Response to Gouveia

Dear Editor,

Captain Gouveia’s widely publicised open letter on Amaila in the dailies juxtaposes extracts from statements by Drs. Clive Thomas and Anand Goolsarran and the two signatories to this letter on the one hand, and statements made by the Government on the same or similar issue on the other. The Captain then requests the four of us to answer four critical questions. Ignoring the contribution to the debate by such committed Guyanese as Janette Bulkan, Alfred Bhulai, Tarron Khemraj and Sasenarine Singh, Carl Greenidge, Lincoln Lewis, Charles Sohan and M. Ali, GHK Lall and others, Capt. Gouveia sees the four as “the ones who killed the project”.

Capt. Gouveia did not invite the Government of Guyana to explain its conflicting claims about the virtues of the project or challenge it for underplaying the hydrological, geotechnical and exchange risks associated with the project. One must remember that the Government has so far not tabled in the National Assembly any of the critical documents for the project or sought the Assembly’s approval. Presented by the Government were two peripheral pieces to meet the requirement of a foreign agency. Were it not for that demand, the Government would not have come to the National Assembly and the project could have gone the way of the Marriot and slid away quietly and successfully like the camoudie.

For the benefit of readers, we address the issues under five headings: debt, tariffs, subsidies, fuel and savings, and cost. We now address those issues, make a brief conclusion and raise some questions to Capt. Gouveia.

1. Debt
Captain Gouveia is relying on a statement by the Government that “no Government borrowing is taking place.” The fact is that the Government, not Sithe, is guaranteeing the Power Purchase Agreement which requires the Guyana Power and Light Inc., a fully-owned state company, to pay a monthly Capacity Tolling Fee that includes the payment of the debts and their related costs, the annual repayment of Sithe’s “capital” and its returns, and the operations and maintenance cost of Sithe’s operating company. By the Government’s own reckoning, the debt elements alone exceed US$2 billion over 20 years. Since the Government agrees to pay that debt if the company defaults, this is what accountants call a contingent liability.

By going to the National Assembly to increase the debt ceiling in connection with Amaila, the Government acknowledged the debt implications of the project. The analysts merely reflected the Government’s position.

2. Tariffs
Gouveia wants to know what would be the tariff after Amaila. Based on our analysis and using GPL’s audited 2012 statements and allowing for a reduction in system losses and growth in demand, the inflated all-in tariff GPL will have to pay Amaila, and a projected increase in the exchange rate, our conclusion was that the total revenue of GPL would have to increase by 23.6%. Our projections were further based on no more subsidies from the Consolidated Fund and GPL’s Licence rate of return which Sithe imposes as a condition in the Power Purchase Agreement. This increase in tariff after Amaila is unavoidable because of the exorbitant US$858 million cost of the project and the unconscionable rates of return to Sithe (19% tax free), China Development Bank (8.5% tax free) and the IDB (9.35% tax free).

President Ramotar and other members of the Government have publicly stated that when Amaila comes into operation, tariffs will decrease by percentages, sometimes claiming it is 20% and at other times by 40%. It is abundantly clear that a 40% reduction will not cover Amaila’s charge of US$122 million at an exchange rate in 2017 that even the Government projects will be more unfavourable than it is now. Let alone pay for fuel and run the GPL.

We are prepared to provide our projections for public scrutiny if the Government is willing to provide its projections and related documents showing tariff reductions of 40% and 20%.

3. Subsidies
Any serious discussion of subsidies must start with the reality that GPL is an extremely inefficient organisation with system losses exceeding 30% for decades. In 2012, GPL made a loss of $5,666 million on revenue of $29,028 million. Even if GPL could cut its system losses to 15% (which is still high), the company would move out of losses to profit and there would be no need for any subsidies. And at 12% system losses GPL will be able to reduce tariffs and still make a profit. But it has failed to reduce system losses to 12% as the GPL Licence required it to do. Because of this fundamental problem in GPL, we say that it is unable to handle Amaila.

Unless and until GPL attains some moderate level of efficiency, a lot of the power bought from Amaila will not be sold and billed to anyone. The savings that are being touted by the Government and the Private sector Commission are false and spurious.

