Betamax-STC deal: the sore spots

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The deal between Betamax and the STC for the supply of petroleum to the country has been bitterly denounced by the new government as an example of crony capitalism exercised by the former regime. Now as the government has officially started talks with the company to renegotiate the deal, what are the sore spots in the contract that are likely to be changed?

Talks between the new government and Betamax to renegotiate the contract between the  company and the State Trading Corporation (STC) officially kicked off yesterday. “Subject to its contractual rights, the management of Betamax Ltd is open to discussions with the government to look into the contract,” the director of Betamax Ltd, Veekram Bhunjun said in a press statement.

Back in November 2009, the then-government signed a contract with the company giving it the monopoly to transport petroleum from Mangalore to Mauritius. Critics of the deal were quick to charge that this was an example of crony capitalism – a view that deepened in the way that the contract was rushed through, without a tender and even without the then-solicitor general of the State Law Office being aware of the deal. In January 2010, the solicitor-general wrote to the STC complaining that, “I was not aware that the STC had already signed… I thought that discussions with the owner (Betamax-ed.) were still ongoing.”

But the problem is not so much in the way the deal was reached, as much as what is in it. The company was given an exclusive contract to transport petroleum to Mauritius on its tanker, Red Eagle, that has a capacity of 74,960 metric tonnes. The tanker was supposed to carry out 16 trips every year to Mauritius’ petroleum supplier in Mangalore.

The problem is that, according to clause 6.8 of the contract, the STC committed itself to paying the company US$17.6 million each year or put, another way, nearly Rs.1.5 million a day regardless of how much oil the tanker actually brought in. On its maiden trip, for example, despite its capacity to carry nearly 75,000 metric tonnes, it brought in only 57,500 metric tonnes of petroleum. The STC had to pay the same nonetheless.

In March 2013, the then-minister of industry, Cader Sayed-Hossen, defended the contract saying that it was nothing new and that Betamax was not being paid more than other previous suppliers. Previously, petroleum was shipped using two companies, Pratibha Shipping and ST Shipping. According to Sayed-Hossen, they were being paid an average of 74 cents for every litre of petroleum they were bringing in, in 2013 prices. “This is exactly what Red Eagle is costing us,” said the former minister.

What the minister left out of his reply, and what Weekly has managed to find out, is that these two companies that Mauritius was previously dealing with were so-called ‘spot charters’. In other words, shipping companies whose prices are pegged to fluctuations in international shipping prices, as opposed to Betamax, which was on a 15- year long-term contract.

Think about it like taxis: if you don’t know the driver, he will charge you what he deems fit, but if you take a taxi for years on end and use him regularly for the same route, you usually get a discount. The same logic applies when it comes to the distinction between spot charters and longterm shipping agreements. So, if Betamax as a contractor was being paid the same as a spot charter, as the then-minister stated, then obviously, at the very least, the Mauritian government didn’t get any particular advantage out of signing that particular contract.

Comparing this with previous contracts is not the point. The real question is that were the prices paid to Betamax reflective of international prices at the time, or since then. In 2009, when the contract was signed, costs of shipping were plunging. According to an OPEC report published in 2009, spot rates – supposed to be the more expensive kind – were on the way down in the wake of the financial crisis, with most shipping companies switching to signing cheaper charter contracts.

According to an audit report by Insights Forensics Ltd, commissioned after the management of STC changed in 2010, freight costs averaged roughly Rs 478,500 a day. In contrast Betamax was paid triple that amount. So, not only did the old government not press for a discount, but it was massively overpaying. And since 2009, freight prices have gone down consistently. By 2011, tanker prices actually fell by 30 per cent because of declining international freight rates. But as if that were not enough, the contract with Betamax also contained an escalation clause that meant that the amount paid to the company would increase by up to 2.5 per cent every year throughout the 15-year contract period, despite the fact that freight rates were actually coming down.

For critics of the deal, the contract looks more like the STC directly subsidising Betamax’s purchase of a tanker – a charge that was vigorously denied by the previous government as well as Betamax. But  what is clear is that although the deal was obviously beneficial to Betamax, for the STC – and by extension the Mauritian taxpayer – it’s been disadvantageous. That should prompt the question as to whether such long-term contracts (15 years in this case) are a good idea, especially in a market where prices fluctuate quite quickly.

The new government went into the talks with the stated intention of halving the amount paid to Betamax and is threatening to put an end to the contract if the talks fail. Betamax is saying that they have not agreed to anything yet and that the talks are being held without prejudice. Reports have also surfaced of divisions within the cabinet of how to handle the situation, with supporters of renegotiation reassuring reluctant colleagues arguing that getting rid of the contract would entail a penalty of US$60 million. Way lower than if the contract is followed through. However, the fact that the company was willing to talk rather than dismiss the government’s stance as too onerous is an indication that, in this case, there is plenty of room to maneouvre. And it’s starting to look like that was by design.

 
The deal has been disadvantageous to the government and by extension to the consumer.
 
 
 
This article was published in Weekly's edition of 15 th - 21st  January 2015
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