The Inter-American Develop-ment Bank (IDB) says the due diligence process which has started for the Amaila Falls Hydroelectric project will finally determine whether or not the bank finances the project and also the level of the financing.
In responding to questions from this newspaper, IDB Representative Sophie Makonnen outlined the bank’s role in the project and its expectations from both the Guyana Power and Light and Sithe Global.
A mandate letter was signed in Xi’an China on September 11, along with the Engineering, Procurement and Construction contract and investment agreement, which marked the commencement of the due diligence. The US$840 million project is scheduled for commencement of construction in 2013 for delivery in 2016. The Government of Guyana said that financial closure for the project is expected by second quarter 2013.
“The mandate letter was signed between IDB and Sithe, where Sithe provides a mandate to the bank to analyse the technical, environmental, social and financial aspects of the project, as input to a possible loan,” Makonnen said. “During the course of the bank’s due diligence, IDB sector specialists will review and appraise the project from a variety of perspectives – institutional, financial, environmental, and social – including the disclosure of an Environmental and Social Management Report in the event that the project is brought to the IDB’s Board of Executive Directors for consideration and approval,” she said, adding that the project’s overall impact on the
economy will also be a
consideration.
The size of an IDB loan – if approved – will be determined based on the study’s findings. “During the due diligence process, the optimal capital structure including the optimum size and nature of an eventual bank loan will be defined,” she said.
With regard to the concerns raised that Guyana may not have the technical capacity to manage such a large project as Amaila, Makonnen said the bank will ensure that both GPL and Sithe have the technical capacity to manage the project.
“The IDB has been involved in the infrastructure sector – including the energy sector – in Guyana for many years. The development of a sustainable energy sector is a priority for the country strategy agreed with the government,” Makonnen said. “Independently of the financing of the Amaila Falls project and because of this multi-year commitment to Guyana’s energy sector, the IDB is well placed to provide technical support. Properly managed, the Amaila Falls project is an opportunity to improve GPL’s technical capacities.”
She noted that the due diligence process will include the requirement that a programme be agreed upon by GPL to continue reducing electricity losses. “We expect that part of the investment in infrastructure required to make Amaila Falls feasible will contribute to loss reductions. This will maximise the benefits of the project to Guyana and its people,” Makonnen said.
Asked whether the bank is concerned about the level of debt that Guyana is undertaking to execute this project, the IDB Representative said the IDB and the government have paid particular attention to the issue of debt sustainability. “The IDB was a major player in the last HIPC debt relief in 2007, which benefited Guyana. Because of that support and Guyana’s subsequent fiscal management, external debt has been brought down from 180 per cent of GDP to less than 60 per cent today,” she said.
This reduction, she said, has promoted growth and the allocation of more public resources to social sectors. “Given the important benefits of maintaining manageable levels of debt, this is a priority for both the Government of Guyana and the IDB,” she said.
On whether the IDB is concerned about the increasing cost of the project, she said that because the IDB supported debt relief for Guyana, it is very well aware of the importance of using scarce public investment resources in the most efficient manner. “Increasing costs are a perennial concern for infrastructure projects all over the world. During the due diligence process, the IDB will analyse this and other risks faced by the project. We will assess the potential for cost increases and assess if the risks are within a range that is reasonably acceptable,” Makonnen said.
Pressed on what safeguards the IDB is ensuring are in place to mitigate possible damage to the environment from the project, she said that all IDB financing requires compliance with the IDB’s environmental and social safeguard policies, which cover a wide range of aspects, from environment to involuntary resettlement and disasters risk management. “One of the priorities of our latest capital increase, known as IDB-9, and of the 2012-2016 Country Strategy that is being discussed with the government is to promote green investments in borrowing countries. The due diligence process will provide the information required to verify that the project follows the mitigation hierarchy. This means avoiding negative impacts, mitigation of impacts that cannot be averted, and compensation for any residual impacts,” she said.
Makonnen said that in addition to this, the IDB and the proponents of Amaila Falls have established an independent panel of experts to advise on environmental and social issues associated with the Amaila project. “As you can see, all this adds up to the highest standards of environmental and social safeguards, which is a key component of what IDB involvement brings to the project,” she said.
Officials of Sithe Global on a visit to Guyana earlier this year expressed the concern that without the financing component from the IDB, financial closure will be difficult to achieve. The government is putting in equity financing while China EXIM Bank is providing a loan for the project.
