The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Water & Sewerage Corporation was unable to hold Consolidated Water accountable for “numerous contractual breaches” because it owed the BISX-listed firm more than $8 million in defaulted payments.

An internal Water & Sewerage Corporation report on the 20-year Windsor water plant supply contract reveals that its inability to make timely payments to Consolidated Water “created a contractual imbalance” that favoured the company.

The report, obtained by Tribune Business, discloses that the Corporation was left with “weakened negotiating power” when it came to Consolidated Water’s alleged failure to obtain performance bonds to guarantee Windsor’s operations - as required by their contract

The BISX-listed company, as previously revealed by this newspaper, used the ‘performance bond’ issue for negotiating leverage - promising to obtain one once the Water & Sewerage Corporation paid its past-due debts running into millions of dollars.

And Consolidated Water also charged the Corporation interest on those late payments - something the latter agreed to pay, and which ultimately ended up costing the Bahamian taxpayer more via government subsidies.

The company, though, would likely argue that it was merely taking prudent action to safeguard its own interests, given concerns over whether the Water & Sewerage Corporation would make good on its debts.

Referring to Windsor’s operator as Waterfields, which became Consolidated Water’s Bahamian subsidiary after the latter acquired it in 2003, the report said: “The Corporation engaged in a contractual obligation bartering system with Waterfields, in favour of Waterfields, as a result of the Corporation’s late and partial payments increasingly in arrears.

“The inability of the Corporation to make timely payments against invoices had, over time, significantly diminished the ‘contractual teeth’ of the Corporation, thus leading to compromises in essential elements of the contract.

“Despite these challenges, it was of paramount importance that securities and insurances mandated in the contract between the Corporation and external entities were logged and tracked by Water & Sewerage Corporation staff other than the day-to-day Water & Sewerage Corporation operations contract administrators.”

The internal Water & Sewerage Corporation report disclosed that Consolidated Water warned, in March 2006, that its failure to pay $2.5 million for water supplied would delay timely completion of the much larger Blue Hills reverse osmosis plant.

And in July 2008, Consolidated Water issued a default notice to the Water & Sewerage Corporation, noting that it had failed for eight months to develop a payment plan to deal with $8.033 million owed to the BISX-listed company.

“There appeared to be a two-fold penalty applied against the Corporation in response to its inability to pay in a timely manner,” the internal Water & Sewerage Corporation document revealed.

“One such penalty was the breach of contractual obligation by Waterfields for the provision of performance securities. It was noted during interviews with Water & Sewerage Corporation executive management that the securities were less than the total arrears, and hence on this argument Waterfields refused to comply with that portion of the contract.

“The second penalty was the application of interest charges to the Corporation for payments in arrears, which the Corporation eventually agreed to pay.

“The weakening negotiation power created a contractual imbalance that may be said to have tempered Water & Sewerage Corporation decisions against any other contractual default of Waterfields.”

The report added that Consolidated Water had failed to provide it with documents showing the history of insurance coverage for the Windsor plant, despite being asked to do so.

And, while copies of a $2.076 million guarantee from the Royal Bank of Canada, and a $1.911 million stand-by credit letter, were submitted to the Corporation, the report said there was no evidence supplied to show these were renewed.

“Continued flexibility was exercised in the management of performance securities and insurance agreements necessary to protect the interest of the Corporation against default,” the internal Corporation report said.

“In the latter half of the desalinated water delivery period, such securities were expressly refused due to the Corporation’s $8 million payment default.

“The water supply dilemma faced by the Corporation, coupled with the Corporation’s payment arrears, constrained the Corporation’s ability to take assertive action against Waterfields for the numerous contractual breaches.”

The internal Water & Sewerage Corporation report, produced earlier this year in anticipation of the 20-year Windsor contract coming to an end, also revealed that Waterfields/Consolidated Water breached an obligation to put the plant’s diesel fuel supply out to tender every three years.

“Waterfields did not comply with the requisite competitive bidding procedure for the diesel fuel supply contract throughout the project life,” the report said.

“It selected the diesel fuel supplier and negotiated 30-day credit terms with the full cost of diesel absorbed by the Corporation.”

The report said Article 6.6 of the Windsor contract called for the long-term diesel fuel supply contract to last for three years, and then be subject to competitive bidding at the same, regular intervals.

The initial contract with ESSO included a penalty waiver for purchases falling below 700,000 US gallons per year, but no lower than 550,000 gallons per year.

It also included a 30-day credit facility, after which Esso extended credit at a rate of 1.5 per cent per month or 18 per cent per annum. The contract term was originally proposed at five years, with either party able to give three months notice to renegotiate price or the contract terms.

“The Corporation approved the initial contract and questioned the apparent lack of competitiveness of the bid,” the confidential report said.

“No documentary evidence was found to suggest that Waterfields had engaged a competitive bidding process at the start of the contract. In addition, no correspondence or approvals were found to suggest that Waterfields solicited competitive bids for the supply for diesel fuel to the plant in subsequent years.”

Going forward, the internal report urged the Corporation to “develop appropriate administrative and operational separation of responsibilities to control the emerging power shift toward Consolidated Water Company Bahamas”.

And it also called for future contracts between the Water & Sewerage Corporation and private sector water suppliers to include clauses referring disputes to arbitration, rather than going through the courts.

“The preservation of the long-term relationships between the Corporation and any major water suppliers should, however, take advantage of alternative dispute resolution, particularly negotiation and mediation proceedings,” the internal report said.

“The Chartered Institute of Arbitrators, in conjunction with the Bahamas Bar Association and the Bahamas Ministry of Finance, have been working aggressively to establish the Bahamas as an international seat of arbitration.

“Future contracts should contain articles that outline a system and a preferred institution to provide independent dispute resolution services.”