Category: Public sector

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Amaila Falls: Deals within a deal

Correction and apology
In an earlier piece, relying on section 25 of the Hydro Electricity Act Cap 56:03 which provided that the assignment or transfer of a licence without the consent of the President, I had questioned the authority of the Prime Minister Mr Samuel Hinds to transfer the Interim Licence from Synergy to Amaila Falls Hydro Inc (AFHEP). While that section was not explicitly amended, there were two later Acts – The Guyana Energy Authority Act and the Energy Sector (Harmonisation of Laws) Act 2002 – that transferred the functions from the President to the Minister who in this case would be the Prime Minister. I extend apologies to the Prime Minister and to readers for this. Without offering any qualification to this apology, I can state that the Prime Minister has failed to exercise his duties and responsibilities under the Act in relation to Mr Fip Motilall and his company Synergy Holdings Inc.

Introduction
Last week’s column concluded with a restatement of the obligations of a licensee under the Hydro Electricity Act. The tenth supplementary AFHEP licence is scheduled to expire this year and that means that the current licensee Sithe Global has about seven months to complete the development works set out in the Licence, a pre-condition for the application for a final licence. Sithe has a lot of work to do and from their own public utterances it seems that they are far from prepared for any serious and public criticism of their plans, clearly more comfortable with dealing with our Prime Minister. That is understandable after having been stung and embarrassed by their performance on what has been a near disastrous Bujagali Hydro Electric Plant in Uganda.

From all appearances and from the Prime Minister’s utterances, Sithe was chosen not by the government but by Mr Motilall whose competence, judgment, marketing skills and political connections have been on public display with regard to the Amaila Falls Road Project awarded to his company by the government against all informed advice. Incidentally my information is that work on the road project has been practically halted and that Mr Motilall is out of the country. There must now be doubts whether Mr Motilall will be in a position to complete the road, a fear that was expressed in a court challenge to the award of the contract to Motilall and by everyone else except the government. Already parallels are being drawn between Burnham and Jagdeo’s adventures with hydro.

‘Bigging up’
But back to Sithe which is expected to be around for some time, although for how long is another matter. Readers will recall that Business Page of May 29 sought to deal with issues raised by Mr Rafael Herz who has been identified as the Project Manager of the Amaila Falls Hydro project. Naturally he and the company want to ‘big up’ themselves but sometimes the results are not what they intend. Here are some claims made by Sithe Global on its website:

1. That it strives to be “among the best in the world at implementing large scale, socially responsible power generation projects, often in places where success has proven challenging.” If that is indeed the case then Guyana should consider whether Sithe is the most appropriate fit for us with our small-scale Amaila and whether the project’s price tag means that Guyanese have to pay Sithe for its name and reputation.

2. Its award of the 2007 EuroMoney Africa Power Deal of the Year for the Bujagali Project. Its website does not state that in 2009 the World Bank recommended a 5 per cent increase in tariffs that year and a similar percentage increase in 2010 in order to avoid “shocking” Ugandans with the inevitable price increase that was expected once the Bujagali dam was completed, despite earlier claims that power tariffs would decrease once the project became operational.

3. That its projects currently total nearly 7000 megawatts with a total capital investment potential of $15 billion. That works out at US$2.142 million per mega watt, or half the cost of Amaila.

Bujagali
On the Bujagali project, Sithe “partnered” with a division of the Aga Khan Fund for Economic Development and formed a company called Bujagali Energy Company Limited to develop the project of which the lead contractor was Salini, an Italian construction company. With Sithe’s most recent experience bordering on a disaster, it would be the most compelling thing in the world for any serious government to do serious due diligence of the Bujagali experience and Sithe’s role in it. They would want to know why the key players in the project including Sithe could have got a major element in the project so wrong; whether the problem was with the contractor or Sithe; whether there was adequate and appropriate consultations; the role and responsibility of the government; the supervision by the regulator, if any, and the scale of the project cost overrun and whose judgment and estimates were at fault.

For Sithe to simply change contractors for the Amaila project is not enough. It must be challenged and must show that it was not culpable in the debacle of Bujagali. Civil society and the press must get answers before the Amaila project gets the green light. Glib talking and throwing around numbers and self-praise are not acceptable. We are suffering from that type of behaviour in connection with the road project in which one name is common.

