GPL deal failed to address system losses - Gaskin
By Gitanjali Singh
Stabroek News
February 25, 2003
Former chairman of the power company, Ramon Gaskin, says the deal the government struck with AC Power for GPL was bound to collapse as it did not infuse the capital necessary to address huge system-losses.
The government had initially requested the equity investment of US$23.45M up front but later allowed the money to come in over three years in four tranches of US$9M, US$6M, US$5M and then US$3.45M. The last tranche was not released by AC Power and is now the subject of arbitration proceedings.
If the annual management fees of US$3.6M, payable at the start of each quarter, are discounted the actual cash receipts from AC Power over the three years would have been U$5.4M, US$2.4M and US$1.4M respectively. The fees are indexed to inflation in US dollars.
“This left no money for any meaningful investment to be done,” Gaskin asserted in an interview last week. He pointed out that when AC Power took control of GEC, there were no supply problems as there was enough generation capacity to meet demand. What needed to be looked at were the system- losses.
AC Power took control of GEC when it had 48 megawatts of power generated by the Wartsila sets and 20 megawatts of power supplied by the Japanese sets. These sets were all new. The 10 megawatts of mobile Caterpillar sets, which were eventually purchased by GPL, were brought in by GEC as standby power at the time.
Gaskin said only Canefield, Berbice had some problems with generation and this was next on the list for new generation. However, GPL, he said, keeps repairing the Crossleys set there and the old Mirlees Blackstone set at the Garden of Eden. The offering document at the time of privatisation showed that the generation capacity was at 82.7 megawatts when peak demand was 71.9 megawatts.
Gaskin said GPL could be extremely successful with $1B in revenue per month since fuel as a component of expenditure has been decreasing as a percentage of total revenue. Fuel accounted for 47.8% of revenues in 2000, 45.8% in 2001 and 43.7% last year. Total operating costs as a factor of revenue have also been decreasing, accounting for 60.7% of revenues in 2000, 58.9% in 2001 and 57.2% in 2002.
Gaskin says the only reason the firm is not successful is wastage and the drain on the finances by the management fee as well as management’s inability to raise matching funds.
He says the cash flow difficulties now experienced by GPL are as a result of the failure to correct for system- losses; the inability to raise matching funds for investment and AC Power withholding the final US$3.45M tranche of equity. The management team supplied by AC Power is off-track on the system-loss targets by 20 percentage points.
Gaskin does not subscribe to the argument of top manager, John Lynn that the targets were based on flimsy information at hand. He said the chairman of GPL’s board, Adam Hedayat was part of the Sask Power team which spent a year in Guyana conducting due diligence on GEC, and that AC Power did its own due diligence before the deal was inked.
Gaskin said the company had a period of 15 months to settle in (October 1999 to December 2000) and it should have started to impact on the system-losses the following year. However, he noted that by GPL’s own records, the losses have been increasing. GPL’s records showed losses moved from 40% (its own assessment) at the end of 2001 to 42% at the end of 2002. Gaskin cited the government’s offering document on GEC which said 50% of the meters were estimated to be defective and would need to be changed to cut out losses, arguing that the managers had no excuse.
He also queried the government’s statements that GPL was in the red to the tune of $475M at the end of 2002. Gaskin said the firm had sales of $12.2B in 2002 while fuel and total operating expenses accounted for less proportionately.
GPL, Gaskin said, reported a gross profit before administrative expenses of $5.3B. However, Gaskin said management decided to burden the accounts of GPL with $1.139B in bad debts (written off) and therefore sustained a loss. Bad debts written off the previous year were $423M.
“There is absolutely no justification for this,” Gaskin asserted. He pointed out that at the end of 2002 receivables stood at $3.6B and to have written off 30% of this as bad debt is an extremely high amount which impacts on rates. This is because a larger deficit is created on the accounts and has to be filled.
Gaskin pointed out that in 2001, receivables were $2.9B before $423M or 14% was written off and the previous year, $306M was written off. Income per month for the firm is about $1B and the firm has boasted a 94% collection rate.
He argues that the management treatment of bad debts in 2002 was inconsistent with previous years and is unacceptable.
He noted that GPL has been a more efficient collector of money owed to it than the old GEC and in 2001 when three months in receivables were outstanding a smaller amount was written off. But in 2002, when 2 months worth of bills was outstanding, a larger percentage was written off. He argues that the firm would have made a profit if management did not write off that large amount as bad debt.
Gaskin further noted that the company’s cash in hand at the end of the year was $390M and he pointed out that had AC Power not withheld the final tranche of US$3.45M or $662M, the cash in hand would have been over $1 billion.
“The cash flow difficulties have been created by AC Power itself in its refusal to release the US$3.45M.” He also feels the government has erred in agreeing to arbitrate the non-release of this sum as the issue was not one for arbitration. He noted that the agreement said that the rates had to be effectively implemented in accordance with GPL’s licence and this was done. The PUC compensation order against GPL, he said, did not interfere with the implementation of these rates in accordance with GPL’s licence. He said the government should have cited AC Power for its failure to meet the system-loss targets and raise matching funds for investment in the company.
And while Gaskin does not doubt that the rate-setting mechanism is acting against GPL’s cash flow, he says the mechanism is also flawed in that it provides for a return far in excess of 23% of equity.
He noted that at the end of 2002 the company had only injected US$20M into GPL but the formula allowed its return to be calculated at 18% of the rate base of US$70M. When the formula is applied, the recovered sums are expected to yield profits on which dividends are payable. However, no dividends have been paid to date as the firm faces constantly increasing costs but no efficiency- savings. But had the system- losses been cut, the profits would have been substantial, Gaskin asserted.
AC Power also earned $432M on its preference shares which is accruing interest in GPL’s accounts of 20%. AC Power is also entitled to the dividends accruing on the government’s preference shares as the government has agreed to assign this to the company. The consumer advocate said the solution to the current crisis is to send the managers home, freeze the rates, and also send home the investors. He said it would cost GPL far less to hire four international managers to fill the top four positions in the company. He said even with a 25% bonus this would cost the firm US$30,000 per month, a total of US$360,000 per year, a savingsof US$3.24M per annum on the management contract arrangement.
Gaskin said that the company can be reconfigured and debt can be raised locally as there is a lot of excess liquidity in the system. He disagreed with Prime Minister Samuel Hinds that rate increases were inevitable and said if GPL were under the PUC such rates would have to be “just and reasonable”.
