The government is applying faulty economics in the case of Amaila

Dear Editor,

Suppose your neighbour offers to marry your daughter. Assuming that your daughter doesn’t mind, would you only be concerned that your daughter could live in a fancy house and have access to half a dozen Prados?  Would it matter that he had beaten his previous father-in-law and girlfriend to death? This is where we are in relation to the debate on the Amaila

The APNU is convinced that hydro development is a central part of the renewable energy plan. A case does not need to be made for hydro at this stage. The savings (in imported fuel, etc) that will follow from any hydro are more or less the same. The dispute is not substantively about the benefits, it is the cost. We need not waste time arguing about the likely savings therefore. For the sake of argument let us say there will be all the savings they claim although we know that roughly half of the thermal generating capacity will remain in place for a variety of reasons, including standby capacity and to serve interior areas, so the saving in fuel can only be approximately half or little more than 50% of current fuel import bill. Let us now look at what matters.

In both the case of the marriage offer and the Amaila hydro failure to answer the 2nd question (about cost) satisfactorily would be irresponsible. To argue, as the government does, that Amaila Falls should be supported because it has benefits is to say yes to your neighbour’s offer without regard to the chances of you and your daughter surviving the marriage. Economic analysis requires not only proof of benefits but an assessment of the cost at which those benefits are to be enjoyed. The cost of the Amaila hydro will depend on many factors, in addition to the cost of construction  whether it is a phased development, the overall structure of the financing (ie debt v equity) the terms on which monies are to be borrowed, performance penalties, concessions granted to the promoters, contingencies, etc.

Studies
It needs to be stressed that an up-to-date economic feasibility study has not been completed. Such a study would provide an estimate of both the costs and benefits under different assumptions. Not only are the studies to which the government and NICIL refer outdated (using 2009 construction estimates for example) but they have unreasonable assumptions, such as GPL commercial and technical losses of 26% and less. In reality they are currently 31%. This is a significant difference and will affect the extent to which lower generation costs can be passed on to consumers. NICIL in its efforts to (mis)inform public opinion neglect to mention these factors.

Furthermore, it is true that the studies undertaken so far suggest that on a per capita basis Amaila was, in 1997, estimated to be the least costly of the hydro sites available. However, the fact that the Daf is the cheapest car built does not mean that a dealer will sell me one as cheaply as possible.  Let the buyer beware, is the caution that the courts apply in disputes.

The final cost of the project has actually been a moving feast. The government has not been able to answer the question convincingly. Only last week one paper (KN) was arguing the GOG already knows that the price is to escalate beyond the US$858M that they and Sithe announced on 31st July. This is consistent with the estimates of analysts such as Thomas, Gaskin and Ram who have contended that the final figure will be in excess of US$1B.

In view of these cost issues the relevant question in the case of Amaila is, did we exercise due diligence in the arrangements for the contracts with Sithe and Synergy.  The IDB cannot do this for us. They can help but we and our agents such as NICIL have a responsibility to do so in the public interest.

When costs are unnecessarily high, someone has to bear the cost of that de facto tax. Who will bear the unnecessary cost? Mr Ramotar has said that there will be no debt because the plant will be fully paid for by the sales of electricity. In other words, consumers will fund the full cost of the investment! Mr Ramotar does not see the irony of this. Most electricity consumers spend a significant proportion of their income on utility bills, rent and food.  Taxing them in this way will take a high proportion of their income – a higher proportion than of the income of the rich. It is bad economics and it is unfair. We have already had this debate on the VAT (a regressive tax) and demonstrated either the PPP’s ignorance as regards first year economics or their cynicism. The fact that the consumers will pay the bills and that a significant segment of those consumers are already poor is precisely why it is poor economics.

Everyone who has studied the issue agrees that the structural diversification of the Guyana economy is critically dependent on the availability of affordable and reliable supplies of energy. These supplies could come from one or a variety of sources, including petroleum and renewable energy including hydropower. It is evident from the available studies on the development of hydro that Amaila could not be a viable stand-alone power project meeting Guyana’s medium or long term needs. The Mercados study, for example, assumes that the only additional demand for energy from industry is likely to be from bauxite expansion – an alumina smelter.

Because the initial hydro, its location and size matter, the government needs to prepare and outline for us their medium to long-term energy plan. Why has this not been done? The answer is to be found in the nature of the agreements, MOUs and licences which the GOG has concuded with prospective investors. To whom have they awarded agreements and for development where and at what cost?  The answer to that set of questions is what we need to know before anything else is said about Amaila. Instead of questioning the patriotism, intentions and competence of those who have commented on the Amaila inadequacies, either President Ramotar or Mr Jagdeo would have been better advised to release information on their plan for integrated development of smaller hydros on the Potaro or Potaro and Mazaruni Basin/s.