China Railways
Now that Business Page has revealed that China Railways’ own website shows no expertise in hydro projects, we are told that real expertise resides in China Railway’s partner, Northwest Hydro Consulting Engineers (NWH), described by Mr Herz as “one of the pre-eminent hydro firms in China.” Interestingly Mr Motilall had once described Synergy in similar terms and my research indicates that Northwest is a hydropower consulting company which carries out various levels of engineering studies of hydropower schemes and helps carry out techno-financial analyses of medium and large hydropower projects.

Mr Herz rejected a suggestion in these columns that the debt interest rate could be as high as 30% and volunteered that “in addition to the several million dollars in cash which Sithe Global has already contributed to developing this project, the company expected to invest approximately $200 million of equity towards the total project cost.” Such generalizations are not a substitute for solid information. At December 31, 2009 Sithe had advanced to AFHEP about US$800,000 which was spent on the project development expenses (US$325,000) and general and administrative expenses (US$480,000). What Mr Herz needs to do is not tell us what is not so, he should tell us the facts.

To be fair to Mr Herz he did not say that Sithe’s equity is in the form of cash and it now seems that the project is already being charged for Sithe’s time and expenses on Amaila. Does this include any payment to Mr Motilall who for several years breached practically every condition of the interim licence he was carrying around in his briefcase looking for a buyer?

Investment
Guyanese have a right to know how much cash Sithe will be investing in the project and Mr Herz might care to tell us why the company which will carry out and own the project has been capitalised with a mere US$2,500! We expect too to know the nature of the expenditure of “several million dollars in cash” spent by Sithe in developing the project and whether and how much was paid to Mr Motilall. Mr Hinds and the PUC would be discharging their duty to consumers and taxpayers by letting them in on all the costs they will eventually have to bear in electricity rates.

On the question of the cost of the AFHEP, Mr Herz had stated its “the cost per kilowatt for the construction of the hydro facility will be comparable to the cost of other hydro facilities of similar scope.” I have done a survey of the cost of projects and have come up with the information set out below, with the caveat that some of the costs are budgeted rather than actual. There are savings in terms of capacity but the relationship is not as direct or linear as might seem logical. Every project is different and where there is a displacement of persons that can be a major cost. For Amaila, population displacement is not likely to be significant.

What makes the Jirau and San Antonio plants so much more expensive than the proposed Belo Monte Dam is substantial expenditure on technically complex and expensive ship locks, as well as environmental remediation. If we exclude those expenditures the remaining cost of construction and transmission falls more within the range of the Belo Monte Dam. Sithe’s most recent Bujagali project has been described as one of the most expensive hydro electricity projects in the world. Amaila will now surpass that.

Back next week with a discussion of the request by the Minister of Finance for more money.

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Amaila Hydro: Deals within a deal

Introduction
Mr Rafael Herz, Project Manager of the Amaila Falls Hydropower Inc, in a letter in the Stabroek News of May 24 captioned ‘Inaccurate information being published on Sithe Global,’ seems to have intended a response to Business Page of May 22 ‘Deals within a deal.’ With the government’s cynical and obstinate refusal to pass freedom of information legislation, it is only through enterprising persistence and the self-serving material offered by PR conscious investors, including Fip Motilall and Sithe, that even limited information comes out in the open. Indeed had it not been for questions posed to Sithe’s representatives at their road show at the Tower Hotel, Prime Minister Sam Hinds would have been silent on what he did and did not sign and Sithe would have been able to avoid the kind of direct questions which its representatives now have to contend with but which seem to make them increasingly nervous.

Mr Herz states that the interim licence previously granted to Synergy Holdings was transferred to Sithe Global from Synergy and subsequently renewed. He then volunteered “that both actions were in accordance with Guyanese law.” It would be helpful if Mr Herz could, within Sithe’s commitment to transparency, tell us the amount of the bond posted as security for performance and whether each of the series of interim licences included “a statement whether the requirements thereof and of the Regulations [published under the Act] have been fully complied with by such interim licensee.”

And it is for Mr Hinds to tell us why with the serial failures of Mr Motilall, and after ten supplementaries to the 2002 licence, the government did not think it fit and necessary to impose any rent or royalty provided for under the Hydro Electricity Act Cap 56:03. In 2008 alone, Mr Motilall was granted three such supplementaries – on April 9, September 3 and December 16! It is a case of whom the politicians bless, let no one touch.

