APNU IS ON SHAKY GROUND

September 15, 2013, By KNews, Filed Under Features / Columnists, Peeping Tom, Source

APNU has shown scant regard for the local private sector. Beginning with the Linden saga when an APNU-controlled region objected to the presence of representatives of the private sector at a meeting called by the President, to a recent exchange between the partnership and the Georgetown Chamber of Commerce and Industry, APNU has found itself at odds with the local private sector.

These incidents would have somewhat soured the relationship between the local private sector and the main opposition grouping, even though both sides have had cordial meetings in between.

It was to be expected that the local private sector, whether as a bloc or disaggregated into their individual associations, would have supported the Amaila Falls Hydroelectric Project. The private sector has always been in the forefront of supporting this project and, given its own business interests, this support was almost automatic.

APNU should have shown a greater appreciation for the fact that the interests of the private sector are tied to this project. This project was not going to compete with domestic investment or to crowd out such investment. On the contrary, the private sector has long argued that the project would stimulate the domestic economy.

APNU, however, having earlier claimed that it lacked the technical expertise to analyze large projects of this nature, found itself under a barrage of criticism after it voted against certain Bills which were seen as necessary to move the project forward. This vote was not a vote per se against hydroelectricity or for that matter Amaila, but it did increase the political risks associated with the project, and for that reason, the developer Sithe Global decided to walk.

Because of this, APNU was subjected to mounting criticisms for its actions, including criticism from the private sector. APNU in turn sought to defend its actions by making arguments which reveal that its case rested on shaky ground and uncertainty.

For example, it said that a case had not been made out that consumers would have benefitted from reduced tariffs. It was not saying definitely that there would be no reduced tariffs; it was saying that a case was not made out. It also said that there was insufficient information about the financial architecture of the project. These criticisms came under fire, because critics of APNU pointed out that it could have all along sought confirmation and information about both concerns.

APNU would have been in a much firmer position if it had simply adopted the position made so often by this newspaper and its very business incisive publisher, Glenn Lall, to wit that the project is overpriced.

It could have also justified its objection by pointing out that the proposed tariff reduction of 40% scaling upwards to 91% in twenty years needed to be reexamined, since this would in itself not provide the degree of cheap energy to make the economy more competitive.

Unfortunately, APNU allowed itself to be rattled by the private sector’s criticism of its vote. Instead of simply treating those criticisms as being a case of a self-serving private sector, APNU took a dig at the sector by suggesting to them that if the hydroelectric project was as good the private sector claims, the local businesses should have been trying to invest in the project. This suggestion was totally unnecessary and drew APNU into a series of exchanges, which saw some of the arguments made by it being annihilated by the young head of the Georgetown Chamber of Commerce.

Those arguments got what they deserved, because they were shakier than APNU’s original objections about financial architecture and non- convincing case about the effects of the project on electricity tariffs.

For example, the claim that the local private sector was too small to invest in a project this size was dismissed on the grounds that the value of national gold output proved otherwise. Assuming that a correlation can be made between this output and investment in the gold sector, APNU ought to appreciate that firstly, it is not just the local private sector that is investing in Guyana’s goldfields.

There is significant foreign direct investment (FDI), including Brazilian investments in the names of Guyanese, that is driving gold output. It should also appreciate that rent- seeking in gold is a far cry from investing in hydroelectricity. Gold is a highly speculative industry and the returns can be extremely high, far higher than the guaranteed rate of return in Amaila.

That aside, there are numerous small, medium and large scale investors in the goldfields. This is the model of investments in the gold industry, but this is not a model that can be transplanted to a hydroelectricity project. You cannot have a situation of thousands of small investors pumping money into the hydroelectric project. It will not get off the ground, especially since we do not have developed financial markets in Guyana.

Many years ago, the Government tried to privatize some state entities by offering blocks of shares for as low as G$10,000. The intention was to allow very small investors a stake in these companies which, even by regional standards, were considered small. The prospectus did not get off the ground since not many persons were interested.

You may be able to attract local investors for an investment the size of the Marriott Hotel, but not for an investment that is in excess of US$850M. That is never going to happen. The local private sector is too small and lacks the expertise to be so involved.

Theoretically, the point can be continuously made that the local private sector should be seeking investments because the level of domestic investment is one of the factors considered by foreign investors when deciding to invest in a country.

However, private sector investments merely signal to FDI that there is money to be made. What is more important is domestic public investment such as infrastructure, which can reduce the costs of investing in a country and increase the returns of specific factors of production.

On a hierarchy of indicators, domestic investments fall right at the bottom tier when it comes to factors that influence FDI. There are other factors that are far more important, such as the level of trade openness, institutional quality, human capital and the cost of this capital, and of course, political stability and political risk.

APNU, therefore, should stop trying to defend the indefensible. It should return to its original position that it lacks the capability to analyze large projects. It should also ask that it be given time to convince itself about the cost of the hydroelectric project and the ensuing effects this will have on final tariffs.