We have been left to guess why the government has failed to make this known. The reason is their fear of the outcry over the terms and costs they have granted to associates.

Access roads
One of the main factors which delayed completion of plans for the Amaila project and the closing of the cost is the completion of the access road. A contract was awarded for the construction of this road in 2011. The contract which should have been completed in Feb 2011 is now not likely to be completed before Feb 2014. In spite of this the supporters of Sithe Global and the government behave as though everything was ready, save for the APNU’s ‘perfidy’!

The problems associated with the contract for the access road and its management provide a good example of what is wrong with the manner in which the GOG makes decisions. The contract and the specs of the road in particular, were so inadequate technically, so poorly written and idiosyncratically worded, that it was hardly surprising that Motilal’s outfit had problems meeting the deadline. It appears that no technically competent authority prepared or cleared these documents. The alignment of the road for example, is not typical and, possibly not appropriate, so the road meanders and at points is far too steep even to permit easy transport of the road-building equipment. The geology of the area is still not fully known, and the specific location of the site of the dam was at the time of our meeting with Sithe Global not yet finally determined.

As a result of failure to meet the deadline, the Synergy contract was terminated in 2012. The new contractor, China Railways, did not go far before calling for a review of the contract and of the design of the road.  NICIL obliged and instead of having the relevant technical staff at the Ministry of Works undertake it, the task was given to a T&T firm. The Guyana taxpayer had to pay for that privilege.

NICIL was responsible for this unprofessional and costly episode. Winston Brasington signed the letters with the specs and issued the invitation to tender. There is nothing to suggest that Mr Winston Brassington or his team at NICIL have any formal training or experience in road construction, project planning or the preparation of tender documents/procedures. For the government it seems sufficient that Mr Brassington and NICIL operate under the eye of Dr Singh, the Chairman of NICIL who also appoints the members of the NP&TB. Mr Brassington is also the Chairman of GPL.

The consequences of the badly written specs and design issued by Mr Brassington have been many. They include delays in the completion of the contract, its eventual termination and transfer to another contractor as well as the cost of having the specs reviewed and rewritten. The initial contract for the road was set at US$15.4M in 2011. The road that should have taken 8 months to construct has yet to be completed and its cost is now over US$30M and running.

Just as alarming, after awarding the contract, NICIL failed to monitor and enforce the terms of the contract with Motilal’s Synergy Inc. The firm was paid in spite of not satisfying the terms of the contract and some argued that they were fully paid although the work did not meet the specs. There was a running commentary in the press regarding this apparent failure to enforce remedies. It was later discovered that the newspapers were ill-informed. Things were worse than they had revealed! Remedies were not to be had because NICIL and the government had failed to notice that Synergy Inc had not renewed the Performance Bond. It therefore lapsed. The insurance company, Hand in Hand, declined to pay. Guyana lost US$1.5M to which it would normally have been entitled.  The government then sought to redeem themselves by suing the Hand in Hand! If we as private sector members fail to pay an insurance premium, we know that we will have to live with the consequences. Not so the PPP, the GOG sued the company for NICIL’s negligence. Of course, we all know that this was only window dressing intended to show that action is being taken.

Why would a responsible government entrust such enormous sums to individuals and an entity with so little demonstrated technical competence and so little relevant previous experience? Why was nothing learnt from the Skeldon experience? The reason is that NICIL is not held to technical standards. It is involved in political work, including misleading the public about the nature of their charter and their relationship with the public. No prizes for guessing who bears the double cost of this luxury and incompetence? GPL is not the only agency that needs to be replaced if we are to go forward.

Skeldon
The current President and his predecessor have been leading the way in trying to mislead the public and in refining the ‘cuss out’ culture. They have also been at pains to aggressively assure the public about the benefits of the Amaila project. The public knows, however, that Mr Jagdeo, as President, made the same promises for Skeldon that Mr Ramotar and he are now making for Amaila ‒ a growth rate of more than 10% pa. Any economist worth his salt knows that all government expenditure does not mean economic growth. Even as the two venerable gentlemen were busily assuring the public about the certainties of the project there is embarrassment regarding the first transformational project. Four years after its commissioning, the US$200M Skeldon factory even after the expenditure of an additional US$30M of taxpayer’s money to rectify the inadequacies of another poorly written and enforced contract, has yet to commence grinding cane for the current sugar crop.

