The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Valuing the Bahamas Electricity Corporation’s (BEC) environmental liabilities at $100 million is a “conservative” estimate, a well-known attorney warning it was a “pipe dream” to believe the Government would realise top price from its partial privatisation.

Romauld Ferreira, an attorney specialising in environmental law, told Tribune Business that BEC’s pollution legacy, combined with its many other multi-million dollar liabilities, meant the Corporation was “not an attractive sale”.

Describing the environmental liabilities as “a major hurdle” to reforming BEC and the wider Bahamian energy sector, Mr Ferreira said the six bidders in the current process could use their existence as a negotiating tool to reduce their price and planned investment in the utility.

He was speaking after Simon Townend, a KPMG (Bahamas) partner and managing director of its corporate finance arm in the Caribbean, confirmed last week that liabilities arising from oil spills and other pollution inflicted by BEC “could be over $100 million”, yet were currently unknown.

KPMG is a key adviser to the Government on BEC’s restructuring/partial privatisation, and Mr Townend indicated to a Bahamas Institute of Chartered Accountants (BICA) conference that the winning bidder(s) could face a massive unknown exposure.

“We have these very significant environmental issues, not least at Clifton Pier, but elsewhere. These environmental issues have built up over many, many years,” Mr Townend said.

“It’s going to take a lot of work and money to figure out what the damage is. It could be $40 million, it could be $80 million, it could be over $100 million to sort out the environmental issues. But we don’t know what the figure is until the work is done.”

The six remaining BEC bidders are likely to be fully aware of the environmental legacy they will inherit, both from disclosures made during the process and their own due diligence.

Such environmental liabilities are likely to have been factored into their pricing proposals, which were due to be submitted to the Government on Friday.

“I think $100 million is conservative,” Mr Ferreira told Tribune Business of the likely value of BEC’s environmental liabilities. “That is a major hurdle to privatisation, the environmental liabilities.

“They would mean that the people who are looking to buy BEC can ask the Government to discount it by $100 million, whatever it is.

“It’s a bargaining tool, and means the idea of selling BEC for cash is a pipe dream. It will be an equity swap.”

Mr Ferreira said the Government would likely have to indemnify the winning BEC bidder(s) “to sweeten the pot”.

Drawing upon his experiences when he was employed at the Corporation, he added: “At Blue Hill Road [power plant], they must have lost two million gallons of fuel, and to clean that up, with Clifton Pier, I don’t know how much they’ve lost.”

Mr Ferreira said that apart from the spillage/leakage of fuel, BEC had in the past engaged in practices such as the dumping of oil in emulsion wells. And boilers had also been used to burn waste oil to produce electricity.

“Anyone visiting there, you can see egregious examples of oil spills at Clifton Pier,” he added. “At Clifton Pier they have over 20 feet of oil in some places. To manage that in perpetuity requires time and resources, and will take away from your core business.

“I remember working with the Corporation, going to Clifton Pier for the first time, and they had very bad environmental management practices. The managers are not evaluated on environmental performance.”

Mr Ferreira also recalled an incident when Clifton Pier was pumping bunker diesel to its fellow power station at Blue Hills.

Because no one told Clifton Pier to stop pumping, diesel fuel overflowed its tanks “on to the ground for at least half an hour”. Yet there were no ramifications or firings.

Mr Ferreira told Tribune Business that BEC’s fuel surcharge frequently included costs to cover the loss or spillage of fuel, which was the Corporation could not explain to customers how it was calculated.

“There’s an Inter-American Development Bank study showing the cost of fuel increased by 20 per cent, and the fuel surcharge increased by 170 per cent,” he added. “What they charge you for is not just the cost of fuel.”

Mr Townend last week said BEC’s unknown environmental liabilities added to the Corporation’s $350 million debt burden, some $180 million of which is government guaranteed, and its $81 million employee pension plan deficit.

Picking up the same theme, Mr Ferreira told Tribune Business: “What would be interesting to note is you have these potential liabilities with the pension plan the employees don’t contribute to, you have overstaffing, you have secretaries earning $66,000 and people being overpaid to work there.

“You have all kinds of problems. When you couple this with the fact that on most islands, they are not making a profit, and electricity generation is subsidised by New Providence, it’s not an attractive sale.

“You would need very skilful negotiators experienced in the industry to deal with it [BEC’s privatisation and restructuring] effectively. That’s a very complicated situation. I’m not saying the skill set’s not in the country, but I have my doubts that the skill sets are in the Government.”

Mr Townend last week explained that the Government had chosen to split BEC into two, a generation arm and separate transmission/distribution arm, as a means of ensuring attention would be paid to the latter business.

He said that virtually all the 60-plus bids the Government had previously received, unsolicited, focused on independent power producers (IPPs) selling the electricity they produced to BEC.

This, Mr Townend said, threatened to leave the issues with BEC’s transmission and distribution business untouched. To prevent this, the Government hired KPMG and other advisers to establish a structured process, and ensure a management/operating partner for the transmission side would be found.

Mr Townend added that splitting BEC into two would encourage specialisation and greater efficiency, while also removing “the inherent conflict of interest” that would exist if it remained one single entity.

If that happened, the danger was that BEC’s transmission and distribution arm would continue to only buy electricity from itself, squeezing out IPPs and preventing the benefits from price competition from being realised.

Likening the management contract for the transmission/distribution operation to the arrangement with Vantage Airport Services over the Nassau Airport Development Company (NAD), Mr Townend said the Government had yet to determine the equity stake it would grant to a joint venture partner on the generation side.