Cost and capacity
Mr Herz’s letter under reference does not state the cost of the project – which his colleagues had told reporters at the Tower event would be around US$667 million – nor did he state the size of the plant on completion, two absolutely necessary pieces of information to test Mr Herz’s assertion that “the cost per kilowatt for the construction of the hydro facility will be comparable to the cost of other hydro facilities of similar scope.” Mr Herz probably assumed that such information was already in the public domain and needed no repeating, but what may need repeating to him is Clause 2 of the Tenth Supplementary Interim Licence issued on January 10, 2011 which states in Clause 2 that the Memorandum of Under-standing (MOU) signed by the Government of Guyana, Guyana Power and Light Inc and Synergy is for the construction of a 100 MW hydro electric plant at Amaila.

It is true that other documents including the ESIA and Sithe’s website refer to a 165 MW capacity plant but surely the MOU which states categorically and unambiguously that that MOU remains in full force and effect (emphasis mine) must be of principal legal significance.

The January 10 2011 licence is described on the electricity.gov.gy website as the latest interim licence and expires at one minute to midnight on December 31 of this year. It seems reasonable enough therefore that it can be relied upon as authoritative in the matter, since if there were any doubts or amendments, such modifications would be written into the binding agreements. Indeed, a responsible government would want to ensure that there is no uncertainty about the details of the country’s largest investment ever, and avoid the possibility of the project sponsor Sithe delivering a plant of 100 MW and claim compliance with its obligations. Maybe it is only after completing its work under the interim licence, that Sithe will be better able to determine the precise details of the plant capacity.

Re-thinking Amaila and Sithe
What was not fair however was for him to expect that the Guyanese public would be gullible enough to accept his generalizations about “facilities of similar scope.” Could Mr Herz not name one or two, or was he afraid and embarrassed to name the Bujagali hydro project in Uganda for which Sithe has earned a rather dubious reputation as project sponsors?

I have done an internet search of projects and by any measure Amaila is coming in at a prohibitively high cost and needs to be rethought. Whether Guyana can now back away from Sithe depends on an interpretation of the interim licence, the wording of which suggests that once the interim licencees have completed the initial development and otherwise fulfilled the terms of the licence and file a notice of such completion and fulfilment together with proof of such completion and fulfilment, the Minister’s options are limited. He may conduct a survey of the works constructed or used and of the lands and waters used and occupied in connection with the project, and provided all the works have been completed, the licence makes it obligatory on him to issue a final licence to which other terms may be added.

Obligations
Next week’s column will examine some hydro electricity projects around the world and their cost, but for now it might be useful for readers to understand what Sithe as the successor licensee must do under the current interim licence in order to qualify for a final licence:

(a) Form and register a Guyana based Special Purpose Company with the “no objection” of the responsible Minister of the equity partners and shareholders to undertake the development of the project. The company which was formed has an authorised share capital of US$500 and at the end of the year of the transfer of the licence from Synergy to Sithe not a single share was issued.

(b) Obtain an environmental permit from the Environmental Protection Agency and all relevant statutory permits required for activities related to the development of AFHEP.

(c) Conclude all arrangements for the sale of hydro-electric energy with proposed consumers specified in paragraph 7 hereto (GPL, Linden/McKenzie area, Omai Gold Mines Limited and other consumers approved by the Minister) and where such hydroelectric energy is to be sold to public suppliers, the related Power Purchase Agreement (PPA) must be approved by the Public Utilities Commission (PUC). My information is that this has still not reached the PUC which in any case ought to have a public hearing before giving its approval.

(d) Complete all technical evaluation with consumers and in particular with the Guyana Power & Light Inc (GPL) including load flow evaluations, to ensure that the project can be implemented without any adverse effect on the quality and reliability of the electricity distributed by public suppliers to the public.

(e) Finalise and survey all lands to be occupied for construction, maintenance and operation of AFHEP, including the access road and transmission line routes.

(f) Prepare and negotiate EPC (engineering, procurement and construction) contracts and incorporate the final prices in the interim licensees’ financial model.

(g) Conclude all financing and pre-closing activities for the development of the AFHEP.

(h) Complete initial developmental works related to the construction of the proposed forty (40) kilometres access road from Pamela Landing to the project site and the airstrip at the project site.

(i) Collect additional hydrological data on an ongoing basis to verify the levels of firm power during dry seasons.

(j) Prepare and submit to the Minister responsible for energy a business plan and a framework for an operating and maintenance plan describing the intended approach to operation and maintenance, the proposed operating standards and likely costs.

(k) Previously applicable to Synergy and Harza.

