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Facing the threat of rising oil and food prices

Introduction
Oil seems to have a talismanic role in the world’s psyche. More than gold its price causes predictions of apocalyptic proportions, paralysis in the modern world and fears of wheels grinding to a halt. Those of us of an earlier generation will recall how the four-fold rise in the oil price in the seventies sent shockwaves across the world and caused a tectonic shift in global resources as more money poured into the oil-producing economies than they could handle. The dramatic increases in oil prices in 1973-74, 1978-80 and 1989-90 were all followed by worldwide recession. Yet with unerring regularity and often defying the predictions of doom, the economies would return to the historical pattern of periods of unprecedented growth, low interest and inflation, consumer confidence and spending.

In the decade of the eighties, the economies of Asia grew (real GNP) astronomically ranging from 120% growth in the Republic of Korea, Taiwan 90%, Hong Kong 65% and Singapore 80%. Even the Asian crisis went almost as soon as it had arrived, leading the region and the world’s economic managers to take the credit for having fixed the system – once and for all. The more hubristic were even prepared to say that inflation had been bottled up, the economic cycle of periods of recovery and prosperity characterised by relatively rapid growth followed by contraction and recession or the more extreme form ‘depression,’ had been neutralised and the central bankers and the IMF were in complete control.

Storm clouds
Even Bush could not mismanage the US economy given the magical powers of Alan Greenspan of the Federal Reserve Bank, while Gordon Brown, the ambitious Chancellor of the Exchequer was credited with all the economic achievements of Tony Blair. The only threats that the revered gurus could see was the bin Laden-inspired terrorism, and more mundanely, the impact of washing drug money in the pure financial stream overseen by the ever more confident central bankers. But then suddenly storm clouds began to gather on the horizon and the respected Economist publication, ‘The World in 2006’ cautioned that the global growth rate of close to 5% for two consecutive years was too good to be true and that things could not remain so rosy for ever.

Real oil prices had already begun to climb, a housing boom or rather bubble financed by sub-prime loans, extravagant consumer spending with the gas-guzzling Hummer and SUVs being the vehicles of choice and negative personal and national savings rates were facilitated and masked by cheap money. History is replete with examples that such a party could not last, that the night would come to an end and the hangover would be long and painful. That unfortunately has now happened, and almost quarterly we see leading institutions like the IMF and the European central banks revising their economic outlook, shaving a few decimal points with each revision. The decline started with the sub-prime mortgage crisis in the US, which now affects the global financial system with fears that the system can collapse and that Bear Stearns in the US and Northern Rock in the UK were only the early casualties.

A matter of opinion
How the crisis will play out, however, is a matter of dispute, and there are conflicting projections by influential players in the system. The influential Bank for International Settlements – the central banks’ central bank – considers that the world economy is probably facing a deeper and more prolonged slowdown than many assume, and that even though the worst of the credit crisis may be over that did not indicate an all-clear for the world economy.

Barclays Capital and the Royal Bank of Scotland seem to have a more pessimistic view of the state of the world’s major economies, and in mid-June the latter advised its clients to brace for a full-fledged crash in global stock and credit markets over the next three months as inflation paralyses the major central banks.

The UK right of centre newspaper the Daily Telegraph quotes the bank as warning that the S&P 500 index of Wall Street equities is likely to fall by more than 300 points to around 1050 by September as “all the chickens come home to roost” from the excesses of the global boom, with the contagion spreading across Europe and emerging markets.

Global inflation has jumped from 3.2% to 5% over the last year. Tim Bond, chief equity strategist of Barclays Capital, believes that the “emerging world is now on the cusp of a serious crisis; that inflation is out of control in Asia,” and that the need to slam on the brakes will cause “a deep global recession over the next three years as policy-makers try to get inflation back in the box.”

One of the less discussed implications of globalisation is that it spreads both its virtues and its vices, and whether it is a matter of inflation, interest rates or a credit crunch, the dangers will move across borders. Of course it also means that every economy becomes its brothers’ keeper with a real and direct stake, and as is evident with the EU countries complaints of loss of independence is not infrequent. Now with oil and food costs soaring, inflation has returned with a vengeance; economic managers, investment managers are nervous; the genie of inflation has re-appeared; and the dangers of inflation are now so great that those managers would readily sacrifice growth to control inflation. But even that is a major challenge and many are now saying that what has in fact changed is that the long-term growth trend is under threat. And again oil is a major factor, with active wars less so with stability gradually returning to Iraq so that even presidential hopeful Barack Obama is now shifting his position on the drawdown of US troops.

