The Amaila deal will cost US$2 billion; it cannot be supported in its current form

Jul 25, 2013 Letters

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Dear Editor,
Hydro Power in Guyana is truly a visionary idea; no stakeholder can question that.  Thus all the calls in support of the “Amaila” deal, especially from the business community, must be recognized from that angle and welcomed.  However, the people cannot support this deal blindly since it has a direct financial impact on their lives over the next 20 years and even beyond.  The numbers must be scrutinized. That is exactly what a group of professionals did over the last few months and now choose to share our findings.
Many questions remain and if only the private sector “doyens” act as the facilitators between those with questions and those with answers, to remove the areas of doubt from the decision makers, this deal can become more “trustworthy”. All are involved and if this “Amaila Deal” meanders into another Skeldon Sugar Factory – all will be consumed, since it is bigger than the size of our economy.
For this deal to survive there must be more objectivity and rigorous analysis driven by real facts.  If one is to carefully observe the utterances from some Government Ministers and the President, their satellites in the private sector and even an Islamic religious leader, it is all cursory emotive outburst driven from a Personal Prejudiced Perspective Collectively.  This is most unhelpful.
There is no place for political sound-bites, as it aggravates a climate that requires mature minds. The PPP/C had better wake-up since their regrettable action of labelling Guyanese patriots as “terrorists” and “anti-national” is a contributor to an atmosphere of war.  In a war, business cannot be done sensibly and Guyana will never win.  Today we all are at failure’s doorstep. So as we are in the season of begging, we beg all the players – Stop it, sit down, talk, give some and get some!  We want to reflect on Cde Cheddi’s words “Winners cannot take all” and “we do not want to dominate but we shall not be dominated”.
Let’s get down to the facts.
This deal is between the Government and Sithe Global Power (Sithe) and we will show with evidence why this deal cannot be supported in its current form and why we must engaging in some serous re-negotiations with the developer (Sithe).
Sithe owns 60 per cent of the special purpose vehicle (SPV) that was designed to build and execute this project.  The Government owns the remaining 40 per cent. The name of the SPV is Amaila Falls Hydro Inc (AFHI).
The central component of this entire deal is a Power Purchase Agreement (PPA) between GPL and AFHI.  The project is structured as a 20-year “take or pay” PPA through which GPL will purchase 100 percent of the generation capacity for an annual payment of approximately US$100 million.  This US$2,000 million (20 years at US$100 million per year) will provide a guaranteed 20 percent return on Sithe’s equity investment of US$150 million (add up to return on their investment US$601 million) as well as repay the principal on the debt plus interest.  The debt being borrowed is US$584 million (Chinese debt – US$484 million and IDB – US$100 million). [See table]

Payback Cost to Finance US$834 million (In US$M)
		Principal	Interest		Total Payback		Terms
China Debt		484.2	307.2		791.4		15 yrs loan @7.2%
IDB Debt		100.0	122.5		222.5		22 yrs loan @8.8%
Sithe Global		–	601.2		601.2		20 yrs ROI@20%
Additional Funds for Sithe Global					384.9
Total Payback over 20 years		584.2	1,030.9		2,000.0

