KIRAN MATHUR MOHAMMED
Petrotrin’s refinery is an objectively terrible asset, and the government is right to take what it can get. Its best option now is to give it away to an energy company that can prove that it has the cash, capacity and track record to be able to properly and profitably restart the refinery as a tax-paying entity.
It’s a bit of a relief that the charade of negotiation with Patriotic is now over and the government has rejected its offer to buy the refinery. The government knew from day one that the union would never be able to present a viable deal, but of course politically it had to entertain the discussions to avoid upsetting the union.
The union just doesn’t have the cash, and its proposal is unbankable on a standalone basis.
Several weeks ago I wrote: “Anyone financing the union deal would inevitably have demanded the equivalent potential upside returns and charged a huge cost of capital – whether directly or indirectly (as it seems was the case) in the form of huge tax breaks – and that’s even in the highly questionable event that any deal could be completed at all.”
So said, so done. When I saw the Credit Suisse deal, it was obvious that this was one of those cases where the senior banker in New York likely said, “It can’t hurt, send over a proposal, but don’t waste too much time on it.”
The State would have had to either give Patriotic and Credit Suisse the equivalent of $5 billion in tax credits or transfer US$500 million in government-guaranteed Petrotrin receivables (including Heritage’s receivables) for the financing to become available.
Pretty audacious, I must admit. The government is correct to reject it out of hand.
Petrotrin is a dubious investment for any serious player. It makes no sense to pay money to buy a company with ancient legacy assets in a high-cost jurisdiction, especially if you know that the deal comes with lots of political and environmental risks and a riled-up union. The asset is illiquid and difficult to sell. Ancient assets mean the risk of accidents are still high.
Oil prices have always been volatile, and the massive international regulatory and consumer shift away from fossil fuels means that short-term investor appetite and medium-term demand for refined oil will both be weak.
Oh, forgot to mention – anyone who takes over the refinery needs to put in several hundred million USD to get it started.
Why would an international (or local for that matter) investor take on all this, when there are cheaper, cleaner and more attractive assets in other countries with fewer headlines and headaches?
What options do we have?
Not many. In the original bidding round, the next best bidders were two international energy companies, Beowulf and Klesch. They both effectively offered nothing to take over and restart the refinery (Beowulf offered a US$42,000 monthly lease and Klesch indicated the only payment to government would be through taxes).
This is the best we are going to get. We can forget about an upfront price – the refinery is worthless. Even if we just shut it down, it would cost millions just to clear the land.
Remember, anyone who takes over the refinery still needs to put in hundreds of millions to restart it. If any such offers still stand post-covid19, we should take them. It will be more than worth it to create hundreds or even thousands of well-paying productive jobs and bring much-needed capital into the country. And if all goes well, the government will finally start seeing some much-needed taxes.
We should acknowledge the reality of the situation and support the government to finalise the renewed bidding process as swiftly and transparently as possible.
The country is spending too much time arguing over this issue. While that’s understandable, given Petrotrin’s historic symbolic value, the rest of the world is moving on. Dwelling on issues like the refinery is distracting us from the deeper structural structural reform and innovation that needs to happen.
The public sector should take Petrotrin’s restructuring as a lesson and encouragement for deeper reform. The private sector should not sit waiting for Petrotrin to start back. It should start retooling and adapting to a future where fossil fuels are not as relevant.
If we do neither, we will consign ourselves to another decade of stagnation and decline. We need to get this done and move on.
Kiran Mathur Mohammed is a social entrepreneur, economist and businessman. He is a former banker, and a graduate of the University of Edinburgh.