Guyanese need to make sure that the Prime Minister and the government do not allow shortcuts which are in breach of these obligations.

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The ‘blasting’ Public Accounts Committee

Introduction
The Public Accounts Committee, a standing committee of the National Assembly is currently reviewing the report of the Auditor General on the audits of the ministries, departments and regions. The composition and terms of reference of the PAC are set out far too briefly in Standing Order No. 82 of the National Assembly which provides for a committee of not less than six or more than ten members. The function and duty of the committee is to examine the accounts showing the appropriation of the sums granted by the National Assembly to meet public expenditure and such other accounts laid before it as it may refer to the committee together with the Auditor General’s report thereon. The Chairman of the Public Accounts must be a member of the main opposition in the National Assembly.

From this it is clear that unlike legislation which the National Assembly makes requiring the specific qualification, experience and competence appointees to boards, commissions and committees must possess, there is no specific requirement for eligibility to membership of the PAC. Nor is there on members an obligation to attend meetings of the PAC or measures for recall so that once a person is appointed, that is good for the entire parliamentary period. Readers may recall that in a Business Page column done on the 2008 report I highlighted the unacceptable failure of key members of the committee, including Mr Stanley Ming of the PNCR and PPP/C presidential candidate Mr Donald Ramotar to participate in the meetings of the committee under the previous Parliament.

Important and challenging
Hobbled as it is by archaic and inadequate rules, this key committee clearly requires persons of competence and commitment to look after the public interest in the finances of the country. That this committee has one of the most challenging mandates of any committee cannot be an excuse for what has amounted to a dereliction of duty by its members.

At the same time, it is clearly unfair to lay the blame solely on the members. The PNCR has chaired the PAC since 1992 and that party must be aware of the egregious financial mismanagement in the country, the pervasive corruption, major deficiencies in the Audit Office – an Auditor General who does not hold a professional qualification, about 80% of the office-holders being acting appointments, non-compliance with its own act, etc – a President and a government which routinely breach to the point of recklessness the financial provisions of the constitution, the Fiscal Management and Accountability Act, the Procurement Act and several other pieces of legislation. The PNCR must have known therefore that the chairing of the PAC requires a person of considerable technical competence, professional expertise and strong personality, qualities which with the greatest of respect to Ms Volda Lawrence, I do not believe she possesses. What is worse is that the PNCR has not replaced the formidable and late Winston Murray, economist and attorney-at-law who was arguably the best chairman the PAC has ever had.

For the records, the current members of the PAC are PPP/C appointees Ms Bibi Shaddick and Indra Chandarpal and Messrs Komal Chand, Nokta and Seeraj; PNCR appointees Volda Lawrence and Ernest Elliot and from the AFC Mr David Patterson. The PAC has no secretariat and must rely on the Auditor General Deodat Sharma and the Finance Secretary Nirmal Reekha as resource persons. The ethnic composition of the sides is certainly interesting. None of this makes for an effective PAC, something which no one in our society seems to care about.

Expensive misunderstanding
The PAC seems further hobbled by some inherited misunderstanding of its obligations. As noted in the introduction above, the duty of the PAC is “to examine the accounts showing the appropriation of the sums granted by the Assembly to meet public expenditure and such other accounts laid before the Assembly as the Assembly may refer to the Committee together with [emphasis mine] the Auditor General’s report thereon.” What the PAC does is to examine only the Auditor General report by inviting public officers to appear before them to defend their ministry, department or region. That is a horrible and expensive misunderstanding of what the PAC is required to do. In my view it is required to examine the accounts whether or not the Auditor General has chosen to do so or more often, chosen not to do so. This column has already pointed out that the Audit Office turns a Nelson’s eye to the Office of the President and much of the discretionary spending that goes on in ministries and departments.

The problem with the approach taken by the PAC is that it assumes – wrongly – that we have a real Auditor General, that he acts as a professional auditor would and that the constitution and other laws are observed. It also assumes that the spending authority is the public officers when we all know that the financial system has been turned on its head and it is the ministers who make many of the discretionary spending decisions. In my view ministers too should be brought before the PAC to answer for their mismanagement and non-accountability of public funds.

Petty cash versus the real thing
I hope the members of the PAC read recently where the President and his docile cabinet told the Minister of Finance to go and find $300 million dollars to make a payment that is not only outside of the law but that suggested that the Minister commands some secret funds from which he can just pull $300 million.

