An analysis of the leadership failure on the Amaila Falls hydropower project

Public exchanges
The story of the Amaila Falls hydropower project dates back many years and much has already been said and written about it.  Very little attention, however, has been directed at the quality of leadership that instigated the possible demise of this project. This column is about the story of the troubled hydropower project over the last two months and how the project might have failed for lack of good leadership.  From the public exchanges on the collapse of the project, not all important decision-makers saw the same picture simply because some were not privy to vital information.  As Michael Useem points out in his book The Leadership Moment, the simplest of necessities, ensuring that everyone understands the big picture, is an essential part of good leadership.  The nine stories in the book, where real danger lurked, expose the need for strategic vision, persuasive communication and consensus building, elements that were missing in the entire discourse about the project.  Much of the blame for these gaps stays with the administration which had the ultimate responsibility of making the project a reality and failed to do so.

Did not matter
One of the challenges of leadership is responding to new information and sudden changes.  Within the more recent time period, several issues on the Amaila Falls hydropower investment were brought together in one file folder and elevated rapidly to a state of prominence.  Helped by the analysis of concerned professionals and academics, the file folder was quickly filled with disquiet about a multitude of issues surrounding the project.  Among them were the profit to be made by Sithe Global, the impact of the loans on the national debt, the uncertainty of the final price to be paid by the consumers of the electricity, the unclear job opportunities for Guyanese and concerns about corruption and cronyism.  The administration proclaimed that the hydropower project was of national significance and then, when confronted with these very legitimate issues, behaved as though these national concerns did not matter.

Hard decisions
One of the most important factors of leadership is being prepared to face important challenges.  One must be ready to recognize when conditions have changed and to understand the meaning and context of the change.  It is like climbing a mountain where weather conditions could change suddenly during the course of the journey and force the climbers to make hard decisions quickly.  Awareness and prior preparation help with readiness for sudden changes and aid in producing adjustments in strategy that often avoids disaster.  As the story about Arlene Blum and her expedition team on the slopes of Annapurna revealed, persuasive communication and not acrimony becomes important in any effort to have others join a decision of critical importance.

Reshaped
Clearly the debate had been reshaped by the many inputs from the analysts and the demand for parliamentary consensus by Sithe Global.  While the administration understood the importance of the hydropower project to the country, it did not demonstrate an understanding of the changes that had occurred before a critical parliamentary vote.  Even though it was on the same side with Sithe Global, the administration failed to grasp that a mere parliamentary majority was no longer acceptable to Sithe Global and that it needed to reassess the implications of going to a vote without accommodating the major opposition party.  Unless there was evidence to the contrary, it seems as if the administration felt that its only option was to pressure the opposition to change its mind.  What the administration appeared reluctant to do was to persuade Sithe Global to change its position.

The administration had very little time between the emergence of the new conditions and the parliamentary vote to meet all the demands of the opposition. Yet, there was an opportunity to begin a sincere process of negotiations that could have paved the way for success.  Instead of taking advantage of the opportunity and negotiating seriously with the opposition before the fatal vote, the administration squandered the little time that it had in calling stakeholder forums and poisoning the atmosphere with demeaning and bellicose language.  In doing so, the administration mobilized the assistance of persons who could not help it.  These meetings had no chance of bringing about the change that either Sithe Global or the opposition wanted since they were not intended to remove the stumbling blocks to a unanimous parliamentary decision on the project.

Turning point
The request for unanimity became a turning point that the administration missed or misread completely.  It should have been a signal to the administration that it too needed to change its attitude and position on the issues that troubled so many about the hydropower project.  As such, the administration had the choice of reaching a compromise with the opposition or persuading Sithe Global that a simple parliamentary majority was enough to legitimize the desired increase in the debt ceiling.  Given the many issues that troubled the larger of the two opposition groups, it appears to this writer that the easier course of action would have been to reassure Sithe Global of the legitimacy of the majority vote, especially since financial decisions by simple parliamentary majority were treated as valid decisions by the opposition.  Consequently, the tactics used by the administration were impractical for the conditions that had to be satisfied.  The path chosen by the administration also suggests that it took for granted the alliance with Sithe Global and did not treat with the company as if the context of the relationship had changed.

Cringe with remorse
It is likely that the administration will cringe with remorse as it reflects on all the possible things that it could have done to save the hydropower project.  One of those things was adequately addressing the pressing concerns that Guyanese had about the rate of return on the Sithe Global investment.  This was a major issue raised by the analysts but not an insurmountable one.  Since all the analysts had settled on a common average of 19 per cent, the profit expectations of Sithe Global would not have been difficult to explain if the administration had taken the time to define and address the issue.  In discussing the rate of return sought by Sithe Global, the most relevant facts would include the returns to be had from alternative investments in Guyana, in other words, the opportunity cost of the investment.  This means that it was necessary to compare the return that Sithe Global was seeking with the return that other companies, local and foreign, were making on their investments in Guyana.  A position of reason would suggest that an abnormal rate of return would fall far outside of the upper limit of the range of returns that other investors in Guyana were enjoying.

At the time that Sithe Global became interested in investing in the Amaila Falls project (2007-2009), some private companies in Guyana that publicly report their financial performance were enjoying profit margins of over 40 per cent and were making returns of between 24 to 27 per cent on their investments. Some of these companies are part of the Guyana Stock Exchange and are still making returns in the high twenties today from their business activities.  With such high rates of return, Sithe Global could have changed its investment strategy.  It could have opted to buy shares in the successful companies that are part of the Guyana Stock Exchange.  Had it held a portfolio that consisted of all the trading stocks in the Lucas Stock Index, Sithe Global would have earned an annual rate of return of 24 per cent on the price appreciation of the stock value alone.  This goal it could have achieved without having to incur the risks and troubles associated with the hydropower investment.   With an annual inflation rate of six to seven per cent, its real rate of return would approximate 17 to 19 per cent.   Sithe Global’s profit expectations were well within the range tolerated by Guyanese.  The administration failed to communicate this point to its critics.