The jury is out
So far it is hard to say which of the two scenarios predicted by BIS and RBS is correct. It is true that the wage-price spiral has been avoided but jobs are disappearing whether in the closure of 600 Starbucks coffee houses or among major car manufacturers, and during this week the stock market actually reacted positively as one of America’s major car manufacturers reported only an 18% decline in sales – it was expected to be higher! Let it not be forgotten that America is still by miles the world’s largest economy and it is the spending habits of the American consumer that have driven the meteoric rise of China and India. The reverse may not be entirely proportional because demand in the numerically significant China and India has increased, but not even America’s worst critic would wish for the collapse of the US economy.

The double edge of the twin
It is one of the ironies that these two economies are partly responsible for the sustained oil and food price increases. While past oil shocks have been caused by supply constraints, the current increases have a significant element of being demand-driven as China’s industries and their growing middle class along with their Indian counterparts find that they can afford cars that are still dependent on oil. The search for alternative energy sources which accompanied pervious oil shocks waned as things returned to relative normalcy with the significant exception of electricity companies which started to move away from oil. The current one will have some similar effect as car manufacturers accelerate their efforts to produce hybrid cars. The airline industry has cut back its flights with immediate effects on the region’s tourism industry that is so pivotal to its survival. And as tourism falls, so too will remittances from the rich countries as migrants struggle to stave off the foreclosure of their homes. Just getting over the next five years without a major catastrophe will be a major achievement.

But while oil has stolen the limelight, food is an equally grave and direct concern, and for the first time in decades countries are suddenly talking of food security. Heads of governments of the region and the world are holding conferences to address the dramatic increases in the price of basic food items, some of which it has to be said are related to the search for alternative energy sources with corn being the most popular cited example. In fact at the World Food Summit (WFS) some NGOs called for a moratorium on ethanol production arguing this would cut wheat prices by 20%.

With oil there may be several alternatives that would be both technically feasible and economically attractive, but food is a different story. The escape of hundreds of millions in the developing world from hunger and poverty means that there are far many more mouths to feed with a growing demand for meat, which itself demands more feed. Like oil, agriculture is not susceptible to dramatic short-term fixes, but that does not mean that more cannot be done, and as we witnessed recently the placing of an export ban on one type of rice by India had an immediate adverse effect on the international price. Countries and their politicians are particularly vulnerable to fears of hunger among their populace and countries are reluctant to co-ordinate national strategies for the global good. For example, while Japan has agreed to release its government-controlled stockpile, Egypt has extended its ban on the rice trade for another year. To compound all of this, the interest of the private operator/producer/exporter and that of the government seldom converge and short of government control regional and international agreements are hard to make and even harder to enforce.

The problem with agriculture is also structural – in both the developed and developing world there is a reducing appetite for participation in the sector with weather and price fluctuations making it like a night at the casino. Added to the challenges of global warming, the reduction of water supplies, declining investment funds, reduced land for agriculture and a long-term trend of falling prices for agricultural produce, we see an industry that can only grow if there is a significant increase in agricultural productivity.

Alas, giving seeds to the populace may appear politically attractive, but it is no more than a very limited short term measure with some impact at the level of the poor household.

Note: I have delayed the column on taxation as I have been promised some additional information.

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QA II concessions, the Minister of Finance and more conflicts

Introduction
In the absence of a Ministry of Planning and Development, the Ministry of Finance takes on immense importance. I therefore publicly greeted the announcement of Dr Ashni Singh as Minister of Finance not as a fellow accountant with training in accountability – of course – integrity, competence, capacity for hard work and an independent streak, but as one who would be confident enough to control expenditure, rein in President Jagdeo’s capacity to ignore the strictures of the constitution in relation to the Lotto funds or to spend first and seek approval after, evident with the frequency and value of supplementary provisions requested in the National Assembly.

More than even the Ministers of Trade or Agriculture, the Minister of Finance is the point person with the private sector, and by his action and even pronouncements can directly affect investments, jobs, performance of the economy, interest and exchange rates and share prices. He is the subject minister for the NIS, the Bank of Guyana and the Guyana Revenue Authority (GRA), appointing their boards often with people of his choice and under his influence, and responsible for the Companies Act and a raft of other legislation. He decides who gets tax holidays, budget allocations (or not), and how insurance companies and financial houses are regulated. His knowledge of the tax laws, their role and operation informs his determination of not only the level of taxation in the country but also the fairness of the system and how the burden is borne by various segments of the tax-paying public.

