Associate Director, Financial Advisory at Deloitte Ghana, Dennis Brown, has advised downstream petroleum sector players to manage their finances well in a transparent manner to convince banks and other financial institutions to finance their operations when the need be.
Speaking as a panelist on the topic “Industry and Banking” at the just-ended Downstream Petroleum Dialogue organised by the Chamber of Oil Marketing Companies (COMAC), Mr. Brown said banks are mindful of the business environment and would therefore lend only to businesses in sectors they are sure of recouping their funds.
Among other suggestions, he advised the petroleum downstream players (Oil Marketing Companies and Bulk Oil Distributors) to have a strong working capital structure, constant supply of petroleum products and good financial records to assure the banks that they would repay their loans.
“You [downstream petroleum players] are operating in a margin-driven business and therefore volumes are key. Are you able to assure the bank to document appraisal information, for instance, constant supply of the product? The product can be described as one that is inelastic demand regardless of the price and consumers will buy it anyway. So the market is available, but on your part, are you able to guarantee that you get constant supply to feed the market”.
“In terms of your business model do you do credit business and if you do credit business do you have a certain cycle you follow? Are you able to manage your working capital out of the cycle so there are large institutions that procure products from you and are supposed to pay in 30 days”, he asked.
He further added “Your bank is going to give you money, they’re going to look at your financial records. You may present something around the project that is forward looking and the number [expected revenue] going forward looks good, but they will validate those assumptions using the historical data that you have. That data, the first thing they would look at is how credible it is. Has the data been prepared through a transparent process, is it accurate enough to facilitate effective decision making”.
Banks Urged to establish Risk Management Framework for Petroleum Sector
Continuing, Mr. Brown also advised banks not to shy away from financing activities of the petroleum downstream players despite the challenges.
He however wants the financial institutions to implement a robust risk management framework tailored for the petroleum downstream sector that would reduce their exposure to losses.
“The consideration is if banks can get down there [petroleum downstream sector] and develop something more tailored in terms of the risk management framework, understand the sector and go beyond and also be able to develop expertise internally around the complexities and the technical concentrations in those sectors to be able to better understand the risk and also develop tailored products.”
“More often banks see unmitigated risks along the project appraisal process and so they raise their hands, they don’t want to go ahead rather than looking at options available to meet those risks. Can they bring another partner [bank to syndicate] on board? Can they bring the insurance sector players on board?”, he said.
The Downstream Petroleum Dialogue brought together stakeholders in the downstream petroleum sector to discuss pertinent issues, share insights and develop actionable strategies for industry growth and sustainability.
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