It was surprising to learn recently that the Barbados National Oil Company (BNOC) has a debt service reserve account (DSRA) with a balance of almost $35 million as at July 31, 2013. The surprise came not in the account itself but that BNOC is holding loans for some Government entities, including the embattled Transport Board.
According to BNOC, “in order to provide for the payment of principal and interest on the bonds as the same shall become due and payable, the company shall fund and maintain the debt service reserve account in an amount which in each year is equal to the debt service amount at all times until the bonds have been fully redeemed. The company shall not be entitled to withdraw any sums from the debt service reserve account until the bonds have been fully redeemed”.
It is quite clear that BNOC has been, apart from buying Government treasury bills, lending money to the Barbados Agricultural Management Company (BAMC), Barbados Tourism Investment Inc. (BTII) and the Transport Board.
In spite of the very successful loss recovery programme put in place in 2008, BNOC went ahead and issued the full $160 million in bonds in 2010. Until now, this action was difficult to understand. Now that it is known that BNOC has been helping to finance
the above Government entities, the perspective is consistent with the other ways that financing is being provided for Government operations. These include printing money at the Central Bank, forcing statutory boards to borrow from the National Insurance Scheme, and getting BNOC to lend to cash-strapped boards.
No wonder it was impossible for the Government to consider reducing energy prices in Barbados over the last three years.
The long-term borrowing of BNOC was done in respect of the building of the new terminal facilities. As a monopoly, it makes excess profits as its prices are set by the Government; plus terminal fees are charged. These favourable conditions provide the environment for profit-making.
However, in light of a subsidisation programme, BNOC experienced losses for almost a two-year period. By September 2008, a loss recovery programme was introduced, with 15 cents per litre added to the price of gasoline and diesel. It raised $18 million in the last six months of fiscal year 2008/2009 and $38 million in the following fiscal year.
Along with the loss recovery from gasoline and diesel, BNOC would have recovered money from other operations such as the arrangement with Barbados Light & Power.
The combination resulted in recovery of around $70 million.
Once profitability had been restored, BNOC embarked on the project to build the new terminals facility. Rather than borrow a smaller amount in light of the benefits derived from the loss recovery programme, BNOC went for the $160 million in bonds.
Of course, the consumers would pay either through direct increases in gasoline, diesel and other products, or indirectly through the fuel adjustment clause in the electricity bills. In addition, the rising electricity bills of businesses would be felt in higher consumer prices.
The impact of such an energy policy was most evident in 2011 when Barbados’ inflation rate grew three times faster than the average in the Caribbean Community region.
This growth was assisted by the Government’s change in tax policy in the value added tax and excise taxes, especially.
“On January 16, 2010, a trust deed agreement was executed between the company and BNB Finance & Trust Corporation to raise the aggregate of $160 million which comprised Barbados-dollar and US-dollar bonds for the purpose of financing the company’s short- and medium-term obligations. The bonds are tenured over a period of three to nine years in five services of fixed and floating rates.”
So apart from borrowing to build infrastructure, BNOC has also been lending to Government entities. The full extent of the loans is not known, but as at July 31, 2013, the debt service reserve account balance was almost $35 million.
Since BNOC cannot withdraw any sums from the debt service reserve account until the bonds have been fully redeemed, the question is, have these cash-strapped Government entities been able to pay BNOC?
In the absence of getting an answer, the facts are that the balance on the DSRA increased from $28.5 million as at March 31, 2013, to $34.4 million as at July 31, 2013. The increased amount suggests that payments to BNOC were not being made.
The evidence of another financing dark hole surfaces.
Clyde Mascoll is an economis and Opposition Barbados Labour Party adviser on the economy.