by Larry Smith
"In a difficult economy you need investor confidence and consumer confidence to get going ." -- khaalis Rolle. minister of state for investments
In 1997 the Free National Movement ran for re-election on a platform that explicitly called for the privatization of BaTelCo - the state-owned telecoms monopoly that everyone loved to hate for its studied incompetence and don't-give-a-crap arrogance.
Even before then, the Pindling government (no paragon of privatization) had held confidential talks with UK-based Cable & Wireless about selling a stake in BaTelCo. But after its landslide re-election in 1997, the FNM launched a formal privatization process. And the PLP continued that process throughout Perry Christie's first term.
We are all too familiar with the more recent history. The FNM continued the privatization process after it returned to office in 2007, and set about reforming the communications sector's regulatory framework. But after more than a dozen years only one major telecoms provider had come forward - Digicell, which later pulled out of the running.
In 2010, Cable & Wireless Communications, a major industry player with a long history in the region, expressed an interest in BTC and eventually agreed to buy 51 per cent for some $210 million - following extensive due diligence by both sides. The sale was ratified by parliament in April 2011, ending an ignominious 13-year saga, and the Bahamian telecoms market will finally be liberalized in 2014, when BTC's mobile monopoly expires.
The chief motivation for the sell-off of BTC was the rapidly advancing technology of the telecoms business, which threatened to devalue the state monopoly and make its operations obsolete. A modern telecoms sector is seen as vital to the country's economic interests, and a major strategic partner would enable BTC to compete and move forward in a transformed market.
Getting the highest value from the sale of a state asset was also a big part of the government's calculation, to help shore up a ballooning fiscal deficit.
Initially, the government had been seeking to sell 49 per cent of BTC's shares, but the offers that came in were considered inadequate, largely because any prospective shareholder would be unable to exercise full control over the company.
Industry observers say that even if a deal was structured to give the private shareholder management control such a course is fraught with issues, and it was hard enough to get interest at 51 per cent. The Bahamas is not strategically on the radar screen for major telecoms players, insiders say. The only logical buyers were Digicell and CWC, who both have a significant presence in the region. Other bidders were all venture capital consortia.
Despite its own previous effort to sell BTC to one of these - an unknown venture capital group called Bluewater - the PLP was able to turn the sale to CWC into a hot-button political issue, working in concert with the unions that have stubbornly resisted every attempt at change in the public sector over the years.
And following its re-election last month, the new PLP government says it wants to regain a majority interest in BTC, while canceling the planned public sale of some of the government's remaining shares. If successful, this will have the unfortunate effect of returning BTC to state control, undoing more than a decade of grinding effort to reform the public sector. It would be the ultimate example of "turning back".
Industry observers say they can't imagine a global public company like CWC accepting minority ownership of BTC. It would have to protect its commercial interests. And even if it did agree to sell 2 per cent of BTC's shares back to the government, this would doubtless incur a significant premium - as much as 40 per cent on top of the actual price of the shares.
A more likely scenario, some say, is for CWC to offer to sell their entire stake back to the government at seven to eight times current earnings and either walk away or accept a lucrative management contract.
In either case, there will be a huge impact on the Bahamas' reputation and finances. This is a case of the government signing a contract with a major investor which received parliamentary approval. Breaching such an contract can be expected to have major consequences internationally.
The sale agreement does provide for a buy-back of shares in the event of insolvency or a "serious and unremediated material default" on the part of CWC, but that would be very difficult to prove legally, experts say.
"If the government pursues this to the conclusion it says it wants, it would be disastrous for the Bahamas in terms of foreign investment," one observer told me. "The international community would look at us and say what on Earth is the government doing? It's nonsensical because governments shouldn't be in the telecoms business anyway."
In fact, at the time of the last BTC auction, there were only about a dozen countries in the world that still had government control of the industry - mostly obscure territories. Among developed countries, only Canada still limits the grant of telecoms rights to domestic carriers. But this rule has come under heavy pressure, and the government says it will soon be lifting the ban.
Experts say the only commercially acceptable way for the government to achieve majority Bahamian ownership would be to sell its entire 49 per cent holding to the public while CWC sells 2 per cent of its interest. CWC would then presumably be able to retain effective control as the major owner in a sea of small shareholdings.