Have you heard this story before? Yes it is the same as the story of the road, the fibre optic cable, the laptops (OLPF) and the desktops for the education system. Dr Ashni Singh is again a common factor in all of these fiascos. The French could have had the PPP in mind when they coined the expression, ‘the more things change the more they remain the same.’

So far the government has neither demonstrated an abundance of competence nor an ability to learn from its errors. Recently, Mr Jagdeo is reported to have stood before a serious audience and claimed that: “There is not a single cent of debt, outside of the money that we are spending on the road and the equity that we are taking that will accrue to this country, and yet we heard that is too high a debt that we are worried about, that’s why we didn’t approve the project.”  Mr Ramotar had earlier also asserted that the Amaila project would be constructed without any debt being incurred by the citizens of Guyana.

Maybe the GOG did not believe that the motion on the debt ceiling laid in the Assembly meant anything. It obviously meant much to Sithe because although it was approved by the legislature the company withdrew. Sithe unlike President Ramotar recognizes that the GOG cannot ignore the views of the legislature. He is fond of arguing, inaccurately, that the executive has powers to implement and cannot be constrained by or to take account of the views of the legislature. It is Sithe rather than the PPP government which acknowledges the role of the Assembly. That is a shame.

Mr Ramotar’s predecessor Mr Jagdeo could afford to ignore the Assembly.  Additionally, the former President may never have been trained in Western or market finance or, if he was, he studied it in an inappropriate place. Those who have studied finance as practised outside Communist states, would know that it is not only a formal debt commitment which a government may find itself having to honour; there is in the profession a concept of contingent liability. The US Government and the Caribbean governments did not have formal obligations regarding JP Morgan or Clico, respectively. The IDB (the lender) website carries the following:

In addition to conventional government debt, countries are also responsible for managing contingent debt. Contingent debt refers to debt that is conditional upon predefined events or circumstances. CLs are associated with major hidden fiscal risks. In fact, be they explicit, such as those liabilities defined by law or by contract, or implicit, because they are not officially recognized, they are not visible until they are triggered or until a problem occurs. As such CLs pose a threat to future government finances. (http://www.iadb.org/en/topics/finance/lac-debt-group/contingent-liabilities-cls,7030.html)

In any case if GPL fails to meet its obligations the government is obliged via this agreement to have the obligation honoured. Additional subsidies will need to be approved by the Assembly. If APNU was part of a consensus to approve the motion Sithe would have a case against Guyana in the event that APNU subsequently refuses to approve a request for transfer and monies owed cannot be paid over by GPL.  It is evident therefore that it is the President’s understanding of economics that leaves a lot to be desired, not the critics’.

Greenhouse gases
The President is reported as claiming: “As the flagship of the Low Carbon Development Strategy, Amaila will enable reductions in Guyana’s greenhouse gases from electricity generation by approximately 90%.” That is indeed a remarkable reduction if it were true. Suffice it for me to observe that if the President’s life depended on good advice he would be most unwise to trust it to those persons who are providing him with such ‘irrefutable evidence.’

Recent research suggests that emissions during a hydro facility’s operation depend on the size of the reservoir and the nature of the land flooded by the reservoir. Estimates for life-cycle global warming emissions from hydroelectric plants built in tropical areas or temperate peatlands conclude that after the areas are flooded, the vegetation and soil in these areas decomposes and releases both carbon dioxide and methane. Current estimates suggest that life-cycle emissions can be over 0.5 pounds of carbon dioxide equivalent per kilowatt-hour.  “To put this into context, estimates of life-cycle global warming emissions for natural gas generated electricity are between 0.6 and 2 pounds of carbon dioxide equivalent per kilowatt-hour and estimates for coal-generated electricity are 1.4 and 3.6 pounds of carbon dioxide equivalent per kilowatt-hour. A few recent studies of large reservoirs created behind hydro dams have suggested that decaying vegetation, submerged by flooding, may give off quantities of greenhouse gases equivalent to those from other sources of electricity.”

So much for the technical expertise of NICIL and/or the Office of the President. The foregoing suggests that those who are fond of calling others ‘ignorant’ have cause to be cautious in their use of the label.

It is sad that in order to justify the case for Amaila, Messrs Ramotar and Jagdeo have to resort to faulty economics. It is unfortunate that the latter finds it necessary once again to fabricate figures of expenditure on previous projects. His claim of US$300M or US$1B spent on the Upper Mazaruni hydro are of course utterly untrue.
It is embarrassing that a regime could find it acceptable to argue the case for a current project on grounds that a previous government wasted money in a similar fashion or made mistakes 30 years ago.

Yours faithfully,
Carl B Greenidge

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