Reports raise doubts about the interconnector's viability, just as a major investor agrees to buy a large stake
As far as news goes, the Great Sea Interconnector has had quite a week: first, two reports were leaked that cast significant doubt on the venture, and then, almost immediately, was the revelation that a major French investor owned almost 50 percent of the shares the company had acquired to implement the project. What does it all mean?
The broad strokes: The holding company or special purpose vehicle that implements the project is also called Great Sea Interconnector or GSI. Twist: GSI is a subsidiary of Admie, Greece's independent electricity transmission operator. Admie is the project owner. Any investor who buys into the project would therefore acquire an equity stake in GSI.
Earlier this week someone leaked to the press two reports compiled by consulting firms and commissioned by the Cypriot government. The first was a “red flag analysis” from Charles River Associates, a global consulting firm headquartered in Boston, Massachusetts. In particular, it was about the technical aspects of the connection line – the planned submarine cable that is supposed to connect Cyprus with Crete and is supposed to cost 1.9 billion euros.
“It is unclear whether the development and use of the GSI will ultimately reduce electricity costs for Cypriot consumers,” says the analysis, seen by the Cyprus Mail.
This report addressed the technical feasibility of the submarine cable and its capabilities if and after completion.
The second dossier to make its way to the media was a legal due diligence report from Curtis, Mallet-Prevost, Colt & Mosle LLP – an international law firm based in New York.
There was a careful review of the documents that Greece's Admie had so far submitted to the Cypriot authorities. The purpose: to find out what deal the various interest groups – possibly including the Cypriot state – can expect from the concession agreement offered by Admie.
It is being considered here whether the state itself should become an investor in GSI and pay in up to 100 million euros.
The summary of the Curtis report reads: “The terms and conditions proposed by Ipto [meaning Admie] for an equity investment in GSI are not sufficiently developed and sufficient to attract serious strategic capital investors to GSI, especially considering that GSI offers limited profitability improvements and faces a significant challenge in raising the financing required to develop the project. “
And: “The draft concession agreement is heavily biased in favor of Ipto and would create an unnecessary additional layer of risk for all of GSI’s equity investors.”
Then on Thursday, seemingly out of nowhere, came news that French company Meridiam had agreed to buy a 49.9 percent stake in the connection project. Admie would retain a majority stake of 50.1 percent. Both Meridiam and Admie declined to comment.
This came just hours after we learned that the Curtis report questioned whether the project could attract “serious investors.” But Meridiam has $20 billion in assets under management.
So, in a sense, did the consulting firm do it “wrong”? Furthermore, were these successive developments pure coincidence, or does the timing suggest something else is afoot?
It's not the first time we've seen mixed concurrent messages around the interconnector. It would not be far-fetched to speculate that competing interests in Greece and Cyprus are waging information warfare.
Sources familiar with the matter tell the Cyprus Mail that the “deal” allegedly concluded between Admie and Meridiam probably refers to a so-called term sheet. This is a document that sets out certain terms of a transaction, agreed in principle between the parties, and is usually negotiated and signed at the start of a transaction. Term sheets demonstrate serious intent, but are usually not legally binding.
In short, Admie and Meridiam may still have a long way to go before signing an agreement.
Regarding the timing mentioned above, the same sources say the following:
“Was the announcement of the deal a bluff? Or intends to make up for the leak [consultancy] Reports?”
Regarding the consultants' findings, the sources said they “raise some fundamental questions and concerns.”
The biggest concern concerns the status of potential stakeholders at GSI. The Curtis report doesn't mince words. Citing the draft concession agreement submitted by Admie, it states:
“GSI (and therefore its equity investors) is essentially treated as an Engineering, Procurement, Construction and Installation (EPCI) contractor, assuming all of the typical obligations of a contractor to a project owner in a turnkey construction contract.”
In other words, equity investors – like the Cypriot state – would be reduced to concessionaires rather than co-owners.
Also: “Go [Admie] would have all the relevant rights that owners normally have over contractors in construction contracts, including the right to order variations, suspension and cancellation of planned works.”
