Govt.’s LNG deal with New Fortress: Seeing the trees and not the forest

Given the current economic and political crises Sri Lanka is faced with, an independent analysis of the “Yugadhanavi deal” seems to suggest that one has to see the trees and not the forest to pass a fair judgment 

By a Special Correspondent

The Government’s agreement with regard to the Yugadhanavi Power Plant is very much in the news. It is good for anybody interested in this matter to take a look at the facts and first of all how we got here. 

History of Yugadhanavi Power Plant

In late 2005, the new Government that took office realised that there weren’t a single power plant under construction while the demand for electricity was to outstrip supply in barely three years’ time. It decided that certain immediate actions had to be taken and called a proposal by CEB’s subsidiary Lakdhanavi Ltd. (which had already built two power plants by that time). Lakdhanavi in response gave a proposal to build a power plant to be owned by CEB. Then two world-reputed companies from Japan and China also gave similar proposals. A CANC was appointed to evaluate the three proposals. 

The CANC was divided on the matter. Lakdhanavi had a cheaper cost but had not done a similar combined cycle power plant before. After the intervention of the then Ministry of Power and Energy Secretary M.M.C. Ferdinando, sanity prevailed and with enormous confidence placed on the ability of Sri Lankan engineers, the project was awarded to Lakdhanavi by the Cabinet. Thus the present Yugadhanavi Power Plant was designed and constructed by Lakdhanavi Ltd. in less than three years. Sri Lankan engineers proved the confidence placed on them was not misplaced. If not, everybody now considering it as a Sri Lankan national asset would have seen it as a Chinese asset. 

The proposal was on DBT (Design, Built and Transfer basis) where Lakdhanavi acted as a contractor to the CEB. However, due to the situation prevailing, the Government requested to convert the DBT basis to the BOOT model and to develop it through a Special Purpose Vehicle (SPV) company. West Coast Power Ltd. was established for this purpose to own and operate the 300MW combined cycle power plant. Lakdhanavi arranged the financing of $ 300 m to West Coast Power Ltd. The power plant was commissioned in May 2010 in Memorandum and Articles of Association of the company and the Companies Act of Sri Lanka.

The present shareholding of WCPL is: Treasury 50%, EPF 27.05%, LECO 18.18% and Lakdhanavi 4.77%. The project was initially funded by 30% equity and 70% debt. The debt was arranged from overseas with support of several Export Credit Agencies (ECA) of respective governments. These ECAs needed a sovereign guarantee from the GoSL as a security. 

As per the country’s law, to provide a sovereign guarantee the Government should have a minimum of 50% shares of the company. Under these circumstances the Treasury arranged a portion of equity through a loan from the ETF and NSB (and also from Lakdhanavi) and assigned 50% for the Treasury. The 40% shares owned by the Treasury which is currently making headlines in the media are the shares the Treasury received for arranging the Government Guarantee given to the international financiers.

Yugadhanavi has now completed 11 years of its 25-year term. The power plant is operated also by a 100% Sri Lankan engineering team from Lakdhanavi. It is one of the most critically required power plants in the CEB system and Yugadhanavi has responded very well by making itself available for even more than the required amount in each of the past 11 years. Yugadhanavi also proved to be a good investment for its shareholders with approximately 16% return on investment. 

 Sale of shares of West Coast Power to NFE

This year onwards, West Coast Power Ltd. will be free of foreign debt and the income will be mainly in Sri Lanka Rupees in the next 15 years, during which the present Power Purchase Agreement is valid until 2035. As per this Power Purchase Agreement, the Net Present Value of the future income for the next 15 years (operating in an assumed LNG tariff to CEB) has been estimated by the Chief Government Valuer on behalf of Treasury. It was said the valuation for 100% shares was Rs. 127 billion. It is believed the Treasury is to sell 40% of its shares for approx. $ 250 m, which seems to be in line with Government valuation. 

One should also consider that any investor who buys these shares having invested in US Dollars, such as NFE, has to get a return that will be based on Sri Lanka Rupees and is exposed to the risk of rupee depreciation. 

Whether we like it or not, this country is now faced with its most severe foreign exchange crisis. When a household has more expenses than its income, it has two choices. One is to borrow and another is to sell something valuable. Borrowing we have done enough and it has now hit the limit. So like any household, we have to turn to the remaining option i.e. selling valuable assets. That is the hard reality.

