JOHN THOMPSON, the Desalination Company’s general manager at the Point Lisas plant this week.

Photo: Adrian Boodan

The Desalination Company is giving consideration to an Initial Public Offering of shares on the local stock market.

Unlike many companies that look to the equity market for capital, Desalcott is not now profitable, said John Thompson, the company’s general manager.

Pointing to the fact that the company has a 20-year contract with WASA, Thompson said using a conservative approach “it may take getting towards 10 years to make us profitable.”

While there may be little prospect of a return on investment within 10 years, Thompson said the rate of return over the life of the contract was “reasonable.”

“At this moment in time, we are not profitable but in the future we expect to become profitable as we pay down our current loans.”

Desalcott makes operational profit (revenues exceed expenditure) but not net profit, because it carries a heavy debt load.

Desalcott’s main banker is Republic Bank, which had provided bridging finance for the company.

Last July, Republic provided Desalcott with long-term financing in the form of a US$112.7 million 20-year loan (it’s not a bond, Thompson notes).

Interest on the loan, which was divided into US and TT dollar tranches, has been fixed for five years. For each subsequent five-year period, the rate is refixed. The company has a guarantee that the renegotiated price will be within a certain range, Thompson said.

Thompson declined to disclose the interest rate being charged by Republic Bank, stating, “I’m not sure Republic would like me to quote it in the newspaper.”

In terms of timing, Thompson said the company was looking at an IPO early next year.

The company might have come to market earlier, but it was in the process of ramping up production from 22 million imperial gallons a day, he added. It goes to 24 million gallons later this month and then to 27.6 million gallons next month.

“We suspect that some of the bigger investors would want to see that the expanded plant works well. We think that by next year we should be able to demonstrate that we have an existing plant that works well.”

Desalcott is 60 per cent-owned by local contractor Hafeez Karamath, whose foreign joint venture partner is US-based Ionics, a water treatment company.

It is too early to say by how much the partners might sell down, says Thompson. He said, however, he would “imagine” that the new shareholders would have more shares than the existing shareholders.

Thompson was reluctant to disclose the exact amount of money Desalcott hopes to raise from the IPO.

He did disclose that the company’s current equity is the equivalent of US$20 million, adding that he hoped the IPO “would be at least that.”

So, is the IPO meant to raise capital to reduce some of the company’s debt?

“That’s one possibility,” said Thompson, helpfully adding that “the other possibility is that our two existing shareholders are probably keen to reduce their shareholdings.”

Both Ionics and Karamath want to reduce their shareholding in Desalcott because they “want to free up some capital to move forward” and do other development projects.

One of the reasons the company is not more solvent is because the plant cost more than the initial investors expected to build.

The Point Lisas site required more civil work which, along with delays in construction, pushed the total funding requirement up by 25 per cent.

“The funding (and I don’t want to hoodwink you here when I say funding, this was how much had to be raised to cover everything) went up from US$120 million to US$150 million.

“The engineering, procurement and construction (EPC) cost went from US$86 million to US$115.7 million.”

The longer construction time and the higher costs would have wreaked havoc with the initial projections, Thompson agrees.

“Yes. It was a good job interest rates came down.”

Delays in completing the construction of the plant did not only add substantial costs to it, it also led to claims by WASA that desalcott owes the utility liquidated damages.

The matter of liquidated damages is still to be sorted out and after going off the record briefly, Thompson said, “Desalcott feels it was not at fault for the delay.”

Contract above reproach

Desalcott is one of several projects undertaken by the former UNC administration which were beset with allegations of corruption and favouritism.

Comparing Desalcott to InnCogen and the airport, Thompson said that unlike those projects, the desalination project went through a “full bidding process.”

An invitation to prequalify was issued. Three bids were submitted and evaluated by a 12-member committee. Desalcott was adjudged the winning bid.

The bidding process is above reproach, says Thompson.

“My understanding is that there has been talk of an investigation for in excess of 18 months now. And I don’t know if ever, formally, the investigation will be said to have been completed.”

Water price competitive

The price of water sold by Desalcott to WASA is globally competitive, says John Thompson, especially when the very high quality of the Point Lisas plant is taken into consideration.

In 2000, Barbados commissioned a desalination plant, which is being operated by Ionics, the same company which partnered with Karamath to build the Point Lisas plant.

The local plant, which will be capable of producing 55,000 cubic metres of water, cost about US$120 million to build.

The Barbados plant, with a rated capacity of 30,000 cubic metres, cost US$12 million.

Asked to compare the T&T plant with a similar plant in Barbados, Thompson said that the Barbados plant took in brackish water with about 1,000 parts per million of dissolved impurities. The Barbados plant takes in water that has been naturally filtered by coral.

The T&T plant takes in sea water with about 30,000 parts per million of impurities. The local plant needs extensive pre-treatment to remove “suspended solids” in the water.

The reverse osmosis train on the local plant works at 1,000 pounds per square inch. In Barbados, it’s closer to 250 lbs per sq inch.

The membranes, piping, pressure vessels and pumping at the T&T plant were all more expensive, said Thompson.