The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

One of New Providence’s two water plants requires an 
“urgent investment” of $3.328 million to maintain its operational efficiency, with any delay potentially creating “an unsafe working environment” for its Bahamian staff.

This warning from the Windsor reverse osmosis plant’s operator was contained in an October 2, 2013, letter sent to Deputy Prime Minister Philip Davis, with the Government yet to resolve the future of a facility with supplies thousands of Water & Sewerage Corporation customers daily.

Rick McTaggart, chief executive of BISX-listed Consolidated Water, appears to be responding to Mr Davis’s “request for options” in resolving the current impasse over who Windsor’s future operator will be.

Consolidated Water’s existing Windsor supply contract came to an end in the summer, but it has remained in place on a month-to-month basis to give the Government time to work out what it wants to do about finding a replacement.

Mr McTaggart’s letter sets out both several ‘options’ for the Government’s consideration and Consolidated Water’s negotiating position, with the BISX-listed reverse osmosis plant operator offering several ‘inducements’ if it gains a new contract for Windsor (see other story on Page 1B).

It offers Mr Davis, and the Water & Sewerage Corporation, two different water pricing options and ‘purchase prices’ for the Windsor plant, setting the ‘base price’ at $5.25 million.

This price is without the $3.328 million worth of upgrades that Consolidated Water says are urgently required at Windsor, and in its proposal, the BISX-listed company adds this to the $5.25 million ‘base’ to create the starting point for any discussions about purchasing the reverse osmosis plant from it.

Consolidated Water’s first option offers the Water & Sewerage Corporation a reduced water purchase price of $5.90 per 1,000 imperial gallons of water supplied by Windsor, with a $1.083 credit for “deferred payment” of its additional capital investment.

Choosing this proposal, though, would mean that while the Water & Sewerage Corporation - and its Bahamian customers - would likely see a drop in water costs, either it or a new Windsor plant operator (if this is the route the Government chooses) would have to pay Consolidated Water a much higher purchase price to take over the facility.

The second option offered by Mr McTaggart is a higher water price of $6.983 per 1,000 imperial gallons of water supplied by Windsor.

This would enable Consolidated Water to recover its capital investment upfront, rather than at the ‘back end’, as proposed in the other option. The result, if the Government/ Water & Sewerage Corporation opted for this, would be a lower ‘purchase price’ for the Windsor plant.

The Windsor ‘purchase price’ could ultimately hit either $11.581 million or $7.087 million, depending on if the Government went with either option, and for the full five years.

But Mr McTaggart offers to “waive” these payments if it would enhance Consolidated Water’s bid to hold on to the Windsor plant for a further five years.

Seeking to maximise the company’s negotiating leverage, he wrote: “I confirm that in both cases, Consolidated Water Bahamas is prepared to waive or reallocate these proposed balloon payments if such action would enhance its tender during the proposed public tendering process.”

Highly-placed Tribune Business sources said the Windsor situation was now before the Christie Cabinet for a decision on both the duration, and terms and conditions, of any new contract with Consolidated Water.

It was supposed to go before Cabinet last week, but never did, and is understood to be back on the agenda for this week.

The Government’s thinking is unclear, with the opinion of Tribune Business contacts divided. One highly-placed source said the Christie administration, led by the Deputy Prime Minister, was still committed to putting the Windsor plant contract out to tender in the interests of transparency and fairness.

This would result in Consolidated Water being given a temporary, transitional contract until the tender was complete and new operator selected - whether Consolidated Water or someone else.

But another source familiar with developments suggested that the Government, realising it was not going to receive better offers, had decided to give Consolidated Water the new agreement it had been seeking since October 2012.

It is especially concerned to ensure there is no interruption to Windsor’s water supply, which at a minimum two million gallons per day would have major implications for the Water & Sewerage Corporation and its New Providence customers.

Mr McTaggart’s letter, which has been obtained by Tribune Business, is likely to raise some eyebrows among observers and Consolidated Water’s rivals because it suggests the Windsor plant’s condition has been allowed to deteriorate almost to the point of becoming obsolete.

“As you are aware from our meeting and our previous meetings on the subject, the Windsor plant requires immediate and significant capital investment to keep it operating reliably and efficiently,” Mr McTaggart told Mr Davis.

“Consolidated Water (Bahamas) main objective in this negotiation is to ensure that it is able to continue meeting its obligations to Water & Sewerage Corporation during the extension period, consequently protecting its reputation in the Bahamas and abroad.

“We believe that any extension of the current agreement must therefor allow Consolidated Water to invest capital to rehabilitate and maintain the plant, and fully recover this additional investment by the end of the extended agreement,” Mr McTaggart added.

“We have estimated and will, subject to executing an extension of the agreement on mutually acceptable terms, immediately invest up to $3.328 million to carry our urgent refurbishment work on the Windsor plant.”