In a democracy, the head of the PAC should have an open line with the Minister of Finance to discuss matters of current concern rather than a review of transactions that have taken place sometimes years earlier.

One wag once said that a $200 expenditure usual attracts more attention than a $200 million transaction, simply because that is how the ordinary mind works.

That seems to hold very true for our PAC, and only a couple of days ago Ms Bibi Shaddick was blasting one region over vehicle log books while Ms Chandarpal was raising questions about some mystery “Economic Fund” and raising questions about advances of “amounts such as $400, $600 and $1,000,” and Chairperson Lawrence was questioning an advance of $60,000. That is like auditing the petty cash and ignoring the bank accounts.

Monkey see, monkey do
It probably is a combination of an absence of institutional memory or relevant knowledge by the PAC but yet one must ask whether politics get in the way of its insisting that the government and its relevant ministries provide proper accounts for audit. For example, the government is yet to reveal the audited accounts for the expenditure associated with the 2005 flood, the 2007 World Cup and the Carifesta X festivities held here, despite repeatedly promising to do so.

This is no petty cash; it involved billions of dollars, and is it insulting to the nation that Dr Frank Anthony is not even asked for an explanation for his egregious failures in relation to the latter two events.

This is the same Minister for whom, in their role as legislators, members of the PAC vote $100 million annually which he uses as a fund to give to whomever he pleases. But because the Audit Office ignores the $100 million fund, the Carifesta X activities and the World Cup 2007, the PAC ignores them as well.

And will someone remind the three ladies on the PAC – who are the only persons who are quoted in newspaper reports – that they were supposed to have followed up uncleared travel advances for the President and his ministers. Do they recall that the President had threatened to publish in the newspapers the names of persons who had not cleared their advances within a month? Does Ms Lawrence remember that nearly three years ago she had expressed the “hope” that the government would soon advertise to fill the vacancy of Auditor General so that the work of the Office of the Auditor General (AG) would be carried out on a more professional basis and in keeping with the constitutionality of the office”? Does she feel good that her hope was in vain?

The Audit Act
To serve competently on the PAC requires a familiarity with the Audit Act 2004 and the obligations of the Auditor General to the committee. The PAC also has an obligation to the Audit Office and should have taken steps to prevent the emasculation of the office’s independence by the Fiscal Management and Accountability Act. It has failed to do so in the same way that it has failed to ensure that the Audit Office complies with its own act. It is a circle of non-compliance.

The PAC is not without its more mundane absurdities and the one that stands out is Local Government Permanent Secretary Nigel Dharamlall, who in a matter involving seized wooden piles asked that “the details regarding the species of the wood, and their dimensions be provided.”

For all its serious and fatal weaknesses the PAC is all we have in the National Assembly in terms of overseeing the controls over public funds. I hope that it will go beyond the limited scope it has imposed on itself and look forward to the early publication of its report.

If the May 21 prediction does not materialise and we are still around to read this column, I share the hope of the writer of the September 2008 letter that, “exemplars [such] as the Private Sector Commission, the Guyana Manufacturing and Services Association, the Chambers of Commerce and Industry and the Institute of Chartered Accountants” would take some real interest in the reported gaps in the management of our fiscal and financial systems and procedures and that the PAC will wake up to its responsibilities. But it will need help, lots of help.

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Amaila: ‘Deals within a deal’

Introduction
Mr Hinds’s intervention on the Amaila issue came one day after the press carried a report that hydro-electric “pioneer” Mr Fip Motilall had received approval for the transfer of a licence to Sithe Global, which some time in 2002 he had been awarded under the Hydro-Electricity Act Cap 56:03 to develop a hydroelectric plant at Amaila Falls.

Letting the cat out of the bag
It is important to nail the myth that Mr Motilall pioneered the Amaila Falls project. The studies on that Falls’ potential were done in the 1970s, and Mr Motilall was given access to them by this administration. If the Prime Minister would care to read from his own website, he would notice that the feasibility study done by Kaehne Consulting Ltd for the government in 2002 described Synergy/Harza as “developers.”

It was the senior Vice-President of Sithe, Mr Jim McGowan who on Thursday last at the Hotel Tower, let the cat out of the bag when, in answer to a question from the press at what was supposed to be a road show, said that his company had “acquired Synergy’s interest in the licence.” Neither he nor Mr Philip Mooney, the consultant to the project appeared to know that the law provides first for an interim licence and then a final licence, or the difference between the two. Indeed, Sithe is acting as if it has a final licence and one wonders whether the pattern of non-compliance with the law will continue despite the increasing scrutiny.