4. Fuel and savings
Capt. Gouveia asks what the savings from the reduced need for fossil fuel will be. It is true that there will be savings on fuel but what Capt. Gouveia ignores is that for twelve years following Amaila’s coming into operation, that is, some time around the year 2030, the entire savings on fuel will be spent on the prohibitively high debt service to Sithe (19%), China Development Bank (8.5%) and the IDB (9.35%). Sithe alone will get back US$720 million for its $150 million which is an effective rate of 24% tax free, given that it insists in repayment of its capital annually, if not monthly.

Perhaps Capt. Gouveia will enlighten the discussion by offering the public his insight on the exchange rate of the Guyana Dollar and the price for fossil fuel in 2037, twenty years after Amaila was projected to go into operation and the period over which he computes the fuel savings.

Additionally Capt. Gouveia refers to a Government statement that “even if GPL was not modernised, Amaila would see a reduction in consumer tariffs of 20% by 2017.” The proposition that anyone would spend US$858 million to deliver power to a utility that is totally inefficient is astounding. A GPL that is not modernised and which maintains the same level of system losses and other inefficiencies will never be able to pay an annual all-in tariff of US$122 million.

Under Captain Gouveia’s proposition the Guyanese public pays twice – first by way of unjustified tariff and then by way of a subsidy out of the public treasury.

5. Cost
According to Capt. Gouveia the price tag has settled. This is not correct. The draft Power Purchase Agreement states that GPL will have to bear 50% of any increase in the ground condition costs up to US$40 million and 100% of any costs in excess. Because first Motilall and then Sithe failed to carry out the development works required under their successive Interim Licences, the real cost of the geotechnical works is yet to be ascertained.

But even if we assume Capt. Gouveia’s statement to be correct, our concern is that the project is too costly. The cost of the project is inflated by a series of add-on charges, some of which are specified, such as Lenders’ Fees and Advisory Costs (US$33.3 million) and Political Risk Insurance (US$57.7 million), and others which are not, such as Development (US$27.2 million) and Other ($16.7 million). Part of the reason for this high cost is lack of proper tender procedures, lack of transparency and the incompetence of those who are negotiating on behalf of Guyana. We suspect that significant amounts of the add-on costs are to be paid to Sithe.

Capt. Gouveia must be aware too that with every passing statement from Sithe, the cost of the project kept increasing. According to documents released to the parliamentary opposition in June 2013, it was US$830 million. By July it went up to $840 million and then in August Sithe announced it would be $858 million, an announcement that surprised even the Government.

Conclusion
We think it unfortunate that the entire debate has been shaped by the false premise of Amaila or no Amaila and the falsehood that Amaila is without serious risks. Again we state that we are not opposed to hydroelectric power but for the reasons set out above, we are opposed to this particular project as conceptualised and structured. We are for all forms of alternative energy, whether it be hydroelectric power, solar, wind or gas and are prepared to engage the Government and its supporters on the merits and demerits of the project and on a way forward.

In the mean time we ask Captain Gouveia to be kind enough to answer the following questions:

1. Is he aware that the deal provides that in the absence of adequate water flow Amaila can contractually shut down the system, thus placing 90% of the country at risk of total blackout for an indefinite period? And that some time within eighteen months, Amaila will shut down for ten days, and for a similar period over every five years?

2. Is he aware that Sithe had not met its obligations under its Interim Licence and that the Licence was extended over a period of eleven years?

3. Is he aware that under the deal, Sithe would collect a US$17 million equity participation fee upon closure in a deal in which it provides 18% as a redeemable preferred shareholder but is granted complete control of the operations, management and finances of the company?

4. Is he aware that in addition to the US$17 million, Sithe would be reimbursed for its pre-development expenses and, annually, the repayment of its capital?

5. Is he aware that the other party contributing US$708 million (82%) in equity and guarantees, plus a lien on GPL’s revenues, gets 40% position in the company while Sithe gets 60% for its 18% which carry less risk?

6. Would he as a CEO take in a partner with a minority position, guarantee him a 19% annual return and allow him to have a first charge on the revenues of the partnership?

7. Can he confirm that Blackstone, Sithe’s parent, has no interest in any of the other entities which would be providing financing, construction, insurance and operations services to the project company?

8. Does he agree that the stand-alone nature of the project is preferred to the modular approach given that upon completion Amaila would not satisfy the country’s demand for electricity?

9. Does he agree that a project of this nature should have been handled from its inception by a broad-based team of experts and policy makers so that it would command the support of the country?

10. And finally, would he be opposed to a re-tendering of the project and to requesting Sithe to return the Licence?

Ramon Gaskin and Christopher Ram