Back to Front: Exploitative International JVs, limited access to financing and gaps in a well-intentioned local content law hinder Guyana’s SME growth potential

Nov 19, 2023 News

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By Svetlana Marshall

To front or not to front?

Kaieteur News – That’s the billion-dollar question facing Guyanese businesses. Eager to tap into the South American country’s booming oil and gas industry, cash-strapped local enterprises  unable to access financing from the banking sector have instead turned to joint ventures partnerships with international companies who use the arrangement as a handy way to conform to the country’s local content laws.

Their company had been operating – and successful – for over a decade before ExxonMobil discovered Guyana’s first economically viable crude oil deposit in 2015, kicking off the country’s multi-billion-dollar economic boom. The discovery was transformative. In December 2019, commercial production began, skyrocketing GDP per capita from US$6,800 in 2020 to US$19,000 in 2022.

Suddenly, the business dynamic shifted. Competition became fiercer as the demand for resources increased, while local commercial banks failed to provide adequate access to financing. As the company sought options to navigate the new economic landscape, a Canadian firm approached with a novel and seemingly lucrative solution – a joint venture (JV) partnership.

But there was a caveat. According to Guyana’s local content laws, designed with the intention to protect local business interests, any company formed through a joint venture partnership needed to be at least 51 percent Guyanese-owned to benefit from the concessions in the Local Content Act.

To meet these criteria, the Canadian company offered a proposal to the local Guyanese company: a JV arrangement where, at least on paper, the Guyanese company would own 51 percent of a new entity, thus complying with the Local Content Act. In reality, the local company would own far less.

It was a tempting offer.

The company would later be approached by at least two other international firms, looking to “rent-a-citizen” or to have it act as a “front” but it declined every time, CIJN was told. Ultimately, the company declined to partake in any such “backdoor” agreement. Other Guyanese companies have also been approached with similar lopsided partnership offers.

The founder of another company operating within the oil and gas industry, who also asked to remain anonymous, told CIJN that a proposed JV partnership with a Trinidadian company did not move forward because, from the get-go, the Trinidadian company only offered its Guyanese counterpart 10 percent ownership.

“At that time, there was no conversation about Local Content, and I agreed to it because I wanted to come back home, and that was my way of getting back into the system,” the local partner explained.

After a successful start, the local partner opted out of the partnership due to the Trinidadian partner’s failure to issue shares.

Government Aware Fronting a Problem

Vice President, Bharrat Jagdeo was among the first to admit that “fronting” was a serious problem in the country’s growing oil and gas industry. At a Local Content Summit in April 2023, Jagdeo said foreign companies are creating JVs with local companies to achieve 51 percent Guyanese ownership to the detriment of local stakeholders.

“If they establish a joint venture, the joint venture has very little assets, so the Guyanese would have 51 percent and the foreign company 49 percent. But the capital is then put in as a loan to the company, the equipment is often put in as a leasing arrangement, so you have to pay from the proceeds, the gross income, all of those things before you have enough profit to declare a dividend. And often it is done at inflated rates, so the cream, the bulk of gross income before dividend is declared from net income,” the Vice President explained.

A Local Content Certificate (LCC) of Registration is a “golden ticket” for doing business in the Guyanese oil and gas industry. Companies that are certified receive preferential treatment when oil companies and their subcontractors are awarding contracts.

Forty services are covered in the Local Content Act Schedule mandating contractors and subcontractors to procure various percentages of certain services, such as transportation, accommodation, surveying, and pipe welding from local businesses and companies. According to the Vice President, however, this aspect of the legislation is also being bypassed.

“We have seen some of the first-tier contractors particularly outsourcing some of the activities because their reporting relationship is not strong enough, outsourcing a lot of the areas that are carved out already for Guyanese in the legislation,” Jagdeo said.

Opposition Member of Parliament David Patterson, who holds responsibility for the oil and gas sector, painted a similar picture. In an effort to effectively penetrate the industry, some international companies are targeting what he described as “mom-and-pop” businesses.

“So, they go and they hunt a small business – mom-and-pop business – or a small individual, and they make him substantive director or owner on paper, obviously, that qualifies them but it really short-circuits the idea, the whole intent of the (Local Content) Act,” MP Patterson said.

He said while Guyanese businesses would gain technical experience and build capacity in the industry, under JVs, financially, the majority would only gain a little, compared to what their international partners would receive. In some instances, Guyanese businesses are merely becoming “salaried” partners. He said in the case of family-owned businesses, it is mainly the family that benefits.

