OFFICE OF THE PRIME MINISTER (OPM).

April 14, 2013.

PRESS RELEASE

Rejection of Proposed Cuts To Electrification - GPL and Amaila Falls

I am astonished by the proposals advanced by the opposition parties to cut the allocations in Budget 2013 that were intended to avoid increases in electricity charges to the 164,000 customers of GPL, and other allocations which were to contribute to the financing and, hence, the realization of the proposed Amaila Falls Hydro-power development.

Allocations to GPL are not grants to the employees, nor to the owner - the State - of GPL but, rather, to the customers of GPL – the public, in general. The budget allocations to GPL, (i) meet the needs created by revenue foregone in keeping tariffs below economic levels, and (ii) provide the necessary investments by the State, as owner of GPL, in extending electrification, and enlarging and upgrading electricity generation and networks. Much of the investment allocations are a ‘passing on’ to GPL of various soft loans and soft monies available to the Government, many of them intended for GPL.

GPL’s prices and costs are not exorbitant. Prices charged, and costs incurred, in providing electricity in Guyana are at about mid-point, or lower than prices and costs in fellow Caricom countries. The generation costs of electricity are driven mainly by the prices for the petroleum products, on which nearly all electricity generation depends.

Development of an appropriate hydro-power site has been steadily more attractive, as petroleum prices have increased. The Amaila Falls Hydro-power development will (i) cut generation cost by half; (ii) over time, reduce foreign exchange costs similarly; (iii) protect electricity-generating costs against the expected, continuing increases in prices of fossil fuels, such as petroleum products.

The above benefits to individual Guyanese citizens and to our economy, as a whole, are threatened by cuts to (i) support for the completion of the Amaila Falls road, in good time, as provided for partly under Electrification, and partly in the Ministry of Works Infrastructure Programme; (ii) expenditures from the GRIF, US$ 80 million (G$ 16 billion) of which would be the State’s equity investment into the Amaila Falls development.
The proposed cuts in the allocations to GPL would stop on-going programmes for institutional strengthening and investments in GPL to reduce losses, improve overall performance and contain costs. The proposed cuts to allocations for the development of Amaila Falls threaten to put back the provision of cheaper electricity by decades.

In the course of the debate in the National Assembly, information was presented which showed:

(i) The suppressed tariffs charged to, and paid by, customers of GPL, were in the lower half of tariffs charged by various electric utilities across Caricom. GPL’s tariffs charged are not high. Over the period 2003 to 2013, tariffs charged have been suppressed by as much as 30 %, with an average of about 16 %.

(ii) Our costs incurred were in the same order. We are all utilizing petroleum products - Diesel and HFO - as primary energy sources, obtained at about the same prices.

(iii) Our calculated economic, commercial prices for the electricity supplied by GPL, were much the same as in many other utilities, and lower than what only a few of the largest customers could provide for themselves through self-generation.

(iv) Firstly, the allocations to GPL meet much of the foregone revenue as a result of the tariffs being kept lower than what GPL needs. The foregone revenue for 2013 is projected at G$ 6.4 billion, whilst the net foregone revenue over the period 2003 to 2013 is G$ 27.9 billion. Much of this could be considered as a fuel subsidy to keep electricity tariffs within easier reach of domestic, commercial and industrial consumers.

(v) Secondly, the allocations from the budget, to GPL, meet the responsibilities of the State, as owner of GPL, to finance upgrades and enlargements of the utility. From 1992 to the present time, the peak demand of the Demerara system has increased from about 33 MW to 87 MW.

Recent investments into GPL, many of them from soft funding available to the Government, exceed G$ 25 billion. These investments include:
(i) The transmission-upgrade, inclusive of seven new sub-stations, three expanded ones, and a submarine cable across the Demerara River

- about G$ 8.4 billion

(ii) A new 26 MW sub-station at Versailles, to be completed by year-end

- about G$ 6.4 billion

(iii) The final conversion in Demerara of 22 MW of generation, and consumers from 50 to 60 cycles

- about G$ 2.4 billion

(iv) The installation of 36 MW of new generation over 2009 to 2011

- about G$ 10 billion

(v) Strengthening metering and the networks so as to counter electricity theft

- about G$ 1 billion;

giving a total of about G$ 28.2 billion in recent investments.

Neither Government nor GPL has been complacent about the challenges faced by GPL, which challenges are reflected for the most part in the large losses (total technical and commercial losses of about 31 %) of electricity generated by GPL, and in poor performance, particularly in the frequency of power interruptions. GPL’s long-term target loss is about 12 %, and the best Caricom figure of about 8 % for Barbados. GPL, in its institutional strengthening programme, has been addressing the high losses and high frequency of interruptions in the electricity supply, with the assistance of experienced and expert persons from the region.

The high technical losses (estimated at about 13 % of 31 %) would require significant investments in upgrades of the network (grid). There is a programme of transmission-upgrade being addressed now – the secondary distribution networks are still to be addressed in a major way.

The commercial losses (estimated at 18 of 31-%) ought not to be. They reflect the large number of ways by which too many past and present employees, and customers of GPL, seek and find ways to pay for less electricity than they actually consume. To reduce the high commercial losses, GPL is utilizing:

- Moral suasion

- Legal force, prosecution, including mandatory jail terms for ‘repeat offenders’

- Investments in ‘hardened’ distribution networks, but this, at its most extreme, raises the investment cost in extending service in a dense urban neighbourhood from an average of about $ 60,000. per household to $ 300,000. per household.
Allocations to GPL, from the budget, are not allocations to the about one thousand employees of GPL and the about 250 employees of contractors, nor to the owner of GPL – the State. These allocations are subsidies to the 164,000 customers, which lower and stabilize the electricity prices which customers are charged.

There has been a recent review of one set of consultants, of which some persons have learnt, which call for an investment into GPL of about US$ 250 million, and the inclusion of a dozen or more top-drawer, very expert and very experienced persons from North America in the Management of GPL. This should be seen for what it really is, that is, like in all activities in our country, GPL is making do with what we have, which is much below prevailing industry-standards in developed countries. It is not the case that the Government is unaware, or complacent on this matter, but apart from finding the investments and the personnel, one must expect, in the first years, additional costs of about G$ 10 billion per year to reward the investments, and more than G$ 0.5 billion per year to recompense the expatriate staff.

The cuts in the expenditure from the GRIF will greatly compromise the Amaila Falls development and, so, frustrate the efforts of the Government to provide Guyanese with a much cheaper source of electricity, protected against raises in the cost of petroleum products. Specifically, the proposed cuts will prevent (i) the completion of the Amaila Falls road in good time, and (ii) the equity investment by the State in the Amaila Falls Development.

The Amaila Falls road is required to be available within three months of full and final closure of all the considerations, agreements and arrangements pertaining to the Amaila Falls Development. The history of this road indicates that it is presenting challenges greater than that for which a number of contractors bargained. Note, though, that all payments have been for work done, calculated on the unit pricing in the contracts. Government has paid Synergy and others only for the work done. This road needs to be completed in good time. Additionally, the Government has committed to provide about US$ 80 million - G$ 16 billion - as equity investment in the Amaila Falls Development. This investment (i) demonstrates the Government’s faith in, and commitment to, making this a successful project, and (ii) will serve to keep costs (and prices to be charged) low, by foregoing for the first period all dividends or other returns on the investment.