Last week’s column summarized the geo-technical features of the troubled Amaila Hydropower Project (AHP). *(Readers please note that the length of roads to be upgraded for the Project is 122 kilometres and not 22 as it appeared in last week’s column.)
The coming weeks will focus on its financing.
Troubled projects
The AHP is one of a class of ‘troubled’ public projects with distinctive features, three of which are highlighted here. First, it has a track record of implementation delays. The Guyana Energy Authority’s (GEA) archives reveal that Amaila Falls hydropower has been pursued since the 1970s. By the 1990s and early 2000s overseas and local investors had explored the pre-feasibility possibilities of hydropower at this site. The geotechnical features of the AHP, which I detailed last week, are those for its most recent version.
Second, it is mired in controversy because of a dearth of official information. Information provided by the private project partners is dismissed as self-serving.
Third, its financing is unclear, based as it is on a project finance model and not a standard business one. In coming columns I focus on explaining, as best I can, the financing model that undergirds the AHP.
Capital costs
Like other infrastructural projects the AHP requires a large outlay upfront (about 80% of the total cost). The intended off-taker of AHP’s hydropower is GPL. The projected cash flow from this forms the core of the AHP’s financing model. Two matters, therefore, immediately arise. First, an IMF Report (2010) scathingly portrays the GPL, thereby justifying the need for an alternative electricity source. However, it also stresses GPL’s 1) inefficiency (as business customers are deserting it to self-generate power); 2) ageing distribution network; and 3) weak revenue administration.
In these circumstances the project cannot successfully proceed without governmental guarantees behind GPL. This has considerable public indebtedness ramifications.
There is a framework agreement (2010) through which the principal project sponsors (GPL, AFH Inc, Sithe Global, China Development Bank (CDB), China Railway First Group, IDB and the GoG) are organizing project financing. The GoG is the named project guarantor/lead sponsor; the IDB and CDB its most senior lenders; and AFH Inc the special purpose vehicle and beneficiary.
My best estimate at this stage is that to be fully completed the project will incur upfront an outlay of at least US$950 million to US$1 billion for construction and financing. This sum is three times greater than the original estimate reportedly given to a Committee of the National Assembly in 2009, and more than 50 per cent larger than that cited in the IMF Report (2010) referred to above. Because of the public debt ramifications referenced above, it should be noted this sum represents about 30 per cent of Guyana’s GDP for 2012.
My estimate is derived as follows: 1) GoG reported equity in AFH Inc (over US$100 million) mainly allocated to preparing the access roads (211 kilometers) component of the project. About one half of this is being earmarked from Norway’s payments under the LCDS. This equity estimate is quite low as it does not take into account the true value of Guyana’s economic resources involved in the project. 2) AFH Inc’s equity via Sithe Global (at least US$220 million). About 10 per cent of this has already been expended on pre-project expenses (technical studies, legal expenses, acquisition of permits, licences, etc). 3) Loan finance provided by the China Development Bank (approximately US$510 million). The Engineering Procurement and Construction (EPC) Contract with China Railway First Group is for US$506 million.
I stress here that I do not have firm estimates for the loans to be provided by the IDB and the China Railway First Group. I have, nevertheless, included modest estimates of these in order to arrive at the total cost given above. In the case of the IDB it is US$175 million plus, the sum most frequently cited in press reports.
At this stage four observations are warranted: First, I have not computed the financial value of the tax expenditures, regulatory relief, and other governmental giveaways (such as use of public lands and rivers), in the project’s concessionary deeds with the authorities. These are expected to be considerable.
Second, the GoG had previously announced its equity involvement at US$40 million, but the sum given above is more than double that.
Third, the project’s financing arrangements carry penalties if financial closure is not secured during 2013, as dam construction is scheduled to start in 2014.
Finally, surely readers are familiar with the unresolved delays in 1) constructing the access roads; 2) readying GPL’s distribution network for the new source of electricity; and 3) completing IDB’s due diligence, despite the mandate letter.
Financing and operations
As the project’s main income stream is payments from GPL for electricity AFH Inc delivers to it on a ‘take or pay’ basis, this makes GPL the project’s main obligor. Recent estimates are that these payments will yield approximately US$100 million annually, for the first 20 years of the planned 75-year plant life of the project.
This revenue yield will clearly have to provide both the guaranteed annual rate of return of 19 per cent and charges on all loans including the CDB,’s and IDB’s which are the senior lenders. These loans are expected to carry about 8½ per cent per year. GPL will pay under a Power Purchase Agreement (PPA) with AFH Inc, the details of which have not yet been released. However, given how controversial PPAs have turned out to be in several poor countries, every effort must be made to have GPL’s publicly scrutinized.
Finally, GPL has publicly committed to reduce current electricity charges (to all consumers) by between 20 to 40 per cent, after the PPA comes into force. This means that new charges per kilowatt hour are projected to range between 19.2 and 25.6 cents.
Next week I shall elaborate further on this project finance structure of the AHP, in light of the motion introduced to the National Assembly seeking to increase government’s loan guarantee for public corporations by 150-fold, to $150 billion.
