Bridge not viable without billions in annual subsidy

New Demerara River bridge

By Gary Eleazar

The Guyana Government is forging ahead with its plans to construct a new Demerara River bridge currently pegged at US$170 million, minus additional costs such as the mandatory accompanying road networks, but given the cost of the entire project, it is not feasible without the input of billions of dollars annually from

Government.
This warning is encapsulated in the feasibility study which was commissioned by the coalition Administration at a cost of in excess of GY$150 million.
According to the Dutch consultants LievenseCSO, “The project is financially not viable without support from the Government.”
The findings have since indicated that the revenues from toll make up for the operation expenditures but cannot support the debt service and that the toll rates can be increased but there is a limit to that since “a too large increase would make the toll unaffordable for many of the people who have to use the bridge.”
While the consultants did indicate that there seems to be strong appetite and sufficient liquidity in the financial markets of Guyana and the region to fund the project, since loans or bonds and preferred cumulative shares issues provide for the required funds, “this so-called Project Financing Structure requires a Government supported Special Purpose Company (SPC).
It was pointed out that a Private Public Partnership (PPP) structure like BOOT

(Build, Own, Operate and Transfer) whereby an investor signs a concession agreement with the Government to build and operate the bridge and in which the concessionaire has to arrange the financing “can only be successful if the Government provides (contribution) support…and certain guarantees.”
The required debt service, according to the consultants, weighs heavily on the financials of the project and is high in comparison with the operational expenditures.
Debt service includes interest and repayments of loans or bonds and generally the loans/bonds are medium-term and require yearly repayment and together with the interest, the yearly cash needed for debt service is considerable, “as a result of the high debt service, it was concluded that the project is not financially viable without a contribution from Government to support the cash shortfall.”
The consultants in their report acknowledged that the Government expressed the wish to maximise funding from the non-government sector in order to limit the Government’s contribution to the funding of the project as much as possible.
The consultants have since determined that this “means that the Project has to be structured in a Public Private Partnership (PPP), i.e. a Built, Own, Operate and Transfer (BOOT) type of arrangement or a Project Finance structure whereby the commercial banks and (institutional) investors are involved, or an intermediate structures like DBFM (Design, Built, Finance and Maintain).”
According to the Consultants, for the new bridge a SPC is assumed, in that it holds the assets and operates and maintains the bridge.
In case of a project finance structure, the Government will be the sole owner/shareholder of the SPC, as envisioned by the consultants.
In such a scenario, the Public Infrastructure Ministry and the Finance Ministry will be the two governing bodies and the SPC will be a legal entity with limited liability under the laws of the Cooperative Republic of Guyana.
According to the consultants, the investment is budgeted at approximately US$150 million of which approximately 20 per cent will be denominated in Guyana dollars.
“The national Guyanese portion has been maximised as much as possible to allow maximum application of the liquidity and appetite available in Guyana and to optimise the natural hedge (revenues in G$ versus operational expenditure and debt service in G$).”
The report has also taken into account the limits for increasing the toll rates are set by affordability, social responsibility, willingness to pay and what is politically acceptable as well as the fact there are no alternatives for crossing the Demerara River safely except for the ferryboats.
According to the consultants, it was concluded that none of the projected toll increases are not nearly enough to cover for the Debt Service as well, even with the highest increase of toll rates of 200 per cent on top of the existing toll rate.
As a result, the Government will have to arrange a contribution (subvention) on an annual basis to cover the gap between the revenues and the cost.
The consultants noted that the main reasons for the need for significant Government contribution are the short period of the financing in combination with the high interest rates.
Meanwhile, as it relates to taxes and dividends, the contracted consultants have determined that it is assumed the project is exempted from paying Import and VAT taxes and that dividends are only paid out if the project makes a profit, that is, positive Net Profit After Tax (NPAT).