Putting the cart before the horse: The Amaila Hydropower Project

Two Thursdays ago, the National Assembly voted against: (a) a proposed amendment to the Hydro-Electric Power Act; and (b) a motion to lift the ceiling from $1 billion to $150 billion for the Government’s guarantees of loans to public corporations and companies. Both of these have a direct bearing on the Amaila Hydropower Project.

The proposed amendment relates mainly to the protection of surrounding areas in which the project is located while the motion is to give coverage to the Power Purchase Agreement to be entered into between the Guyana Power and Light (GPL) and Amaila Falls Hydro (AFH) Inc. AFH is the company responsible for the construction, operations and maintenance of the project over a 20-year period, after which the project is to be handed over to the Government free of cost.

Today, we begin our examination of the Amaila Hydropower Project in some detail, and consider what might have gone wrong to cause the National Assembly to vote down the proposed amendment referred to above as well as the motion to lift the guarantees of loans ceiling.

Accountability WatchThe project, its estimated costs and financing
The Amaila Hydropower Project provides for the construction of a 165 MW power station and high voltage transmission line to interconnect with GPL in Linden and Georgetown. According to Sithe Global, the developer of the project, the expected benefits include:

●  Reduction in the cost of generating electricity, resulting in an estimated saving of $700 billion to consumers over the contract term;
●  Reduction in GPL’s exposure to the volatility in oil prices;
●  Transformation of the electricity sector from oil dependency to one of renewable clean energy; and
●  Increase reliability of electricity supply.
The estimated cost of the project is US$840 million, broken down as follows:
US$M              US$M
Construction costs
(Engineering, Procurement & Construction)                                      519.6
Additional construction                                                                          46.3
Start-up                                                                                                        16.7
Development                                                                                             25.4
Other                                                                                                             18.1
Contingencies                                                                                             26.5

Capital costs                                                                                             652.6

Interest during construction                                       97.1
Lenders’ fees & advisory costs                                     34.9
Debt political risk insurance                                      55.7

Financing costs                                                                                       187.7
Total costs                                                                                                840.3

The project is to be financed through a combination of debt and equity, accounting for 70 per cent and 30 per cent respectively, as shown below:
US$M            US$M
Debt financing
China Development Bank                                                              413.2
Inter-American Development Bank                                           175.0
Equity financing
Sithe Global                                                         152.1
Government of Guyana                                    100.0               252.1

Total financing                                                                           840.3

In effect, the project will be jointly owned by Sithe Global (through its subsidiary AFH) and the Government, with shareholdings of 60 per cent and 40 per cent respectively. Some critics have argued quite justifiably that the Government should have held majority interest in the company, especially when one considers that the loans from the China Development Bank (CDB) and the Inter-American Development Bank (IDB) will have to be guaranteed by the Government. Therefore, of the total project costs of US$840.3 million, the Government will be responsible for financing US$688.2 million or 82 per cent, through a combination of equity and guarantees of the funds that AFH will be borrowing from the CDB and the IDB. The Government, however, cannot guarantee a loan under the Guarantee of Loans (Public Corporations and Companies) Act to AFH, a privately-owned company. Here company means a state-owned/controlled company. To compound matters, according to newspaper reports, the Government had signed a loan agreement with the CDB in July 2010. If this is so, then legal boundaries have been crossed.

The debt to equity ratio of 70:30 means that a significant amount of revenues derived from the Power Purchase Agreement with GPL will go towards the servicing of the debts to the CDB and the IDB. Interest during the 40-month period of construction alone with be US$97.1 million to which must be added lenders’ fees and advisory services amounting to US$34.9 million. In addition, the interest charged by the two lending agencies during the 20-year contract period will be reflected in the price that GPL has to pay AHF. These charges will eventually have to be borne by the electricity consumer.

If the project is financed by equity alone, there will be no interest charges, and as a result the cost of construction will not only be lowered by approx. US$130 million but also the Power Purchase Agreement with GPL will reflect a lower figure. It is unclear why the Government has not opted for more equity financing for the project.

In terms of the construction costs of $519.6 million, the works will be undertaken by China Railway First Company Ltd. An additional construction cost of US$46.3 million is also included but it is unclear what this represents. Similarly, there are costs relating to Start-up (US$16.7 million), Development (US$25.4 million) and Other (US$18.1 million) for which details are scant. These additional amounts must be viewed against the background that an amount of US$26.5 million has been separately earmarked for Contingencies.

