CDC dangles US6.25M investment but conditions apply
By Gitanjali Singh
Stabroek News
March 9, 2003
The government, in working to save its joint-venture operation with CDC Globeleq in GPL, has eight hurdles to cross before the investor can bring in US$9.7M to recapitalise the company and stem the chronic system losses.
The hurdles cover revocation of the Public Utilities Commission (PUC) $1.3B compensation order and a cap on future penalties; agreement on future management fees and structure; providing incentives for employees; reducing the management’s performance targets; agreement on collections on behalf of the old GEC; the need for further government equity in GPL; changing the tariff setting mechanism and establishing a timeframe for new equity injection.
CDC Globeleq, which now wholly owns Americas and Caribbean (AC) Power with whom the government entered a joint venture for Guyana Power and Light (GPL), is prepared to walk from the investment. However, the government in considering its options is obviously worried about its ability to attract another investor for the utility as well as the damage to Guyana’s investment image should CDC Globeleq walk.
Time is not on the government’s side as it deliberates on measures to resolve the outstanding issues. GPL had put in a power rationing system starting yesterday, because of fuel shortages, although the government has now committed to paying for the company’s fuel needs thus avoiding a complete shutdown in nine days.
“...We have to find a way of solving this and I am going to get much more involved in it over the next few days,” President Bharrat Jagdeo said on Friday as he commented on the negotiations with CDC Globeleq and the blackout situation.
“We have to find an outcome that would make sure we don’t have more blackouts, and an outcome that would eventually see some efficiency... in this company. Any new arrangement will have to do a number of things: if it has a temporary increase in tariffs, it must have a potential for reducing the tariff once the fuel rate comes down, because the fuel would have added tremendously to the increase. But there must be enough capital to deal with the line loss and the commercial loss,” the President said.
Wes Griffin, head of CDC Globeleq investment in Guyana, told Stabroek News on Friday that unless the key issues were addressed to allow GPL to be economically viable, AC Power would not invest further funds.
“If the arbitration panel goes against AC Power, the US$3.45M in question [dispute] will be invested in GPL. However, that will not be sufficient to turn around the company, as there are certain fundamental flaws and other issues that must be addressed. Unless the key issues are addressed to make GPL an economically viable enterprise, AC Power will not invest further funds in GPL other than that which it is legally committed to invest.”
Griffin confirmed that CDC Globeleq had discussed with the government informally on a number of occasions the firm’s willingness to walk from the investment in Guyana once the government stopped haggling over the US$3.45M outstanding tranche of the US$23.45M equity investment.
“While it would be subject to final internal approvals, I am confident that if the government of Guyana were to stop haggling over the US$3.45M and sign releases allowing AC Power to walk away, we would do so and hand over our shares to the Government of Guyana,” Griffin said.
He said the government had not pursued this option seriously and rather, had been hoping to reach a resolution with CDC Globeleq to allow it to move forward with the restructuring of GPL.
“In that regard, AC Power has indicated a willingness to support the investment of an additional US$9.7M (including the disputed US$3.45M) in GPL, replace senior management, move to a cost plus contract (for managers), embark on a programme targeted to reduce commercial losses and to reduce the return on the preferred shares in 2004, down to zero if necessary, to minimise any tariff increase in 2004 beyond that which is required in 2003,” Griffin said.
The negotiations have not concluded, as Cabinet Secretary, Dr Roger Luncheon indicated at his last media briefing but have rather stalemated.
In a letter to Prime Minister Sam Hinds on Wednesday, CDC Globeleq outlined the eight areas, which remain unresolved after it received the government’s black lined version of its December proposals to restructure the company.
Stabroek News was told the first and major issue listed was the revocation of the PUC order and a capping of future orders by the utility watchdog as well as a guarantee against any litigation against the company, which could prevent higher rates from being effected. The government has agreed to the capping of the fines but not to interfering in the judicial process and is reported to be looking at options on how to close this gap should the court uphold the PUC order.
The second issue is the disagreement over future management fees and the management structure. Whilst CDC Globeleq wants a cost plus arrangement, the government wants the management fee capped at US$1.5M per annum. The investor argues that it needs some incentive, as it would not be getting any returns from its investment in the current financial state of the company.
CDC Globeleq also wants an incentive based fee arrangement for managers plus employees but the government is not amenable to this.
The investor firm wants the various performance targets, including that for technical and commercial losses relaxed considerably but the government also does not agree.
On the issue of collections for the old GEC, the government wants more time to consider the issue of what was owing to GEC, what was collected and what was paid. GPL has collected US$2M and has paid over some but not all. CDC Globeleq is saying that the government cannot take forever to decide on this issue.
CDC Globeleq has also taken the position that for it to bring in more equity, the government has to match it to retain its 50% stake in the enterprise. Hence, if it brings in an additional US$6.5M in equity, the government needs to match this in cash or kind. It has suggested that the government use the US$2M payable to the old GEC as a cash payment and the other US$4.5M could be offset by other transactions. The government has not sanctioned this.
The investor further wants the tariff mechanism amended to allow for a sufficient level of cash flow to make the operations of GPL sustainable and to allow the firm to be able to repay and service debt. It has offered to reduce its rate of return from 23% to 19% to allow for enough cash to be generated allowing GPL to raise debt. However, the government has not agreed to this.
The final outstanding issue is for there to be an agreement in principle on the restructuring and a timeframe established to allow for the necessary actions required to take place before the total US$9.7M in equity will be injected. The government, however, wants the money brought in up front and CDC Globeleq objects to this.
The matter is expected to engage the intense focus of the cabinet in the next few days, as a decision is needed urgently to bridge the gaps and put GPL on an even keel.
However, there may be a requirement of the government seeking short-term financing arrangement for GPL as the matter before Justice Dawn Gregory Barnes blocking the interim rates have not been heard. That matter is returnable on March 17th. GPL lawyers have moved to have the matter struck out and Anil Nandlall; lawyer for consumer advocate, Raymond Gaskin is to file a reply.
