Tag: Synergy

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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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Does Dr Luncheon not know that Synergy and Harza were granted a licence in 2002 to develop a hydroelectric plant at Amaila and that Synergy became the sole licencee in 2004?

I thank Dr Roger Luncheon for his attempt by way of a press release issued through his office to educate me about the Amaila Falls Hydro-Electric Project (AFHEP). In the release, Dr Luncheon kindly suggested that if I and others like Dr Janette Bulkan want to move from the “periphery of public discourse” – to which he has banished us – onto ground where we will be respected by governments, civil society and international organisations, then we need to start getting our facts right. Respect from any government that deprives citizens of their fundamental rights, ignores the constitution and the rule of law, tolerates and itself engages in suspect, secret and unlawful transactions, practises nepotism and discrimination and is inept and incompetent is not something I would ever wish or welcome. And as for civil society and international organisations, I take it that even Dr Luncheon could not be so bold as to think he can speak for them.

Devoting part of his statement specifically to me, Dr Luncheon said that a letter I wrote in the press on Monday, April 11, 2011 (‘Serious questions remain about the LCDS…’), proves that I do not “understand the basics” of what is being proposed for Amaila Falls. These were his words: “He [Ram] repeatedly claims that the Amaila Falls Hydro Power project is being built by Mr Fip Motillal and Synergy Holdings. This is not true – the project is being built by the Sithe Global group of companies.”

Let me reciprocate in a mutual education exercise with Dr Luncheon by quoting from Synergy Holdings’ website: “Synergy Holdings Inc. is involved in this project (The Amaila Falls Hydro-electric Project (AFHEP)) as the developer to design, build, own and operate a hydroelectric plant in Guyana.”

Let us assume that that is what lawyers call ‘puff,’ or ‘big talk’ to use a more popular phrase. Does Dr Luncheon honestly not know that in 2002 Synergy and Harza International were granted a licence by the Government of Guyana under the Hydro-Electricity Act Cap. 56:03 for the development of a hydroelectric plant at Amaila Falls? And that the licence was amended and extended in 2004 when Harza pulled out leaving Synergy as the sole licensee? And that the licence was again extended in 2006 for one year?

For Dr Luncheon’s benefit, let me quote from the preamble of a Memorandum of Agreement dated May 23, 2006 between Synergy, GPL and the Government of Guyana on whose behalf no less a person than Prime Minister Sam Hinds signed.

“WHEREAS, SYNERGY proposes to construct a hydroelectric plant at Amaila Falls in Region 8 of West-Central Guyana, has conducted a detailed feasibility and an Environmental Impact Assessment (EIA), and has received a licence from the GoG and an environmental permit from the Guyana Environ-mental Protection Agency to construct the Amaila Falls Hydro Power project…”.

Perhaps Dr Luncheon thinks that by recruiting Sithe as contractors or project managers, Synergy is relieved of its obligations, liabilities and responsibilities under the licence. If so, he could not be more wrong.

It is worth noting that Dr Luncheon avoided my question about the basis and logic for the government putting LCDS money into a project which reverts to the state after a defined term. Instead, he diverts into a discussion about Sithe with which Synergy seems to have worked a deal which leaves Mr Fip Motilall to make money simply by playing the role of speculator and being the President, Chairman and CEO of what is turning out to be a government-financed/guaranteed company, using precious national and natural resources covering thousands of acres.

It is dangerous when the Head of the Presidential Secretariat, Cabinet Secretary and chief spokesperson of the government is not only badly informed but is unable to understand the implications of the increasingly reckless decisions by the government even in the light of what are simple, clear and direct questions. Even as he accuses me of lacking basic understanding, I respectfully offer a word of advice to Dr Luncheon, who I think is a good and well-meaning man: among his colleagues in Cabinet and government, are few persons on whom he should rely for accuracy of information, integrity, competence, moral rectitude and courage.

Dr Luncheon is a busy but clearly tired and overworked gentleman, of whom any expectation of a continuing public exchange concerning the facts about Amaila, Synergy, Mr Motilall and LCDS money would be unreasonable. So instead, I ask him 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. That would be immensely helpful to persons including Dr Bulkan and me.

