Government invites US$30M bid for 50% stake in GPL
Stabroek News
April 16, 2004
The government is inviting the formation of a consortium of widely held financial institutions in Guyana to take up a 50% equity position in the power company at a "bargain" price of US$30M payable over two years. The government estimates its equity in GPL at US$45M.
An offering document circulated to stakeholders including pension funds, fund managers, commercial banks, insurance companies and the National Insurance Scheme, dub the offer a "relatively safe blue-chip investment" guaranteeing a minimum return of treasury bill plus 3% to a maximum of 15% per annum.
The government offers to amend the Guyana Power and Light (GPL) licence to minimise the effects of lag in costs on revenues - to treat property taxes as an allowable expense; for previous year costs to be adjusted for inflation for rate setting purposes; and for there to be monthly instead of quarterly adjustments to basic year tariffs to allow for actual fuel costs to be passed on to consumers promptly. The former managers of GPL had complained of the negative effect on revenue of the lag of actual costs in the rate setting formula. The formula used the previous year's costs while the company was spending at current prices. Fuel surcharges were also applied at the end of each quarter.
The government is also offering to have the performance targets transferred from the Operating Standards and Performance Targets (OSPT) to the rolling five-year development and expansion (D&E) plan, including loss reduction targets. This would remove the risk of penalty from the Public Utilities Commission for non-compliance with performance targets which was a key issue in the rate setting formula. There is a cap on fines for non-compliance with targets under the D&E of G$20M. However, failure to meet the performance targets under the OSPT had attracted a $7B fine from the PUC (a refund for consumers) still embroiled in a court challenge at the appeal stage.
The government is also willing to forego dividends for 10 years to minimise the impact on tariffs, but this obligation will be borne in the rate setting formula.
However, the government wants to be the one to name the chairman of the board of the company from three names submitted by the consortium and for an equal number of directors to be had by each side. It sees no need for a management agreement with the consortium. It was hoping to see a memorandum on the establishment of such a consortium yesterday and to have an MOU between the government and this consortium by May 31, working towards having a new arrangement in place and operational by December 1.
"As Guyana develops and graduates from concessionary loans and grants, it is envisaged that more and more of its development would be financed from direct private investment at commercial rates and government's revenue. Investment in GPL provides an excellent opportunity for (i) Guyanese financial institutions to make their first experiences in syndicating a significant direct equity investment not mediated through bank loans, and (ii) a relatively safe blue-chip investment earning more than the treasury and bank deposit rate," the offer said.
The government retook control of GPL in April 2003 for US$1 after AC Power, its joint venture partner, walked from the deal amidst growing public dissent over its tenure in the form of rising tariffs. AC Power had injected US$20M into the operation but had also taken out a substantial amount in management fees since 1999.
GPL turned a profit in 2003 of $77M after losses of $119M in 2001 and $149M in 2000. Gross generation fell by five per cent last year but operating revenues increased by 7% to reach $13 billion of which the generation cost was 60%, an increase of 12%. Sales fell by seven per cent while technical and commercial losses increased by one per cent. The average selling price per kilowatt-hour moved from $19.97 in 2002 to $44.20 in 2003, a 121% increase.
The government sees an equity investment of US$30M in three tranches of US$10M opening the door to US$150M in debt financing for the firm once it could justify a 2:1 debt to equity ratio. It could also reactivate the European Investment Bank loan of 20 million Euros. The offer document says the Inter American Development Bank is willing to redistribute the loan for the rural electrification programme for US$10.2M to go to cut commercial losses.
The offer speaks of the need for about 10 megawatts of new generation each year, still projects for a public offering (in another ten years) with a possible waiver of capital gains tax in such a transaction. The document skimmed through issues such as long-term loss reduction targets (12%), the need for tariff rebalancing, and the rural electrification programme.
"This invitation presents a challenge, an opportunity, a first step, a sheltered learning experience for managers of our local money on whose shoulders would lie responsibility to motivate, accumulate and invest our savings directly as equity in the infrastructure, industries and services we need," the document said.