The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Opposition’s deputy leader yesterday renewed concerns that PowerSecure lacks the necessary freedom to run Bahamas Power & Light (BPL) as a business, arguing that it was being “hampered and impaired” by the Government.

KP Turnquest told Tribune Business that the Christie administration’s vetoing of BPL’s ‘base rate’ increase proposal was but one example showing that its Board and management has less autonomy than their counterparts at the Nassau Airport Development Company (NAD).

PowerSecure’s BPL management agreement, and the Bahamas Electricity Corporation (BEC) restructuring, were based on the so-called ‘NAD model’, which allows the Government to retain ownership of the underlying assets while engaging private sector expertise to operate them.

Mr Turnquest, though, again queried whether such a model was appropriate for an energy utility such as BPL, given that PowerSecure has “no skin in the game” other than an annual performance bonus capped at $3 million.

He was speaking after Deputy Prime Minister Philip Davis, who has ministerial responsibility for BEC/BPL, blamed the Government for the utility’s recent woes, suggesting its inability to make quick decisions was creating “uncertainties” and holding it back.

Mr Turnquest said one such “uncertainty” was likely to be the Rate Reduction Bond (RRB) issue, which is supposed to refinance BEC’s $650 million legacy debts and provide the freedom for BPL to raise much-needed investment capital.

He suggested, though, that concerns over BPL’s current performance, and ability to service the bonds, was making it difficult for the Government to place the RRB with both Bahamian and international investors.

Tribune Business contacts have suggested that the RRB issue may now not be placed until 2017, which would further delay progress in reforming BPL and lowering energy costs for Bahamian consumers.

“It does seem that the management and Board of BPL is substantially constrained, given that they may have been given the perception that they were going to have the freedom to run the company in a business-like manner,” Mr Turnquest told Tribune Business.

He pointed to BPL’s proposed ‘base rate’ increase, which was subsequently blocked by the Government, even though there may have been sound commercial and cost recovery reasons for implementing it.

BEC’s annual losses, averaging between $20-$30 million since 2007, suggest that the utility provider is selling energy ‘below cost’, and that its prices are insufficient to cover its operating expenses.

As a result, BPL, as BEC’s successor, wanted to raise the ‘base rate’ portion of consumer tariffs, which is the segment supposed to generate all its cash flow and profits.

The increase would have placed BPL on a more sustainable financial footing, and enabled the utility to better invest in upgrading its aged, inefficient and poorly maintained infrastructure.

“In order for it to be sustainable in the short and medium-term, BPL needed to make some adjustments,” Mr Turnquest said. “Either on the cost side by reducing headcount or a rate increase.

“Again, if they [BPL management] don’t have the opportunity and responsibility to determine a business case in respect of being able to put forward cogent arguments for whatever rates and funding they require, then obviously management is being hampered and impaired.”

Linking the ‘base rate’ rise refusal with the Government’s reluctance, even as owner, to invest in BPL, the FNM’s deputy leader added: “One has to say management control is impeded, given that it is being held back by the Government of the Bahamas, or the Cabinet of the Bahamas.

“I’d always expressed concerns about bringing in a management team to run BPL, with no skin in the game, and under a politically-appointed Board.”

PowerSecure’s five-year management contract for BPL guarantees it a minimum of $2 million per year, and maximum of $5 million if it hits key performance targets.

Thus its earnings could be anywhere between $10-$25 million, yet it is being asked to do an awful lot for the compensation on hand.

Mr Turnquest said that the refinancing of BEC’s $650 million legacy debt was likely to be “a significant headache”, given that the new company’s hands were tied financially until this was accomplished.

“It will be very difficult to do that [place it] without a government guarantee,” he added. “The state of BEC’s legacy liabilities to-date means they have not been able to go to the market.

“I suspect it has a lot to do with the state of the current review by the rating agencies, and international investors wanting some kind of guarantee that this debt will be backed by the Government.

“Without a rate increase and new generation equipment to bring down the cost of operations, there’s not much faith that BPL will be able to continue as a viable, going concern without Government subvention, much less pay the RRB.”

The proposed RRB aims to remove BEC’s legacy bank and bond debt from its balance sheet, plus deal with environmental and unfunded pension liabilities.

These will be transferred to a special purpose vehicle (SPV), which will securitise the debt and sell it to investors as bonds. They will be repaid principal and interest from revenues generated by BPL, which will be free to raise new capital to finance infrastructure improvements.

Investors are guaranteed the first slice of any revenues generated by BPL, the Government hoping this will eliminate the need for a ‘guarantee’ from itself.’

However, feedback from capital markets participants has suggested that the RRBs are under-priced for the risk investors are being asked to take, with the Government seeking to place the Bahamian component at a coupon equal to Prime. As a result, appetite for their purchase is understood to be lukewarm at best.

Mr Turnquest, meanwhile, said the majority of BPL’s problems appeared to be on the generation side, and he criticised past governments for interfering politically in BEC.

“It requires several governments to acknowledge that they’ve interfered so much in the management of BEC that is now a significant burden on future Bahamians,” he told Tribune Business.

“It is a tremendous burden that has to be reconciled, and we have to find competent solutions.”