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The Amaila Falls Road Project: Whose Synergy? – part 5

Introduction
In Oslo, Norway two Fridays ago, speaking to a reporter from Stabroek News, President Jagdeo added to the growing confusion about the Amaila Falls Hydro-Electricity Project in what was intended to be a clarification. He gave costs, he gave details about the contract, he addressed the country’s exposure to Synergy and he enthused about the huge benefits which will accrue to electricity consumers from the hydro-electricity project not only after it becomes public property, but in its first twenty years of privately-owned operation. If the President was correct, what he said would have been welcome and great news indeed. But he was amazingly wrong. He confused – conflated would be too nice a word – the road project with that of the hydro-electricity project. And in the process what he did not seem to know he was rather casual about.

Unfortunately he was either not properly informed before he spoke, or he was unclear in his own mind. Part of the difficulty faced by Guyanese trying to understand this high finance and low politics is that there has been no single voice or messenger of tidings about the project. On the government side we heard – often more than once – from the President, the Prime Minister, the head of the Presidential Secretariat, the Minister of Finance, and from Mr Winston Brassington, the head of NICIL. We heard lots from Mr Fip Motilall and recently from Mr Rafael Herz of Sithe Global, the designated project manager of the Falls project. Instead of the message being consistent it has often been contradictory.

It is perhaps true that the press did not pay enough attention to the evolution of the project during which the signs and seeds of confusion were first sown by the President and the Prime Minister as far back as July 24, 2006 at a press conference at the Tower Hotel, and later fuelled by persons like the Head of the Presidential Secretariat, the Minster of Finance, the Head of NICIL, Mr Motilall from Synergy and Sithe Global.

The first bit of confusion arose at that July 24 press conference when President Jagdeo and Prime Minister Hinds were announcing the Memorandum of Understanding which was being sold to the public as a done deal. There were two elements to the MOU – the supply of thermal power to GPL and the hydro-electric project. Under the first, Mr Fip Motilall was required to supply a second hand 25 MW thermal plant to the Guyana Power and Light Inc for a handsome reward. Even that he was unable to capitalise on. Things must have been really bad with him.

The misrepresented process
The clear message that the President intended in speaking with the reporter in Oslo was that the cost of the hydro-electric project was known as a result of the award of a contract. Clearly referring to the hydropower project in his Norway statement, the President said that the “project cost is, after public tender where you saw 20 companies pick up the bid documents and five companies sent in bids, 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.”

He explained the “transparent process” the government has to follow as including the assessment by a technical team of the bid’s capability and price, followed by a recommendation to the national tender board and finally to cabinet which can exercise a veto. But in the case of the road project bid, this did not happen. To be precise, for the road project contract, there were 17 expressions of interest and only four bids, all local. Secondly, the contractor selection process was controlled by the state-owned company NICIL in clear violation of the Procurement Act prompting Dr Roger Luncheon to say, unusually carefully for him, that the contract was awarded “within the framework of the [Procurement] Act.”

The Memorandum of Understanding (MOU)
I have a copy of an MOU between the Government, GPL and Synergy signed on May 23, 2006. The discerning or sceptical reader may find what may appear to be inconsistencies between the information that has been made public and the provisions of the MOU. These may have arisen from subsequent amendments and agreements, although that does not seem to be the case. Here are some of the key provisions of the MOU which for the sake of brevity I have summarised but as far as possible using the wording from the MOU.

Date and parties: May 23, 2006. The parties are Guyana Power and Light Inc represented by its Chairman Mr Ronald Alli; the Government of Guyana represented by Prime Minister Samuel Hinds; and Synergy Holdings Limited represented by its President Mr Fip Motilall.

Status: The MOU is what is called a “subject to contract” arrangement that sets out the framework but not the finer details of the rights, responsibilities and obligations of the parties. Section 8 provides that the MOU constitutes an expression of principles and binds the parties to negotiate in good faith in accordance with those principles. The section goes on to specify that the MOU and any obligation of the parties with regard to the project are subject to contract.

