Counting losses in the Triton oil rip-off

The full impact of the Triton oil saga on the economy is slowly beginning to unravel with the financial and oil industries becoming first casualties of the aftershocks.

Insiders and lawyers warn that the full impact, which “will be extremely far reaching,” will be felt throughout the economy for a long time to come.

This, thanks to what the government has described as “criminal fraud” on part of Kenya Pipeline Company and Triton, a local oil marketer. The firm collapsed, taking with it at least Sh7.6 billion (considered by some as a conservative figure) of financiers’ money.

Other oil marketers are said to have lost billions worth of oil in consignments that never reached them. Sources within the banking industry intimate that the government’s unco-ordinated and largely knee-jerk reaction has caused an unprecedented slowdown in loan approvals.

A source privy in one of the banks but who cannot be quoted because he is not authorised to speak to media, said that soon after the Triton story came out some banks recalled all loan applications to double-check approvals and, where necessary, request for additional supporting documents.

Some of the applications recalled had gone past the loan approval stage and were only waiting for final signature before funds are released.

The loan applicants will now have to wait a little longer as banks re-evaluate their risk exposures and loan approval procedures. “You will see a lot of tightening up of requirements as lenders move to reduce their level of exposure on credit facilities offered,” says Mr Mwangi Karume, a partner with Njoroge Regeru Advocates who has been advising banks.

A source in another bank told Smart Company that the management had a newspaper article analysing how banks were exposed photocopied and all credit managers made to countersign a copy as an acknowledgement that they had read, understood the consequences of the saga and appreciated the lessons.

This shows how far banks are willing to go to make sure Triton saga will never occur again, where a financier is left holding neither funds lent out nor the collateral.

At the third bank, credit approval has been restricted to credit managers, with other staff told to consult their line managers at every decision making point in loan approval. The ultimate effect will be a slow-down in credit, especially to the private sector.

Borrowers will also be required to provide more securities and in some instances see banks get more involved in borrowers’ investment activities. A slow-down in lending will negatively affect economic growth, at time when the country is flirting with recession, with this year’s growth expected at 3 per cent, slightly above 2008 which is expected at 2.2 per cent.

It would also counter the Central Bank of Kenya recent policy to cut its benchmark rate (CBR) from 9 per cent to 8.5 per cent to ease access to credit for both private sector and government. It noted: “These measures are aimed at enhancing liquidity in the banking system and support growth in the recovery process.”

Credit is to the economy what oil is to the engine. Corporate operations are financed by debt while consumption is mostly credit driven. “We are not looking at local financiers only but even international. This saga will increase the country’s risk, which will have an all-round impact,” says Mr Peter Mwangi, a partner at Walker Kontos, the law firm retained by Kenya Commercial Bank to pursue more than Sh2 billion it advanced to Triton.

The matter is in court, awaiting the two parties to file their agreement after opting for an out-of-court settlement. The country’s risk going up means that borrowers tapping the international market for funds will have to pay a higher premium on money advanced to cover high risk while those going for the local market will put in more security.

“It means that borrowers have to do more to make lenders release funds to their accounts or offer other credit facilities,” says Mr Mwangi of Walker Kontos.

The Triton “fraud” puts the country’s oil industry in a very precious position in terms of sourcing finances for purchase of fuel. A source in the oil industry predicted that the country could experience a fuel shortage in April or May if one of the big five - Shell, Caltex, Oil Libya, Total and government owned National Oil Corporation (NOCK) - does not import oil because they are the only ones with the financial muscle or still have credibility to import enough fuel.

“The impact on this (Triton “fraud”) will be extremely far reaching,” says Mr Njoroge Regeru of Njoroge Regeru Advocates. The law firm has been engaged by Total Kenya, which is laying claim to more than 5,900 metric tonnes of petroleum products it says was sold to before the firm ran into problems but was never delivered.

For a start, he says, it casts doubts on the whole concept of the open tender system (OTS), where one oil marketer ships in oil on behalf of the industry. The winner imports the monthly oil requirement and sells to other marketers at an agreed price. The idea being to create economies of scale that makes it possible for the importer to source oil at cheaper prices.

The oil, being credit financed, is then sold only on consent of the financiers, as the imported oil acts as security. KPC, the custodian of the oil, undertakes to release the oil only when it receives “clear and non-equivocal instructions” from the financier(s) .

That way the financier is able to track the oil and take payment to offset his loan as sale progresses. The system is designed in a way that it obliges KPC to release regular statements on stocks held in trust at intervals to the financiers.

The collateral financing system was introduced to allow in independent players who could not import commercially viable quantities.
“That system has now been very seriously undermined,” Mr Regeru says.

“What has happened at KPC, where buyers were assured of oil only to be informed later that it is missing, has undermined every known tenet of business contracting,” he added.

At the very extreme, the lawyers say, oil importers could be forced to go to the international market to buy oil in cash as none of the international financiers or seller would not trust KPC.

And KPC being a government owned company the mistrust could be extended to the State, which in such circumstances would be expected to come in to offer guarantees.

Most directly affected will be the so called “local independent oil marketers” who had lately become a threat to the multinational retailers. If it boils down to paying cash upfront, few would survive, returning the country back to the mercies of the big boys.

“It puts financing of importing oil at a very high risk which is not good for the country,” says Mr Karume.

The banks are no longer certain of repayment. “That in itself puts a very big dent on the confidence level in the oil market,” says Mr Mwangi.

It translates to increased cost of borrowing and cost of managing lending. “They will have to do more to know what their clients are doing and where they find they are taking unwarranted risk cancel the credit facilities,” Mr Mwangi says.

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