By: Sase Singh; MSc – Finance, ACCA
Building the Berbice River Bridge was a sensible priority for any Government to do and with good reason. It made travelling to the Corentyne so much more efficient and cost-effective. It aided economic expansion. It caused an injection of private capital into the economy at a time when it was vitally needed. And they are so many more positives because of this Bridge. In the general scheme of things, it was an excellent project for Guyana.
So when former President Bharrat Jagdeo assented to the Berbice River Bridge Act, No 3 of 2006, clearing the way for negotiations with the Private Sector regarding the construction of the bridge, all and sundry were extremely pleased by this strategy. The model touted then was one that encouraged the Private Sector to take part in a Public/Private Sector partnership. The noble objective it was, such a model could only have worked if the economy was doing well.
However, since then, the macroeconomic fundamentals have changed dramatically, and are performing way below par in 2018 compared to those People’s Progressive Party (PPP) years. For this model to work well, Guyana has to be growing at a rate very close to five per cent; in 2018 we are expecting a two per cent growth rate and not much better in 2019. This is a major reason why the Bridge cannot see the sorts of revenue to stay afloat.
In my experience, the risks in public projects tend to expand the longer the payback period because the financial model is more imperfect. Internationally, underestimating future financing, required cap-expenditure and maintenance cost are not uncommon. Therefore, there is a fine balance between the operation model being properly aligned to the revenue streams. The opportunity for divergence is always present.
What is happening on the Berbice River Bridge is what we in the financial sector call “winner’s curse”. This situation comes about because of an over-estimation of the traffic flows at conception that leads to an over-valuation of the future unimpaired cash flows. To make the deal bankable, the conceiver of the deal oversold the idea to the financiers without adequately modelling for two things – one a change of Government from one that was pro-Private Sector to one that offers lip service the “engine of growth”. Actually the A Partnership for National Unity/Alliance For Change Government can be accused of being hostile to the Private Sector. Secondly, at the rate Guyana was growing economically under the PPP, no one expected the country would have been reduced to such an economic basket case, so quickly with the change of Government.
With modern modelling techniques and software, this situation is becoming less prevalent now, but I will bet my last dollar that when National Industrial and Commercial Investments Limited (NICIL) conceived this deal, they did not properly model for most of the risk issues and thus the current predicament. No one in the PPP/Civic Government thought they would have lost power, even after the 2011 elections. That was a material miscalculation on the part of the conceivers and financiers of this bridge and unfortunately that is a risk that has to be borne somewhere.
Even in modern societies, circumstance do change materially at very short notice, consumer preference will change. Under the PPP Government, the Guyana Sugar Corporation (GuySuCo) would have never let go of thousands of Berbician, which kicked off a financial drought in Berbice. Today GuySuCo, the largest financial machine in Berbice, pays the bridge less cash because of a much lower use of its road and river crossings. That started an adverse financial infection of the revenue stream. This stuff is not rocket science.
Doing business in Guyana is far from ideal and thus this financial model when conceived by NICIL should have been better stress tested to ensure there were greater safety nets in place. One such safety net was that the Government should have put more cash into the project, especially at the equity level to bring a more balanced financial structure to the deal. Clearly, there was not enough contingency planning when this financial structure was conceived to better protect the creditor’s interest and the shareholders.
Therefore, the time is appropriate to unpack this deal and nationalise it permanently, if necessary, so that it does not fail. I encourage all stakeholders to meet at the table and work it out. Guyana cannot afford any more uncertainty on this bridge, it is too vital to our national interest.
