THE SITHE GLOBAL PULLOUT : - a double-edged sword

Wednesday, 14 August 2013 23:40, Source

IF taken holistically, the withdrawal of Sithe Global from the Amaila Falls Hydropower Project ought to be construed for what it is: a double-edged sword.

On first thought, the pullout of Sithe, hitherto the project’s lead investor, evokes among the ordinary observer conjectures of an implosion of the Amaila venture as well as wider economic Armageddon.

Indubitably, investors are spooked, to say the least. The decision by Sithe - a subsidiary of global alternative asset manager, the Blackstone Group, no less – to opt out entirely from what could be the country’s largest development project, while citing a debilitating lack of political unanimity, may well add the cap to long spiraling private sector sentiment that the unprecedented parliamentary configuration is most untenable for economic activity.

Meanwhile, on the cooler end of the thought spectrum, Sithe’s exit could be seen as having created a proverbial breathing space: an opportunity for the political stakeholders to mount a tactical retreat from the partisan rancor that characterises the Amaila debate; regroup under a framework of constructive interfacing; and reassess – and if necessary, restructure – the project.

Already, a whiff of compromise hangs strongly in the political atmosphere. After news of the Sithe pullout, President Donald Ramotar, in a measured, conciliatory tone that stood in marked contrast with what might have obtained under his more feisty predecessor, maintained his commitment to engagement with the Leader of the Opposition, Mr. David Granger whose party’s recalcitrance in the legislature prompted the Sithe pullout.

The President has indicated that he is striving to persuade Sithe to reconsider its exit but even for the more optimistic Amaila watchers, qualms continue to fester. The cost of the project’s financing, for one, is said to be set to reduce if only the debt to equity ratio were rebalanced in favour of the latter by offering shares in the project.

With Sithe’s sixty percent stake now seemingly vacant, there is room for this even though government’s forty percent shareholding is off-limits since the administration, in order to keep eventual tariffs low, has chosen to forego returns on its equity contribution.

One commentator intimated that the cost of debt financing, inclusive of interest, lender’s fees and advisory services, and debt political risk insurance, amounts to US$ 391.7 million – 45 percent of the project’s total cost. As this newspaper reported Friday last, there is certainly some regional and local investor appetite for a stake in Amaila. Economists say that local private investment in Amaila is particularly desirable as the returns ideally remain, and are reinvested, in the economy whereas the returns to foreign investments are usually repatriated abroad. However, a top government official close to the project tells this newspaper that “the scale and complexity of this [Amaila] transaction will limit your choices of whom you approach for equity contribution.”

Regardless of the exact number of investors waiting in the wings, to attract any investor, the political gridlock needs to be broken. Sithe’s insistence on political unanimity, even in the face of majority approval in the legislature, is not an unreasonable precondition for its continued involvement in the Amaila Hydropower development. Any investor might well insist on unanimity since by its very nature, a hydropower investment is as long-term as it is large – in Amaila’s case, Sithe depended on a 20-year Power Purchase Agreement (PPA) with a state-owned utility, GPL, to recoup its US$ 158 million investment in the project.

As has been widely reported by now, Sithe’s eventual decision to depart was prompted by its fear that the project could someday be nationalised under a new administration. Though even the government’s most ardent critic would concede (albeit grudgingly) that the People’s Progressive Party/Civic remains the most dominant political entity in the country, Sithe knows as well as anyone that no individual or group is politically invincible. From the Middle East, where entrenched regimes are being violently dismantled, to Venezuela, where the electorally unbeatable Hugo Chavez was speedily taken out of the political equation by natural causes and his party narrowly spared defeat in a subsequent presidential election, political dynamics globally are especially fluid.

Therefore, to ensure that a changing of the guard does not lead to nationalisation or worse, expropriation, Sithe sought Amaila’s endorsement by all political parties in order to legitimise the integrity of their investment in the project and insulate it against a future political force majeure. The emergence of the main opposition party,

A Partnership for National Unity (APNU) as the lone holdout among the political parties must have been especially chilling, in part because the main faction of that Party, the People’s National Congress (PNC), led by the Socialist Forbes Burnham, once helmed an administration which initiated a sweeping wave of nationalisations in the ‘70s and ‘80s.

Even though the PNC, under Desmond Hoyte, initiated free-market reforms in 1989, it is the PPP/C, which came to power in 1992 after winning the first free and fair elections of the country’s post-Independence era, that largely shepherded what came to be described as the first- and second generation economic reforms. Partly because of this, and partly due to APNU’s frequent skirmishes with the private sector, the main Opposition is not especially regarded as being pro-business.

To earn the universal political buy-in that renews investor confidence, however, another major qualm that needs addressing is the apparent lack of an independent assessment of the entire thing, even as numerous studies of it have already been done heretofore. As the Inter-American Development Bank (IDB) gets set to present the latest study – its much anticipated economic, technical and environmental due diligence of the project – commentators charged that the IDB is not necessarily a disinterested party, and continue to clamor for an independent review of the project’s technical and economic viability as well as of the eventual tariff structure the project would lead to.

An independent assessment might rightly be seen as redundant, but could very well be the crucial bolt that could hold together a shaky consensus that would allow the project to go forward.