In a series of five columns I did in May-June 2010 I pointed out the amazing level of unfamiliarity with key provisions of the Hydro-Electricity Act demonstrated by no lesser persons than President Jagdeo and the Head of the Presidential Secretariat Dr Roger Luncheon, and the confusion they have sown with throwing around figures and relating one story to another. Mr Hinds now completes the triumvirate when he asserts, in clear contravention of the law, that he had authorized the transfer of the licence from Synergy to Sithe, something which only the President is authorized to do.

PM’s understanding
There is nothing about the project that Mr Hinds says now or has said before to suggest that he knows anything about the law relating to hydro-electric power or the facts pertaining to Synergy/Sithe. The law provides for the payment of rent and royalties under an interim licence; the publication by the Chief Works and Hydraulics Officer in the Gazette of any application for a licence; the posting of a bond as security for performance; that “a licensee shall at all times have an office in Georgetown”; that the licence must state “the date of each permit and extension thereof which may have been issued in favour of the interim licensee; and a statement whether the requirements thereof and of the Regulations [published under the Act] have been fully complied with by such interim licensee.”

Exactly one month ago, on Friday April 15, 2011, in the face of mounting confusion sowed by Luncheon and Jagdeo on the one side and Synergy and Sithe on the other, I publicly asked Dr. Luncheon to use his influence to have publicised “the licence(s), extensions, agreements including that of May 2006, and the terms and conditions for cash and other inputs by the government towards the Amaila Hydro-electric project.” This has not been done.

The triumvirate could not make available what the law requires but suddenly the Prime Minister shares the details of the agreement which Mr Motilall had concluded with Sithe, including the US$5 million dollars in “cash and unpaid time since 1997 in helping to develop the Amaila Falls Project.” Does Mr Hinds not know that “pioneers” also make side deals and that the costs he claims Mr Motilall expended are not reflected in the financial statements of Motilall’s company?

Pioneer’s profits
In matters relating to Amaila Mr Hinds has shown a remarkable tendency to mis-remember and mis-speak, and anyone who takes his words seriously risks being misled. What is very clear is how poorly the Prime Minister is informed about the project and how little he appears to care about its consequences for the consumers and taxpayers of this country. He did give an indication of how much Mr Motilall will benefit from his pioneering efforts by volunteering that “depending upon the profitability of the project the pioneer would receive multiple of his investment in cash and time.” A multiple of two means twice US$5 million, a multiple of three means three times, etc. With Sithe being the most expensive hydro-electric developers in the world, there are several multiples accruing to Mr Motilall. That licence should have been cancelled, but it was not. Did I hear someone say Simon and Shock International Logging Inc and Vaitarna?

China Railway
At what was described as a forum to consult with the public, Sithe billed China Railway as the contractors for the construction of the hydro-electric plant, although under questioning its senior officers admitted that there was as yet no contract between Sithe and China Railway. What is particularly interesting is that the China Railway Group lists on its website its core business as railway construction and including “infrastructure construction, survey, design and consulting services, engineering equipment and components manufacturing, as well as property development.” Despite extensive search on the group’s and its subsidiaries’ websites, I could find no trace of the Chinese company being engaged in hydro-electric plant construction. It is difficult therefore to comment on the confidence which Sithe is placing in the China Railway Group as their preferred contractor.

Guyana and GuySuCo are reeling from lack of demonstrated expertise by Chinese contractors for the Skeldon Sugar plant which cost the country nearly two hundred million United States dollars. We as a country would want to avoid a similar experience and should do our own due diligence on the Chinese Railway. We have been far too gullible in the past, at great cost to the country.

Sithe’s contribution
At the consultation at Tower Hotel, we were told that the total project cost was US$675 million and that Sithe’s principal – the Blackstone Group – was putting in US$200 million in cash, a proposition not borne out by other information. President Jagdeo not too long ago had announced that the final cost for the hydro will be US$306 million, the transmission line US$145 million through a public tender and US$150 million is there for contingency and interest cost.” That leaves US$75 million of the US$675 million to be accounted for.

It is unusual for a fixed price contract to have a contingency but even a 10% contingency would amount to only US$45 million, so that the interest cost during construction will be $105 million. If as Sithe’s representatives said, Blackstone is putting in US$200 million and we know the government plans to put in US$70 million of Norwegian funds, then the balance needed is US$181 million, to finance expenditure progressively over the 3-4 years construction phase. If the interest is a minimum of $105 million during construction, one is looking at an interest rate of in excess of 30%!

