‘No guarantee’ request for BEC debt raises eyebrows
Guardian Business Editor
Published: Oct 16, 2013
The government has raised eyebrows among those involved in the process to take over the Bahamas Electricity Corporation’s (BEC’s) generation and transmission and distribution responsibilities, by demanding bidders be capable of handling BEC’s $200 million-plus debt without a government guarantee, Guardian Business understands.
In addition, this paper can confirm that the government not only intends to wholly-own the transmission and distribution company, but also to be the “initial majority owner” of the generation company that will be created from BEC and for which it is currently soliciting companies to sign management contracts for.
Guardian Business understands that these two clauses - relating to the ownership and debt-related responsibilities of the winning bidders in particular - have ruffled some feathers among potential bidders to execute contracts with the government in relation to the two entities, as the government pushes ahead with its BEC reform initiative which is intended to reduce costs to consumers.
It is understood that these details were recently made known in a “pricing proposal” document provided to the six companies participating in the current stage of the reform process, with this document stating that the government intends for the restructuring and refinancing of current BEC debt and other long term liabilities by either NewCo (the transmission and distribution company) and JVCo (the generation company), or JVCo alone, “in a manner which ensures that there is no need for a government guarantee to support the liabilities”.
If it could achieve this, this debt would no longer appear as a contingent liability for the government - a favorable outcome for the government given it would allow the government’s debt to GDP ratio, a major concern for multilateral financial institutions and credit ratings agencies who are watching this country’s economy, to fall by a not insignificant amount.
However, some observers have suggested that the demand that companies bidding take over responsibility for all BEC debt and liabilities and require no government guarantee would essentially exclude most potential bidders from the process.
Confirmation that the generation company (JVCo) is to be “initially majority owned” by the government has surprised some industry players who had expected the joint venture the government had proposed would see it take a minority stake in the entity, Guardian Business understands.
Informed observers have suggested it would create some nervousness among potential bidders, who would be hoping to ensure that their investment is not placed at risk of government interference.
BEC General Manager, Kevin Basden, only recently stated at an energy conference held at the Atlantis resort on Paradise Island that the government’s “social obligations” to keep customers’ electricity switched on despite non-payment, for example, have been a factor in the high costs suffered by the financially-strapped entity.
Guardian Business understands that a pricing proposal document provided to potential bidders suggests that JVCo’s capitalization will “change over time”, including with an initial public offering (IPO) taking place at “an agreed time”.
Potential bidders have been asked to submit pricing proposals by November 15th in order to remain with a chance of obtaining management contracts for either NewCo (the T&D company) or JVCo (the generation company).
In that document it is suggested that the government intends to “transfer all of the existing generation assets into JVCo” to account for its equity stake in the company, another point which is likely to generate some concerns given questions over to what extent the new company would rely on existing generation assets to create power, as opposed to having to install new generation, and therefore, the ultimate value of these assets.
Part of JVCo’s contractual obligation is to agree to installing a certain amount of new generation on New Providence, and there are expectations that this will be part and parcel of achieving many of the cost efficiencies the government is demanding.
Meanwhile, Guardian Business understands the generation company is also being made responsible not only for the cost of generating power, but for the purchase of fuel for the first three years, and commitments to reducing the cost of this input, which has long formed the major component of BEC’s costs.
This fuel purchase responsibility has been demanded notwithstanding the fact that under the PPA that will be signed with NewCo, the T&D company, they will be asked to provide a “firm price” for the power they will generate.
This suggests that they would have to provide power at the same cost to JVCo, who will distribute it, notwithstanding any fluctuations in fuel price, which it will be their responsibility to absorb.
With respect to the terms of the contracts to be signed with companies to manage NewCo and JVCo, Guardian Business understands that in the case of both the government intends to execute a 10 year contract.
In each case, it is asking for “significant reductions” in costs to consumers to be generated within the first five years, and overall performance to be improved to that of a “world class utility” within the period of the ten year contract.
Would-be bidders for each contract have been informed that the government will measure their performance according to specific metrics, with “significant weighting” placed on the achievement of “immediate cost savings”.
On the generation side, the company to be brought in is being asked to show how it can offer power at a lower cost to customers than the “overall level of estimated cost to the customer” from BEC’s generation of power that is said to stand at 29.4 cents per kilowatt hour. This BEC cost includes generation costs (including staff, maintenance, depreciation and interest) at 6.8 cents/kWh, and fuel costs of 22.6 cents/kWh.
The company taking over management of T&D as the JVCo service provider, will be expected to “beat” a current estimated cost to the customer from the current T&D system of 10.9 cents per kilowatt hour, made up of “T&D costs (including staff, maintenance, depreciation and interest)” at 4.9 cents/kWh and “line losses (technical and non-technical)” which are estimated to stand at six cents/kWh.
Guardian Business understands that each proposal will be reviewed by a selection committee, which will perform a “quantitative evaluation” of each proposal, and engage the bidders in “competitive negotiations” before making recommendations to Cabinet on who to select.
Potential proposers are this week said to be meeting with KPMG and undergoing a BEC management presentation, and also doing BEC site visits, as they gather information that they will need to put forward their proposals by November 15th. By November 29th, the government is anticipated to select its preferred bidders, with negotiations then occurring between November and December 2013.