– IMF highlights “generous” provision as potential risk for reduced profits for nation
By Abena Rockcliffe-Campbell
The International Monetary Fund (IMF) has noted that Guyana’s generosity to oil giant ExxonMobil creates perfect conditions for the company to engage in actions that can result in the country securing even smaller revenues than that which is expected.
Guyana has committed to paying all the interest on loans secured to fund operations at the Stabroek Block. The block is currently worth over US$320B.
The 2016 Production Sharing Agreement (PSA) that Guyana signed with ExxonMobil has made such “generous” provisions. The agreement states that ExxonMobil will be able to recover the cost of “interest, expenses and related fees incurred on loans raised by parties comprising the contractor for petroleum operations and other financing cost provided that such expenses, fees and costs are consistent with market rates.”
The provision is very broad and covers any cost that ExxonMobil may incur for petroleum operations and even “other financing.”
IMF thinks that this provision can prove to be disadvantageous to Guyana.
The international body said that the treatment of interest expenses in the ExxonMobil/Guyana contract appears to be generous.
The fund said that the treatment of interest expense is important because “excessive or abusive use of debt can have a detrimental impact on the amount of profit oil to be shared between the government and the contractor. The mission understands that in Guyana’s PSAs interest expenses, irrespective of the source of financing, are permitted to be recovered provided that such expenses are consistent with market rates.”
Moreover, IMF noted that interest payments are exempt from withholding taxes, providing yet another incentive for contractors to finance their costs with debt.
Further, IMF said that it is quite common to have limitations on interest deductibility.
Some countries disallow interest expenses or limit the amount of debt permitted for cost recovery purposes through caps on debt to equity ratios or earning stripping rules.
The international body said that other countries may prescribe that interest may be deductible only on borrowing to fund development costs or a maximum percentage of such costs.
IMF pointed to Uganda’s model PSA, which allows interest on loans (from any source) to finance development operations only up to 50 percent of the total financing requirement. Interest on loans to finance exploration is not allowed.
“Such a restriction could be supplemented with regulations or guidance defining the financing requirement as the cumulative negative cash flow, including tax paid but excluding other disallowed costs.
The mission understands that in Guyana, it is common to exempt petroleum and mining companies from withholding tax on interest payments. Therefore, limiting the amount of debt for cost recovery purposes or disallowing interest expense altogether in PSAs may be appropriate.
In many cases, oil companies, which form a consortium for a project would borrow from their parents companies. And there are innumerable case studies which show that it is in these instances, corruption takes place.
This dose of reality was recently provided by Local Content expert, Anthony Paul, to those who attended the enlightening Spotlight on Energy forum, which took place in Port of Spain a few weeks ago.
There, Paul said that oil companies are often borrowing funds, many times from their parent entities, at rates higher than bank rates and with administrative costs that are gold plated. The Chatham House Advisor who is the author of Guyana’s draft Local Content Policy, reminded that oil investors have one clear, simple goal; that is, converting the wealth of the people and taking it to their shareholders as quickly as possible.
Along the way, they will employ several strategies towards getting huge profits.
If the right systems of controls are not in place, Paul is on the record as stating that significant revenue to the state would be lost.
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