Further, at that time, the global financial crisis had created problems for many investors, and with gold prices soaring, Sithe Global had a chance of switching to a popular and lucrative investment opportunity.  Instead, the company chose to stay with the industry in which its core competence exists, renewable energy.  One has to see this as the company being faithful to the commitment that it made to invest in the hydropower project in Guyana.  It is amazing therefore that the administration could not bring itself to explain openly and plainly to Guyanese the reasonableness of the return sought by Sithe Global so that the people could get a better sense of the validity of the profit expectations of the company.  One must wonder what was restraining the administration from defending the expected benefits of this private company in whose success it had a vested interest.   One rationale that came to mind was that it did not want to be seen defending the creation and maintenance of a monopoly with protected status while it was out there attacking the monopoly position of GT&T in the telecommunications sector.  The other is that Sithe Global does not want its true rate of return disclosed, and its decision to walk away is a likely indication that it would not get the return for which it is looking.

Another dilemma
Another dilemma for the administration was the awkward situation that it had created for itself regarding the burden that the debt of the project would have on the national economy.  From publicly available data, the gist of the hydropower deal was based on an offer by Sithe Global to build, own, operate and transfer the facility to the government after a period of time.  It is now obvious that Sithe Global was not willing to use its own money for the entire project and preferred if the government borrowed some of the money.  It must be kept in mind that Sithe Global is nothing more than an investment arm in the area of energy for its parent company Blackstone.  The equity investment of Sithe Global could therefore be seen as having two purposes.  One was to help make the project a reality and reap a return from it and two was to help bring the amount to be borrowed within reach of what Guyana could afford.  Sithe Global therefore was not looking to hold debt, but since its money would have been among the early funds to be spent, it needed to hold collateral to protect its money.  The only collateral available was control over the future assets of the facility to be built.  Guyana wanted the project badly, and with little or no options for raising the required cash, it had no choice but to accept Sithe’s demand for control of the project.

Haziness
Notwithstanding the equity, Guyana still had to find the rest of the money to pay for the construction of the facility.  Through the low carbon funds, it had the money for the road and other expenses.  Guyana was likely to get the remaining cash US$500.8 million from the China Development Bank (CDB) and US$100 million from the Inter-American Development Bank (IDB).  Unless the administration could get people past the concept of guarantee, the conflict over the debt issue, and hence the high cost of the project, will not go away.  The haziness of the debt revolves around the clutter of the financial structure of the deal.  Under the project financing model, the debt could be separated into two stages.  One stage is the construction loan to be acquired from China and the IDB.  Theoretically, the project company, Amaila Falls Hydropower, Inc (AFHI) is holding that debt, but in reality the debt is being passed through to GPL through the Power Purchase Agreement (PPA).  Sithe Global could walk away from the project with only a bruised ego since the Government of Guyana will stand in for Sithe Global if the debt was not honoured.  The other stage of the debt is the purchase of the completed plant from Sithe Global using GPL’s revenues.

In the second stage, GPL will be buying the assets and liabilities of the hydropower facility and the power that it generates.  In addition to the debt, it would also be buying Sithe Global’s equity.  It is true that GPL has a juridical personality and a revenue source that are independent of the government.  But the government is the sole shareholder of GPL.  Learned men and women understand that the unitary relationship between the Guyana Government and GPL, through the shareholding status, makes it hard to separate the government from the debt of the project with the word guarantee.  Besides, multilateral institutions like the World Bank define public debt as the sum of all domestic and external obligations of public debtors.    In Guyana, this would include the debt of autonomous public bodies such as Guyoil and GPL.  It also includes publicly guaranteed debt among which is debt owned by the private sector.  These are all counted in the nation’s debt stock.  The position of the administration on this matter was an unhelpful one.

Future earnings
Apart from the definitional problems, debt could arise from operationalizing the contract between GPL and Sithe Global.  Here the principal issue is the management of the future earnings of GPL.  It is not clear if GPL has to prepay or purchase on credit power from the project company.  If it obtains trade credits, it might be able to pay as it collects money from its customers.  If it has to prepay, it would have to depend on the administration to issue some type of debt, perhaps Treasury Bills, to cover the monthly financial commitment to AFHI while it waits for money from its customers.  As such, the manner in which the PPA operates could automatically trigger an active debt situation for both GPL and the administration since a currently cash-strapped GPL would be unable to make advance payments without receiving help from a third party.  This is not totally clear from the available information and was not made clear by the administration in its pronouncements.  At all times, the first bill that GPL will have to pay is the debt to China and the IDB.  Since the government owns GPL, the debt belongs to the government.  Complicating the issue is the fact that project financing models tend to rely on gross cash flows and not net cash flows and this raises the question of how GPL will pay for its operating costs.  Under either the prepaid or postpaid scenario, the future earnings of GPL will be assigned automatically to Sithe Global.  With all its money committed, the next issue then is where will GPL get the money to upgrade its system.  There is no clarity on this point.

Little opportunity
By leaving too many important issues unresolved, including the price of the project and employment opportunities for Guyanese, the administration gave the larger opposition party very little opportunity to join a consensus.  It should not have been too difficult to provide the explanations needed to secure agreement on the project, but the administration miscalculated the amount of information that it should share with third parties.  With Sithe Global already departed, the administration is now trying to close the barn door with offers of dialogue with the opposition with full information.  The timing of this action is flawed, even though the offer of dialogue on the future of this important national initiative with full disclosures provides renewed hope for the revival of the project.