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Oil companies could take Guyana for a ride with uncapped interest rates for Stabroek Block loans– IMF warns
Kaieteur News – The International Monetary Fund (IMF), one of Guyana’s key development partners and advisors on the oil sector, believes authorities should move to close fiscal loopholes in the Stabroek Block Production Sharing Agreement (PSA) that would lead to abuse.
One area it highlighted in a technical report prepared for the State is the need for immediate attention on provisions governing interest rates taken on loans by ExxonMobil and its partners, Hess Corporation and CNOOC Petroleum Guyana Limited.
The IMF said it is an industry norm that the government of the day disallows interests from being recovered on loans. Even if this is allowed, the administration sets a cap or limit to prevent the full interest amount from being recovered.
The IMF pointed out that Guyana not only allows the recovery of the interest but also sets no cap. Guyana has also waived its right to tax such interest amounts too.
The foregoing loopholes it said, therefore, provide enough incentive for the contractors to finance their projects with loans instead of revenues from their accounts.
The IMF was keen to point out that in certain territories; governments even limit the number of loans that can be used to back a project. Guyana does not find itself in such a category.
An example is Uganda’s model PSA, which allows interest on loans to finance development operations but only up to 50 percent of the total financing requirement. Interest on loans to finance exploration is not allowed.
The IMF believes that such a restriction, should Guyana choose to use one, could be supplemented with regulations or guidance defining the financing requirement. It also noted that limiting the amount of debt for cost recovery purposes or disallowing interest expense altogether in PSAs would be an appropriate course of action for Guyanese authorities to take.
In a previous interview, former University of Houston Instructor, Tom Mitro, had urged Guyana’s authorities to correct this state of affairs in the Stabroek Block PSA as it leaves Guyana open to the abusive use of debt by Exxon.
During an exclusive interview, Mitro said, “The treatment of loan interest varies by country and situation. Countries like the USA that have only an income tax on oil and no production-sharing do allow tax deductions for interest on debt of oil companies.
However, countries like the U.K., Angola and Nigeria that have royalty and special petroleum tax regimes, do not allow tax deductions for interest costs of oil companies.”
The Petroleum Consultant added, “This is due partly to the fact that these governments offer certain investment tax incentives already, such as tax credits or special allowances, and they view interest on tax deductions as unnecessary or duplicative. In some PSAs, they do allow interest as part of cost recovery, but that is no longer a common practice. If it is allowed, it is vital to establish strict rules that prevent potential abuse.”
Mitro had said that most common is setting a maximum debt to equity ratio that effectively limits the borrowing to no more than 60-70% of the capital costs. Also,
Mitro said that these regimes may limit the repayment period of the local computations so that interest isn’t excessive.
Another common practice, the official pointed out, is to cap the rate of interest. In this way, Mitro said that governments avoid companies pushing a lot of their corporate debt at inflated rates into the local project, merely in order to obtain cost recovery benefit at the expense of the government.
Mitro said that there have been notable cases of abuse such as Chevron in Australia where the authorities accused them of charging interest to their local affiliate at a rate that was well above their actual borrowing rate merely to obtain tax recovery benefits in Australia.
The issue of gold-plated interest rates being pushed on Guyana has been raised on several occasions with the Ali administration. All officials within the government apparatus have however maintained that no changes will be made to the Stabroek Block PSA. All fatal flaws shall remain intact.
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