Last week, we began a discussion of the Amaila Hydropower Project in the light of the National Assembly’s rejection of: (a) the proposed amendment to the Hydro Electric Act mainly to protect the surrounding areas; and (b) the motion to lift the ceiling for Government’s guarantee of loans to public corporations and companies. Today, we continue that discussion.
Review of the main points raised
We examined the cost estimate for the project and we noted that six other countries, including Brazil, have constructed or are constructing hydroelectric power plants at an average cost of US$2.32 million per MW, compared with the estimated cost of the Amaila Project of US$840.3 million or US$5.09 million per MW. This has led knowledgeable persons to conclude that the project might be over-priced, especially when one considers the original price tag was US$300 million, later adjusted to US$450 million.
Government’s response was that the facility being constructed in Pakistan at a cost of US$2.46 million per KW does not include the installation of a transmission line and the construction/upgrade of access roads. In the case of the Amaila Project, these are estimated to cost US$175 million. Taking these into account as well as the latest estimate provided by Sithe Global of US$858 million for the cost of the project, the revised cost works out to US$4.14 million per KW, that is, 68 per cent higher than that of the proposed construction in Pakistan. The Government did not comment on the hydro-electric facilities in the other five countries where the average cost is US$2.30 million per KW, that is, 80 per lower than the cost of the Amaila Project. The high cost of the Amaila Project therefore remains a valid concern.
In terms of financing, the debt to equity ratio of 70:30 will result in a higher cost to the project costly because of the debt servicing charges amounting to $US$97.1 million, in addition to lenders’ fees and advisory services (US$34.9 million) and debt political risk insurance (US$187.7 million), giving a total of US$319.7 million. If AHF Inc. were to be totally equity-financed, these charges could be avoided, thereby reducing the cost of the project to US$538.8 million, or US$2.20 million per KW (excluding the cost of the transmission line and the access road). We had also stated that it is not in Guyana’s best interest for the Government to have minority interest in the project since it will be responsible for 82 per cent of the project’s financing through a combination of equity and guarantees of loans.
Sithe Global has since clarified that: (a) the only guarantee it is requesting from the Government relates to the Power Purchase Agreement between GPL and AFH Inc.; and (b) the loans from the China Development Bank (CDB) and the Inter-American Development Bank (IDB) are specifically being provided to AFH Inc. and for which the Government is not required to issue a guarantee.
These are important clarifications since the general feeling was that the Government has to guarantee the repayment of these loans. This was especially so, given the Government’s desire to lift the ceiling for the guarantee of loans, corresponding roughly to the size of these two loans as well as amounts involved in the Power Purchase Agreement (PPA). Taking these clarifications into account, the extent of Government financing of the project will be 12 per cent, with Sithe Global contributing 18 per cent. The remaining 70 per cent financing comes from the CDB and the IDB by way of loans which have since been revised to US$500.8 million and US$100 million respectively.
Concern, however, still remains about the high debt to equity ratio in AFH Inc. If both Sithe Global and the Government can agree to a higher level of equity financing, the cost of the project will be significantly reduced. Can the Government afford more equity financing? A review of its latest audited accounts revealed that the Government had net cash resources in the tune of $63.084 billion as at 31 December 2011. Included in this figure was an amount of $90.856 billion reflected in the Monetary Sterilisation Account which was set up to capture the proceeds of the issue of medium term (180 and 360 days) Treasury Bills. This account also reflected balances of $56.610 billion, $69.956 billion and $87.921 billion at the end of 2008, 2009 and 2010. Without the risk of jeopardizing payments for the redemption of Treasury Bills, can the Government not use some of this to boost its equity contribution? In addition, can the equity base not be extended to include shareholders other than Sithe Global and the Government?
Lifting the ceiling on Government guarantees
In accordance with Section 3(1) of the Guarantee of Loans (Public Corporations) Act, the Government is authorized to guarantee the discharge by a corporation or a company of its obligations under any agreement which may be entered into by the corporation with a lending agency in respect of any borrowing by that corporation which is authorized by the Government. The aggregate amount is not to exceed G$1 billion.
The motion to lift this ceiling to G$150 billion is to give coverage to the PPA involving payment to AFH Inc. of approximately US$100 million per annum for 20 years for the supply of electricity. This works out to G$40 billion. However, AFH Inc. is not a lending agency in the context of Section 3(1) of the above Act, and therefore there are legal implications if the motion is approved.