But there is more. Blackstone is an investment and advisory firm that specialises in putting deals together, not financing other people’s projects. As its website states their “alternative asset management businesses include the management of private equity funds, real estate funds, [hedge fund solutions], credit oriented funds [and] publicly-traded closed-end mutual funds .. and various financial advisory services.”

Sithe’s role therefore appears to be a higher form of deal-making than Motilall’s, putting no money into the company but walking away with tons of money as the project’s developer. Needless to say, it is the country’s consumers and taxpayers who will pay.

Electricity cost
The interest cost referred to by President Jagdeo only goes up to the point of completion. If at that stage the project would have cost US$675 million, interest for the duration of the licence will cost hundreds of millions again. The management of the Guyana Power and Light Inc and the Public Utilities Commission need to get involved.

But at this stage they, the taxpayers and consumers are either in the dark or totally quiet, with no clue as to the price consumers will pay for electricity when the hydro-electric power starts to flow. The information I have is that any savings on fuel costs will be used to pay interest costs so that while the country will save on the fuel bill, the consumers will not be better off, at least for a couple of decades. That probably sums up the Amaila deal and sub-deals.

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On the Line – Annual Reports of the NIS 2008 and 2009

Introduction
As it enters its forty-second year as the workers’ retirement and short-term insurance fund, the National Insurance Scheme is facing one of its most serious crises ever. For several years during the Burnham Administration which set up the Scheme in 1969, its surplus funds were treated it as a source of cheap borrowings by the Government. I recall first looking at the finances of the Scheme with trade unionists Lincoln Lewis and Nanda Gopaul in the mid-to-late eighties and our shock at seeing all the investments in long-term, low-interest (5%) government paper when the inflation rate was considerably higher. Now, with seemingly more investment freedom, the Scheme is actually doing worse, partly a measure of the absence of quality investment opportunities in the economy.

In the context of its current travails, it is more than ironic that its 2009 annual report tabled belatedly in the National Assembly along with its 2008 report, has a creative cover design with the words “Embracing the Future….. Reaching New Heights!” As part of its near-term challenges, the Scheme’s directors must ponder about the safety of more than $5.8 billion the NIS has tied up in the collapsed insurance giant CLICO Life and General Insurance Company (SA) Inc. Readers will recall that the Guyana courts last year ordered the company to be liquidated after its parent in Trinidad and Tobago had over-extended itself and sought the protection of the Central Bank in that country. Within months, all the CLICO subsidiaries, from The Bahamas in the north to Guyana in the south, fell like pins at the bowling alley.

The CLICO fiasco
For several years, the NIS had over-exposed itself to CLICO, with its investment in that company – according to Finance Minister Dr. Ashni Singh – at one time running at about 40% of the Scheme’s assets. President Jagdeo too had described the investment as “bad” but they were defended by Dr. Roger Luncheon, the Board’s chairman since 1992, on grounds of “comparative analysis …. with other simultaneous investments”.

The Scheme derives its income from contributions and investments. Mature Schemes expect that as contributors retire, investment income from the accumulated savings would account for an increasing share towards the heavy cost of long-term pensions. That did not happen in 2009 when long-term benefits increased by 9.2% while investment income fell by 16.5%, from $1,615 million to $1,348 million. Total expenditure, mainly on benefits and administration costs increased from $7,835 million to $8,351 million, or 6.6%. This does not mean the Scheme is in immediate danger of collapse. It is not. On an annual basis benefit payments are still covered by contributions and the Scheme has liquidity cushion in the form of billions in fixed deposits in the commercial banks.

What is happening though is that partly as a result of CLICO, net income is falling at a rate that even the actuaries could not anticipate when they did their last review in 2006. Moreover, the viability of a Scheme is measured not by traditional cash flow models but by long-term considerations since a worker pays today to receive pensions well into the future. And if the Minister of Health is right about life expectancy increasing, the amount the contributor will receive in long-term benefits also increases. To deal with that danger, consideration has been given to increasing the NIS pensionable age but that is unlikely to go down well with the public.