But that would require a several hundred million dollar public offering - some five times bigger than any previous Bahamian IPO, and therefore very difficult for the current market to absorb. And when it comes down to actually putting up their money, potential buyers may stop thinking emotionally and start thinking about the risks to their investment from pending competition.
Politically, the government will want to come away from this with something to show, but CWC won't want to give up control. And complicating matters is the fact that another cellular license has to be issued in less than two years to open the mobile market for the first time. Experts say this should be a foreign player like Digicell with the resources to compete with both BTC and Cable Bahamas.
Suggestions have been floated lately on social media sites that the government could regain control of BTC and meet its competition obligations by allowing private companies to rent wholesale access to its network and retail services independently. Such resellers or sub-brands are known as mobile virtual network operators, or MVNOs, but this model does not offer real competition.
The Bahamian mobile market is already saturated, and the incumbent network carrier will want to retain the most profitable clients, so the potential for customer acquisition by MVNOs may not justify the investment.
It is also interesting to reflect on the startling fact that the recent network-wide communications shutdown preceded by an island-wide power blackout coincided exactly with the prime minister's much ballyhooed first meeting with CWC chief Tony Rice. This is potentially damaging for future privatization efforts
In the final analysis, this is all such a monumental waste of time, effort, resources and political capital. Instead of trying to turn the clock back to make a prehistoric political point, this government should be focusing on the future, spurring the economic recovery and finding ways to control our deficits and debt that are rising to dangerous levels.
BEC -- The Other Dinosaur
"Fossil fuels will be the way forward for the foreseeable future for the Bahamas' primary power producer. " -- BEC Chairman Leslie Miller
It seems the government has decided to turn the clock back at BEC too, putting a politician in charge whose sole qualification appears to be an inability to pay his electricity bills (an admission Leslie Miller made publicly prior to the election).
And recent remarks by both Miller and Bradley Roberts, who was responsible for BEC in the previous Christie cabinet, are even more chilling.
Roberts confidently predicted more load shedding this summer - presumably in a bid to deflect criticism for the three island-wide blackouts that have occurred since the May 7 general election.
As former BEC Chairman Michael Moss has noted, there is a difference between load shedding and the "unprecedented" major blackouts that have occurred recently. For the past several years, there have been no island-wide outages on New Providence, he confirmed, not even during last year's hurricane.
But load-shedding is another matter. This is what happens when there is not enough generation capacity to meet peak demand - so the available capacity has to be rationed. An outage, or blackout, arises due to accidents, breakdowns, sabotage, or natural disasters.
"I remain fully satisfied that the measures implemented during my chairmanship will ensure that New Providence consumers will finally experience a summer devoid of load-shedding after many, many years," Moss said recently.
Those measures have included costly major overhauls of BEC's aging generators, and the rental of extra gen-sets during the high-demand summer months.
According to an operational review in 2010 by Emera, the $7 billion Canadian energy company that owns 80 per cent of Grand Bahama Power, BEC was being operated "on a very short-term horizon…units are run many hours past the manufacturers recommended major overhaul periods resulting in higher maintenance costs, forced outages and damage to the units."
Moss, an electrical engineer himself, does not deny BEC's critical financial and operational condition, but he attributes it largely to a politically motivated rate cut in 2003, when Roberts was minister of works and utilities. Within two years BEC's own consultants were warning that the corporation's finances "had deteriorated to a danger zone".
The advisors noted that for the 2003/2004 financial year BEC "experienced negative cash flow of over $7 million" and pointed to an urgent need for a rate increase, which went unheeded. So the corporation lost $2.9 million in the fiscal year ended September 2006, with losses progressively worsening until the trend was finally reversed in 2010, following a 5 per cent rate increase requested by Moss.
Before then, Emera's operational review pointed out that BEC's cash flow was being managed on an emergency basis to meet key loan, fuel and payroll requirements. "The company has difficulty accessing capital markets and has no reserves to deal with a major event such as a hurricane…safety and environmental systems are lacking...and external auditors have expressed matters of concern."
In 2003, when Roberts was cutting electricity rates, then Trade & Industry Minister Leslie Miller was talking about capping the price of propane fuel, which threatened shortages as no sane importer will sell at a loss. Ultimately the propane price was raised, but now Miller is in charge of BEC and talking grandiosely about cutting its $400 million annual fuel bill by buying direct from Venezuela.
