CDC ready to sell GPL share for $1
'Investing in Guyana is not for the faint of heart,' says official
By Gitanjali Singh
Stabroek News
March 13, 2003
CDC Globeleq says the 11th hour has passed in negotiations with the government and it is offering its shares in GPL as part of any bona fide offer for the nominal sum of US$1.
Head of CDC Globeleq investment in Guyana, St Lucia and Dominica, West Griffin says even if the arbitration panel were to rule against AC Power and the outstanding US$3.45M equity had to be brought into GPL, the firm would not stay, as the investment is high risk with very low returns.
Griffin says CDC Globeleq's decision to invest in the emerging parts of the emerging markets is the major reason and this means that Guyana, St Lucia and Dominica - the latter two profitable utilities - would be put on the market with Guyana sooner than the others.
The only way CDC Globeleq would consider staying on in Guyana for the long haul, Griffin says, would be if it reaches agreement in a matter of days with the government to restructure GPL into an economically viable enterprise but he is not optimistic about this.
"I am not optimistic that we will reach agreement at this stage. We are well past the eleventh hour and we are trying one last time to arrive at agreement with the government." And even if such an agreement were reached CDC would entertain proposals to inject equity into the firm and an eventual sale of its shares.
Griffin says the cost of turning around GPL rises with each passing day and the risk of being successful in completing the turn-around is increasing substantially as the facilities fall further and further behind on maintenance.
He points out that by the time a restructured agreement is implemented for GPL, the firm would need an additional US$5M over and above the current level of required financing to pay for fuel and to meet minimum operating costs. The firm would also need to find another US$6-7M for capital expenditure to keep the company afloat, as it is way behind on preventative maintenance because of cash flow difficulties since 2002. GPL as a result has been eating away at the cushion in the life of the machines and if any engine were to be lost, load shedding would increase.
Murray Rogers, who heads the Dominica Electricity Company, estimates that it would take six to 12 months once an agreement is reached to go through all of the engines and have these in working order to allow for an acceptable level of risk on the technical side.
CDC Globeleq had expected to replace the GPL managers by June and has not yet recruited a new management team to replace the ESBI managers because of the lack of an agreement with the government. The longer the talks drag out, the less time there would be for a smooth transition in management. With the extreme pressure on financing, Griffin sees the current management team leaving in a matter of weeks with no new managers identified to take over.
CDC had initially budgeted to bring in US$1M into GPL in additional funds when it began talks with the government in August of 2002 to restructure the company but the figure has now reached $6.5M as a result of the increasing costs associated with a delay in reaching agreement.
CDC now has on the cards to bring in a total of US$9.6M in financing for GPL, which, with additional equity from the government, would be used as matching funds to secure the US$20M loan from the European Investment Bank. This would have been invested in a three-year programme to cut commercial losses significantly. The efficiency savings, which could result, would allow for surplus funds to be ploughed into curbing technical losses.
Griffin says CDC Globeleq has undertaken to reduce its return on its preferred shares in GPL from 20% per annum to zero if necessary and to reduce its allowable rate of return on the rate base from 23% to 19% to keep rate increases in 2004 to 2003 levels (excluding the cost of fuel). These concessions in effect would realise a return on equity of less than 15% before tax for CDC Globeleq but in effect no returns for a further three years on its investment in Guyana. This means that for a total of six years and on a total investment of US$29.7M, the firm would not have earned any.
Griffin says CDC Globeleq is aware and is sympathetic to the plight faced by Guyanese consumers and that is why it is offering these concessions. He anticipates that with the efficiency savings, rates would be reduced from 2005.
Griffin and Rogers were in Guyana on Monday for talks with the government on eight of the outstanding issues to allow for an agreement. Another marked-up version of the December proposals is expected from the government by the end of the week.
Rogers said the discussions were productive but the real test of this would be in the written positions of the government.
Griffin has set a two-week deadline on reaching agreement before CDC gives up totally on Guyana. This time-frame would coincide with an anticipated ruling from the arbitration panel on the disputed US$3.45M equity.
"The risks associated with investing in GPL make it less attractive for CDC to invest further funds than walking away," Griffin says and Murray argues that there is no "giant win" for CDC in signing a revised deal with the government as significant investment is required and a lot of hard work needed to turn GPL around.
Murray says CDC Globeleq regards the US$20M in equity injected into GPL so far as a sunk cost in GPL and if it has to bring in the US$3.45M, this would also be considered a sunk cost at some point because of the prospects of GPL and the inevitable walk away of CDC Globeleq from GPL.
"We do not feel welcome in Guyana. Investing in Guyana is not for the faint of heart," Griffin says in response to how the firm views the investment climate in Guyana.
Griffin explains further that if by next weekend no agreement is reached with the government, there would be further blackouts, as funds are required for fuel.
"AC Power would be presented with a choice of buying fuel or paying managers and we would chose to buy fuel and not pay the managers. We would then ask for AC Power to be released from its contract and to let the managers step down," Griffin says.
Under such a scenario, AC Power in the form of CDC Globeleq would manage the company as it is obligated to until it is released from its contract with the government. Griffin says the firm has offered to hand over its shares for US$1 to the government as well as management of GPL but the government is not responding.
CDC Globeleq, Griffin says, wants to ensure that there are no disruptions and to allow for a reasonable transition in management, needs the new managers identified.
Asked what he would say to any investor desirous of investing in Guyana following CDC and ESBI experience, Griffin says they would need to understand the risks. Rogers' position is that the risks of investing in Guyana are higher than in any other place in the world and a new investor would need to understand those risks.
Having written off its US$20M invested in GPL, Griffin says the company has a hard time justifying to itself a further investment in GPL because of the risks.
"AC Power does not consider the turnaround to be a good economic investment considering only the US$9.7M to be invested. AC Power is receptive to offers to purchase its shares from anyone in Guyana or elsewhere who makes a bona fide offer," Griffin says. The only significant criterion here would be for the government to allow CDC to sell its shares.
"Any offer of one US$ or more, excluding the results of the arbitration will be considered," Griffin says. He asks that offers be made via email to West Griffin at e-mail address wgriffin@energy-asset-management.com. The investor's name, phone number and address should be included along with their offer price under two scenarios; AC Power wins the arbitration and the US$3.45M is not invested and AC Power loses the arbitration and has to invest the US$3.45M.
Even if CDC Globeleq should reach agreement with the government, the firm would be keen to partner with person(s) interested in injecting equity into GPL and eventually sell its stake out to that interest, Griffin indicates.
The challenges that immediately confront GPL would be implementing a new billing system, a new accounting system and installing new meters countrywide to stem commercial losses of electricity. Twenty five percent of the system losses are on the commercial side as a result of defective metering and thefts. Eighteen percent is as a result of technical deficiencies in the system.
If agreement were reached between the government and CDC, certain obligations would have to be met including the implementation of rates, negotiating acceptable terms of repayment with creditors of the outstanding US$7M debt among other issues.
Griffin indicates that one of the greatest challenges confronting GPL now, apart from securing fuel and paying its bills is getting meter readers to cover certain areas due to security concerns.
"Recently, one contractor hired to perform disconnections was stabbed while performing his duties," Griffin notes and he says given such challenges, the turn around of GPL would require a concerted effort of employees, customers and shareholders.