The reality is that this PPP/C Government continues to mislead the people that the true cost of this project is US$834 million; this is a fraction of the truth.  Mr. Ramon Gaskin, former technical advisor to President Cheddi Jagan and former Chairmen of GEC (GPL) has done his duty to Guyana, he has called the PPP/C out on this US$2 billion figure. The truth remains that this deal is costing the nation US$2 billion – sourced from the IMF (page 35 of http://www.imf.org/external/pubs/ft/scr/2011/cr11152.pdf).
As we unpack this deal, we find it is overpriced and will result in the cost of electricity increasing if pursued as currently structured.  Our financial model is absolutely clear on this issue.  This means we have been lied to by the PPP/C Government and thus there is now a credibility vacuum on the issue at hand.
We call on the majority in Parliament to use their instrument of authority to demand that the lead negotiator on this deal, Mr. Brassington, recuse himself from any further dealing with the electricity sector. This will provide the opportunity for seamless re-negotiations of this deal to make it feasible and beneficial to the Guyanese nation. Failure to allow for independent financial interrogation of this Deal will make it almost impossible for the majority in Parliament to support any increase in the debt ceiling; unless they want to face the wrath of their constituents.
To prove that this deal has to be re-negotiated we ask the following questions.
1.  Why is a sum of US$40 million being charged to the Guyanese people for ”additional works” on top of the US$517 million that was quoted by the Chinese Contractor, when we already have US$26 million assigned for ”contingency cost”?
The Chinese Contractor has quoted a figure of US$517.1 million to build the 165 MW hydro power station and a 270 km transmission line.  Most of the money will be spent on building the following:
a. 2.5 km Dam crossing the Kuribrong River and Amaila River;
b. Water intake structure, headrace tunnel, power shaft, surge shaft, and power tunnel, overflow spillway; water outlet;
c.  Powerhouse and turbine generators, electrical switchyard and substation located adjacent to the powerhouse;
d. Emergency diesel generators (about 1 MW);
e.  One backup Pelton hydroelectric turbine generator (less than about 1 MW);
f.   270 km of high-voltage, 230-kV transmission lines that sit on top of some 900 steel towers and two electrical sub-stations.
From the detailed analysis we have done, including some comparison with some bills of quantities on other hydro power stations mainly in Africa, these figures of US$517 million plus a contingency cost of US$26 million are reasonable sums.  Therefore, no one is questioning the quotation from China Railway (the EPC Contractor) for the core work.  The big question mark hangs over this US$40 million for “additional works” and it must be explained and justified or weeded-out forthwith from the deal.
2.  Then there is US$27 million for ”development cost” which is the cost incurred from conception to implementation.  So why is there a further US$24 million for “start-up cost”?  The big question mark hangs over this US$24 million for “start-up cost” and it must be explained and justified or weeded-out forthwith from the deal. Start-up costs are the costs needed to start the implementation; it is a subset of development costs.  The Parliamentarians must demand detailed bills of quantities on both of these costs to weed out any double counting.
3.  Then there is the good old Jagdeo favourite – “Others”.  This deal has a cost item called ”others” for US$16 million?  For whom and for what?
4.  Then there is US$91 million for ”interest during construction”.  Collection of interest during construction reduces the funds available for the real “bricks and mortar” expenses. Why can’t these interest costs be capitalized and rolled into the total payback cost and recovered when the electricity starts flowing to GPL?  This is like throwing US$91 million over the falls during construction.  Surely if the Bankers believe in the project to actually lend their money, then they can surely defer the interest until the juice starts flowing?
5.  Then there is the ”Political Risk Insurance” from Sinosure, the Chinese insurance company and ”Lenders Fee & Advisory Cost” which we found to be comparable to what obtains internationally, so we have no concern over these two expense items.
From this simple discourse, we see room to rationalize between US$85 million to US$171 million from this Project bringing the construction cost to between US$664 million and US$749 million.  The lending rates must also be reviewed considering the prevailing financial condition in the world and this will shave-off a further US$45 million to US$57 million in interest charges payable to the Bank  which is currently estimated at US$429 million (CDB+IDB).
We will talk about strategies in a follow-up letter (e.g. the Government can borrow directly the financing GAP which is expected to be less than US$50 million rather than US$100 million and use those funds to increase its equity stakes in the project with fully IDB engineering supervision; thus benefiting from concessionary rate of below 4.5 per cent).
In the final analysis, the financial terms of this deal have to be re-negotiated and from our modeling, we see GPL paying to the developer (Sithe) closer to US$80 million per year, saving the country some US$400 million over the 20-year life of this agreement. This is a pre-requisite before the blessing of the majority of the people can be showered on this project.
In conclusion, the other authors of the modeling process choose not to be publicly acknowledged, since they all hold sensitive positions in North America, but I am forever grateful to these patriots for working with me on this project.
Sasenarine Singh plus four others

 

 

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