Changes to power company pacts under negotiation
Management overhaul on table
By Gitanjali Singh
Stabroek News
January 13, 2003
The barrage of criticisms against the power company over line losses and increasing tariffs in the last three years has climaxed in the government and the CDC negotiating changes to the investment pacts which could include new managers.
The negotiations come after three years of constant criticism that the company has failed to reduce commercial and line losses while increasing tariffs. The proposed management changes are expected to save the company about US$1M annually.
The Commonwealth Development Corporation (CDC) now owns 100% of AC Power, the government's 50% partner in GPL, having reached agreement recently with ESB International (ESBI) of Ire-land for it to withdraw from their 80/20 partnership. A government source said ESBI has also agreed to retire from the management of GPL. According to the proposal put to the government by CDC, ESBI is to be paid US$1.2M to retire from the partnership and management contract as part of unpaid fees and this would have to be factored into the GPL rate base.
The CDC recently reorganised its power investments, shifting them from a division within the corporation in the UK to a subsidiary in Hous-ton, USA - CDC Globeleq. It hired Bob Hart of Hart Energy International to head that operation and the negotiations with ESBI came after this reorganisation.
The proposed change in GPL's management structure includes a shift away from the costly management contract to individual managers being hired. CDC would be allowed to hire about four managers directly and the others are to be taken on by GPL. Managers would earn salaries instead of fees and it is expected that this would save about US$1M annually from the current management contract fee of US$3.6M, a senior government official said. This is because in a management contract, profit can be built in. In the case of individual managers, it is clear what salaries are payable.
"Generally, the new arrangement is such that we will know what we are getting and what we are paying for," one government source said. Before December, some 16 expatriates filled top positions within GPL and it was intended that this would be reduced as the years went by. The number of overall positions would also be less.
The US$3.6M management contract has been sharply criticised since it was argued that one of the responsibilities of the new owners was to provide their management expertise.
Prime Minister Sam Hinds, with responsibility for the electricity sector, on Tuesday confirmed that GPL's poor performance has led to the shareholders in the past six months negotiating amendments "to salvage the situation and arrive at a situation which is more viable and sustainable for GPL."
"AC Power in December had put to the government side its thoughts which are pretty comprehensive on resolving the issue and the government has a team of persons studying those proposals. This team will negotiate with AC Power to arrive at a set of adjustments for the agreements (entered into with CDC/ESBI in October 1999)," Hinds told Stabroek News. Sources say the chairman of the team is Housing and Water Minister, Shaik Baksh and the other members are Trade Minister, Manzoor Nadir, government's directors on GPL - Winston Brassing-ton and Ronald Alli, and electricity sector advisor to Hinds, Maxine Nestor.
There has been a public outcry over the inability of the current managers of GPL to reduce the technical and commercial losses as had been agreed to in the management contract while the company keeps increasing tariffs. The prevailing argument is that if the technical and commercial losses had been cut, there would have been no need to raise tariffs by 14% in 2002 as the savings would have met GPL's shortfall in revenue. Tariffs are raised to meet the shortfall in revenue in the preceding year.
Stabroek News understands that consumers are faced with a further 15% hike in tariffs from the start of next month. GPL is scheduled to file for this rate increase by January 28th when it produces its interim return certificates to show that it needs to recoup this sum to cover its expenditure in 2002.
Hinds' position on GPL's performance is that it has been "poor" and that the company has found itself in a difficult financial position. However, the Prime Minister was reluctant to speak on the details of the proposal by CDC or the positions of the government. But this newspaper has learnt that CDC has given formal sanction to no dividends being paid over the next three to four years to help stabilise costs within the company. Initially, only the government had agreed to forego dividends in the start up period to keep costs down but now the CDC has agreed to do the same. The investment by AC Power has not yielded the 23% rate of return guaranteed in its contract.
Hinds also expects that very shortly the two sides would arrive at a revamped package to be promptly implemented as GPL faces rising costs but is falling behind in revenue.
On the other hand, the source said there is need for greater integration in the company with managers and staff working as a single unit. There is mounting concern about the level of corruption associated with the transmission of electricity and thefts are believed to be widespread.
In October 1999, AC Power agreed to invest US$23.45M into the new GPL in exchange for 50% equity and control of the management. To date, all the equity has been paid over but US$3.45M remains in the escrow account as some issues are still to be sorted out. Sources say that CDC/ESBI had issued instructions not to pay the final instalment due on October 1 last year because it believed that the government had not delivered on its promise to guarantee rate increases.
Of the US$20M injected into the company, US$14M was used to liquidate debts of the corporation. GPL needs additional investment but sources say a more pressing need is to reduce the commercial and line losses so as to stabilise the supply and cost of power to consumers.
Stabroek News was told that the CDC has indicated that it would like to have the issues resolved by the end of the month or it would have to consider going to arbitration.
