The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A former Cabinet minister yesterday said he fears the Government will not receive ‘full value’ from any Bahamas Electricity Corporation (BEC) buyer due to the numerous “uncertainties” surrounding energy reform efforts.

Phenton Neymour, former minister of state for the environment, told Tribune Business that the Christie administration had yet to clarify the ‘rules of the game’ in a liberalised energy sector - something that automatically increased the risk for any BEC private sector partner.

Apart from regulatory reform, Mr Neymour, who had responsibility for BEC under the former Ingraham administration, said the Government had not addressed key issues such as the Corporation’s unfunded pension liabilities and whether the existing duty concessions for its fuel supplies would continue post-privatisation.

All these issues, the former minister said, were unanswered questions that reduced BEC’s value to potential investors, and would result in them lowering the purchase price they would offer the Government.

The Christie administration has issued a tender that proposes splitting BEC into two. It is seeking a joint venture partner to invest in taking over the Corporation’s generation assets, and a management company to operate its transmission/distribution infrastructure.

Technical proposals from interested parties are supposed to be submitted by mid-September, but Mr Neymour criticised the month-long due diligence process as too short to allow bidders to conduct a proper evaluation of BEC.

Admitting that this made him “very suspicious”, the ex-minister questioned whether a deal for BEC was “already done”.

“It appears as if this deal is already made,” he told Tribune Business. “Each element is driving me to the conclusion that the deal has been made.”

Asked why he had come to this conclusion, Mr Neymour added: “The bidding period is too short for an entity to evaluate BEC.

“One month for assets worth hundreds of millions of dollars? That is not sufficient time to evaluate BEC’s organisational structure, the state of their equipment. All of these are essential for an entity to properly assess the state of BEC.

“I gave more time for the proposal for the integration of renewable energy. That was just 25 Mega Watts (MW), and I gave them more time than they are doing now.”

Warning that the Government was “risking the process” by not addressing fundamental issues upfront, Mr Neymour told Tribune Business: “I am very suspicious of the activities of the Government as to how they are carrying out this process.

“It is the same type of thing we saw with regard to the referendum and everything else. It appears as if transparency has gone out of the window.

“I am very concerned that the Bahamian people will not get value for their assets.”

Mr Neymour suggested that it was premature for the Government to solicit bids for BEC without having the legislation to facilitate reform, and accompanying regulations, in place.

“To go out and seek a proposal without first amending the legislation, and putting in place the necessary regulations, increases the risk to the potential buyer because of the uncertainty that exists in certain areas,” he told Tribune Business.

Noting that the valuation of BEC’s physical assets, chiefly its generation plant and transmission/distribution assets, was “critical”, Mr Neymour said a ‘rule of thumb’ was that each 1 MW of generating capacity was worth roughly $1 million.

With BEC able to produce around 400 MW, he suggested that its generation assets were worth around $400 million alone.

Setting aside the issue of whether BEC should be privatised as a single entity or split into two, Mr Neymour said the reforms would likely lead to a downsizing of the Corporation’s Bahamian workforce.

With any private sector partner likely wanting to bring in its own staff and technical experts, he questioned how staff changes at either one or both companies would be handled by the Government.

Calling for the issue to be “guaranteed” before reform moved ahead, Mr Neymour told Tribune Business: “The other issue we have to look at is will the Bahamas government continue to allow duty exemptions for any new company?

“They allow it for BEC, but will they continue it for another entity when it runs into $25-$35 million annually? That’s a lot of taxes they would have to forego.”

Another problem yet to be addressed are the unfunded liabilities in the BEC staff pension plan. This employs a defined benefit model, now out of fashion worldwide, with 100 per cent of the contribution burden borne by the Corporation.

BEC’s last published audited financials, for the year ended September 30, 2010, showed the plan had an actuarial deficit of $31.11 million.

And with plans assets valued at $150.959 million, and the value of its obligations standing at $221.357 million, any purchaser stands to inherit a $70.398 million unfunded liability.

“BEC has already made it clear that they cannot move on with the existing pension plan,” Mr Neymour added.

“These issues have not been properly explained, and will affect costs for any new buyer. These are some of the issues that need to be settled before BEC is put out to bid.

“Does a buyer want to carry that [pension liability]? These uncertainties are driving up the costs, and reducing the purchase price. All of these uncertainties should be cleared up before the organisation is put out to bid.

“It is driving up the cost to the new buyer, so they will reduce their price and the Bahamian people will suffer at the end of the day, as they will not get value for the assets the Government is selling.”