The projects: There are, or were intended to be two projects under the MOU for which separate contracts would have had to be negotiated. They are a Thermal Project for the supply by Synergy of a 25 MW thermal plant then located in Cozumel, Mexico; and second, the Amaila Falls Hydro-Electric Project (AFHEP)

The purpose and initial matters: The MOU sets forth in a schedule the principles under which the parties would negotiate in good faith towards consummating development, financing and implementation of the two projects.

Under the MOU, the GoG granted Synergy the continued rights to develop AFHEP under the terms of a hydropower licence issued in July 2002 and extended in October 2004 and which at the date of the MOU would have expired in July 2006. The MOU extended the hydropower licence on July 27, 2006 for an additional one (1) year period…

Synergy agreed to proceed with the implementation of both the projects on an “Open-Book” basis, ie, it would disclose to the government and the GPL all costs associated with each of the projects. In turn, the government and the GPL agreed that the equity investor(s) in the projects – presumably Synergy and others it brought in – would be entitled to an internal rate of return of 25%, and certain tax and duty concessions.

Since Synergy practically abandoned the thermal plant project, only the particulars of the hydroelectric project are set out below. There is no indication that either GPL or the government sought any form of redress for Synergy’s failure or indeed felt it worthwhile to do so because of the status of the MOU.

The hydro-electric project
The parties agreed to pursue hydro on a Build, Own, Operate and Transfer basis under the July 2002 licence. The period specified in the MOU for a power purchase agreement (PPA) under which GPL would buy all the power generated by the hydro project Synergy is 25 years from the date of commercial operation, which was stated then as running from December 31, 2010 to December 31, 2035. The MOU provides for an automatic extension for an additional 10 years, at the conclusion of the original PPA term. So where the 20 years free transfer from Synergy to the government comes from is not clear. That in fact is supposed to be the major selling point of the deal with Mr Motilall but a reading of the MOU suggests that we may have been misled. Indeed Synergy’s ownership can extend indefinitely since the MOU provides that if AFHEP’s installed capacity is expanded, “changes to the BOOT structure would be necessary.” The MOU is emphatic – transfer to government only arises if there is no expansion by the end of the 35-year period.

Cost and revenue
Under Schedule A which deals with the hydro-electric project, the return is specified as “a minimum cash-on-cash leveraged (U.S. Dollar) internal rate of return of twenty five percent, after tax and duty concessions.” This is even higher that the rate which the government criticised in the telephone company agreement.

The MOU provides that the cost for power of 775 GWH delivered to Sophia, Georgetown shall not exceed US$0.075/kwh. Failure of the parties to agree upon, and of Synergy or any other participant in the AFHEP to guarantee, such US$0.075/kwh cost for delivered power are stated as grounds for the government, in its sole discretion, to terminate the AFHEP and any related agreements. Such US$0.075/kwh price is stated as being subject only to adjustment after construction is completed, and then only to the extent necessary to reflect inflation associated with O&M costs.

But here is what the President told Stabroek News in Norway: “We will buy the power on average at [US] 10.9 cents per kilowatt hour here and that includes all the costs.” So before the project is even started, the price per kilowatt hour has gone up by 45.8%!

Construction
The MOU provides that bidding for the construction work for the AFHEP would be pursued on the basis of full international bidding through advertising “for interest” in the international media and, through subsequent joint selection, identification of a short list of qualified bidders, subject to Guyana law and any requirements of the financiers for the AFHEP. Only such short-listed bidders shall be sent the bidding documents and requested to submit proposals. With G0G’s input, Synergy shall have the exclusive final right to select the EPC contractor.

There is no information or evidence out there that suggests that any bidding has been done – locally or internationally. If it were, someone would have said so by now. This means that capital costs for the project and its operating costs are yet to be determined.

What is interesting is that there was no mention of a road in the MOU. The closest the MOU came to this is in the recital or preamble in which it is stated that “Synergy proposes to construct… approximately 300 km of associated double-circuit 230 KVA line to transmit the power from the project site to Georgetown.” That those who conceptualised as well as those who prepared the MOU would have overlooked such a basic matter is a real cause for concern.