This apart, the government is required to provide the guarantee at a time when GPL is in serious operational and financial difficulties despite the enormous amounts of subsidy and capital contributions from the Government. In all probability, GPL may not be able to honour the payment terms of PPA unless there is a quick and sustained turnaround of the company’s fortunes. The Government will therefore have to come to GPL’s rescue by providing the necessary additional subsidies to enable GPL to discharge its obligations to AFH Inc.
The difference of G$110 billion relating to the proposed new ceiling, presumably was to give coverage to the Government’s guarantee of the two loans from the CDB and the IDB totalling US$600.8 million. We now know from Sithe Global that the Government is not required to guarantee the repayment of the two loans to AFH Inc. It is therefore unclear why the Government wants to lift the ceiling for the guarantee of loans to G$150 billion. Assuming it is legally possible to use the Guarantee of Loans Act, a more realistic figure would be G$50 million, bearing in mind that currently there are no guarantees that are outstanding. The latest audited accounts of the Government showed two outstanding loans totaling G$200.64 million relating to the defunct Guyana Transport Services Ltd. and the Guyana Telecommunications Corporation that has since been privatized. The Auditor General has quite rightly recommended that these liabilities be transferred to the public debt.
Cost to the consumer
According to Sithe Global, GPL payments to AFH Inc. in the first 12 years will be approximately 11 US cents per Kh, with further reductions to 5.6 US cents in year 13, and 1.8 US cents after 20 years. Currently, GPL’s generation costs are 30 US cents per Kh for diesel and 19 US cents for heavy fuel oil (HFO). However, Mr. Carl Greenidge is of the view that the cost to the consumer remains a major concern and that the Government keeps purporting that tariffs will be reduced but has not proved this to be so. He stated that 11US cents per Kh is what AFH Inc. will deliver to GPL and not the consumer and that the cost to the consumer has yet to be determined.
Mr. Greenidge also indicated that his Party was unable to use the formula in the draft PPA to arrive at a price to the consumer. In addition, at a meeting with the IDB, the experts could not explain how the formula works, and this happened in the presence of Mr. Winston Brassington, Dr. Luncheon and Dr. Ashni Singh. Mr. Greenidge further indicated that the IDB is of the view that a price could not be determined until the due diligence is completed and that neither the design has been finalized nor the precise location of the project identified, yet the final costs have been determined.
Prof. Clive Thomas, on the other hand, stated that the quest to leave a legacy (and for fame) has overpowered rational thinking and that while hydropower is good for the country, the Amaila project in its present form is totally unacceptable. The Government should therefore count its losses and abandon the project before further damage is done. He also indicated that consultants hired by the Government have indicated to him that the studies showed several liabilities that can result from the project. He concluded that as painful as it may be, it is better to leave a flawed deal sooner than later.
Conclusion
The clarifications provided by Sithe Global have proved very useful in a better understanding of the Amaila Falls Project. However, concerns remain about the high cost of the project which hinge mainly on the mix of financing. If some way can be found perhaps to reverse the debt to equity ratio, the cost of the project will be significantly reduced.
One cannot discount the views of Mr. Carl Greenidge and Prof. Thomas, two eminent economists, notwithstanding their political affiliations. These gentlemen are capable of rising above political considerations and in the case of the Amaila Falls Project, they have done so. Decision-makers should therefore listen to them and exercise the greatest degree of caution and prudence in deciding whether to give the green light to the project as it is presently configured. Any lesser arrangement may turn out to be a cause for regret and is likely to have serious implications for the future of this country. Some of us may not be around to bear that regret.
Finally, stakeholders need positive assurances that:
Adequate mechanisms will be in place for the preservation of our environment;
A thorough and independent evaluation pronouncing definitively that the project is economically, technically and otherwise feasible, and that all the associated risks have been properly addressed;
GPL has the technical, operational and management capacity to perform satisfactorily under any proposed new arrangement;
Independent review confirming that electricity tariffs will indeed be reduced; and
The final, reformulated cost of the project represents the best value for money.
If such assurances cannot be given, then it would be in the best interest of the country to follow Prof. Thomas’s advice.
