Private investors ‘hungry’ for slice of Amaila action - Local, regional investors cite ‘soundness of project’ & prevailing economic conditions as reasons behind eagerness to cash in
Written by Imran Khalil, Thursday, 08 August 2013 23:03, Source - Guyana Chronicle
LOCAL and regional private investors are hungry for a slice of a project like the Amaila Falls Hydropower Project (AFHP), say top private sector officials.
Artist’s impression of Amaila Falls Hydropower Facility
This sentiment appears to contradict charges by the Opposition parties that the private sector, which has been a vocal proponent of the project, was not willing to “put its money where its mouth is.”
Sithe Global, a subsidiary of the powerful US-based Blackstone Group, is the only private investor in the project. The Guyana Chronicle was unable to ascertain whether consideration was given to include other private investors in the venture.
“If shares were offered [along] with a proper prospectus, for Amaila Falls Hydropower Inc. (AFHI) which is the Special Purpose Vehicle set up to generate hydropower, inviting investment into that company investors would definitely come on-board,” Chairman of the Private Sector Commission, Ronald Webster, told this newspaper.
| ‘If shares were offered [along] with a proper prospectus, for Amaila Falls Hydropower Inc. (AFHI) which is the Special Purpose Vehicle set up to generate hydropower, inviting investment into that company investors would definitely come on-board.’ - Chairman of the Private Sector Commission, Ronald Webster |
Ronald Webster
A high-ranking financier with a top local financial institution, which brokers investment deals for wealthy clients, concurs, saying that such shares will “definitely be over-subscribed”, particularly by cash-flush institutional investors from the Caribbean. He posits, though, that institutional investors are particularly “rigid” with regards to transparency requirements.
The Amaila Falls
“If any country in the Caribbean should [already] have had a hydro plant, it should be Guyana,” the financier opines, pointing out that the Dominican Republic, which has much smaller rivers than Guyana, already has several hydropower plants, at least one of which was financed by a consortium of private Caribbean investors put together by a Trinidad-based merchant bank.
Most of the officials contacted earlier this week for this piece requested anonymity due to the heightened political sensitivity of the Hydropower Project.
Officials cite the “soundness of the project” itself, and prevailing economic conditions as reasons behind investor eagerness to cash in on the Project.
ECONOMIC CONDITIONS
The financier indicates that as a result of the economic headwinds buffeting Caricom, investment opportunities have dried up, leaving investors with large cash reserves and nowhere to put them.
“Well, you can probably put it in the bank and get a one percent [rate of interest on the deposit],” he quips.
He notes that the only significant investment opportunity of recent arose when the Trinidad-based First Citizens Bank held an Initial Public Offering (IPO) of shares during the course of the Bank’s privatisation, and he claims that the shares on offer were “oversubscribed”.
The financier notes that the pension schemes and mutual funds in Trinidad are bloated with cash. Suriname and Guyana, he adds, also face excess liquidity in their financial systems. These three countries have benefited handsomely from a commodities boom that has made for enviable balance sheets.
To top it off, he indicates that most regional investors have very little exposure to Guyana, and as such would welcome the chance to diversify their income base.
RATE OF RETURN
When appraising a project, investors consider the rate of return on their investments, as well as cash flows.
“The rate of return has to be competitive to attract investors with high net worth, because people go to them all the time [asking them to invest in projects],” the financier says.
Lead investor, Sithe Global is expected to earn a 19 percent rate of return on its sixty percent equity contribution to the project. This is an attractive rate, investors say, with the private sector representative noting that this is not an unusual figure “since power generation usually [yields] a high rate of return.” However, according to Prime Minister Samuel Hinds, government’s forty percent stake in the company does not earn any rate of return as the administration has decided to forego it in order to reduce capital costs, and keep eventual tariffs low.
The financier suggests, too, that even the issuance by AFHI of bonds at a rate of 8.5 percent, which is reportedly the interest rate AFHI is paying on the US$500.7 million loan extended it by the China Exim Bank, would be enough to send investors into a frenzy.
That rate, he says, stacks up favourably against the rates bondholders receive on debt issued by Caribbean governments. Checks by this publication revealed that rates on bonds in the Caricom region ranged from 4 to 8 percent.
Investors would also favour Amaila-issued bonds as they are US-dollar dominated, the financier suggests. He cites the Barbados National Insurance Scheme’s purchase of sixteen percent of a recent Bajan public debt issue as evidence of regional investor appetite for debt
Some observers worry that borrowing from the China Exim Bank unduly requires that the engineering, procurement and construction (EPC) contract be issued to a Chinese contractor. The EPC contract was awarded to China Railway Engineering Corporation at the conclusion of, what project officials say was, a competitive bidding process involving three Chinese contractors, and one each from India and Italy.
SURE BET
Private investors would be drawn, too, by the “high probability of getting back their money” due to the secure cash flows into a power generating company.
Electricity is “essential” to any economy, says the financier, and when compared to other investments, for example in the hospitality sector where demand is uncertain, an investment in the power sector is a sure bet.
A power purchase agreement (PPA) has been signed between the power generator, AFHI and the state-owned utility company, Guyana Power and Light (GPL) Inc., obliging the latter to purchase the electricity produced by the former. Notwithstanding that, Webster observes that all the power generated by Amaila would be sold anyway since the demand for electricity by firms and households is increasing and would soon match the supply capacity of the hydropower facility.
The financier, meanwhile, adds that investors in a power generating company are given “full priority or lien on the revenue” stream of the utility company to ensure payment for the power sold. In the Amaila case, tariffs collected by GPL are held in escrow by Republic Bank for payment to AFHI.
In addition the government has also provided, what has been described by project officials as, a “guaranty backstop” that mandates the administration to cover GPL’s obligations should the state-owned utility fail to meet its payments to AFHI.
Last Updated on Thursday, 08 August 2013 23:05