Mr. Christopher Ram had indicated that, based on his most recent research, the project appeared to be significantly over-priced. In support of his assertion, he compared the 165 MW Amaila Hydropower Project which will cost US$5.09 million per MW with the following:

Pakistan has recently signed an agreement for a 147 MW hydro-electric power for US$362 million. The cost per MW is US$2.46 million;

In Nepal, Spark Hydro Power, a renewable project developer, is set to commence construction of the 101MW Tamor-Mewa Hydel Project at a cost of US$186.2 million. The cost per MW is US$1.84 million;

In Guinea, Semafo Inc., a Canadian gold producer that mines in West Africa, is building a 130 MW hydroelectric power plant on the Cogon River for $230 million. The cost per MW is US$1.77 million;

Last month, the Government of Uganda awarded a contract of the construction of a 600MW Karuma hydro power plant and associated transmission line to Sinohydro Corporation of China. The value of the contract is US$1.65 billion and the cost per KW is US $2.75 million;

In 2009, Benin’s state-owned utilities company Commu-naute Electrique du Benin (CEB) and China’s Sinohydro signed a contract for the construction of a 147 MW hydroelectric power plant and dam on the Mono River. The contract is for EUR282 million or US$366.6 million, and the cost per KW is US$2.49 million; and
In November 2010, Brazil inaugurated six hydro stations with a total capacity of 645 MW in the Goias State. These projects had a total cost of BRL2.9 billion ($1.72 billion), and the cost per KW is US$2.66 million.

The average construction costs for the above hydroelectric power plants work out to US$2.32 per MW which is less than half of that for the Amaila Hydropower Project. Of course, cost structures in different countries will vary depending on a variety of factors but the comparison does give us a general idea that the Amaila Hydropower Project may be significantly over-priced. In 2002, the original price quoted for the project was US$300 million but it later went up to US$450 million or US$2.73 per MW.

Applicability of the Public Procurement Act
Since the Government has a minority interest in AFH, the Public Procurement Act is not applicable. Given the extent to which the Government is investing in AFH, a majority interest in AFH would have been in the public interest. As it now stands, the rigorous standards of accountability, transparency and governance practices that are associated with the operations of a state-owned/controlled entity would not be made applicable to AFH.

For example, the contract for the construction of the access road as well as the upgrading of existing roads was awarded to Synergy Holdings. This company, however, did not have any experience in road building but, according to the latest statement from the Attorney General, was the lowest from among three bidders. Under public pressure, the contract was eventually terminated because of unsatisfactory performance. However, the Government was unable to recover any amount paid to the contractor because the performance bond that was lodged as a guarantee for satisfactory performance had expired. No action was taken also against the person(s) responsible for this costly lapse. Similarly, Synergy Holdings identified Sithe Global as the developer of the project without evidence of competitive bidding before doing so.

Putting the cart before the horse
Since its conceptualisation in 1997 and the events/activities that followed, the Government did not see it fit to engage the National Assembly with regard to a project of this magnitude. This is despite the fact that it is this body that has to pass the relevant legislation and to approve funding for the project, including the lifting of the ceiling for the guarantee of loans to cover the Power Purchase Agreement between GPL and AFH. It was only when the Government needed the support from the Legislature that certain disclosures were made on a confidential basis. However, such disclosures raise more questions than answers, and the action of the combined Opposition in exercising caution and financial prudence appears quite justified.

Perhaps the Government did not anticipate that it would have lost control of the Legislature. Had it not done so, the amendment to the Hydro-Electric Power Bill and the motion to lift the ceiling for the Government’s guarantees of loans, would have gained easy passage in the National Assembly. Prior to 28 November 2011, regardless of the arguments of the Opposition political parties justifying a different course of action, the Government’s side would not budge. Therein lies the current dilemma facing the Amaila Hydropower Project. The Government has put the cart before the horse. It is not too late to reset the process to allow adequate time for Parliamentarians and other stakeholders to seriously reflect on the Government’s proposal. The Legislature should not be made the rubberstamp for the actions of the Government.

To be continued

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