The government authorised an €88 million bank guarantee to cover a massive bank loan for the private consortium selected to build the new gas power station, The Sunday Times of Malta can reveal.

Negotiations on the financing of the project between Electrogas Malta Ltd and Bank of Valletta could only be concluded on the basis that the government guarantees the private loan.

The government last night said the bank guarantee was temporary and in line with EU law.

The new power station, a key electoral promise made by the Labour Party, was meant to start producing energy from last March, but has been delayed by 18 months.

The new LNG power plant is expected to be in place by June 2016.

Following months of discussions, on December 19, 2014, the government authorised a deal to issue a bank guarantee of €88 million to cover the bank’s exposure in case something goes wrong with the Electrogas project.

On the basis of this bank guarantee, BOV’s branch in Republic Street approved a loan to the private consortium of over €101 million. This amounts to almost a third of the €370 million needed to finance the project.

Sources close to the bank told this newspaper that during the long negotiations it became evident the private consortium did not manage to raise the necessary finance. Instead, it turned to the government to provide a bank guarantee so that the bank could cover its exposure and grant the loan.

“Without this loan, the gas power station project would not have been possible. Thus, the government had to do what it never did before and issue an €88 million guarantee on a loan given by the bank to a private company,” the sources said.

Without this loan, the gas power station project would not have been possible

Sources at the Finance Ministry confirmed that a government bank guarantee to cover the loan to a private entity is “unprecedented” as the government normally only issues such guarantees to entities in which it has a shareholding.

The government has no link to Electrogas Malta Ltd as the company is fully owned by private interests, including leading companies – Tumas Group and Gasan.

So far, the government has declined to give this newspaper a list of bank guarantees and letters of comfort issued in 2014.

Last night, however, the government said the new power station is based on a project financing model.

In order to benefit from the rates obtained by Enemalta through the competitive process and provide additional certainty to the banks with respect to payments due to Electrogas, the tender document provided for a Security of Supply Agreement. The agreement would allow the government to step into Enemalta’s place and take over the power purchase agreement and the gas supply agreement with Electrogas on the same terms and conditions under pre-defined circumstances.

“In order to ascertain that no undue advantage is given, the government is in discussions with the European Commission with a view to ensuring that the security of supply agreement does not grant any incompatible State aid.”

In the interim, the lending banks have provided funding to Electrogas through a bridge facility, which enables Electrogas to progress with the project schedule.

The government explained that to provide the bridge financing, and until the security of supply agreement is in place, the banks required a temporary guarantee from the government and a guarantee from the Electrogas Consortium.

“This temporary guarantee has been provided in compliance with the Commission Notice on the application of Articles 87 and 88 of the EC Treaty to State aid in the form of guarantees which sets out the requirements for State guarantees to be deemed to be free of State aid. The satisfaction of the criteria in the notice has also been evidenced to the State Aid Monitoring Board, which has granted its approval for the temporary guarantee to be issued.” Electrogas Consortium was required to pledge its equity and letters of credit as their form of temporary guarantee. Moreover, Electrogas was also required to pay the government fees for having issued the temporary guarantee.

Last October, Electrogas project coordinator Michael Kunz issued a statement underlining that the project was well funded and the consortium’s members “possess the necessary financial resources to continue funding the development costs of the project”.

Mr Kunz said last night: “No project this large and complex would be possible without the help, support and cooperation of many parties, including the government, Enemalta, the planning authority and Transport Malta. The company is grateful for the support it has received and looks forward to working closely with all parties to complete the project.”

Upon the signing of the agreement with Enemalta in May 2014, Electrogas was meant to make a €30 million upfront payment to fund the lower electricity tariffs, but the payment had been delayed.

On December 22, just three days after the government’s final approval of the €88 million bank guarantee to cover the Electrogas loan, the government announced it had received the first €2.5 million instalment from the consortium.

The government said the rest of the €30 million would be paid in monthly instalments over a 12-month period.

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