A BITE OF THE CHERRY

Jun 02, 2010 Features / Columnists, Peeping Tom

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Why is it so difficult for the government to state precisely what is the price at which electricity would be supplied to the national grid from the proposed hydroelectric project? This information will be contained in the power sales agreement between GPL and the project owners.  If released, it will extenuate most of the concerns being expressed about the viability of this project.
A power sales agreement is necessary to attract equity partners. It will also have a bearing on whether the debt financing aspect of this project can be secured. The donors would want to know what the sale price is for power generated from the hydroelectric plant.  From the perspective of those who have to lend the money, it will help them decide whether the project is viable and whether the loan can be repaid.
The government is saying that this will be the largest investment ever in the history of Guyana.
The Upper Mazaruni Hydroelectric Project was on paper a much bigger project, but never got going. So if the Amaila Falls Project gets going, it will have implications for the country’s public-guaranteed debt.
No doubt if multilateral financing has to be sourced, and it now seems as if 70% of the funds for this project will have to come from such sources, then the government will most likely have to stand as a guarantor for the repayment of this loan, and the donor community, along with whichever multilateral agency the money will come from, are going to be concerned about the impact of this single project on the public-guaranteed debt.
This is a hurdle that the government has to consider. Is it likely that it will be able to raise 70% non-equity financing for a US$450M project considering the likely impact on the level of the public- guaranteed debt?
This is all the more reason why project costs have to be kept low. Even at US$450M, the project cost relative to other hydroelectric projects is prohibitively high.
The higher the project cost, the higher will be the cost of the electricity generated. The higher the cost of the electricity generated, the less viable.
To add to the problems is the stunning rate of return of 20% that will be given to the equity partners.
Emerging out of a global recession, investors are keen on looking for safe projects to sink their funds.
They are likely to seek long-term investments with no great risk, and to settle for a rate of return far less than 20%. Why then would the government offer such an attractive rate of return of 20% to the equity partners, especially considering that it can obtain debt financing at single digit interest from multilateral sources.
Why not aim for single digit financing for the whole project as was done with the Skeldon Sugar Factory?
A rate of return of 20% is extremely generous, considering that the dam to be constructed will have a lifespan of 100 years, but will be transferred to the government within twenty years of competition.
At that rate of return it means that by the time the project is ready to be handed over to the government, the equity partners would have made back their money, four times over.
So why not reduce the rate of return to the equity partners to 10%. This ought to still be attractive for investors still smarting from losses from the global financial crisis. It also means that within ten years, they would have recovered their capital, and have another ten years to smile all the way to the banks.
Why also not allow Guyanese, including non-resident Guyanese, a bite at the cherry? Or is the equity partnership reserved for selected investors?
Thirty per cent of US$450M is US$135M. If the government offers a 10% return on equity, this entire sum can be raised by local and non-resident investors. Ten per cent is far better than what all Guyanese are now earning from sinking their funds in the existing financial instruments offered by local banks.
There are thousands of Guyanese who would wish to see their savings accrue a 10% rate of return and they would be willing to make the investment since they would recover their investment within ten years and still have another ten years to enjoy the rate of return. So why not offer equity partnership to as many Guyanese as possible.
What about the tens of thousands of non-resident Guyanese? Should they not be brought also on board as equity partners?
A great many of us were encouraged to invest in CGX and even though oil has not yet been found, there are many persons who are still optimistic. Investing in this hydroelectric project will allow Guyanese to contribute to their country’s development and still make some money. It is a win-win situation.
The problem is that should the government opt to go this route, they would have to make public the details of the project: the sources of financing, the power sales agreement etc. This may be asking too much of a government that is hypersensitive towards criticism and extremely secretive about the deals that it is negotiating.

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