Business Chambers Advocate for Penalties

In an interview with CIJN, President of the Georgetown Chamber of Commerce and Industry (GCCI), Kester Hutson said the Chamber is actively monitoring the situation.

Hutson said that with a membership of almost 900 companies, a large percentage of which operate in the oil and gas industry, the Chamber has received an alarming number of complaints about local companies “fronting” for regional and international firms.

“We have recognized that companies have been trying to circumvent the process of establishing a Local Content Certificate and we want this to stop. And we are very serious about this matter, because it affects business development in Guyana,” he said.

He said local companies would only do harm to the economy, should they engage in corrupt activities to manipulate the Local Content Legislation.

“Once fronting is happening, it means that there is no direct development for Guyanese businesses. All those resources will be exported, and not even imported into Guyana, and that is a serious concern. It affects the whole value chain for the oil and gas sector, and there is no development in local businesses – skills transfer, finance, building out your company.” GCCI, he said, is actively engaging the Local Content Secretariat (LCS) on the matter. However, he declined to disclose how many suspected cases of fronting the Georgetown Chamber has reported to the Local Content Secretariat. “I can’t give you an estimated figure because of our relationship with the Secretariat [but] we consider it a sizable amount that warrants an alarm,” Hutson told CIJN.

Even as he declined to provide critical details on the issue, the GCCI President expressed confidence in the Local Content Secretariat to bring an end to the matter.

“The secretariat is actively monitoring the performance and activities of these companies, and certainly, there will be fines attached to any company that is caught in these illegal acts. So, rest assured, there will be penalties – stiff penalties – to this effect,” Hutson said.

Director of the Local Content Secretariat (LCS) Dr. Martin Pertab said the Secretariat was resolute in protecting the rights of Guyanese companies. Like Hutson, he warned that non-compliance is an infringement that attracts a fine under the legislation: GUY$1 million (US$4,761) for individuals and GUY$5 million (US$28,809) for companies.

He said the Secretariat is examining ways to counter the presence of rent-seeking behaviour and fronting.

“The Secretariat is examining ways to counter this kind of behavior. For instance, LCS is working closely with the GRA [Guyana Revenue Authority] to ensure that persons acting as local partners in JVs pay their fair share of taxes. Also, audited financial statements are now mandatory and form part of the renewal process for an LC certificate,” Dr. Pertab said.

Patterson: Too Many Gaps in Legislation

MP Patterson believes that the current issues confronting the country could have been prevented or minimized. He said the Government, in hurriedly passing the Local Content Legislation, was warned by A Partnership for National Unity + Alliance For Change (APNU+AFC) about the gaps in the legislation.

MP Patterson was among Opposition Members of Parliament, who, while underscoring the importance of such a legislation, lobbied the one-seat majority Government to send the Local Content Bill to a Parliamentary Special Select Committee to be reviewed and strengthened. Instead, the Government rushed the bill through the National Assembly in December 2021.

According to the legislation, a “Guyanese national” is a citizen of Guyana. But MP Patterson said in a country like Guyana with open immigration laws, the legislation opens the door for people with third, fourth and even fifth generational ties to the country to claim citizenship – and cash in on the Oil and Gas Industry while being compliant with the Act.

Such was the case of Ramps Logistics. Mere months after the passage of the Local Content Bill, the Trinidadian company, which had been operating in Guyana since 2013, sold 51 percent of the company to Deepak Lall, a Trinidad-born businessman with Guyanese parentage.

The Local Content Secretariat had initially denied Ramps a Local Content Certificate, but in November 2022, the High Court ordered the Secretariat to issue Ramps Logistics with a Certificate of Registration as soon as possible or risk prosecution.

Chief Justice Roxane George ruled that the Local Content Secretariat breached the Local Content Act when it refused to issue Ramps Logistics with a Certificate of Registration, since it had reached the 51 percent requirement with regards to Guyanese ownership.

“The applicant has satisfied the statutory requirements and preconditions necessary for the grant or issuance of a certificate of registration under Section 6 (2) of the Local Content Act,” the Chief Justice ruled while noting, at the time, that the Act provides a relatively simple regime for registration once a person satisfies the criteria, the case of being a Guyanese company.

The Chief Justice added that the Local Content Act had “no regulations and no rules.”

