PROGRESS AT WHAT PRICE?

Mar 06, 2012 Features / Columnists, Peeping Tom

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The President of Guyana does not get it. No one is opposed to major developmental initiatives. Even the opposition parties would be crazy to oppose projects that will bring benefits to Guyana.
What is being opposed are the undertaking projects that are not viable, and the undertaking projects which are intended to inflate the coffers of the oligarchy.
Guyana needs hydroelectricity. There is no question about that. What then makes the president feel that his detractors are against Guyana having hydroelectricity?
What the so-called detractors are against are deals that will not benefit the people of Guyana. What they are opposed to are deals that will turn out to be rotten. What they are against is the cryptic nature of these deals. What they are against is how these deals are being done. This is what the President needs to understand.
True, Guyana needs hydroelectricity. But at what price? The price of oil right now is about US$105. There was a time when it was below US$20.
The government was moving at a snail’s pace then on hydro because fuel prices were low. It is now using the high price of oil on the world market as justification for hydroelectricity.
But this price does not reflect actual demand. It is a price which has been inflated because of political tensions in the Middle East. As former Budget Director for the United States, David Stockman alluded to recently, if the United States stops its warmongering, if its assures Iran that it will not attack it, if it assures Iran that Israel will not be allowed to attack it, the price of oil can immediately fall by 30%.
So what we have is a price for oil that is being propped up by political tensions. Yet it is this very price, which can fall dramatically anytime soon, that Guyana is basing its estimates for the price of electricity which is going to be sold to the Guyana Power and Light, in a take or pay power purchase agreement, by those who will control the Amaila Falls Hydropower Plant.
This is the first thing that is wrong about this arrangement. Instead of a “take or pay” power purchase agreement, it should be a “pay for what is taken” arrangement.
In short, not only are the investors assured of a 20% return on equity, they have no risks to take when it comes to the sale of the power. They have very little risks at all. So what sort of investment is this?
The second thing that is wrong concerns government equity. The government should have insisted that the road project be part of its equity into the overall project. What ended up happening is that not only is the government funding the entire road project, but it did not listen or did not care to listen to the concerns of the Kaieteur News about the contractor who it awarded the bid to build the road. As a result it has now found itself in a terrible mess and with a huge dent on its credibility.
And if the Guyanese people think that the government’s only blunder is in this road project, they had better think again.
The IMF has said that the effects of this hydroelectric project on the economy of Guyana are dependent on the resulting tariffs. Unlike what the government is saying, the investment itself is not going to dramatically improve things. In fact, it will increase the BOP deficit to between 16-18% of the country’s Gross Domestic Product. What is important are the resulting tariffs for power.
The IMF projects tariff reductions at between 20-40% after the plant is operationalised. And David Stockman says that oil prices can reduce by as much as 30% if the threats against Iran are removed.
As such, the same anticipated benefits that we expect from hydro can be had from a reduction in oil prices if the threat against Iran is quelled.
This is the ridiculousness of the deal that has been agreed upon by the government of Guyana.
The Guyana Power and Light, which the IMF says is entering into a “take or pay” deal with the developers of the hydropower plant, is not saying what price they will be paying for power. And this is part of the problem with most of the major projects conceptualised under the Jagdeo administration. They are being kept under wraps and sufficient information is not known about them.
Instead of the government opening the contracts for public scrutiny, or at least making disclosures sufficient to win over public confidence, the public has to rely on the International Monetary Fund for information.
And according to the IMF, the range of tariff reductions will between 20- 40% and not the 40-60% that most consumers would have been expecting.
Does the government of Guyana really believe that the hydroelectric project is going to promote industrialisation when tariffs are not even likely to be halved?
It will not happen, and the only persons that are going to benefit from this deal will be the foreign investors who will for twenty years smile all the way to the bank based on the guarantees on their return to equity. It is as simple as that.
TO BE CONTINUED

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