The overflowing VAT
In the period since Dr Singh’s appointment in September 2006, he has tested the public’s confidence in him in critical areas with his relationship with the private sector and civil society often being at best, polite. In both years following his appointment, he not only broke with tradition but with the implied constitutional requirement (Article 13) to engage stakeholders in pre-budget consultations. He failed even to acknowledge a request by the women’s group Red Thread to meet him on the effects of VAT on women in particular. He did not correct a misleading date (September 15, 2007) on his 2007 mid-year report presented to the National Assembly in November 2007 despite this being drawn to his attention and it reported to have been behind related delays in 2007 by the Bank of Guyana and the Statistical Bureau to publish important information on the economy.

In his first full year as minister the National Assembly rubber-stamped some of the most expensive supplementary provisions ever made in the country ($18 billion), witnessed an unacceptable level of budget under-statements on revenue with VAT alone being under-budgeted by 76 % and the combined effect of two taxes that were supposed to be revenue neutral (VAT and Excise Tax) being under-budgeted by 48%.
The consequence of this was the steepest single year rise in the tax burden this country has witnessed for as long as statistics are readily available (see table below) and a massive 10% increase in the 7-year period 2000 -2007, putting Guyana in the league of rich countries despite the government’s inability to offer the poor and the unemployed basic assistance, or citizens, security, and the continuing flood of migration to any country that Guyanese can enter – legally or otherwise. Amidst all the confusion caused by some misleading statements on VAT from government spokespersons and the Guyana Revenue Authority, the Minister stayed behind a wall of silence. That silence was extended to the saga of the QA II concessions until his ministry responded to increasing concerns expressed by the public.

Tax to GDP ratio – selected years 1992 to 2007

1992     1996     2000     2004     2007

42%        40%          37%         40%         47%

Source: Ministry of Finance National Estimates

Intervention
The intervention came in the form of a wordy four-page clarification from the Ministry of Finance on June 15 and a statement issued through GINA on June 16 responding to a Stabroek News article on the QA II saga on the same day. The clarification restated the government’s commitment to openness and transparency, claimed that fiscal concessions are rule-based and not discretionary, recounted the recent history of the law on tax holidays and sought to blame the saga on poor legislative drafting.

An examination of the statements, however, shows that they are misleading in terms of how the law is applied. The Minister had played a role in the QA II saga wearing several hats, some of which would have involved obvious conflicts and at least wearing one of those hats he should have realised that the law as passed and assented to by President Jagdeo did “not reflect Government’s intent.”

While it is true that the scope for tax holidays is limited to geographical regions and particular types of activities, it is far from correct to suggest that the tax holiday laws are not discretionary. The relevant section of the Income Tax (In Aid of Industry) Act quoted in the clarification provides only “that the Minister may grant an exemption from the Corporation Tax,” which can hardly be considered mandatory. Did the Minister and Cabinet restrict their consideration of the tax holiday provisions to Corporation Tax as the law provides, and not to income tax? In other words, did he give any preferred hotelier or other non-incorporated entity any tax holiday because it was “pioneering” and would he say what authority he used for doing so?

A stretch
Under the claim of transparency the statement refers to “substantial information on tax exemptions” included in annual reports of the Guyana Revenue Authority. It seems a real stretch to consider a total figure as “substantial information” when the quantified information applies only to concessions by the Customs and Trade Administration in respect of goods imported by or for a pot-pourri of products or sectors. There is no information on the beneficiaries of tax holidays and on any Income, Corporation or other taxes remitted.

While the President on the occasion when he castigated Mr. Yesu Persaud spoke of the concessions in the past tense, the Ministry’s statement confidently states that the QA II concessions are subject to approval by the GRA and the Ministry of Finance [sic]. Are we to believe that a matter taken to Cabinet in May 2007 had not been approved one year later and that the company would have proceeded with their multi-million dollar investment only with “subject to” approval?

The statements also tell us that the Minister is Chairman of the Privatisation Board which made the recommendation to the Cabinet of which he is a key member and that the decision by Cabinet was subject to approval by the GRA and the Minister of Finance – confusing to most ordinary minds. Since as the “clarification” states that “Cabinet’s decision is the definitive authority for subsequent decisions and actions,” do the GRA and the Minister have any discretion in the matter, whatever the law says to the contrary?

