our neighbours.
I further anticipate that the invasion of illegal small miners (mainly Brazilian and Venezuelan) will rise. Social costs (including threats to the community rights of the indigenous population) will also rise as the lure of private profit intensifies with the increasing world price for the minerals being explored, particularly gold. These social costs include 1) a rise in prostitution; 2) increasing theft of indigenous lands; 3) the rapid spread of social diseases; and 4) an inescapable rise of trafficking in persons.
Not least of all, I also anticipate that environmental damage will grow exponentially. Thus incidents of mining-pit collapses, mercury poisoning, and ground-water pollution, (already at dangerously high levels, see Thomas, 2010) are expected to multiply. Additionally, the risks of deforestation and forest degradation will increase, as it has been well-established that mining is the main driver of these.
The question of funding
Judging from questions readers pose, there is little clarity as to the amount of funding already committed to the LCDS and the potential for further increases.
Put simply, the largest single commitment of funding to the LCDS has come from Norway. According to the MOU a sum of US$250 million has been promised over five years, beginning in 2009-2010, and based on expressly stated performance-based results. Because of disputes, these payments are effectively more than a year in arrears, even though some relatively small sums have been handed over.
Assuming, however, that the promised US$250 million is spread evenly over the years 2011-2015, the annual average sum will therefore, be about US$50 million. If this amount is expressed as a share of projected total investment and then expressed as a fraction of the projected constant GDP over the period, we obtain a ratio of 2.3 per cent. The question therefore is, what would be the likely direct impact of this investment on Guyana’s GDP growth?
In order to estimate this I reintroduce a concept I have used several times before to estimate the direct impact of investment on Guyana’s GDP growth. That concept is the incremental capital-output ratio (ICOR). As previously explained the ICOR is notoriously difficult to estimate as it can vary for a number of reasons, including the time period chosen, lags, and capacity utilization. ICOR essentially measures the average annual share of total investment in GDP 
(divided by the average annual growth rate of GDP .
To avoid unnecessary disputation the estimated ICOR, which I use is that recently cited by the IMF (IMF 2010). That estimate is 5.4, which means it takes on average an investment the equivalent of 5.4 per cent of GDP to generate 1 per cent growth in GDP. Since Norway’s average share of estimated total investment over the five years 2011-2015 is about 2.3 per cent of GDP, then based on this its investment may be expected, on average, to directly impact growth by about 0.4 per cent annually for the same period (2011-2015).
Readers may consider in light of the observation that GPL is basket case, this is quite modest and therefore wonder why all the fuss about the LCDS. Is it a case of much ado about nothing? The first draft of LCDS, however, had anticipated a far larger investment than US$50 million annually. It has in fact projected for 2009 unspecified interim payments to get the LCDS started; for 2010-2015 the sum of US$60-250 million annually; for 2013- 2020 the sum of US$230-350 million annually; and from 2020 onwards, an amount in excess of US$580 million annually.
Years later, and at this point in time, however, the reality is that the gap between the actual and projected benefits from the LCDS remains, to say the least, disturbingly high.