The problem is selling national assets in Sri Lanka has such a hard perception perhaps due to bad experiences in the past. Let’s say you own a gold sovereign which is valued at $ 500. Now whether you have the sovereign or USD notes in your safe, there is no difference. Your wealth has not diminished. There is nothing wrong in selling an asset as long as two conditions are met: (a) It is sold at its correct value (2) Proceeds are used for its intended purpose. 

Thus, the offer of $ 250 million of New Fortress seemed to be satisfying the first condition. It is up to the Government to see whether the second condition also is fulfilled after the transaction.  

The strong protest against the Yugadhanavi transaction is due to the sale being conditional to the prospective buyer getting an exclusive right to invest in a LNG terminal in Sri Lanka and to operate it and also to supply LNG for a five-year period.  

Giving LNG infrastructure development rights to NFE

The CEB has already called for a tender to bring a Floating Storage and Regasification Unit (FSRU) and the connected pipelines. The CEB has guaranteed a take or pay for storage and regasification of LNG quantities starting with 38 million MMBTU per annum which will eventually go up to 50 million MMBTU per annum for 10 years; on average, take or pay LNG storage and regasification quantity is 42 million MMBTU per annum. 

The quoted price for the FSRU and the pipeline was $ 3 per MMBTU and the selected offer was from a joint venture of Chinese and Pakistan companies. It is reported that another US company bid at $ 1.49 per MMBTu but was disqualified by CEB for technical reasons. In case the FSRU is awarded to the Chinese/Pakistan JV, CEB and CPC will have to pay $ 126 million per year for storage and regasification of LNG alone as a rental. 

The New Fortress Energy USA offered for FSRU and the pipeline for storage and regasification of LNG for five years for a minimum quantity of 35 MMBTU per year of LNG at USD 1.45 for MMBTU. Thus, the annual cost to the Government will be $ 50.75 million. So the savings on the FSRU and the pipeline alone is approx. $ 75 m per annum thus resulting in $ 375 m saving for five years in addition to the $ 250 million the Government would get for the 40% shares of the Yugadhanavi Power Plant compared to accepting the offer of the Chinese/Pakistan joint venture. 

Giving LNG supply rights to NFE

The New Fortress Energy also offered to supply LNG for five years for a minimum quantity of 25 MMBTU per annum for two power plants in Kerawalapitiya totalling 650 MW. 

The Government decided that the LNG will be purchased by a 100% Government-owned entity and sold to the respective independent power producers. The LNG purchaser will be a Government entity which has representations from the Treasury and Ministry of Power and Energy. 

Thus the Government entity will purchase the LNG from the New Fortress Energy (NFE) on three internationally recognised formulae. The Government as the purchaser decides on each year the formula to be used. Also, the NFE agreed, considering the seasonal variations, that if in a wet year, the purchaser is not in a position to buy the pre-agreed quantity in a particular year, to postpone the shortfall to next year. Furthermore, there will be an option for resale of any unused LNG with consent of the Government to mitigate the losses arising out of the Take or Pay concept in the LNG industry worldwide. It is well known that the LNG business around the world is based on a minimum Take or Pay basis whoever is the buyer. 

An independent critic should also consider the geopolitical realities in the region. Everybody is aware of the concerns of Western nations about Sri Lanka’s inclinations towards China. The Government of China already owns our Hambantota Port. In the Colombo Port there is already a Chinese-owned terminal. India too is concerned about these developments.

The pressure is building from the West by way of resolutions in UNHRC and withdrawal of GSP+ by the EU, etc. The US and EU are our biggest trade partners next to India. When recently CEB awarded a solar project tender in a northern island very close to India, there were diplomatic rumbles that emanated across the Pork Strait.

In this scenario giving a Sino-Pak presence in a very strategic energy venture close to Colombo will not be seen kindly either by the West or India. One can therefore argue that making the LNG terminal a US-based company’s asset is a smart political act of the Government (which so far seems to be very much pro-Chinese) as well.

It is up to the Government to come up with a gas supply contract which is not disadvantageous to Sri Lanka with NFE. That is yet to happen. However, given the current economic and political crises Sri Lanka is faced with, an independent analysis of the “Yugadhanavi deal” seems to suggest that one has to see the trees and not the forest to pass a fair judgment.