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Connecting energy, finance
Despite repeated statements of intent over many years, there continues to be a major disconnect between the energy sector and the financial sector in T&T.
Figures 1 to 3 summarises the disjointed relationship between the energy sector and the local financial sector. They show that the energy sector is the main driver of our economy yet there is little involvement of the local financial sector with the bulk of the financing coming from foreign direct investment (FDI).
The Governor of the Central Bank, in his address at the recently concluded T&T Energy Conference, sited four reasons for the lack of local financial sector involvement in the energy sector:
1. Large capital outlays and long lead times to production
2. High risk and uncertainty associated with exploration investment
3. Potential for inherently variable resource revenue; and
4. High interest rates and inefficiency of domestic capital markets
Other reasons are put forward by the chamber are:
1. The investment required for energy sector projects is beyond the scope of most local investors.
2. The availability of cheaper capital in many international markets.
3. A traditional lack of understanding by the local financial sector of the energy sector.
4. Limitations on institutional investors’ ability to invest in the energy sector, due to existing regulations.
5. Lack of options available to local investors; this is underscored by the absence of energy companies listed on the domestic stock exchange.
Options for linking
The Governor of the Central Bank proposes that a junior stock exchange could be an effective mechanism for raising capital for this sector, while broadening public participation. A junior stock market is a mechanism whereby enterprises that find difficulty raising capital through commercial loans can source the required funding. He cited successful junior markets in the United Kingdom (London Stock Exchange Junior Market), Canada (Toronto Stock Exchange Junior Market) and within the region a junior market was launched in Jamaica, in 2009.
Another option, though similar in spirit but implemented differently, is to encourage and facilitate local financial institutions and local private energy companies to own part of all new energy projects approved by the Government. This can be achieved through contractual agreements for energy sector projects between the Government and international investors by stipulating that a percent of project financing should come from local financial institutions.
The exact percentage should be governed by the total cost of the project, the availability of capital locally and the interest displayed by the local private financial institutions and should be subject to negotiation between the investor and the Government.
Initially a small per cent—say five to10 per cent of the total project cost—could be considered a target figure. The production sharing contract (PSC) which governs the commercial relationship between the State and the oil and gas companies in the upstream and project agreements and gas supply contracts in the downstream, could be used as mechanisms to achieve this objective.
This approach of growing the domestic capital market by facilitating the participation of indigenous banks was adopted by the Qatari’s in structuring the financing of the Qatargas 2 project.
The whole issue of linking the local financial sector and the energy sector is the subject of an Energy Chamber, Energy Luncheon which is scheduled for March 24.
At the luncheon, the Unit Trust Corporation’s newly appointed executive director, Eutrice Carrington, will provide special insight on tangible ways to connect the country’s strong financial sector with the energy sector.
For more information on the luncheon please contact the Energy Chamber at
6-ENERGY or [email protected]
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