By Vishani Ragobeer
Amid complaints that lengthy payments from the contractors in the oil and gas industry is a significant challenge for local companies, Vice President Dr. Bharrat Jagdeo says the new Local Content legislation will provide a much-needed carve-out for local players.
Providing payments some 60 to 90 days after the final provision of goods and/or services is accepted as standard practice in the oil and gas industry. As such, the foreign companies operating offshore have adopted this.
Because Guyana’s oil and gas industry is still in its infant stages, some local companies contend that the large, foreign companies operating here should not expect local companies to immediately operate with the same terms and conditions as exists in Houston or Trinidad.
“This was a complaint since I was Opposition Leader and it is going to be part of the Local Content legislation,” Dr. Jagdeo told the News Room on Wednesday.
For context, the government works towards finalising brand-new Local Content legislation that is expected to provide stipulations for local companies getting involved in the nascent oil and gas sector. During the consultations for this legislation, the lengthy payment period was one of the concerns raised.
Dr. Jagdeo said the government has taken this concern into consideration and explained that for companies defined as local companies, a payment system more suited to “the scale of the companies and their specificities” is needed.
“That means a shorter period for extending credit to the oil companies,” he said pointedly.
When engaged on this matter, President of the Georgetown Chamber of Commerce and Industry (GCCI) Timothy Tucker reasoned that such a provision is much needed.
“Sixty to 90 days is usually the industry standard but we are a new oil-producing country (and) we have been asking for flexibility from the industry,” he told the News Room during a recent interview.
This is not just a matter of local companies wanting to secure their monies early. Instead, Tucker explained that while companies wait on the 60 to 90 period to pass before they can receive their payments, they still have to cover their costs. These costs include paying staff, covering overhead expenses and paying taxes.
Tucker also explained that while the local companies wait on these payments, they also have to consider the interest accumulating on loans they might have taken to supply those goods and services in the first place.
Further, this protracted delay between delivery of goods/services and payment receipt puts Guyanese businesses at a disadvantage because they are also forced to pay the opportunity cost of having their capital tied up awaiting reimbursement from oil and gas players – when it could have otherwise been used to finance other profitable ventures during this 90-day period.
In some instances, this may force businesses to seek bank overdrafts. Simply, a bank overdraft is an extension of credit from a bank that allows a company to continue withdrawing money (up to a certain limit) even when the business’s account has insufficient or even, no funds.
Dr. Jagdeo acknowledged this complex situation and explained that this has informed the government’s efforts.
“…because the interest rates are high and they have to have to maintain the (bank) overdrafts for a long period when they extend suppliers’ credit to the companies, that was putting them at a disadvantage.
“But if they get a shorter period for the honouring of the invoices, then that should significantly reduce the disadvantage they face,” the Vice President stated.
When engaged by the News Room, Minister of Natural Resources Vickram Bharrat also said that the government is currently in talks with foreign contractors to reduce that payment period.
