Corruption is a human rights issue, which ought to be recognized as such by States, the business community and civil society. Those who peacefully work for the rights of others against corruption should be recognized, celebrated and protected as human rights defenders.
Mary Lawlor, UN Special Rapporteur on human rights defenders
Indigenous communities in the Amazon basin continue to face numerous problems, including oil spills, deforestation, and pollution of rivers by both legal and illegal mining. All of these negatively affect the lives of the people and wildlife in the area. At a meeting in Ecuador last Tuesday, indigenous leaders from 500 communities in nine countries in the Amazon basin, including Ecuador, Colombia and Brazil, are demanding that governments in the region halt the activities of extractive industries because of the damage being done to the rainforest. They feel disrespected at not being consulted in relation to oil and mining projects, and are urging the governments to respect agreements and legal rulings that recognise communities’ rights over territories. According to the Coordinator of Indigenous Organizations of the Amazon River Basin, ‘[w]e are demanding humanity support us in our fight for life, for water, for the mountains, for our identity’. The head of the indigenous organization in Ecuador echoed similar sentiments: ‘If we don’t stop (extractive expansion), practically the entire Amazon basin will be a desert’. See Stabroek News article referring to a Reuters report on the matter at https://www.stabroeknews.com/2022/03/16/news/regional/indigenous-communities-meet-in-ecuador-to-demand-end-to-extractive-industries/.
On the climate change front, a heat wave is hitting near the North and South Poles. In certain parts of Antarctica, the temperature in mid-March was 70 degrees Fahrenheit above average; while in the Arctic Region, it was 50 degrees warmer than normal. There is no doubt that the warming of both Poles is due to global warming and climate change caused mainly from the burning of fossil fuels that releases greenhouse gases into the atmosphere. According to scientists, it is usual for the warming to take place at the same time at both Poles, considering that they have opposite seasons; and this is not good news for the planet. (See https://www.washingtonpost.com/health/hot-poles-antarctica-arctic-70-and-50-degrees-above-normal/2022/03/18/a07427ec-a723-11ec-8628-3.
In response to our article last week, one reader commented that there was no mention about the proposed flooding of the area during the construction of the headrace tunnel that takes water from connecting channels and conveys it to the forebay towards the turbine generators. This would directly lead to the displacement of the indigenous people in the area and destroy their way of life. However, according to a NORAD report titled “Review of the Amaila Falls Hydropower Project in Guyana” dated 12 December 2016:
No resettlement is required and there is limited human activity in the area directly affected by the project. About 23 km2 of rainforest is inundated by the power plant’s reservoir. The live storage volume is small compared to the annual water flow and the plant will be operated mainly as a run-of-river plant with little impact on the downstream river hydrology, except for the about 4 km stretch of the river between the intake dam and the tailrace outlet from the powerhouse.
According to the report, the construction of 85 km of new access road and the rehabilitation of 122 km of existing roads are the most serious threat to the environment as they provide easy access for mining and exploitation of the forest. As such, strict access controls should be put in place. Affected parties should also be consulted prior to the resumption of the Project. (See https://www.regjeringen.no/globalassets/departementene/kld/kos/guyana/final-report-norconsult-2016.pdf.)
According to economist Tarron Khemraj, the reservoir will release methane for years to come. He expressed his discomfort with the clearing virgin forests for running 270 km of transmission lines, arguing that the trees are much more valuable standing than clearing them. He indicated that a recent study shows that power transmission lines are a main source of forest fires in California. (See https://www.stabroeknews.com/2022/03/07/news/guyana/use-oil-money-rather-than-boot-for-amaila-hydro-khemraj/).
At the recently concluded Energy Conference in Guyana, Mr. Winston Brassington made a presentation on the Amaila Falls Hydropower Project in which he identified ten main risks associated with the Project. There are in relation to: (i) construction costs; (ii) construction delays; (iii) geotechnical considerations; (iv) hydrology matters; (v) political force majeure e.g. nationalization; (vi) other force majeure; (vii) Guyana Power and Light (GPL) demand; (viii) payment commitments by GPL; (ix) interest rates; and (x) foreign exchange.
In today’s article, we discuss these and other related matters.
Construction costs
The engineering, procurement and construction (EPC) contract with China Railway First Group Ltd. is a fixed-price contract in the sum of US$700 million under a build, own, operate and transfer (BOOT) arrangement, compared with US$519.6 million under the previous arrangement with Sithe Global, an increase of US$180.4 million. Consider-ing the recent steep increases in the cost of fuel, steel, aluminum, cement and other construction materials as a result of COVID-19 and the Russian invasion of Ukraine as well as the various sanctions being imposed on Russia which are likely to see further increases, one wonders whether a fixed contract price is appropriate. Will the contractor bear any cost overruns arising from price escalations and increased labour costs?