MP Patterson said while Lall may be qualified to be deemed a Guyanese, the Local Content Act was intended to benefit first and second-generation Guyanese.

“The intention of the Act was obviously to address first and second generations, indigenous businesses and to ensure that they got a leg up in the competition,” he said.

With the door wide open for people with Guyanese heritage to claim citizenship, whether they are second or fifth generation, the Opposition believes that Guyanese companies, though benefitting from enhanced capacity in the oil and gas sector, and increased employment, are getting the shorter end of the stick.

Dr. Pertab, the Director of the Local Content Secretariat, while admitting there may be shortcomings, said since the Local Content Act came into effect, there has been an increase in the number Guyanese businesses. Approximately 850 companies are listed on the Local Content Register – all of which are either 100 percent Guyanese-owned or mostly owned by Guyanese. He said the legislation has pushed foreign companies to transition to Guyanese owned businesses, while others have opted to engage in JVs.

“Some of the existing foreign companies have been gradually transitioning towards Guyanese-owned. One of the key drivers has been the need to have a Local Content Certificate before providing any of the 40 carved-out services under the first schedule of the Act. This is critical, especially in the measurement of Local Content. The diaspora has also been investing in these areas, though many of them are through JVs,” Dr. Pertab explained.

The prioritization of Guyanese suppliers to provide goods and services identified under the first schedule of the Act has led to a substantial increase in investment in those areas over the past year.

“Existing locally-owned companies have expanded their operation and broadened their line of services. New JVs between locals and foreigners are more common in areas/sectors where limited local capacity seems to exist, for instance, in areas such as fabrications, machine services,” he added.

However, while there has been significant progress, access to capital remains a challenge. Dr. Pertab said the Secretariat intends to take a systematic approach while working closely with the Private Sector and International Oil Companies (IOCs) to help address the issue.

“A key achievement thus far has been the reduction of payments to local companies to 35-40 days. Other measures include the establishment of a predetermined timeline before a contractor, sub-contractor, and licensee can re-tender a contract, especially in relation to the 40 carved-out areas,” Dr. Pertab said.

Locals Forced to Find Financing Alternatives

In the absence of financing, locals have turned to using land and buildings as a form of equity. The increase in land and property value has facilitated the establishment of some of the JVs, Dr. Pertab said.

For small businesses, in particular Afro-Guyanese owned businesses, it is not as easy as it sounds.

In the absence of financing, they said, it is extremely difficult for small-scale companies to compete against the major traditional Guyanese businesses that have expanded their reach to the oil and gas industry.

Another businessperson told CIJN that in an effort to accumulate the required finance to keep the company afloat, personal assets had to be leveraged.

While the commercial banks, in some cases, offer to loan 80 percent of the value of an invoice received, it is oftentimes well below the required sum.

“For a growing business, you need money for a full operation, rent, phone, in our case, we needed to find PPEs for the guys, transportation, and all of those things cost money,” the businessperson said.

Governor of the Bank of Guyana, Dr. Gobind Ganga said there is nothing stopping banks from accepting guarantees from international institutions as a collateral for a contract to supply goods and services. According to him, the financial system is above board. “The financial system is already strengthened, and is above board,” he told CIJN.

A Caribbean Economies at a Crossroads: Inter-American Development Bank (IDB) Report suggests that commercial banks and other lending institutions in Guyana are making more cash available.

According to the report, which was released in August, 2023, private sector credit reached 17 percent in February and March 2023 before moderating slightly to almost 14 percent in May 2023. In 2022, private sector credit grew by more than 15 percent in December. It said out of the three major lending categories, lending to businesses experienced the most growth, averaging 20 percent in 2022.

It is unclear, however, whether the increase in lending translates to more money in the hands of small businesses.

Small Business Cut Out of Opportunities

The businesspeople who spoke with CIJN suggested that the restrictive criteria established by commercial banks, coupled with a class system that marginalizes small businesses and minority groups, have made it extremely difficult to operate within the sector. While not opposed to the formation of JVs, the companies said most opportunities are snatched up by “big businesses”, with deals for projects and services in the industry sealed long before official tendering processes, and often excluding small businesses.

