Creative Debt Avoidance or Hidden Burden?
The Case of the Rio Cobre Water Project PPP That May Raise Water Rates for Jamaicans
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Video: Jamaica’s Prime Minister Dr. Andrew Holness at the Rio Cobre Water Treatment Plant groundbreaking in March 2024 where he makes the case for Public-Private Partnerships (PPPs) as among the “creative ways” to fund infrastructure to avoid adding to the public debt so Jamaicans don’t get burdened with new taxes.
A multi-billion dollar project designed to boost Jamaica’s water supply has advanced despite a sharp interest rate hike.
Originally estimated at 9.5%, the interest rate has now surged to a weighted average rate of 15.16% fixed for 22 years, pushing the cost of the project from US$76 million (J$12.22 billion) in November 2022 to US$92 million (J$14.75 billion) in December 2024.
The project, structured as a Public-Private Partnership (PPP), involves the government-owned National Water Commission (NWC) and Rio Cobre Water Limited (RCWL), a private entity backed by VINCI Construction Grands Projets, a member of the French construction conglomerate Vinci Group, Jamaica Producers Group Limited, Eppley Limited and NCB Capital Markets Limited. In 2022, one of the project’s financiers, Development Bank of Jamaica (DBJ), listed its cost at US$60 million.
In a letter dated Dec. 9, 2024 that was shared with 18º North, Financial Secretary Darlene Morrison called the interest rate increase “exorbitant” and expressed concern that at a time when global interest rates are on a downward trajectory, locking in at a high rate would “be at a disadvantage to the NWC as well as the Central Government and the country,” as certain PPP structures impact the public debt.
Despite these concerns, Finance Minister Fayval Williams approved the project, stating that the debt would be borne by RCWL, not the NWC, and that no sovereign guarantees were involved.
Read the Cliff’s Notes version here:
Sovereign guarantees would help lower the interest rate but add to the public debt and potentially increase the taxes that Jamaicans have to pay.
But since the NWC will now be required to pay a significantly higher monthly tariff of nearly J$100 million per month, will Jamaicans be taxed anyway in the form of higher water rates? Should the government have explored other options to reduce the project’s financing costs?
Financial Concerns and Escrow Account
It was precisely because of the financial impact to the NWC why a “no objection” and, or approval had to be sought and gotten from the finance ministry in the first place.
In Morrison’s letter, she urged NWC Acting President Kevin Kerr to try to maintain the interest rate at 9.5% and recommended the NWC negotiate down or seek to remove a requirement for an escrow account to cover six months of debt service payments, called a Debt Service Reserve Account (DSRA), as this was another significant contributor to the project’s inflated cost.
She pointed out that the NWC was already being required to maintain a reserve account for payments to RCWL, and adding a DSRA would further burden NWC’s “already strained cash resources.” According to the latest financials on NWC’s website, the entity lost more than J$3 billion in 2021.
However, the junior minister responsible for water, Matthew Samuda, pushed back, urging a review from the finance minister as Morrison’s position “imperils the project” just before finalizing financial closure.
In a Dec. 12, 2024 letter, he explained that RCWL struggled to secure local financing after the 2022 signing of the water purchase agreement between NWC and RCWL, forcing it to seek international partners. Eventually, IDB Invest and the French development agency Proparco joined as financiers, alongside local institutions such as Sagicor Group and DBJ.
Samuda called the 15.2% interest rate for a loan in Jamaican dollars fixed for 22 years “reasonable” under the circumstances, noting that large local companies are borrowing at up to 14% for five-year terms. Additionally, he noted that the DSRA is a “market standard” that became “fundamentally unavoidable” after efforts to limit or remove it were unsuccessful. He said to limit the financial burden on the NWC, RCWL’s backers agreed to cover its upfront costs while NWC will be responsible for the funding cost of it and the return on equity related to it.
Escalating Costs and the NWC's Burden
As a result, NWC’s monthly fixed tariff for capital costs will increase from J$177 million to J$275 million, though the variable rate for operational costs went down from J$33.15 per cubic meter to J$30.01 per cubic meter.
