Putting the cart before the horse: The Amaila Falls project (Part III)

Since my article of 5 August on the Amaila Falls Project, a number of important developments took place. Readers will recall that the National Assembly had previously voted down the proposed amendment to the Hydro Electric Act as well as the motion to lift the ceiling for the Government’s guarantee of loans. On 7 August, the Assembly revisited these two proposals and approved the amendment to the Act as well as a revised ceiling for government guarantees to $50 billion, with the proviso that this figure could be reviewed in three months’ time, if necessary. By this time, the IDB will have completed its due diligence on the project. The Government had proposed a lower ceiling of $130 billion but this did not find favour with the AFC. The main Opposition party, APNU, however, voted against both proposals.

It is now public knowledge that Sithe Global has withdrawn from the Project, citing a lack of political consensus for such large project. The Government has since been trying hard to lobby APNU to support the project but so far it has been unsuccessful. The future of the project therefore appears uncertain. Today, we continue our discussion of the Amaila Falls Project.

 

Recapitulation of the last article

 

20130819watchDespite some clarifications from Sithe Global, concerns remain about the high cost of the project, which hinge mainly on the mix of financing i.e. 70 per cent debt and 30 per cent equity. If the project is financed totally by equity contributions, the latest revised cost of the project will be reduced by US$187.5 million, comprising US$97.1 million in interest during the construction phase; US$34.9 million in lenders’ fees and advisory costs; and US$55.7 million in debt political insurance. However, when one considers that interest will accrue during the 20-year operational stage of the project, the potential savings could be significantly higher.

It may not be possible to have total equity financing but certainly a reversal of the debt to equity ratio will go a long way towards reducing the cost of the project. It would make sense to expand the equity base by including not only local institutional investors, such as banks, insurance companies and other private sector organisations, but also investors from overseas, rather than having Sithe Global and the Government as the only investors. All of this will translate into a lower figure that GPL has to pay AFH Inc. for the supply of electricity and hence a significant benefit to the consumer in terms of a lower electricity tariff.

The views of Mr. Greenidge and Prof. Thomas should be given serious consideration before any green light is given to the project. The former Finance Minister argued that: (a) no evidence was produced on how electricity tariffs will be reduced; and (b) no one seems to know how the formula in the draft PPA works to arrive at approximately US$2 billion that GPL would have had to pay AFH Inc. over the 20-year period.  His most recent statement was that the project should not be a stand-alone one but rather one in a cluster of hydro projects in view of the extremely high cost of the transmission line to bring the electricity to the national grid. Prof. Thomas, on the other hand, was emphatic that the project as is currently configured is not acceptable and that demand will outstrip supply from the project by 2019. He advised that it would be better to cut our losses and abandon the project before it is too late.

We then concluded that stakeholders need positive assurances that: (a) adequate mechanisms will be in place for the preservation of our environment; (b) a thorough and independent evaluation pronouncing definitively that the project is economically, technically and otherwise feasible, and that all the associated risks have been properly addressed; (c) GPL has the technical, operational and management capacity to perform satisfactorily under any proposed new arrangement; (d) independent review confirming that electricity tariffs will indeed be reduced; and (e) the final, reformulated cost of the project represents the best value for money.

On Friday last, NICIL decided to release to the Opposition parties on a confidential basis, a report of a feasibility study of the project conducted in 2009 by an Argentinian consulting firm. It is not clear on what basis this firm was selected to undertake the study. This piecemeal release of information on the project on a confidential basis is also a source of concern.

 

Lifting the ceiling for Government guarantees

 

The main purpose for the motion was to lift the ceiling for the Government’s guarantee of loans to cover the PPA between GPL and AFH Inc. This agreement provides for GPL to pay to AFH Inc. approximately US$100 million per annum for 20 years. This works out to G$400 billion. The amount of G$150 billion would therefore have been wholly inadequate to cover the PPA for the 20-year duration. In any event, it is inconceivable that the Government will provide a guarantee for such a large sum. I had suggested that a figure $50 billion, which will cover at least two years of the PPA. The National Assembly approved of raising of the ceiling to this amount.

This higher ceiling for the guarantee of loans does not necessarily result in an increase in the public debt. When a public corporation is unable to service a loan that the Government has guaranteed or where a corporation ceases to exist without repaying a loan that the Government has guaranteed, it is only then that the outstanding debt is transferred to the public debt. The PPA is, however, not a loan but if GPL defaults in its payment to AFH Inc., the Government will have to honour GPL’s commitment through advances from the Contingencies Fund to be cleared later by supplementary estimates. If GPL is unable to pay an invoice from AFH Inc., the latter will re-invoice the Government, and until such time that payment remains outstanding, it becomes a debt of the Government.

 

I have since been privy to the draft PPA. There is a section captioned “Assignment of Receivables Agreement” in which GPL assigns and pledges a first priority lien and security interest in all of GPL’s right, title and interest in and to the following, whether now or hereafter existing or acquired:

 

* All proceeds from any sale, transfer or other disposition of electric energy directly or indirectly by GPL to any GPL customer, excluding new connection charges; and

 

* (i) Each of the accounts (including any sub-accounts within such accounts) and all amounts, securities, financial assets, investment property, cash and other instuments or amounts or other property deposited or required to be deposited therein from time to time or credited or required to be credited thereto from time to time and all income or gain thereon, (ii) all of its securities entitlements with respect to financial assets credited or required to be credited from time to time therein, and (iii) the proceeds of all of the foregoing.

 

In other words, GPL is pledging all of its assets as security for honouring the terms and conditions of the PPA. If there is default, the bank as the collateral agent will step in. This scenario is equivalent to GPL going into receivership! That apart, why is there a need for a government guarantee to cover the same agreement? Is it not a case of double counting? The Government’s original request for lifting the guarantee ceiling to $150 billion, equivalent to US$750 million, coincides with the cost of the project, excluding the Government’s contribution. Could it therefore be that Sithe Global was indirectly trying to extend coverage for its own investment as well as the loans from the CDB and the IDB? Fortunately, the National Assembly has tied the increase in the guarantee to GPL and the PPA. In any event, it is not possible for the Government to provide a guarantee to an entity unless it is State-owned or controlled. AFH Inc. is a privately-owned company since the Government owns only 40 per of its equity while Sithe Global owns the rest. Interestingly, the draft PPA describes AHF Inc. as a public corporation. Was there initially an intention to make it one? If so, the analysis of project’s financial architecture would have been a completely different one.

 

Amendment to the Hydro Electric Act

 

It has been argued that the amendment to the Hydro Electric Act is a precondition for the IDB to proceed with its due diligence of the project. In approving the amendment and the lifting of the guarantee of loans ceiling, the National Assembly has given the green light for the project as it is currently configured, notwithstanding the various concerns expressed by APNU, the AFC and other knowledgeable persons.

 

The AFC justified its support for these two measures by contending that it wanted to give the project a “life line” and that its support was “conditional”. However, Sithe Global had earlier made it clear that it would walk away from the project if there is no political consensus, meaning that APNU would have also had to come on board. The AFC would have known of APNU’s position, and its decision to vote in favour of the two pieces of legislation would not have caused Sithe Global to change its mind. The objective of giving the project a “life line” would therefore not have been achieved. Now that the National Assembly has been given its approval for the project, how will the AFC get the Government to deal with its concerns? Would it not have been more appropriate for the AFC to have these concerns satisfactorily addressed first before giving its support?

To be continued

 

 

 

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