Dear Editor,
A brief note to my letter on Amaila Falls that was published in SN on Saturday (‘Does the government have the requisite technical expertise to manage large infrastructure investment?’). It is now evident that there has been misinformation or misleading data with regard to the cost of the project. A review of the project’s web site ‘Amaila Hydropower.com’ reveals that the total project cost was never fixed at US$450 million as had and has been reported in the local press. In fact China Railway, which won the bid for Engineering Procurement and Construction (EPC), had bid US$430 million, but that was only for the transmission lines and the hydroelectric plant. And it had already been known, based on this component price, that the total would be closer to US$700 million for a complete project with financing in place. The web site features a release available to the press for the past five months, from October, which states that “During negotiations that took place throughout the middle part of this year (2011) China Railway proposed an updated EPC price that reflected a very significant EPC price impact caused by three chief factors: increased commodity prices, changes resulting from engineering work/site reconnaissance and appreciation of the Chinese Yuan. The increased prices of key commodities such as copper (up nearly 50% from original bid to mid 2011) steel (up 35 percent) and crude oil played a significant role in the EPC price increase. Quantities of material required to build the facility were also adjusted as the required pre-construction site reconnaissance work was completed. Finally the appreciation of the Chinese Yuan Reminbi by nearly 8 percent was the single largest factor in the proposed price increase.”
Comforting is the fact, reported in the following paragraph, that “China Railway accepts the risk of further price escalation as of the commencement of construction.” By which one may understand that prior to the commencement of construction the project cost is likely to continue to increase depending on the factors elicited above. As of today, the EPC costs are at US$508 million. This is what the Chinese are asking. A mere 18 % increase on their original of 2009. So how do we get to US$835 million? The release states, “The higher EPC price requires AFH (Amaila Falls Hydro) to secure more debt financing which results in higher costs for interest during construction and political risk insurance. Certain non-EPC costs have increased as well.” (?) We are assured that, as things are, the final slate of US$835 million “includes all financing costs, non-EPC construction costs and project development costs.” Here, we note, there is a need to specify these interest and other financing costs. We are told that Sithe has already spent US$10 million on third party environmental technical and legal costs associated with the development and financing and will contribute more than US$200 million in equity funding during the construction period. The Sithe website says they work with Blackstone, a major financier. The release also promises that GPL “is able to reduce electricity tariffs when the project comes on line.”
This now needs to be recalculated in light of observations by others. It should take three-and-a-half years from start of construction, we are told. Three conclusions are evident. The first is that the public information concerning bids and prices may have been inaccurate, since the project, in all its aspects, never cost less than US$700 million. Also evident is that this price should never have been offered as definitive, as the site reconnaissance revealed a need for more money. The second is that, as is often the case, the project is and was subject to fluctuations in commodity prices from which we either gain (as with gold) or lose. How this was presented as a contingency in the contract needs to be examined. We risk facing even higher costs since there is little likelihood that the yuan will fall to pre-2009 rates or that essential commodities will also fall to pre-2009 rates over the next five years. The third is that full disclosure by the government is necessary for public comprehension and support of this very important project. Release the contract and let us all have a look. We are assured by the release that “AFH continues to negotiate to minimize price increases.” Of this we are confident. As a serious company they need to get this project going as much as we do. And they bring a great deal of technical and financial expertise. But it must be clear to us where all the money is going. We need oversight as voters, consumers and citizens.
Yours faithfully,
Abu Bakr