Pass the buck
But placing the blame on the framers of the 2003 legislation raises further questions. At the time of the 2003 legislation Dr. Singh was not only the Budget Director in the Ministry of Finance and should therefore have been concerned about the legislation’s potential revenue impact, but he was also a member of the board of the GRA as a nominee of the Ministry of Finance and in that capacity too should have perused the legislation both for impact and flaws. Yet it has taken two years after granting concessions under the act as Minister, before there has been any acknowledgment that the act is flawed.

The ministry’s statement also sought to place, incorrectly in my view, the concessions for QA II on the same level as the Berbice bridge for which there is separate legislation passed subsequent to the 2003 legislation (Act 3 of 2006), specifically exempting the income of and dividends and interest paid by the concessionaire from corporation, income and withholding tax, and income earned by contractors and subcontractors to be exempted from income tax for the concession period.

Given the confusing statements made by spokespersons who are either expected to know or apply the relevant laws, the proposed seminar on privatisation and fiscal concessions to be hosted by the Privatisation Unit (of the Ministry of Finance) on July 9 becomes all the more necessary, and it is clear that the list of participants should be widened. Moreover, while it is never good to hold up applications regarding investments it may be preferable to place such applications on hold pending corrections and clarifications.

Conclusion
But there is one final issue that neither the clarification nor the statement addressed. Under section 38 of the Investment Act 2004, concessions granted under the section of the Income Tax (In Aid of Industry) Act dealing with tax holidays require a procedural audit by the “Auditor General or any suitably qualified person” designated by him. The only professionally qualified accountant in that office is the wife of the Minister of Finance, which potentially could unfairly place her in the unenviable position of being associated with adverse comments on concessions that her husband would have granted. Whatever opinion is issued by the Audit Office and whatever Chinese Wall may have been put in place, this is a most blatant case of conflict of interest in a most important function of the country’s administration. The respective functions simply cannot co-exist and the Public Accounts Committee should immediately step in to end it.

Next week: BP turns its attention to the operations of the general tax laws under the watch of the President and the Minister of Finance.

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Are Guyana’s companies built to last?

Introduction
If we look across the Caribbean we see a number of companies that have extended well beyond their borders with Grace Kennedy, Republic Bank and Trinidad Cement being very prominent, burnishing their Caribbean credentials by cross-listing on the regional stock exchanges. Perhaps reflecting their growing confidence and strength, Trinidad and Tobago companies appear the most enterprising as their domestic market becomes more saturated forcing them to seek new opportunities and markets abroad. With the USA’s plans to follow International Financial Reporting Standards in place of US GAAP it may not be long before we see a Caribbean company seeking listing on a US stock exchange.

Where does Guyana stand among Caribbean companies having established one of the early companies (Banks DIH) to have gone into wide public ownership and with veteran entrepreneur Yesu Persaud regarded as one of the leading private sector persons in the region?

It seems not very far, defying all the hopes that the launch of the Guyana Stock Exchange and a very favourable tax regime for public companies would see an increase in the number of companies listing on the stock exchange, raising money from the public and providing the platform for take-off.

Going private
Instead the relationship between the Guyana Securities Council and leading public companies is at best strained; no company has yet listed and the quality of corporate governance is still strained. In fact, with public companies such as Guyana Stores, JP Santos and Hotel Tower Limited coming under limited personal or family control, it would probably be truer to speak of ‘going private’ rather than ‘going public.’

It may have been pure coincidence that Banks DIH was again in the forefront among local companies to have offered a significant share to a foreign company – Banks Barbados – although the purpose may have had little to do with regional co-operation. It is difficult to say how beneficial the move was to the company as a whole, but it was both bold and novel to see truly outside directors with real clout being placed on the board of any public company in Guyana.

The other major public company with wide-shareholding – DDL – has not only not done well in its overseas ventures, but many of its new ventures have been as private companies not subject to the higher standards of transparency and disclosure applicable to public companies. Worse, the company like so many of its counterparts seems to take the approach of the goldfish, unable or unwilling to see any wart that would restrict its own development, no matter how obvious to even the most casual observer.

Of course the government has abandoned its commitment to widespread public ownership and Guyanese can only dream of a stake in any of those companies which are being given all sorts of goodies to ‘encourage’ them to risk exploiting our natural and sometimes non-renewable resources. While we ask the government to comply with the Investment Act in relation to local private sector companies, we should not lose sight of the danger of worse excesses taking place in relation to foreign companies. These deals which can bind the country for decades should be tabled in the National Assembly in the interest of transparency and to reassure those investors.