Contextualizing the issue, MP Patterson said while the Local Content Act mandates contractors, sub-contractors and or licensees to implement local content as an essential component of their petroleum operations, the failure to include a de-bunching clause into the Law, makes it difficult for small and medium scale companies to secure contracts directly from first tier contractors and their subcontractors. In cases where the country may lack capacity to provide critical services as outlined in the first schedule, the Minister has the powers to waive the requirement. MP Patterson fears that Guyanese companies can be shut out for an extensive period if, the contractor or sub-contractor upon being granted the waiver, signs a contract for the provision of a particular service for a period of 10 or more years. He believes that under such an arrangement, local companies may have to wait 10 years to build capacity and generate finance in that particular industry, placing them at a disadvantage. “There must be some sort of incubation period,” he stressed.

The Opposition parliamentarian said while the country, since the start of commercial oil production in December 2019, has witnessed the creation and expansion of businesses in the oil and gas sector and other industries in the areas of construction, accommodation, transportation and logistics, many businesses are being left out in the cold, particularly small businesses established subsequent to the passage of the Local Content Act.

The reality is in the numbers: while the Centre for Local Business Development said they have over 3,000 registered members, Esso Exploration and Production Guyana Limited (EEPGL), in 2022, utilized the services of just about 1,500 local suppliers.

“While there have been new firms with people who are very excited, the number of new businesses that have actually secured contracts in the oil and gas industry, more or less, remains the same old players under new arrangements to meet the requirements under the law,” MP Patterson reasoned.

Ramps Logistics, now 51 percent Guyanese owned, is one such company. Long before Guyana started pumping oil, Ramps Logistic, in 2015, landed a contract with ExxonMobil Guyana to provide logistical services and shore base management for the Liza 2 offshore project.

Other major players in the industry include Guyana Shorebase Inc (GYSBI), Vreed-en-Hoop Shorebase Inc (VESHI), Guysons (Guysons K+B), Atlantic Marine Supplies and Panthera Solutions Inc, and their records suggest that while they all have been birthed out of joint ventures, their local majority owners have been well-grounded in Guyana’s economy for decades.

Building Local Capacity

Director of the Centre for Local Business Development Dr. Natasha Gaskin-Peters told CIJN that since its establishment in 2017, the Centre has trained more than 3,000 Guyanese businesses to build their capacity to compete in the oil and gas industry.

Financial management, human resource management, supply chain management and health, safety, security and environment (HSSE) are among the training programmes being offered by the Centre in addition to API Q1 Mentorship and ISO 9001:2015 Mentorship. The impact, Dr. Gaskin-Peters said, has been felt across sectors.

“A lot of the businesses that we work with are traditional businesses. So, they already existed within the economy. Many of them were servicing the mining sector, for example, so with the advent of the oil and gas sector, they have transitioned to oil and gas,” she explained, while noting that a number of new businesses have also popped up.

It is estimated that of the more than 3,000 companies registered with the Centre for Local Business Development, some 200 have teamed up with international companies to form joint ventures. Dr. Gaskin-Peters said for a large part, the joint ventures have proven to be truly beneficial, with local companies gaining much needed experience in a sector that is undoubtedly new to Guyana.

Regional and international companies seeking to land joint venture partnerships in Guyana look for local companies with reputation and a track record of delivering quality products and services in fields that align with theirs. As such, she said, quality management systems and health and safety management systems are important, as well as prudent financial management, financial stability and work ethics that are above par.

Dr. Gaskin-Peters said the Centre also works with local businesses to ensure they get the best out of a partnership, including how to do proper due diligence before engaging in a JV.

She too admitted that access to finance from local and international financial institutions such as commercial banks, have proven to be extremely difficult for some, stalling their growth and development, and even hampering their ability to secure JV partnership agreements.

“We are hearing a lot from local businesses that they have grown at a fast pace, and at this particular moment there is a need for financing, so if they don’t get the much-needed financing, of course it will hamper their growth,” she said.

Be Careful and Bring Value to JVs

For Andrew Mendes, managing director of Farfan & Mendes Ltd, Guyanese companies should only enter partnerships that they can afford and bring value to the relationship.

Panthera Solutions is a Guyanese owned and operated oil and gas solutions provider that was birthed out of a strategic partnership with Farfan and Mendes Ltd and Canadian-owned Crosbie Group. Both sides had conducted extensive due diligence, including on-site visits, and drafted a number of agreements, including a Shareholders’ Agreement and an Asset Purchase Agreement.