BEC has bought its fuel from a regional trading company (Shell Western) for many years. All the major oil companies sell via intermediaries like this, at prices that are benchmarked by an American company called Platts. Although most of the fuel ultimately comes from Venezuela, BEC buys at the Platts published price plus an "adder", which is marginally higher than it could be in order to get 75-days credit.
Venezuela (through its Petrocaribe arrangement) also sells at Platts plus an adder, but it offers easier credit terms to regional governments in return for "political solidarity". Savings are supposed to come from cutting out the regional traders who coordinate fuel deliveries to local distributors. But most Caricom countries that are members of Petrocaribe have higher electricity rates than the Bahamas
Petrocaribe provides fuel at market value but requires only part payment up front. The remainder can be paid through a 25-year financing agreement at 1 per cent interest. But PetroCaribe will only deal with state-controlled entities, which was one of the big sticking points when the first Christie administration looked at this issue. It would require the government to set up its own fuel supply chain. You can imagine the implications of that.
In 2010, Emera's operational review said BEC's critical financial condition meant that it could not contract for fuel without government backing, and had no long-term fuel hedging strategy to reduce volatile pricing for customers. Following the rate increase, BEC has been able to sign a fuel agreement and undertake limited borrowing without government guarantees. However, a proposal for a temporary rate increase to recover some $5 million in losses due to Hurricane Irene last year was not approved by the government.
In addition to presenting himself as BEC's financial saviour, Miller also likes to depict himself as an expert on alternative energy. He recently asserted that ocean thermal and wind energy are not feasible in the Bahamas, and completely ignored waste-to-energy, which is perhaps the most feasible option of all. He also offered to meet with Chinese suppliers to determine the viability of solar power.
Under the previous government, BEC had signed a groundbreaking preliminary agreement with a US firm to build pilot OTEC generating plants here - at no cost to BEC - and was studying the application of medium-scale wind and solar power in the Family Islands - as recommended by all the recent consultant reports. The previous government had also been moving towards approval of a consortium of Bahamian waste companies to manage the Harrold Road landfill and convert the island's garbage into energy.
But after five years of research and detailed consultant recommendations under the FNM, the Bahamas still does not have the policy framework to support alternative energy. Meanwhile, Jamaica already has wind farms, independent power providers and net billing, allowing customers to sell electricity back to the grid.
Miller's garbled opinions on OTEC should worry anyone interested in pushing alternative energy. The initials stand for ocean thermal energy conversion, a process which uses the temperature difference between cooler deep and warmer surface waters to run a heat engine to produce electricity and fresh water. The Bahamas has great potential for this technology because of the deep ocean trenches that lie just offshore on many islands, including New Providence.
Electricity has been produced via OTEC at the National Energy Laboratory of Hawaii for some 30 years, but there are no utility-scale examples yet, although several projects are underway around the world. A 10-megawatt pilot plant is being built now in Hawaii, for example.
However, the project that is currently proposed for Baha Mar is a seawater district cooling facility, which will save substantial energy costs for air conditioning at the resort while reducing demand for BEC. The US investor also wants to build pilot generating plants on New Providence and Andros to supply power to BEC on a contractual basis.
Talking rubbish and dismissing these alternative energy initiatives before the new government has even settled into office does not bode well for the future of BEC or the Bahamas.
Getting the highest value from the sale of a state asset was also a big part of the government's calculation, to help shore up a ballooning fiscal deficit.
Initially, the government had been seeking to sell 49 per cent of BTC's shares, but the offers that came in were considered inadequate, largely because any prospective shareholder would be unable to exercise full control over the company.
Industry observers say that even if a deal was structured to give the private shareholder management control such a course is fraught with issues, and it was hard enough to get interest at 51 per cent. The Bahamas is not strategically on the radar screen for major telecoms players, insiders say. The only logical buyers were Digicell and CWC, who both have a significant presence in the region. Other bidders were all venture capital consortia.
Despite its own previous effort to sell BTC to one of these - an unknown venture capital group called Bluewater - the PLP was able to turn the sale to CWC into a hot-button political issue, working in concert with the unions that have stubbornly resisted every attempt at change in the public sector over the years.
