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posted 18 Sept 2018, 13:41 by Gerry Kangalee   [ updated 18 Sept 2018, 14:15 ]
David Walker
Sometimes accounting and finance can be so very straightforward. You don’t have to be an expert in accounting or finance to agree with the dire consequences of the government’s explanation of the situation at the Petrotrin refinery.

Regardless of where your sympathies lie, the message is clear. There is a loss of two billion dollars a year as a result of the situation at the refinery and the only way to stop it is to close the refinery, as we have been told. These are the underlying facts and the only sensible outcome is to close the refinery in order, they say, to save this annual drain of two billion dollars that the country cannot afford.

Having spoken to a number of fellow experts and lay persons, that appears to be the understanding across the board. It is said that the facts speak for themselves and that the discussion moving forward urgently, must be about how best to terminate the refinery operations and how to compensate the workers and deal with the inevitable and severe contagion that will follow.

It seems, therefore, that I stand alone with a radically different interpretation of the data that’s been presented.

We’re looking at the relative merits of two courses of action. The first is continuation of refinery operations in some form and the other is the termination of said operations. The basic premise of the argument thus far is that closure would see the end of losses of two billion dollars annually. This interpretation is disastrously wrong. We must first understand that the annual loss of two billion dollars includes interest payments of 1.2 billion dollars according to the latest audited statement.
Whether refinery operations continue or cease will not change that simple fact one iota. We shall continue to pay 1.2 billion in annual interest charges for as long as those loans remain outstanding. That is not affected in any way by a decision about whether or not the refinery operations are terminated.

The extent of the loss that can be affected by the decision about closure is eight hundred million dollars (2 billion total loss minus 1.2 billion interest charges) at best. This is not based on some spurious data or inside information. This is based on the company’s own published figures. Let me put it another way. If the refinery operation were to cease tomorrow, there would still be a loss of 1.2 billion dollars annually as a direct and inescapable consequence of interest payments arising not from operations or manpower costs but from catastrophic decisions made by the board of directors.

But that’s not the end of the misunderstanding about the data. Read carefully and you will observe that the loss of 2 billion dollars is for the entire Petrotrin operations. It is quite likely that the total loss is not generated exclusively by the refinery operations. Of the remaining 800 million dollars unaccounted for by the interest payments, an unknown amount is quite likely attributable to other parts of the business. This will further reduce the financial benefit of closure to the low hundreds of millions annually, a figure that could possibly be addressed by improvements in operations.

We don’t know how much of the remaining loss of 800 million is outside of the refinery because all we have is consolidated data. We need to see disaggregated data i.e. the performance of each area of operations in order to assess how much or how little would be saved by the closure of the refinery. I suspect that losses are spread across the entire operations of Petrotrin for the simple reason that mismanagement and waste surely did not end at the boundaries of the refinery given one all powerful and incompetent board of directors at the helm.

With an understanding of these two irrefutable facts - that the interest payments will continue regardless of the closure and that the refinery is probably not the cause of all residual losses, I have come to the unavoidable conclusion that closure of the refinery, based entirely on the data presented by the government and the company will at best result in only a marginal improvement in the company’s performance, certainly nothing near the 2 billion dollars that is implied in the government’s statements and the consequent understanding of most citizens.

You should add to that narrow financial analysis, the speculation that compensation on closure will cost at least another billion dollars. The government and the company have not given us an estimated figure; something one imagines must have been contemplated and assessed prior to making such a far reaching decision. It would be bad enough if the costs of closure ended there but they do not. Expenses arising directly as a result of closure include substantial decommissioning costs. Add those to the workers’ compensation, ongoing maintenance and insurance and the promised assistance to affected communities to get a more complete picture.

Against this, they propose to send thousands of workers home and devastate an entire region of the country and unleash the most severe dose of financial contagion we have ever seen. I will be collaborating with a colleague to put some flesh on the bones of the expectations for the impact of the closure decision on the multitude of stakeholders and the national economy in the weeks ahead. It is staggering that no firm data has been offered on its impact.

By way of comparison, when speaking about the impending impact of Brexit on its operations, Jaguar’s boss made the following statement -”About a quarter of a million people in the UK rely directly, or indirectly, on the success of his company (Jaguar), Mr Speth said”. When will our business leaders ever reach that level of social responsibility? Do they even gather the data? Do they care? How can such a far reaching decision be made without a reliable estimate of its impact in its many forms?

You now know why I stated earlier that I disagree with both their analysis and their prescription for improvement. They say that their decision is irreversible. Can we accept such a premise when their logic is so demonstrably wrong and will have such dire consequences? My answer is no, what’s yours?

The government can ignore everything I explained above. There may even be valid arguments that they can provide that I am unaware of which they can deploy in defence of their chosen course of action. What I ask is that we hear those arguments, failing which this decision must be reversed for the sake of Petrotrin, its workers, its many stakeholders and the country at large
Gerry Kangalee,
18 Sept 2018, 14:11