“Everything is covered by agreements. You need to have a lawyer who is (familiar with these types of) contracts, who knows about them to advise you to dot every ‘i’ and cross every ‘t.’ The ideal is to manage your relationship going forward as if you have to refer to the agreement, you’ve probably lost the relationship,” Mendes told CIJN.

He said Panthera offers a realistic model of what JVs should represent.

Panthera solutions was incorporated in 2018 – approximately three years before the Local Content Act came into effect. Even in the absence of such a legislation, the companies had agreed that Farfan and Mendes would become the majority owner on the basis that it was Guyanese-owned.

Mendes said in forming the partnership, it was important for it to be a “win-win” situation. He said both companies matched the money they put in. Crosbie brought the expertise needed to provide a range of technical services, such as scaffolding, International Rope Access Trade Association (IRATA) rope access, non-destructive testing (NDT) inspections, hull gauging and fabric maintenance among others, while Farfan and Mendes provided critical knowledge of operating in the Guyanese market and had a solid local reputation for upstanding business practices and finding and developing human resources, having operated in Guyana for well over 50 years.

“When starting Panthera, we both put money on the table, and that was matched to the shareholding,” he said.

Mendes said Farfan and Mendes was careful not to enter into an arrangement that it could not afford. He recalled that a few years ago, a first-tier company had approached Farfan and Mendes to form a partnership, however, it was not practical for the company to do so.

“Now, the reality is these people get contracts of US$300 million or US$500 million. So, it would have been an unreasonable expectation for me to enter a partnership with a company that’s dealing with that scale of business. There was no way we could have covered our share.  Because if it is a US$300M contract, where would I have been able to find $160 million, which would have been my share of the cost of that partnership. So, we got into things that we could have afforded to get into and be a true partner by sharing the risk and the cost. That is, to me, the best way of approaching that particular scenario,” he said.

In the case of Panthera, Farfan and Mendes was comfortable in its ability to meet the demands of the partnership, including its share of investment.

Today, he said, Panthera is a profitable venture.

“Farfan and Mendes has always been profitable as a business, and Panthera is profitable as a business. There’s still a lot of money that we would have invested as equity upfront in Panthera that is still owed to both Crosbie and to ourselves,” Mendes said.

Millions of dollars were also invested in equipment, certifications and capacity building to enable the company to secure a contract.

“So, everything was money invested, hedging the risks as well as returns on future contracts, so, it was risky, yes. But it worked out. Because we were prepared to invest the money upfront in the training,” he explained.

Mendes said in approaching financial institutions, Farfan and Mendes, and by extension Panthera, are transparent, and often take proactive steps, should they foresee any issue that would impact their cash flow, and ability to manage any loan.

“We are actually completely transparent and proactive around that, which then gives the bank comfort. When we come to them with something, we don’t give them surprises. Banks don’t like surprises, but that’s a function of how we manage our business,” he said.

Mendes said due to its partnership with Crosbie and the demands of the oil and gas industry, which requires a high standard of management, the company leveraged the expertise that the oil and gas sector essentially required to improve the management of the overall business. Before, it took the company months to get its financials. Now, with the investment in its enterprise resource planning software and capacity building within its finance department, the company now has its financial reports produced and ready by the 15th of every month.

“I get all my financial reporting on the profit and loss balance sheet, everything, on the 15th of the following month. But that’s because we’re managing our finance department far better than we used to,” he said. These reports inform the company of any need to source bridging finance, should it experience a cash flow crunch in the future.

Farfan and Mendes has been prudent in its financial management, and that has given it a competitive edge, especially when it comes to the rigorous processes required when attempting to secure financing from regional and international financial institutions.

In order to qualify for a loan from IDB Invest, Mendes said, the company underwent due diligence that spanned more than a year and included the exchange of numerous documents. Though challenging, it did help the company improve in the areas of governance and management.

However, Mendes said the local banking sector still operates in a very traditional manner, with limited options of products and services for a high growth market.

“It tends to be very risk averse. And what they want to do is they want to secure everything before they give you the loan, and in particular for startup companies, that’s going to be a challenge because they have no track record and…they may not have the level of security that may be required. There’s a need for the banks, private sector, government and the regulator to have concerted dialogue to address these challenges,” he said.

(This story was reproduced from the Caribbean Investigative Journalism Network. It is supported by the Guyana Press Association Energy Reporting Grant funded by the Open Society Foundation.)

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• Content, Guyanese, Laws, Svetlana Marshall, ventures

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