Competing at more than cricket
But back to our private sector companies and whether they have what it takes to compete regionally and internationally to take on and beat the Bajans, Trinis and Jamaicans, like we do in cricket – at least some of the time. GBTI is a sound financial institution that can move outside of the Guyana market, but nothing that the directors have said suggests that they are thinking in that direction.

What a boost it would be for Guyana to hear that our own GBTI has taken majority control of another regional financial institution. Or that Bakewell – a private company – has moved into another market. Indeed these are legitimate questions to any entrepreneur who laments the domestic business environment.

Seeking answers to these questions I turned to my favourite and best-selling business book, Built to Last: Successful Habits of Visionary Companies by Jim Collins and Jerry I. Porras, which was followed up by a solo effort by Jim Collins: Good to Great: Why Some Companies Make the Leap . . . and Others Don’t.

Included in Built To Last, are eighteen companies the authors identified as a “visionary company,” defined as one that is a premier institution in its industry, is widely admired by knowledgeable businesspeople, made an imprint on the world, had multiple generations of chief executive officers (CEOs), had multiple product/service life cycles, and was founded before 1950.

Good habits
In a summary of the book the Vance Caesar Group, ‘Premier Leadership Coaching,’ identified as the key question which Messrs. Collins and Porras sought to answer as “what has enabled some corporations to last so long, while other competitors in the same markets either struggle to get by, or fade away after a short period of time?” Collins and Porras took as their benchmark 18 well-known, well-established and healthy companies (‘visionaries’), and compared them to a counterpart in their specific area of business using as yardsticks common patterns and differences between their company and the counterpart. The result was a set of guidelines and principles that all companies, large or growing, can use to keep themselves growing, strong, and ahead of the competition.

Here are the outstanding features of companies that are built to last.

Clock builders, not timekeepers – They are focused on building the organisation so it would run “as smooth as a clock.” Visionary companies lead, not follow – build not watch the clock.

Have a set of core values – They began with a set of core values that persist and are practised at every level in the organisation, in good times and bad.

Have a core ideology – While the core value stays the same, the core ideology changes, preventing the company from being left behind and eventually disappearing. This is not the same as responding to every fad that comes around and usually takes place slowly, but fast enough to keep ahead of the competition.

BHAG (Big hairy audacious goals) – Not all shifts are incremental. Companies that are built to last periodically undergo paradigm shifts in products, and have clear-cut, compelling, cutting-edge goals the company sets to climb the next mountain.

Have a ‘cult-like’ culture – Everyone in the company must commit to the same core ideology, must be indoctrinated into the company culture, must develop a tight fit with others in the company, and must think of themselves as the ‘elite’ in their field.

Don’t be afraid to evolve – Visionary companies monitor trends, do their research and anticipate and even create changes. They do not wait on the market or on some other visionary before making their move.

Look inside for top management – Visionary companies have management development processes and succession plans in place to ensure smooth transitions and direction as the company ages. It is not unusual to find a defined succession plan that is more than one level deep, capable of responding to the most dramatic shock without any noticeable disruption.

Constantly innovate – Without this, the company’s products/services become obsolete and lead to a decline.

How have BTL companies fared?
Are the companies identified in the book still considered “Built to Last”? The answer depends as always on who is asked. Converts to the ‘Book,’ which they spell with a capital ‘B,’ would point out that every one of the 18 companies cited is still in business, is still a household name doing what they were doing decades before. Taken as a basket, these companies are also doing quite well in terms of total shareholder return, even though the writers themselves say that the companies were not selected on the basis of stock market performance.

Cynics not only point out that the shares of Motorola and Sony have lagged on the S&P 500 Index while Disney has taken a long time to recover from a long slump, but that the test was so widely framed as to allow too much latitude. At least 7 of BTL’s original 18 companies have stumbled, prompting the question, have companies struggled because they ignored the principles in the book or because they followed them?

Of more direct interest is the book’s relevance to our own entrepreneurs who are mostly self taught in the school of entrepreneurship, and whether the principles that may have contributed to the success of mainly US companies can be applied to Guyana where the business culture seems so different from the Caribbean, let alone the USA.

If Guyana is to compete then our companies – big and medium-sized – would need some paradigm shift in how they see their businesses. How our entrepreneurs respond will shape the Guyana economy for the next few decades.

