TOR Debt hits GH¢2 billion

The AL-HAJJ newspaper says an official government document it has stumbled upon indicates a sordid state of affairs at the state-owned Tema Oil Refinery (TOR), whose hydra-headed debt has defied solutions under Presidents Jerry John Rawlings and John Agyekum Kufuor and is set to continue unabated under the Mills’ Presidency.

The newspaper, edited by Alhaji Bature of Alhaji and Alhaji fame, said “As at December 31st 2010, the oil refinery’s indebtedness to creditors, suppliers and banks, including securitized debt has jumped to a whopping Two Billion and Eigthy-Four Million Ghana Cedis. (GH¢2,084,000,000.00). This amount is up from the 31st December 2008 figure of One Billion Six Hundred and Seventy-Eight Million Ghana Cedis (GHC1,678,000,000.00) and a ‘paltry’ Three Hundred and Ninety Three Million Ghana Cedis (GHC393.9 million) as at December 31 2000.”

“The document which according to our source, emanates from the National Petroleum Authority, (NPA) was to establish the true financial liabilities of the state refinery once and for all and to guide the Government and stake holders on the way forward.”

The Government, ‘AL-HAJJ’ is reliably informed, would make a formal announcement to that effect any time this week.

“Given that TOR’s debt situation has always been persistent despite all the payments made as well as the debt that has been taken over by Government, it continues to pose huge fiscal risk. There is therefore the urgent need to find a lasting solution to the problem. As a first step, the stock of debt has to be dealt with, and the proposal is for Government to take over part of the debt by issuing bonds which will be at a lower interest rate than the current rate being charged by GCB and the trade creditors”, is how part of the recommendations made in the report reads.

It continued: “To ensure that the debt overhang cycle does not continue, petroleum under-pricing which leads to TOR having under recoveries which partly explains TOR’s debt situation will be addressed”. The recommendation finally called for the restructuring of the management and board of directors of the entire institution to improve efficiency. “The management, board of directors and the entire institution will have to be restructured to improve efficiency in their operations because a part of the debt over hung is as a result of operational losses. The possibility of having some private sector participation in the organization will also be explored”.

TOR recovery levy collected by the Mills administration for 2009 and 2010 amounted to only One Hundred and Thirty-Three million Ghana Cedis, (GHC133.0 million), while in the same period, Government paid Six Hundred and Thirty-Seven million Ghana Cedis (GHC637.0 million). Meanwhile, a Ghanaian ‘Think Tank’IMANI in a write-up by two of its Directors; Bright Simons and Franklin Cudjoe which was widely published as far back as the 27th January 2009 in the print and electronic media, and which was Titled ‘Unravelling Ghana State-Owned Oil Refinery (TOR) Debt: A Provisional Analysis’ seems to confirm TOR’s current precarious financial position. Part of their submissions reads:

“PROSPECTS

… charging the $1 billion TOR debt on the consolidated fund is out of the question. It will balloon the fiscal deficit and blight the macroeconomic environment for years to come. Another around of amortisation would more likely than not lead down the slippery road of convergence with the general lending rate that we have described in the case of the 5-year bond. Instead, we think the debt should be securitized.

An Expert affiliated with Government of Ghana estimates that TOR's debts are double the value of its assets. The implication is that its credit standing is somewhat precarious, as most of those debts are trading losses and therefore largely not reflected on the asset column of the balance sheet. Meanwhile the refinery's medium-term strategic goal is to triple capacity and thus enjoy improved economies of scale. One presumes further improvement in downstream capacity utilisation will also be considered. The price tag would be in the order of $300 million. This would mean additional debt, and not on the best of terms considering the refinery's credit standing and the global economic crisis.

With assets of $600 million and debts of 1.4 billion, will securitisation be a tall order? Only to the extent that raising finance for any project is getting tougher by the minute. After all raising loan financing wouldn't be child's play either. But when valuing TOR's assets we are wont to ignore the weight of its statutory monopoly status in the refinery portion of the downstream sector. Government could tactically decide to preserve that monopoly in order to construe it as a highly valuable soft asset. Indeed the monopoly could be interpreted to represent an exclusive license to refine crude in Ghana, and could on that basis be appraised at another $600 million based on discounted future projections.

If TOR's assets are worth $1.2 billion, then its debt position of $1.4 billion ceases to become, strictly speaking, a millstone. The conversion of TOR's debt to equity could then be justified to creditors on account of the massive enhancement of its financial performance owing to improved economies of scale and higher turnover. The broader context is that petroleum refining, especially against a backdrop of cartelist behaviour or limited competition, is inherently viable commercially.

TOR could safely operate at a 20% net margin even at current sub-optimal output and capacity utilisation rates. Of course the bottom-line is that any such process would probably involve an alteration in Government's sole ownership status and a resolution by the political elite to commit, beyond lip-service, to full cost recovery. Ameliorating the social effects of price deregulation should then become a process external to the operational considerations of the crude refinery.

A voucher system based, perhaps, on the E-Zwich platform could be introduced to ensure that subsidies are guaranteed for public transport operators in the form of reimbursements during sharp upsurges on the international petroleum markets, while cross-subsidization is maintained to stabilise the prices of social-sensitive kerosene and LPG. Otherwise TOR may be doomed”, they concluded.