And following its re-election last month, the new PLP government says it wants to regain a majority interest in BTC, while canceling the planned public sale of some of the government's remaining shares. If successful, this will have the unfortunate effect of returning BTC to state control, undoing more than a decade of grinding effort to reform the public sector. It would be the ultimate example of "turning back".
Industry observers say they can't imagine a global public company like CWC accepting minority ownership of BTC. It would have to protect its commercial interests. And even if it did agree to sell 2 per cent of BTC's shares back to the government, this would doubtless incur a significant premium - as much as 40 per cent on top of the actual price of the shares.
A more likely scenario, some say, is for CWC to offer to sell their entire stake back to the government at seven to eight times current earnings and either walk away or accept a lucrative management contract.
In either case, there will be a huge impact on the Bahamas' reputation and finances. This is a case of the government signing a contract with a major investor which received parliamentary approval. Breaching such an contract can be expected to have major consequences internationally.
The sale agreement does provide for a buy-back of shares in the event of insolvency or a "serious and unremediated material default" on the part of CWC, but that would be very difficult to prove legally, experts say.
"If the government pursues this to the conclusion it says it wants, it would be disastrous for the Bahamas in terms of foreign investment," one observer told me. "The international community would look at us and say what on Earth is the government doing? It's nonsensical because governments shouldn't be in the telecoms business anyway."
In fact, at the time of the last BTC auction, there were only about a dozen countries in the world that still had government control of the industry - mostly obscure territories. Among developed countries, only Canada still limits the grant of telecoms rights to domestic carriers. But this rule has come under heavy pressure, and the government says it will soon be lifting the ban.
Experts say the only commercially acceptable way for the government to achieve majority Bahamian ownership would be to sell its entire 49 per cent holding to the public while CWC sells 2 per cent of its interest. CWC would then presumably be able to retain effective control as the major owner in a sea of small shareholdings.
But that would require a several hundred million dollar public offering - some five times bigger than any previous Bahamian IPO, and therefore very difficult for the current market to absorb. And when it comes down to actually putting up their money, potential buyers may stop thinking emotionally and start thinking about the risks to their investment from pending competition.
Politically, the government will want to come away from this with something to show, but CWC won't want to give up control. And complicating matters is the fact that another cellular license has to be issued in less than two years to open the mobile market for the first time. Experts say this should be a foreign player like Digicell with the resources to compete with both BTC and Cable Bahamas.
Suggestions have been floated lately on social media sites that the government could regain control of BTC and meet its competition obligations by allowing private companies to rent wholesale access to its network and retail services independently. Such resellers or sub-brands are known as mobile virtual network operators, or MVNOs, but this model does not offer real competition.
The Bahamian mobile market is already saturated, and the incumbent network carrier will want to retain the most profitable clients, so the potential for customer acquisition by MVNOs may not justify the investment.
It is also interesting to reflect on the startling fact that the recent network-wide communications shutdown preceded by an island-wide power blackout coincided exactly with the prime minister's much ballyhooed first meeting with CWC chief Tony Rice. This is potentially damaging for future privatization efforts
In the final analysis, this is all such a monumental waste of time, effort, resources and political capital. Instead of trying to turn the clock back to make a prehistoric political point, this government should be focusing on the future, spurring the economic recovery and finding ways to control our deficits and debt that are rising to dangerous levels.
BEC -- The Other Dinosaur
"Fossil fuels will be the way forward for the foreseeable future for the Bahamas' primary power producer. " -- BEC Chairman Leslie Miller
It seems the government has decided to turn the clock back at BEC too, putting a politician in charge whose sole qualification appears to be an inability to pay his electricity bills (an admission Leslie Miller made publicly prior to the election).
And recent remarks by both Miller and Bradley Roberts, who was responsible for BEC in the previous Christie cabinet, are even more chilling.
Roberts confidently predicted more load shedding this summer - presumably in a bid to deflect criticism for the three island-wide blackouts that have occurred since the May 7 general election.
As former BEC Chairman Michael Moss has noted, there is a difference between load shedding and the "unprecedented" major blackouts that have occurred recently. For the past several years, there have been no island-wide outages on New Providence, he confirmed, not even during last year's hurricane.
