Editorial | Unravelling JPS

With markets uncertain about the company’s continued control of Jamaica’s power grid, the Government’s decision to lend Jamaica Public Service (JPS) US$150 million to help pay for the post-Melissa rebuilding of its electricity transmission and distribution system is as understandable as it was inevitable.

After all, no one is willing to loan JPS large sums of money if neither lender nor company knows if JPS will still have a licence to continue its Jamaica business in a year-and-a-half’s time. Yet, the Government is anxious to have light and power returned in the shortest possible time to the tens of thousands of individuals and firms in the west and southwest of Jamaica, who lost electricity when Melissa, an unprecedented Category 5 storm, battered the region at the end of October. The full restoration of power is also crucial to the island’s broader economic recovery.

In these circumstances, this newspaper will not be surprised if JPS leans on the Government to spring for more than the US$150 million which the administration has already committed.

But, the logic of the Government’s action notwithstanding, there are important questions for both the finance minister, Fayval Williams – who has been inexplicably quiet about the economic and fiscal implications of the hurricane – and Daryl Vaz, the energy minister, to answer about the JPS deal.

The most obvious of these is the interest rate on the bridging loan, which, surprisingly, per Mr Vaz, was still being negotiated at the time he announced it in Parliament on Tuesday, although the funds were being disbursed. While the urgency of the situation is appreciated, it is unusual for business, even that related to important national considerations, to be conducted in this fashion.

Other important questions (which have also been raised by the political opposition) relate to the current valuation of JPS.

INTER-RELATED GROUNDS

These are important on two inter-related grounds.

First, when the Government announced in July that it wouldn’t renew JPS’s licence in its current form, it acted under Condition 30 of the current agreement. That means that, at the end of the two-year notice period, the Government is obligated to purchase the power generation and distribution company as a going concern, at “a fair market price”. That price is to be determined by “an agreed team of independent valuation experts”, or, in the event of disagreement on the valuators, by arbitration.

Second, Mr Vaz has disclosed that, if in July 2027 there is no agreement for JPS to continue its monopoly to transmit and distribute power, the Government’s loan(s), if not paid back by then, will be converted to equity. Technically, the loan will become part of the Government’s payment for JPS: its power plants and transmission and distribution system.

Mr Vaz explained: “What is important is to indicate that, in any scenario, the Government is protected. Scenario one is a five-year loan, which they have the option to pay out in two years, if a new licence has been agreed on, which would allow them to raise capital, new capital based on a new licence.

“And, secondly, if that negotiation is not concluded, then the Government has already indicated in the letter that I wrote that the Government would make arrangements to acquire their assets, which means that the funds that will be owed will be taken out of any disbursement.”

HAPPEN IN PARALLEL

Two things, apparently, will have to happen in parallel over the next 18 months. The Government, having rejected the company’s request for a 15-year rollover of the current licence, the parties, presumably, will attempt to negotiate an agreement with which either side can live. At the same time, there has to be detailed work to determine a “fair market value” of the JPS’s assets, in the absence of agreement.

Says Condition 27 (b) of the licence: “[T]hree (3) calendar months before the expiration of the licence or extension thereof the licensee will furnish to the GOJ (government of Jamaica), a certificate by their auditors of the probable estimate of the sum to be paid by the GOJ upon acquisition and arrangements will then be concluded as to the manner of payment by the GOJ …”

These matters were further complicated by the advent of the storm, as well as the signal by one of JPS’s two major partners (40 per cent), Japan’s Marubeni Corporation, that it wished to exit the investment – obviously ahead of the licence/sale negotiations with the Government.

Prior to and since the storm, Marubeni has been unable to find a purchaser. The other big partner, Korea’s East-West Power (also 40 per cent) seemingly has no interest in acquiring Marubeni’s stake. The Government is the other significant shareholder, with around 19 per cent.

JPS has put the overall cost of its rebuilding at US$350 million. It is assured of US$150 million from the Government. Given all the entanglements, there would be little surprise if markets remain skittish about putting up that sum. JPS’s Asian majority shareholders are even less likely to put up equity.

The Government, therefore, will probably have to be an indirect lender of last resort, or guarantor of loans to the company, which Mr Vaz has suggested that it is willing to be.

The critical but missing voice in all this is Minister Fayval Williams’, the keeper of the treasury. She must speak.