Conclusion
The provisions set out in the MOU contradict in significant ways what the public has been fed since the road contract came under scrutiny. What is clear is the President needs to advise himself better of the MOU and related matters before he speaks on the issue. There are several issues which need further consideration but which require more detailed and accurate information. These are serious and I believe enough has been revealed to justify a review of this entire fiasco. I am sure Business Page will return to this subject, sooner rather than later.

Meanwhile, from next week will see Business Page turning its attention to other matters.

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The Amaila Falls Road Project: Whose synergy? – part 4

Introduction
Today’s column continues this series on the award of a US$15.4 million contract made by the government to Synergy Holdings Inc. for the construction of a road leading to the Amaila Falls, the site identified for the hydro-electricity project (AFHEP). Let us start with what we know: Mr Fip Motilall was given a licence by the President to develop the Amaila hydro project; the contract to construct the road to the project site flies in the face of common sense, economic logic and the Procurement Act; there are conflicting estimates of the cost and consequences to electricity consumers of the cost of power when the hydro-electricity facility comes into commercial operation. Beyond these basic pieces of information, there is a huge void. While the public pleads in vain with the government for details, columnists and letter writers seek to fill the void by undertaking extensive research to help the public understand what is being done in their name and for which they will bear the costs and receive the benefits.

The opposition PNCR a couple of weeks ago asked for the tabling of the Amaila Falls arrangements in the National Assembly. Nothing has been heard about that request but the leadership of that party was given a wonderful opportunity earlier this past week to pursue it when President Jagdeo invited them to meet him over local government elections. It was an opportune time to remind the President that under item 6 of the May 6, 2003 Communiqué he had committed to lay in the National Assembly “all existing and future agreements for GPL and the rest of the electricity sector.”

They could have gone further and reminded President Jagdeo that he had said to President Carter in August 2004 that “the government stands by all the commitments made in this agreement between him and PNC Chairman [sic] Corbin.”

Broken promises
Broken promises from President Jagdeo are nothing new but what is new and painful is that we are left with huge and frightening information gaps on critical aspects of what could be the largest project ever to be undertaken in the country. We cannot forget the President’s record on the largest to date – the Skeldon Factory in which he played the deciding role and which leaves the country in a big financial hole. The Skeldon project has so far been an embarrassing and costly burden – perhaps even bigger than critics had warned – and the demands on the taxpayers keep rising while budget targets made by the corporation’s dream team one year become useless the next.

As Skeldon has shown, the bigger and grander the project, the higher the risks and the greater the consequences of failure. Unfortunately caution is not a virtue associated with this government, and we seem to run blindly into disaster. The parallels between GuySuCo’s Skeldon Project and the Amaila project are frightening.

Conflicting numbers
There are essentially two projects involved with Amaila – the road and the hydro-electricity project itself. That the road project will cost taxpayers only the face value of the contract (US$15.4 million) cannot be assumed. The Request for Proposal said nothing about duty and tax concessions borne by the taxpayers but which could have made a huge difference to the bid price if one bidder was given exclusive assurance about tax concessions, disguised subsidies, or overruns.

The engineer’s estimate of the cost of the road project including bridges is in excess of US$20 million so we have to prepare ourselves for some major cost overruns. Dr Luncheon who was the first to defend the contract process now says that Synergy is behind the eight ball, which in billiards means in a losing position. If translated that means that Synergy cannot deliver on the contract, then the government will have no option but to throw more money into the road contract.

Dr Luncheon should have been more direct and tell us what the failure by Synergy to deliver the road project on time and on budget will mean, which is what the public needs to know. Instead it is another layer of confusion, coming just a couple of days ago after the government sought to contradict its own project manager/sponsor over the cost of the hydro project. In a letter to the local press Mr Rafael Herz, Sithe’s designated Project Manager said the estimated cost of the dam, powerhouse, transmission line and substations was US$650 million (including an estimated US$190 million for the transmission line and other supporting infrastructure). Two days later the government disputed the number, placing the figure at $495 million inclusive of the transmission line. And if we go back one year ago, the President had announced that “final studies” on the project would have been completed in August 2009 and that the bid for the project was US$600M. The final studies have clearly not been done, or costs determined.