But load-shedding is another matter. This is what happens when there is not enough generation capacity to meet peak demand - so the available capacity has to be rationed. An outage, or blackout, arises due to accidents, breakdowns, sabotage, or natural disasters.
"I remain fully satisfied that the measures implemented during my chairmanship will ensure that New Providence consumers will finally experience a summer devoid of load-shedding after many, many years," Moss said recently.
Those measures have included costly major overhauls of BEC's aging generators, and the rental of extra gen-sets during the high-demand summer months.
According to an operational review in 2010 by Emera, the $7 billion Canadian energy company that owns 80 per cent of Grand Bahama Power, BEC was being operated "on a very short-term horizon…units are run many hours past the manufacturers recommended major overhaul periods resulting in higher maintenance costs, forced outages and damage to the units."
Moss, an electrical engineer himself, does not deny BEC's critical financial and operational condition, but he attributes it largely to a politically motivated rate cut in 2003, when Roberts was minister of works and utilities. Within two years BEC's own consultants were warning that the corporation's finances "had deteriorated to a danger zone".
The advisors noted that for the 2003/2004 financial year BEC "experienced negative cash flow of over $7 million" and pointed to an urgent need for a rate increase, which went unheeded. So the corporation lost $2.9 million in the fiscal year ended September 2006, with losses progressively worsening until the trend was finally reversed in 2010, following a 5 per cent rate increase requested by Moss.
Before then, Emera's operational review pointed out that BEC's cash flow was being managed on an emergency basis to meet key loan, fuel and payroll requirements. "The company has difficulty accessing capital markets and has no reserves to deal with a major event such as a hurricane…safety and environmental systems are lacking...and external auditors have expressed matters of concern."
In 2003, when Roberts was cutting electricity rates, then Trade & Industry Minister Leslie Miller was talking about capping the price of propane fuel, which threatened shortages as no sane importer will sell at a loss. Ultimately the propane price was raised, but now Miller is in charge of BEC and talking grandiosely about cutting its $400 million annual fuel bill by buying direct from Venezuela.
BEC has bought its fuel from a regional trading company (Shell Western) for many years. All the major oil companies sell via intermediaries like this, at prices that are benchmarked by an American company called Platts. Although most of the fuel ultimately comes from Venezuela, BEC buys at the Platts published price plus an "adder", which is marginally higher than it could be in order to get 75-days credit.
Venezuela (through its Petrocaribe arrangement) also sells at Platts plus an adder, but it offers easier credit terms to regional governments in return for "political solidarity". Savings are supposed to come from cutting out the regional traders who coordinate fuel deliveries to local distributors. But most Caricom countries that are members of Petrocaribe have higher electricity rates than the Bahamas
Petrocaribe provides fuel at market value but requires only part payment up front. The remainder can be paid through a 25-year financing agreement at 1 per cent interest. But PetroCaribe will only deal with state-controlled entities, which was one of the big sticking points when the first Christie administration looked at this issue. It would require the government to set up its own fuel supply chain. You can imagine the implications of that.
In 2010, Emera's operational review said BEC's critical financial condition meant that it could not contract for fuel without government backing, and had no long-term fuel hedging strategy to reduce volatile pricing for customers. Following the rate increase, BEC has been able to sign a fuel agreement and undertake limited borrowing without government guarantees. However, a proposal for a temporary rate increase to recover some $5 million in losses due to Hurricane Irene last year was not approved by the government.
In addition to presenting himself as BEC's financial saviour, Miller also likes to depict himself as an expert on alternative energy. He recently asserted that ocean thermal and wind energy are not feasible in the Bahamas, and completely ignored waste-to-energy, which is perhaps the most feasible option of all. He also offered to meet with Chinese suppliers to determine the viability of solar power.
Under the previous government, BEC had signed a groundbreaking preliminary agreement with a US firm to build pilot OTEC generating plants here - at no cost to BEC - and was studying the application of medium-scale wind and solar power in the Family Islands - as recommended by all the recent consultant reports. The previous government had also been moving towards approval of a consortium of Bahamian waste companies to manage the Harrold Road landfill and convert the island's garbage into energy.
But after five years of research and detailed consultant recommendations under the FNM, the Bahamas still does not have the policy framework to support alternative energy. Meanwhile, Jamaica already has wind farms, independent power providers and net billing, allowing customers to sell electricity back to the grid.
