The reliability and cost of electricity generation in The Bahamas is vital to the local economy and, in our view, a matter of national importance. It is for that reason that we feel compelled, from time to time, to express a point of view on any policy changes which might adversely affect the economy, no matter how well-intended those changes may be.
The proposed energy reform process, specifically, the legacy debt that surrounds Bahamas Electricity Corporation (BEC), has been a topic of much discussion lately. It is our considered opinion that there are at least two important points that are in need of further in-depth and objective analysis before proceeding any further. The first is the reported suggestion by the prime minister of deferring a decision on BEC until late December 2014 in order to give more time to address the legacy debt issue. The second and closely related issue is the recommendations by Simon Townsend, spokesman for the financial advisors, KPMG, for tackling the legacy debt. Townsend and KPMG are apparently in favor of having BEC issue a rate reduction bond which, in their view, should receive a positive reception in the capital markets, including any banking institutions that would be interested in investing in the bond.
In that regard, we are strongly of the opinion that it would be a grave mistake to take the approach of dealing with the legacy debt of BEC before dealing with the fundamental issue of power generation. In other words, it is a heroic and unrealistic assumption to believe that over $450 million of BEC's debt can be repackaged at better rates in today's market, given some of BEC's current challenges, such as:
o The electricity rates that are regarded as too high by households and businesses resulting in non-payment of electricity bills and an extraordinarily large accounts receivable at the corporation.
o BEC's technical and financial performance over the past several years has brought the company close to the point of bankruptcy and the type of strong revenue performance necessary to pay the legacy debt is not currently possible in BEC's present state.
o Potential lenders in the capital markets would most certainly take into account the less-than-stellar performances on the technical and financial sides and accordingly be wary of the risks associated with new debt offerings by BEC, especially when coupled with no new proven savings to the customers.
Matters to consider on the legacy debt issue
1. Under the new proposal, BEC/government would be attempting to raise the cost of power by 2.5 to four cents per KWH to pay for the legacy debt even before developing and implementing a plan to deal with power generation. It is unlikely that people who aren't paying their bills now would begin to pay at higher prices and also having to factor in the VAT when that becomes operational.
2. The legacy debt is likely to be set up in a non-standard revenue bond, which means it will be paid on a priority basis with no provisions for deferred payments. Those payments to the bond investors are pulled from the general revenue account even before BEC gets paid. When you factor in declining revenues due to fewer people paying and then to deduct this debt payment, it means that there is even less money available for subsidizing BEC. Any attempt by the government to increase the subsidy would adversely affect its fiscal position and place it at odds with the international financial agencies.
3. Despite the suggestion by KPMG, the financial advisors, that there is an appetite for BEC's proposed bond issue, it is more likely that the investors buying the debt in the capital markets are going to look at the issues outlined above and against the background of BEC's historically poor performances. Investors will either not buy the bonds or demand higher rates of interest. The capital markets are efficient; investors will demand a premium (via higher interest rates) for the risk of investing in a BEC bond.
In our experience, it is not unusual for some loan arrangers or financial advisors to be less than frank with a potential client in order to secure the services contract. Quite often, there are promises of very attractive terms and interest rates and then, at the last minute, the arranger informs the client that the market is not reacting the way they thought it would and the interest rate needs to go up and the term needs to be shortened. At that point the client, which would be BEC and the government, would have too much time, money and political capital invested to back out.
The recommended way forward to structure a legacy debt model
1. Firstly, there must be a demonstration that the corporation will make the necessary changes to effect efficient management and to ensure that its financial and operational performance going forward would be both successful and reliable.
2. Secondly, after improving operations, demonstrate concretely that costs will come down sufficiently to ensure a significant discount to the ratepayer, even after the cost of the legacy debt is added to the bill.
3. Thirdly, demonstrate that any technical improvements, including the acquisition of new equipment, will be configured in such a way that will ensure the long-term, continued success of BEC's operation and commitment to energy reform.
In summary, the proposal to deal with the legacy debt before fundamental restructuring at both the managerial and technical levels at BEC is a high-risk proposition that is likely to fail. Although some reference to the success of the Nassau Airport Development (NAD) model was alluded to, we offer a word of caution. The BEC proposal is much different from the NAD model in the way new revenue streams are applied. Under the NAD model the passenger facility charge is used primarily for debt repayment. Passengers must pay the bill in advance when they buy their tickets and the ticket price is competitive with regional airports. Rate charges at BEC are already beyond that charged by regional counterparts. A successful restructuring at BEC must include lower charges to consumers, improved efficiency and a clear path to profitability.
o CFAL is a leading independent investment and advisory firm based in The Bahamas with a long and proven record of stability and integrity across all economic climates. Its experienced team of advisors provides sound, informed and innovative financial planning solutions for institutions and individuals, including a full range of financial services that include investment management, pension management and administration, brokerage services and corporate advisory services.

Click here to read more at The Nassau Guardian