Assuming there is a cost number, somewhere in this range, someone should say what it is. The difference between the two most recent numbers is 31% of what the government is now saying the figure should be. Hopefully, the press will seek an explanation from Mr Herz. Amid all the confusion then there is a project of at best uncertain cost. The reality is that there may be no actual number because there is as yet no contract for the construction of the hydro project itself. We know that Mr Motilall has the licence but whether that allows him to decide who will build the hydro-electricity project is not known, or what the guaranteed/ ceiling price which GPL, the project’s customer will have to pay. The terms of the licence could help but that too is top secret.

The project licence
If anyone knows anything about the licence for the big deal that person is not letting on. Under the Hydro Electric Power Act (HEP), any licence has to be applied for to the Chief Works and Hydraulics Officer and is issued by the President. The application would contain critical technical and financial information evidencing vital capacity to fund, build and operate a hydro-electricity project. Since Synergy does not now possess those virtues, it was unlikely to have had them at the time the licence was issued to it in July 2002. It should therefore consider itself lucky that the President issued it with a licence in 2002 and then extended it first in October 2004, and then in 2006 for one year, even as its inadequacy became increasingly obvious. Section 7 of the HEP requires the payment of rent and royalties about which nothing has been heard, including whether Synergy has met such payment obligations. This is all very forgiving, considering the Financial Management and Accountability Act which requires special legislative authority.

A May 2006 MOU referred to in the third part of this series provided that the extended licence “shall be terminable by the government at any time during the one year extension” if Synergy failed to complete certain targets. The one year came and went, targets were set and missed, while Synergy committed to but never supplied a 25 MW thermal generating plant, because it never found the money to do so. Surely very few other than the President would entrust a 154 MW hydro-electricity project to a person who could not deliver a 25 MW of thermal power which can be bought on the internet.

But when it comes to Synergy all we have had from the government is grandstanding. In early 2008 the President threatened that if financial closure did not take place soon, the company would lose the “franchise” to build and operate the hydro facility. More than two years later, instead of terminating the licence and seeking a more reputable licensee, the government is now planning to put more taxpayers’ money into Synergy’s hands.

Scale of the project
Uncertainty also arises over the scale of the project and whether it is a single phase project or whether the 154 MW is just for starters. In August 2009 it was reported that Phase I would involve the installation of 154 MW capacity, Phase II 410MW and in Phase III, it would reach a further 1060 MW. If this is anywhere close to serious, we have to ask whether the Amaila Falls area has that volume of water, whether the second and third phases of the project go automatically to Synergy, who will buy this extra capacity, who will finance the later phases, and when does the BOOT kick in.

The Russians with their bauxite and the Brazilians have already indicated that they have their own ideas and ambitions about hydro-electric power in Guyana, which suggests that they are not interested in doing business with Synergy or Amaila. So the expansion may be a dream, a distraction or idle talk. Whichever it is, the public needs to know.

Start date
For starters, Synergy was under an obligation to begin construction of the hydro-electricity project in 2007 with commercial operation taking place in 2010. It failed miserably. The project manager-designate now says that construction will begin in early 2011 but with two caveats. The first is the completion of the road to enable the transportation of equipment and machinery and the second, obtaining debt financing. Now those are major caveats.

There is a lot of cynicism around and many even doubted that the AFHEP would get started. I think that with the single-mined obstinacy of the President and his adventurous way of committing state funds, the project will get going. But the President is returning from Oslo empty handed and with growing uncertainty about the timing of the inflow from Norway. The Budget already has a huge hole and his expressed impatience in Oslo when he realised the Norwegians and other donors were not sending him back with a bagful of money was his recognition of a potentially major setback. Maybe there is a link between human rights, extra-judicial killings and Amaila. On the positive side, the East Bank Demerara schoolchildren are spared the need to line the road for the President’s return which will be contrastingly low key.

Next week we look at cost, sources of funding and their implications for rates.