Miller's garbled opinions on OTEC should worry anyone interested in pushing alternative energy. The initials stand for ocean thermal energy conversion, a process which uses the temperature difference between cooler deep and warmer surface waters to run a heat engine to produce electricity and fresh water. The Bahamas has great potential for this technology because of the deep ocean trenches that lie just offshore on many islands, including New Providence.
Electricity has been produced via OTEC at the National Energy Laboratory of Hawaii for some 30 years, but there are no utility-scale examples yet, although several projects are underway around the world. A 10-megawatt pilot plant is being built now in Hawaii, for example.
However, the project that is currently proposed for Baha Mar is a seawater district cooling facility, which will save substantial energy costs for air conditioning at the resort while reducing demand for BEC. The US investor also wants to build pilot generating plants on New Providence and Andros to supply power to BEC on a contractual basis.
Talking rubbish and dismissing these alternative energy initiatives before the new government has even settled into office does not bode well for the future of BEC or the Bahamas.
To say that it is waste of time for the Gov't to go after CWC when it should be doing other things with the recovery of the economy is littery hog wash.
The Public was not getting all of its answers from the former Gov't when the negotations were going on and at the end left many questions unanswered. Why not a commission of inquiry.
You said that this would not be good in the investor or the international world as they would see us as being not good for investments. Don't forget the I-Group. Parliament dealt with this matter by the PLP Gov't and The Ingraham Gov't came behind and changed things.What is the differences in your inferences. Did the FNM gained investors confidence?
The People need answers and they sure as hell won't get it from you and your likes.
Posted by: Leon Griffin | June 27, 2012 at 10:47 AM
Since you see this issue in a conspiratorial partisan framework, let me point out the following:
On this deal, the process was far more open and the available information far greater than they were with the Bluewater deal under the PLP (with Brave Davis as Bluewater's lawyer).
There is no way in hell that we should go back to state control of the telecoms industry, which is what this is all about.
Posted by: larry smith | June 27, 2012 at 10:52 AM
A great article, but one thing that hasn't been explained by the Government yet is why we would want to reclaim the 2%. Have they given any reasons yet?
Posted by: Mark | June 28, 2012 at 07:54 PM
"We were seeking to divest the government of The Bahamas of 49% of the shares of BTC – not 51%, only 49%. The difference, then as now, is absolutely crucial. With 51% you are the majority owner and ultimately in control. With 49% on the other hand, you are in the minority with all the usual disadvantages and drawbacks."
-- Contribution to the debate on sale of BTC to Cable & Wireless by Perry Christie, March 23, 2011
Posted by: larry smith | June 28, 2012 at 09:09 PM
Like I said - state control.
Posted by: larry smith | June 29, 2012 at 07:33 AM
I am a graduate student at the University of Miami in the field of Electrical Engineering, with a concentration in Power Systems.My undergraduate studies were done at the University of North Carolina at Charlotte.
I think that the statements by BEC Chairman Leslie Miller are very shortsighted, and if he pushes this ridiculous idea into the minds of the Bahamian people, this will continue to keep the Bahamas in third world status.
He is clearly poorly informed on, or simply oblivious to, the energy crisis that The Bahamas is experiencing. First and foremost, governments should not have any form of control in a nation's power generation because this creates a monopoly and limits competition. Governments should regulate a free market for investors.
Moving forward, The Bahamas should pursue alternative energy and reduce our dependency on fossil fuels. At the very minimum, we should mandate that BEC and any future competitors generate 25% or more of their power from renewable sources.
In my personal opinion, wind farms on the family islands are an option and for Nassau, photovoltaic cells will best suit the city due to its major development.
I have studied solar cells and much work is needed in order for them to become the most reliable form of renewable energy, but with proper research it can be implemented into the existing power grid to reduce the dependency on the present diesel generators that are being used.
It is not sensible for the Bahamas to stay stagnant and make no major improvements in the energy sector.
While pursuing my Master's degree, I wish to do research in the area of power quality and renewable energy. One would be surprised to know how much energy is wasted because of improper equipment, or simply because of a lack of knowledge by system operators.
Posted by: Neilsen Beneby | June 29, 2012 at 12:36 PM