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Original Post Date: 2011-03-21 Time: 23:00:03 Posted By: News Poster
A Senior Economist with the Institute of Economic Affairs, Dr. John Kwabena Kwakye, has questioned the approach to settling the Tema Oil Refinery (TOR) debt, arguing that it is seriously flawed.
“Not only is the process cumbersome, it also puts an unnecessary burden on consumers” he argues in a recent paper released by the Institute. The paper suggests that a tidier, more pragmatic, and more effective way of liquidating the debt would be for Government to take over the debt, securitize it, use the proceeds to pay the creditors and redeem the securities when they mature.
The TOR debt was accumulated largely as a result years of under-recovery of production / operational costs of the Refinery, a situation that left the Refinery highly indebted to the Ghana Commercial Bank (GCB) and other lenders, to the extent that the over-exposure of GCB nearly led to its collapse.
Figures obtained from the website of the downstream petroleum sector regulatory body, the National Petroleum Authority (NPA), indicate that TOR’s debt stood at about GH¢ 2.1 billion as at the end of 2010. The IEA paper observes that, the debt has put not only the balance sheet of GCB, the largest bank in the country, at considerable risk, but also the financial stability of the entire banking system.
As a means of recovering the TOR debt over time, a TOR Debt Recovery Levy (TDRL) was introduced into the petroleum pricing formula. As of May 2008 the TDRL constituted 4.2 percent of the ex-pump price, alongside other taxes and levies which accounted for 30.5 percent. The IEA considers the incorporation of the TDRL in a petroleum formula as seriously flawed, because it supposedly, adds to the cumbersomeness and complexity of a formula already overloaded with other numerous taxes and levies.
The IEA’s paper stresses that, the best way to liquidate the existing stock of TOR debt is not to levy it through the petroleum price, but for Government to take it over as part of the public debt and securitize it with its guarantee. The securities will be similar to the TOR Bonds that were issued several years back and guaranteed by the Bank of Ghana (BoG) and the Government of Ghana to raise funds to defray part of the debt owed by TOR to its creditors.
The modalities for the proposed TOR Debt Securities (TDSs) according to the IEA could be worked out, such that, unlike the TOR Bonds that carried a fixed coupon rate, they areindexed to inflation or linked to Treasury Bill rates. This way, the paper says, its attarctiveness would be enhanced. It also proposes that subscription to the TDSs be open to banks, corporations, and the general public. The paper further argues for a framework to make the securities tradable in the secondary market or re-discountable at BoG, such that holders need not hold them to maturity if they do not so wish.
Providing further details on the proposed TDS, the IEA paper suggests that they have a maturity period of about ten years. The interest costs on them borne by the budget. Though the IEA recognizes that this will put some burden on the budget, it says it is a necessary and manageable burden. Its contends that although GH¢ 2.1 billion today may seem high, in ten years time the economy and taxes would have expanded to the extent that it would be much easier to pay the maturing TDSs from the budget. Additionally, it explains, using a portion of future oil revenue to offset the debt will ease the burden, and make the potential risks of the TDSs to the budget tolerable.
On the issues of petroleum pricing, deregulation and subsidies, Dr. Kwabena Kwakye describes as misleading, official pronouncements that Governments have been “subsidizing” petroleum products. He argues that, technically, such “subsidies” should appear as a line item in the budget payable to TOR to meet its unrecovered costs.
“The fact that TOR accumulated such large debts over the years suggests that it was either not being compensated at all or was being partially compensated;” he argues. The IEA Senior Economist contends that, the entities that provided funds to TOR to cover its budget deficits were really the ones that paid the “subsidies” enjoyed by consumers through lower-than-cost prices; adding that, “If Governments want to provide fuel “subsidies” to consumers in a true sense of the word they should compensate TOR for its losses and not leave it to seek funding from creditors.
The paper further argues against universal fuel subsidy, pointing out that studies, including one by the International Monetary Fund (IMF) on Ghana, have found that provision of “universal petroleum subsidies” benefit the rich rather than the poor and is therefore not a good social safety net.It cites Stanley Fischer, former Deputy Managing Director of the IMF as having once noted in an IMF Board discussion on provision of Petroleum subsidies by oil producers that the best way to help the poor was not to give them free oil but rather to provide them with targeted social safety nets. “We could not agree more with him. In fact, as Ghana becomes an oil producer, we should not make the mistake of selling petroleum products below genuine costs.” the paper stresses; adding that, oil-producing countries that for long periods heavily subsidized oil for their populations paid heavily in terms of consumption inefficiencies and foregone critical development and social projects.
The IEA position on petroleum subsidy is however not shared by other civil society groups, particularly, ISODEC, which holds the view that no empirical evidence has ever been adduced to support assertions that petroleum subsidies benefit only the rich. ISODEC thinks that, on the contrary, higher fuel prices arising out of the withdrawal of fuel subsidies hurt the poor most.
The rich, ISODEC explains, will always find ways of passing on their costs either in the form of fuel allowance claims from their employers or building the extra burden into the price build up of goods and services they provide. ISODEC says, a Poverty and Social Impact Assessment of petroleum price deregulation was undertaken sometime in 2003 but the dissemination of the report was embargoed, short circuiting in the process any possible and meaningful discussions on the findings. “Such a study, which captures the cost-benefit analysis of deregulated petroleum pricing would have been useful for the debate the IEA is initiating,” says ISODEC.
On petroleum pricing and cost efficiency, the IEA paper list the key components of TOR’s costs as crude oil price, the cedi-dollar exchange rate, refining costs and other operational costs. These cost components according to the paper, determine the ex-refinery price, and constitutes about 65 percent of the ex-pump price. The remaining 35 percent of the ex-pump price is made up of a range of taxes and levies. It explains that, if the ex-refinery price is kept below what these cost-components call for, then TOR will not be able to fully cover its costs and would have to be reimbursed by Government or it would have to borrow to finance the difference. The point is made that, while the first two cost components are beyond TOR’s control, the last two depend on its operational efficiency, and that, it is important such efficiency meets industry standards – which means, TOR’s operational inefficiencies should not undeservedly be factored into the ex-refinery price.
Original date published: 18 March 2011
Source: http://allafrica.com/stories/201103211362.html?viewall=1