Five-year summary

Source: NIS Audited Financial Statements

Section 37 of the National Insurance Act requires an actuarial review at least every five years, although the better view is for triennial reviews. Ever since the 2006 review, the financial statements consistently note that the Board is “reviewing and implementing the above actuaries’ recommendations.” That slothfulness is a luxury the Board cannot afford given that the actuaries had warned that using an intermediate scenario projection the Scheme’s expenditure would exceed its income in 2015. It now seems that even before taking any loss on the CLICO investment, the critical point will arrive long before 2015, and possibly in this very year.

The President and Vaitarna
One hopes that the directors will wake from their slumber and that there is a reversal of fortune. But for the government to make good on President Jagdeo’s pledge that the “NIS has not lost a cent because …they will be paid back”, taxpayers will be carrying the can for all those individuals and entities who got taken in by CLICO’S Ponzi-like interest policy to attract money to finance its parent’s Bahamas operations. The President, willingly or unwittingly, for reasons which we can only speculate, is prepared to compensate risk-takers in CLICO at the expense of the pensioners, workers and the NIS, one of the country’s most important and enduring institutions.

The President at the National Cultural Centre fifteen months later backpedaled and committed his government only to very specific sums for the CLICO recovery efforts – $3 billion from the Petroleum Fund and another $600 million from a source he did not then identify. It now seems that that money has been unlawfully diverted from the Guyana Forestry Commission in a transaction with Vaitarna Holdings Private Inc. which took over a Timber Sales Agreement previously held by Caribbean Resources Limited, a CLICO subsidiary. On that occasion, the President spelt out how the money was going to be used – to pay CLICO’S 4,366 holders of Executive Flexible Premium Annuities and 39 policyholders with balances in excess of $30 million who he said would receive the remaining $900 million, “up a maximum of $30 million each, with priority being given to non-institutional policyholders.”

Chicken feed
Not only did this exclude the NIS as an institutional policyholder, but $30 million is chicken feed to the $5.8 billion it has in CLICO. And there was worse coming from the President when he indicated that for purposes of the payout, “the balances outstanding would be those as of the time that the judicial management commenced, that is, February 2009.” Taken literally, that means that there will be no interest after February 2009 when CLICO went bust. If that is the case, then the NIS will have to write-off all the income it has taken up in its books from that date.

For some inexplicable reason the auditors of the Scheme appear to have misinterpreted a letter from Dr. Roger Luncheon as a guarantee on the basis of which they gave an unqualified opinion on the Scheme’s financial statements. If they were aware of all that was taking place around CLICO, they would have insisted on no income from the investment in CLICO being recognised and for the investment to be marked down. If the directors refused to do that, the auditors should have qualified their opinion rather than take the soft option of an emphasis of matter.

There are two favourable possibilities. Although the President’s remaining term can now be counted in months, if his Party is re-elected it is likely to feel compelled to pay the NIS the full principal and interest it has outstanding in CLICO. In this quasi-legal liquidation, there are only a few pension funds to challenge for parity of treatment. Second, with those pension funds paid off, the NIS will be the only entity entitled to the proceeds from disposal of CLICO’s remaining assets. For the NIS, the CLICO’s investment could be a major stumbling block in the 2011 actuarial review unless it is resolved by that time. I repeat however: any sums paid out of the Treasury constitute a cost to the taxpayers, plain and simple. Yet those very taxpayers and their representatives are completely in the dark about the various ways that the government will bail CLICO and its directors out of the illegal mess that they have created.

Valuable statistics
The NIS maintains some excellent statistics on its contributors and beneficiaries and I believe that it has been making real effort to address the weaknesses in its contribution records, some of which may never be resolved as employers have gone out of existence. Some of the statistics seem counter-intuitive or hard to explain. For example, is it credible that in 2010 there is less than half the number of self-employed contributors as there were in 1997 or that the number of active employed contributors is less than it was 20 years ago? I think not.

The future
The next actuarial study will be most instructive and will give an indication of what the future holds. Failure to act on the 2006 recommendations will make the 2011 recommendations that much stronger. The future calls for fresh ideas, boldness at the Cabinet level and new blood in the Board. Several of the directors – who are very much part of the problem – have been there since 1992 and most of the new appointees are due to ex officio changes, so for example Ms. Doreen Nelson replaced Mr. Patrick Martinborough on his retirement as the Scheme’s General Manager and Ms. Linda Gossai replaced Mr. Edward Layne on the Board after she succeeded him as Accountant General. The Board may even need individuals with paranormal qualities to exorcise the ghost of CLICO. Only then can they start thinking of a future.