Since the project is expected to produce an additional 15 million imperial gallons per day (2.044 million cubic meters monthly), that works out to J$336.4 million per month at the higher rate, which is J$91.6 million more than the previous J$244.8 million, according to the NWC’s regulator, the Office of Utilities Regulation (OUR).
While construction costs rose only slightly from J$10.3 billion to J$10.42 billion, Samuda stated, increased financing costs, due diligence expenses, professional fees required by the multilaterals, and the DSRA requirement pushed the overall cost from J$12.22 billion to J$14.75 billion, a 21% increase.
On Dec. 13, 2024, Finance Minister Williams wrote to NWC’s Kerr, “Please note my approval for the Rio Cobre Water Treatment Plant PPP to proceed as per the reasons outlined above,” and on the same day, the loan contract was then signed with IDB Invest.
Williams’ reasons included that “The NWC will NOT be signing any documents relating to the debt,” and “there is no guarantee (express or implied) from the GOJ or NWC.”
Williams pointed out that between 2021 and 2022 when the rate was estimated at 9.5%, Bank of Jamaica’s (BOJ’s) overnight rate was 0.5% “at the low,” a spread of 9 percentage points for a private borrower. With BOJ’s overnight rate at 6.25%, if the same 9 percentage point spread is applied, the rate would be 15.25%, “which is the rate that the borrowers have been able to secure.” She conceded that if it were the government borrowing at this rate then the rate would be “exorbitant.”
Questions on the Rate and Cost Increases
But an analysis by 18º North challenges Williams’ justification. When the water purchase agreement was signed in November 2022, the Bank of Jamaica’s (BOJ) overnight rate stood at 7%. So, if the projected borrowing rate then was 9.5%, the spread would have been a mere 2.5 percentage points. Applying the same spread to the BOJ rate of 6.25% at the time of Williams’ letter in December would suggest an expected rate of 8.75%, significantly lower than the 15.16% ultimately secured. The BOJ policy rate has since been reduced even further to 6%.
Williams didn’t explain why she based her calculations on the historical 0.5% BOJ rate rather than the prevailing rate at the time of the 2022 agreement. But, like her, DBJ also used a historic estimate. It told 18º North that when the 2022 PPP agreement was posted on its website with a cost at US$60 million, the estimate was from January 2021 and only included capital expenditure and not the financing costs.
Criticism and the Case for Competitive Bidding
Consulting economist in the water sector, Donovan Dowie criticized the government’s decision to accept the 15.16% rate, calling the rationale “absolute nonsense.” Dowie, who’s done work for some of the multilateral agencies, including IDB, argued that international competitive bidding could have reduced costs. “People from Hungary, Canada, Germany, all over would have applied,” he said. The OUR also indicated that it had previously mentioned back in 2017, when it was introduced to the project, that competitive bidding would have been preferred, but that decision was out of its hands.
Dowie further surmised based on his experience that NWC will be obligated to purchase water from the project, regardless of demand, effectively guaranteeing RCWL’s revenue, so that raises questions about the appropriateness of the corporate-level financing terms. (A request has been made for a copy of the agreement to verify this information.)
Given that a local firm like Sygnus Credit Investments Ltd. recently secured 10% annual rates into perpetuity on a $1.7 billion Jamaican-dollar denominated preference share offer, Dowie described the 15.16% interest rate as “high.”
“It’s better the government lend it to themselves, even float it themselves as a bond,” Dowie said.
Government's Reluctance to Increase Public Debt
In January 2025, the Government of Jamaica successfully borrowed J$5.4 billion from investors, who’ll get an average annual yield of 7.8% for the next 25 years.
Even in 2023, Jamaica’s first internationally-marketed bond linked to Jamaican dollars had an interest rate of 6.75% for five years and global central banks hadn’t yet started lowering rates.
But the Jamaican government appears unwilling to add to the public debt.