In addition, Admie would have the right to approve GSI's selection of contractors. This would require GSI to have the system built and transferred upon completion and Admie to be able to operate the system for the remainder of the concession period.
And the kicker: “GSI – instead of Ipto today – would end up absorbing losses and liabilities resulting from cost overruns in the contracts negotiated by EuroAsia and Ipto with Nexans and Siemens (and in any future contracts with other project contractors) due to liability limitations. “Protection of contractors, obligations to compensate contractors for increased costs or contract price increases due to fluctuations in work and for any severance payments.”
The report clearly describes the agreement as one-sided in Admie's favor.
On all this, our sources commented: “The Republic of Cyprus wants to be a co-owner of the assets. There is no way you would accept being an equity investor without also being a co-owner.”
However, they pointed out that this isn't necessarily a deal-breaker.
“Some problems you can live with, others you can’t. It’s about negotiating with the Greeks.”
On the news about Meridiam and why the company would be willing to act as a concessionaire rather than a co-owner – following the Curtis analysis – the sources offered the following:
“Meridiam may want to take on high risk and maximize returns as it is accountable to its shareholders. So you could opt for the concession/buy-in agreement.
“But the Republic of Cyprus has different criteria – its goal is not to maximize profits, but to ensure affordable electricity for Cypriot consumers.”
The Cyprus Mail learns that the government received the Curtis report about a month ago.
We are also told that the Cypriot state's participation in GSI's equity was never a given.
The state's 100 million euro stake would correspond to around 30 percent of the GSI share.
Another standout observation from the Curtis due diligence report:
“The documents received from Ipto do not provide reliable evidence that the project is financially feasible as envisaged in the Cbca agreement or the Ipto draft documents.”
“Cbca Agreement” refers to the cross-border cost sharing agreement concluded on October 10, 2017 between the respective energy regulators of Greece and Cyprus.
It continues: “The Cbca agreement was signed in 2017 and provides for (i) a total capital cost of the project of €1.5 billion and (ii) a grant of €750 million from Cinea [European Climate, Infrastructure and Environment Executive Agency](iii) 50% financing of the entire capital requirement by the EIB [European Investment Bank]and (iv) 20 percent commercial bank financing.
“In the seven years since: (i) the projected capital costs of the project have increased by €500 million; (ii) the Cinea grant was awarded at an amount that was 93 million euros below forecast.”
Energy Minister George Papanastasiou told the Cyprus News Agency on Saturday that Cyprus is progressing according to plan and that an agreement between the implementing body and an investment fund like that of Meridiam and Admie is always good news for a project.
“If an agreement has actually been reached with such an investment fund, it is always good news for a project of this size, regardless of the specific project, as financial resources will be found to continue and complete it,” he said.
He also confirmed to the Cyprus Mail that he and a team will travel to Greece next week (December 27) to hold “face-to-face” discussions with the Greek Ministry of Energy on the two advisory reports as well as the general status of the interconnector.
Responding to a question from the Cyprus Mail, the minister said he did not know whether Admie would attend this meeting.
The two governments are involved because the interconnector is a public-private project.
Admie, the owner of the project, is itself 51 percent owned by the Greek state. The State Grid Corporation of China holds a 24 percent stake, the rest belongs to other investors.
State Grid, a Chinese state-owned power company, is the largest utility company in the world. According to Wikipedia (as of March 2024), State Grid is the third largest company in the world in terms of sales, behind Walmart and Amazon.
The Chairman and CEO of Admie is Manousos Manousakis. The company's deputy CEO is Qu Qi, a Chinese national. Another Chinese citizen, Yin Liu, sits on the board.
Although the Curtis report states that GSI was founded and is currently based in Greece, the company is also registered as an “overseas company” in Cyprus.
Searchable registry records show a company called “Great Sea Interconnector Single Member SA.”
It was registered in Cyprus on August 6, 2024. Its directors include Manousos Manousakis and Yin Liu.