Consolidated Water’s proposed capital investment level pales in comparison to the $10-$12 million that EPS Consultants, a rival Bahamian bidder for the Windsor plant contract, had proposed to invest in upgrading the facility.

Don Demeritte, the former Water & Sewerage Corporation chairman and principal in EPS Consultants, could not be reached for comment despite several attempts by Tribune Business.

Still, Mr McTaggart’s letter made it clear that any delay in upgrading the Windsor plant could jeopardise the health of its staff. He did not, though, indicate whether this would impact the quality of water delivered to the Water & Sewerage Corporation and its customers.

“We hope that our very quick response to your request for options demonstrates our commitment to resolving the present uncertainty, and underscores the urgency of the situation,” Mr McTaggart told Mr Davis.

“We are carefully monitoring the operating conditions at the plant to ensure that our staff continue to work in a safe environment.

“However, we are concerned that any further delays in carrying out the rehabilitation work could create an unsafe working environment for our staff, in which case the operation of the plant would be adversely affected.”

Mr McTaggart’s letter is slightly different in tone to Consolidated Water’s original proposal for a five-year Windsor contract extension, which was sent on October 5, 2012, to Water & Sewerage Corporation general manager, Glen Laville.

That letter, from Brent Brodie, Consolidated Water’s vice-president of sales and marketing, offered the Water & Sewerage Corporation the same price as its second option presented last month to the Deputy Prime Minister.

That letter, while offering to forego a fixed capital cost recovery charge, also pointed out: “As you have witnessed from visits to the Windsor plant, some of the infrastructure has reached the end of its useful life exactly as scheduled.”

Mr McTaggart, in his letter last month, made it clear that Consolidated Water would not relinquish the Windsor plant without a fight, giving every indication it would submit a bid if the Government went through with its public tender plans.

Today, the Water & Sewerage Corporation’s options are to either extend the existing supply agreement with Consolidated Water for another five years, at a rate to be negotiated; purchase all equipment, facilities and materials at Windsor from the company; or require it to simply remove them.

Mr McTaggart called on the Government and Consolidated Water to agree a purchase price for Windsor, arguing that this was in the best interests of the tender process and his firm’s efforts to develop a financial proposal for an interim contract.

Valuing Windsor’s property, plant and equipment insurance at $13.52 million on a replacement value basis, Mr McTaggart said Consolidated Water had made “significant upgrades” to Windsor, which is located in western New Providence near Lynden Pindling International Airport (LPIA).

Among the upgrades he touted were four extra seawater production wells; two containerised reverse osmosis production units featuring 400,000 imperial gallons per day of production capacity; diesel and electric-driven pumps and generators; and a second diesel storage facility.

Mr McTaggart’s letter outlined that Consolidated Water is seeking between a six-month to five years’ extension on its Windsor supply contract, terms that applied to both pricing options presented to the Deputy Prime Minister.

In return, Consolidated Water’s Bahamian subsidiary promised to “immediately commence rehabilitation work” at Windsor and complete this within four months, once an agreement was reached with the Government/ Water & Sewerage Corporation.

Yet in return, Consolidated Water wants performance measurements and penalties to be suspended for those four months, stating that it will only use “best efforts to deliver as much water per day” during that period.

That could fall below the two million imperial gallons per day minimum currently required.

Finally, Consolidated Water wants the Water & Sewerage Corporation to give it a 60-day notice period if it wishes to terminate their contract and replace it with a new Windsor operator.

Under the first option, based on total investment of $8.578 million ($5.25 million base price plus $3.328 million capital upgrades), an interest at an annual rate of 7 per cent, the Windsor ‘buy out’ price increases by $50,039 monthly.

After one year, the price has risen from $8.628 million to $9.178 million, and it continues to increase, hitting $9.779 million after two years; $10.379 million after three; $10.98 million after four; and reaching $11.581 million if any deal lasts for the full five years.

Under the second option, with Consolidated Water recovering its investment costs via the Water & Sewerage Corporation’s regular payments for water delivery, the ‘buy out’ price drops from $8.562 million after one month to $7.088 million if the full five years are utilised.

“The primary difference between the two options is their effect on Water & Sewerage Corporation’s cash flow during the extension period,” Mr McTaggart wrote to Mr Davis.

“Option one provides a lower water price to Water & Sewerage Corporation while it tenders the operating contract ($790,590 per year less than option two), with a larger balloon payment at the end of the agreement.

“Option two provides the same water price as our October 5, 2012, proposal, (which reduces water costs to Water & Sewerage Corporation by $1.5 million per year compared to the current water price), with a smaller balloon payment at the end of the agreement.

“Therefore, option one would reduce Water & Sewerage Corporation’s water payments by a total of $2.291 million per year compared to current water costs.”