The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A total $377.4 million investment is required to convert Bahamas Power & Light’s (BPL) generation plants to liquefied natural gas (LNG), an IMF ‘working paper’ revealed yesterday.

The paper, which drew on Inter-American Development Bank (IDB) data, forecast that a $189.3 million spend is necessary to convert both BPL’s existing plants and 120 Mega Watts (MW) in new generation capacity by 2023.

The figures, and the timing of their release, are especially interesting given that 120 MW of LNG-fuelled, short-term additional generation capacity is exactly what is proposed in the former Christie administration’s arrangement with New Fortress Energy.

The IMF paper, ‘Public Investment scaling-up and debt sustainability: The case of energy sector investments in the Caribbean’, noted that besides $39.3 million to convert BPL’s existing power plants to LNG, further investments of $60 million and $90 million are required to add an additional 40 MW by next year, and another 80 MW by 2023.

That is just for generation conversion and expansion. The IDB data cited by the paper estimated that a $188.1 million investment will be needed to construct LNG regasification terminals and associated infrastructure in the Bahamas, which are another component of the New Fortress proposal that the Minnis administration is now considering.

The figures cited by the IMF paper give an insight into the scale of the investment necessary to overhaul the Bahamian energy sector, with its authors describing LNG as a “viable” fuel source for the Bahamas and five other Caribbean countries.

The paper assessed whether public investment (capital spending) by the Government was justified to deal with major infrastructure weaknesses, especially if they were self-financing and led to GDP growth in the medium to long-term.

With the Bahamian GDP stuck in ‘low growth’ mode despite Baha Mar’s impending opening, and the Government’s latest borrowing binge set to potentially add $722 million to the $7 billion-plus national debt, energy sector reform is becoming increasingly vital to turning this nation’s economic and fiscal prospects around.

Reduced energy costs, and a more reliable supply, would improve the competitiveness and profitability of all Bahamian businesses and the wider economy, as well as stimulating increased consumer demand from greater disposable income.

The IMF paper, released yesterday, estimated that the Bahamas’ energy requires $471 million in total investment, breaking this down into $150 million for upgrading existing power plants/building new ones; $251 million to introduce LNG facilities; and $70 million for renewable energy.

The Bahamas’ capital needs were second only to Jamaica’s $740 million in the Caribbean, and were equivalent to 5.3 per cent of GDP against a backdrop of just 0.4 per cent annual economic growth from 2006 to 2015.

Pegging annual debt servicing costs at $39 million should the Bahamas execute such reforms, the IMF paper said the investment would pay for itself if it delivered between a 7.1-8.3 percentage point reduction in BPL’s annual operating expenses over a 15-25 year period.

“Energy investments in the Caribbean are an example where public investment projects could generate tangible cost savings to both cover financing costs and support long-run growth,” the IMF paper added.

“A sustained reduction in the energy bill would deliver measurable long-run competitiveness and growth benefits, with favourable impact on public debt sustainability across most Caribbean economies. The estimated impact on long-run GDP following the pass-through of cost savings, net of debt service, yields a more favourable debt trajectory than the baseline in all Caribbean countries.”

The paper’s authors agreed that finding private sector investment remained a “first-best solution” for the Bahamas and other Caribbean nations, but warned that this nation’s small market size and limited economies of scale inevitably meant “substantial” government involvement.

They found that the Bahamas’ relatively low debt-to-GDP ratio, in comparison to other Caribbean countries, meant it would be “safe” for the Government to finance the investment required - although this nation’s 2017-2018 Budget data may soon lead to a reappraisal of this position.

Such investment, the IMF paper projected, would likely reduce the Bahamas’ debt ratio by a modest 4 per cent of GDP between 2019-2030, due to a combination of improved energy efficiency and growth triggered by the expenditure.

“For public financing of energy investments to be feasible, the baseline debt trajectory needs to be sustainable,” the authors reiterated. “Even if the debt trajectory is not explosive, relying entirely on public investment financing in such highly indebted states would increase vulnerability to large macro shocks, including natural disasters, by reducing available fiscal space and capacity to borrow.

“Hence, securing private sector financing of energy investments, where possible, would significantly improve the public debt path over the long run through reducing the initial rise in public debt load while retaining the long-run, growth-enhancing impact, provided that a significant share of the cost savings is reinjected into the economy—for instance, passed on to consumers in the form of lower electricity tariffs.”