While we note that there will be independent supervision to ensure that the works are executed in accordance with the specifications and other terms and conditions of the contract, what guarantee is there that inferior materials will not be used during construction? We had independent supervision of the East Coast Demerara Road Expansion Project, built by the same contractor, that had significant cost and time overruns. The same can be said of the yet-to-be completed Cheddi Jagan International Airport Expansion Project and the Sheriff Street/Mandela Avenue Expansion Project for which the Chinese companies China Harbour Engineering Corporation and Sinohydro, respectively, are the contractors. The Guyana experience has shown that supervision of government infrastructural development projects by government officials can hardly be considered independent supervision.
Another issue relates to possible defects in the construction works that can result in delivery in the less that the agreed 165 MW of electricity along the 270 km route to GPL in Georgetown. One cannot forget the US$200 million Skeldon Sugar Modernisation Project, built by the Chinese contractor CNTIC Ltd, that never worked. The Marriott Hotel is another example where numerous defects were uncovered after the project was handed over to the Government. The contractor in this case was the Chinese company, Shanghai Construction Group.
Construction delays and force majeure
According to the presentation, construction delays relate to delays in commissioning of the Project due to contractor’s delay, and for which the contractor accepts force majeure. Force majeure relates to unforeseeable circumstances that prevent someone from fulfilling his/her contract. Examples include natural disasters or the outbreak of hostilities. A force majeure clause would normally excuse one or both parties from performance of the contract, and includes suspension of performance or all or part of the obligations during the period of force majeure.
In the absence of a sight of the agreement with China Railway Group Ltd., the contents of the force majeure clause could not be determined. One suspects that the generic clause found in most contracts would have been used, and that the period of force majeure would be discounted in the consideration of the timeline for the completion of the Project. According to the presentation, the risk due to force majeure is mitigated through the fixed price contract.
The presentation also referred to political force majeure (such as nationalization) for which Guyana is liable for cost incurred if the contract is terminated. Other force majeure includes the payment of damages for which both parties are required to bear the cost.
Geotechnical considerations
These relate to possible delays in the construction due to ground conditions and are the responsibility of China Railway. Engineering studies would have been completed before the location was selected. In any event, as the construction progresses, ground conditions will have to be re-assessed and appropriate adjustments made.
Hydrology matters
These include the likelihood of having insufficient water to generate power. Considering that there were times when the Amaila Falls ran dry, the risk is significant and is assumed by the Government of Guyana, through the guarantee provided in the Power Purchase Agreement with GPL. The NORAD report referred to above is clear that the Project alone cannot provide a 100 percent emission free power generation and that other generating sources will have to be added as back-up especially during dry periods when the water flow may be insufficient for full capacity operation. This is in line with the concerns expressed by former Minister of Finance Carl Greenidge and Prof. Clive Thomas referred to in last week’s article.
At the recently-held energy conference, the Prime Minister stated that a second hydropower plant, similar to that of the Amaila Falls Hydropower Project, is expected to be constructed during the period 2027 to 2030 and that plans are being prepared.
Guyana Power and Light demand
This relates to the risk that the power demand by the GPL will be insufficient vis-à-vis the power generated by the Project. Should this happen, GPL and ultimately the consumer will have to bear the cost though the Power Purchase Agreement. According to the presentation, the risk is considered low in terms of probability of occurrence and its impact. How-ever, we are of the view that the impact will be significant if the consumer has to bear the cost via increased tariffs.
A related matter is the absorptive and distributive capacity of GPL. Considering the current situation whereby technical and commercial losses in generated electricity is approximately 30 percent, some 50MW of electricity supplied by the Project will be lost. One therefore hopes that GPL will undertake significant upgrades in its distribution infrastructure systems within the next three years while at the same time seeking to minimise the extent of commercial losses through theft and other causes.
The presentation referred to the risk associated with the inability of GPL to meet its obligations under the Power Purchase Agreement, which has been deemed low in terms of probability of occurrence and low-to-medium in terms of impact. In view of the fact that the operations of GPL over the years have been heavily subsidized by the Government, in our view the risk of default in payment is considered significant without Government support. The risk is nevertheless addressed through the increase in the ceiling of government guarantees to public corporations and other entities in which controlling interest vests in the State, as discussed in last week’s article. This means that should GPL default in its financial obligations under the Power Purchase Agreement, the Government of Guyana will have to discharge the liability.
Interest rates
The risk of interest rate fluctuations is to be borne by China Railway Group and would have been considered by the developer in arriving at the US$0.77 per KW reflected in the Power Purchase Agreement. In the previous agreement, included in the total financing of the Project was an amount of US$97.1 million shown as interest charges over the construction period in addition to US$187.7 million in financing costs and US$34.9 million in lenders’ costs and advisory fees. According to the presentation, the probability of occurrence and impact are considered low, while noting that current interest rates are low.
Foreign exchange implications
The Power Purchase Agreement is in US dollars while the revenue generated by GPL to service the Agreement is in Guyana dollars. This has foreign currency implications should the Guyana dollar depreciate vis-à-vis the US dollar. The reverse is also true. Both parties will have to share the risk. The presentation noted that the Guyana dollar has been stable over the years at about G$208.5 to the US dollar but this can change in view significant direct foreign inflows as a result of the operations of the oil and gas industry.