The Grenlec arbitration ruling – what’s next?

Are Grenadians really aware of the situation that has been created as a result of the decisions taken by past and present governments culminating in arbitration proceedings and the recent decision of the ICSID arbitrators? 

We know that the arbitration ruling mandates that the Government of Grenada repurchase the shares of WRB owned Grenada Private Power Limited. I suspect that the majority of our citizenry has not processed the full implications of this situation.

Based on the current share price on the Eastern Caribbean Stock Exchange, (ECSE) and valuations based on other accounting methods, Grenlec as a company is valued at around EC$191 million (US$70.7million) – that, of course, represents 100% of the company. On the other hand, the arbitration award totals approximately US$71 million – representing 61.34% of the company! This US$71 million is not fixed but growing by the day, as interest is accumulating until the date of repurchase of the shares.

Here is where things get really dicey.

The Grenada government has publicly stated that it does not intend to own the WRB shares in question and therefore any investor looking at stepping into purchase WRB’s interest would have to look at the arithmetic as outlined below:

  • Market value of WRB’s 50% shares in Grenlec: US$35.35 million
  • Market value of WRB’s 11.38% (WRB owns this through a separate entity): US$8.04 million
    • (WRB will likely sell these shares to the new investor as a package deal)
  • Total market value of 61.34% of Grenlec: US$43.39 million.

Now, as I understand it, government is looking to have any new investor take the full brunt of the US$71 million arbitration award (plus accrued interest). That way, the investor pays WRB for its 50% holdings in Grenlec, pays WRB’s legal fees which government is obligated to pay plus advances made by WRB to the ICSID plus interest payments as spelt out in the award. It means the potential investor has to pay a premium (in excess of the market value) of approximately US$27.31 million just to purchase 61.34% of Grenlec’s shares. How does the new investor recover his investment for a slice of Grenlec’s assets that is grossly overvalued, without raising electricity rates?

An investor stepping into this situation will most likely want to look at putting in more efficient generation which means they will have to raise additional capital. The investment climate created by the Electricity Supply Act of 2016 does not make it attractive for a potential investor since the Act speaks to competition for new generation. The Act may have envisaged competition with regard to renewable type generation but because of issues of land space, there is hardly any potential in Grenada for utility-scale wind and PV solar generation to attract any serious investor, so in the final analysis that may not be a real concern for the incoming investor.

Clearly, from the above, we see the enormous challenge faced by any investor if he overpays for the assets (not to mention the fact if he wants to raise additional capital for system improvements). A decent return on investment would be nearly impossible without some innovative approach to structuring the sale. Such an approach may be a combination of government paying part of the arbitral award and providing concessions to the investor with respect to duties and corporate taxes. I have not included an increase in the electricity tariff as this would not be palatable either to the government or the electricity consumers. On this note, I hope it would not be the case where an investor is given the tacit understanding that rates could be increased and then later, the government makes the argument that the “independent” regulator, the Public Utilities Regulatory Commission (PURC) is the responsible entity for making decisions with regards to the electricity tariff. That playbook would not fool anyone.

Having read the Shareholder’s Agreement coming out of the 1994 privatisation of Grenlec, there is no doubt in my mind that this was a terrible agreement for Grenada – in fact, as one individual with an intimate knowledge of the industry puts it: “This agreement is the worst I have seen in all my years in the energy field.”

Successive governments over the years should have renegotiated this agreement and not fall into the trap of having the matter go to arbitration. As the arbitrators pointed out in their award, their task was to arbitrate what was written in the agreement. The technocrats and legal folks advising the government should have seen that this was an unwinnable situation and put up the red flag to sidestep the arbitration path. Unfortunately, here we are today, in this intractable situation. I pray that somehow, the country can come out of this with the electricity sector impacted in a positive way.

Concerned Consumer

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