It’s touted its commitment to fiscal responsibility and plans to achieve a 60% debt-to-GDP ratio by the 2027-2028 fiscal year, down from over 140% in 2012 and just below 70% in 2024.
At the groundbreaking for the Rio Cobre water project in March 2024, Prime Minister Dr. Andrew Holness, who is also the senior minister responsible for water, revealed that from 2009 when NWC submitted its plan for the project, it was authorized to enter into contract with Vinci, but there were delays because his party had lost the election. He hailed PPPs as among the “creative ways” of making sure infrastructure investments like Rio Cobre don’t add to the public debt, and “do not become a burden on you.”
“You’re not going to see an increase in cost,” he assured Jamaicans. “In fact, it is highly likely that your costs will go down and your service will improve.”
Impact to Water Rates
But despite these assurances, the cost of the Rio Cobre project has quietly escalated, raising concerns about its eventual impact on consumers.
Dowie said “YES!” that he expects water rates will increase, but NWC stated that "no decision has been made."
Even if rates remain stable, some observers say the government may have to subsidize NWC as it’s done in the past. In 2020, for example, GOJ provided NWC with J$1 billion for capital investments and directly funded J$9.9 billion in capital projects as the entity suffered losses of more than J$5 billion.
The OUR, which must approve customer rate changes, indicated that it has to ensure that rates are “economical,” and the project "should not result in a spiralling of rates.” It said it doesn’t know about DBJ’s US$60 million cost since the figure presented to it in 2022 by NWC was US$76 million.
In his letter, Samuda had indicated that the final interest rates were within the OUR’s acceptable range. When confronted about that, the OUR said it ultimately supported the project because of the additional water that would be supplied by the project. It also said whereas the previous loan was denominated in US dollars, this one would be in Jamaican dollars, eliminating the foreign exchange risk. Plus, there are provisions for refinancing.
The OUR said the project’s success will hinge on whether the NWC can lower the proportion of water it loses in the supply area to the mid 40% range. For decades, 70% of NWC’s water has been lost to issues like leaks, theft and faulty water meter readings, so only 30% has traditionally been sold. The OUR says, based on a plan currently being implemented, the NWC has had some success in bringing down the rate in some sections of the supply area and has a “good chance” of hitting its targets. The OUR cautioned, however, that if the NWC is unable to “significantly reduce” its non-revenue water in the supply area, “this poses a risk for higher rates.”
18º North has since learned that non-revenue water rates in the supply area currently stand at 46% in Kingston & St. Andrew, 45% in Portmore, St. Catherine, and 74% in St. Catherine. While it’s not clear the proportion of the new water that will be used in each area, the project’s original intention was to provide for the growing needs in St. Catherine.
Construction of the Rio Cobre plant is expected to commence in February 2025 and take two years to complete. RCWL, which will operate the facility for 23 years before ownership is transferred to the NWC unless an extension is granted, said only when it supplies the water, will the NWC be billed. Since there will be more water to sell, it said the water will be “attractively priced.”
None of the government ministers, Holness, Williams or Samuda, would answer why there was no sovereign guarantee provided or why there was seemingly no competitive bidding.
But with costs having already escalated at the start of construction, and with the newly-released budget estimates for 2025-2026 showing NWC expected to have yet another deficit — J$1.9 billion — and the government having to support it with J$10 billion for other capital projects, the question remains: Is the government’s facilitation of a 15.16% interest rate for this project because of its reluctance to add to the public debt really making financial decisions in the best interest of Jamaicans, or is it setting the stage for potentially higher consumer costs, just of a different kind?
“The people are going to have to pay back for it anyway,” Dowie said.
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Editor’s Notes:
This story has been updated mostly to reflect the new budget estimates in the final paragraph.
The exchange rate used for the first reference to the project cost being US$76 million (J$12.22 billion) in November 2022 to US$92 million (J$14.75 billion) was based on the numbers in Samuda’s letter in December 2024.
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