Next week: Business Page’s response to the statement by the Ministry of Finance on the Queens Atlantic II Group and related matters.

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Open letter to the Minister of Finance on VAT

It is heartening that Dr. Ashni Singh, the Minister of Finance has finally addressed the Press on matters concerning his Ministry, even though he was less than forthright on the matter involving the President, Mr. Yesu Persaud and tax concessions.

I am writing to pose publicly to Dr. Singh two straight questions: 1) Is he aware that had the rate of VAT been correctly computed prior to its being set into law, the standard rate would be less than 16%?

2. Would Dr. Singh now be equally prompt in reducing the rate – which incidentally he can do on his own, subject only to an affirmative resolution of the National Assembly?

I would appreciate a timely response from Dr. Singh.

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The President, ‘scraps’ and concessions

It was a week of ‘scraps’ for President Jagdeo, if we count his inexplicable meeting last Monday at State House with the scrap metal dealers, who come under Prime Minister Sam Hinds’ portfolio. There were, however, two others, one involving the country and the other specifically the private sector. At the GBTI Business Forum 2008 on Monday, the President cast aside the expressed hope by the bank’s CEO that the forum rise above the controversy of the net benefits/loss from the CARICOM/EU Economic Partnership Agreement (EPA) and address its opportunities and offerings. The President chose instead to engage in what many in the audience saw as a barely disguised and inappropriately timed attack on the EPA, the Caribbean Regional Negotiating Machinery (CRNM), some of his own regional counterparts and the European Union.

But it was the launch of the new newspaper the Guyana Times where the President really bared his knuckles as he associated leading businessman and entrepreneur Yesu Persaud with ‘ignorance’ and suggested that the entrepreneur and leading private sector spokesperson for scores of years attend a seminar on the tax laws of the country. Mr. Persaud, speaking in his capacity as a private sector representative at the launch had dared to suggest that the concessions which the government had granted to Queens Atlantic Investment, the parent company of the Guyana Times Incorporated be extended to “all Guyanese.” A more transparent and equal treatment for investors has for years been the concern of domestic operators, and indeed the PPP in opposition, as they witnessed foreigners being granted sweetheart deals that effectively doomed local operators as second class in the scheme of things – the wood sector being the most obvious example.

Mr. Persaud was perhaps referring to ongoing concerns that concessions had been offered to the five new businesses of the investor group, instead of some only. The President who admits to being a close personal friend of the investors took umbrage at the call and announced that he had asked Mr Winston Brassington of the Privatisation Unit to hold a seminar on the tax laws, leaving the audience to wonder why not the GRA?

President Jagdeo explained that the concessions were in respect of the pioneering projects of the investors, the antibiotic plant and the textile mill. The problem which many share with Mr. Persaud is that the piecemeal information on the deals has had to be forced out of the government and its spokespersons while the group has remained conspicuously silent, obviously confident that the government would deal with it as a PR exercise and not a disposal of state resources in which all are interested. Perhaps the Guyana Times, which calls itself the Beacon of Truth, would show its editorial independence and commitment to truth and the people of a country that makes it all possible for its investors, to run its own story on what many may consider a steal of a deal.

The truth
All this of course could have been avoided if the government had complied with section 37 of the Investment Act 2004 that requires it to publish in the Gazette information regarding the fiscal incentives granted under section 2 of the Income Tax (In Aid of Industry) Act Cap 81:02. Only then would the nation be able to decide the real truth and how the agreement limits the concessions to the President’s “pioneer” industries.

The President was at pains to justify the as yet undisclosed concessions as having been granted under the authority of Cap 81:02. In fact, the act gives discretionary powers to the minister to grant concessions under two circumstances set out in section 2 as follows:

(a) the activity demonstrably creates new employment in one of the following regions –

(i) Region 1: Barima – Waini

(ii) Region 8: Cuyuni – Mazaruni

(iii) Region 9: Upper Takatu – Upper Essequibo

(iv) Region 10: Upper Demerara – Upper Berbice

(b) the activity is new economic activity in one of the following fields –


 (i) Non-traditional agro processing (excluding sugar refining, rice milling and chicken farming);

(ii) Information and communications technology (excluding retail and distribution);

(iii) Petroleum exploration, extraction, or refining;

(iv) Mineral exploration, extraction, or refining;

(v) Tourist hotels or eco-tourist hotels.

Limits
But the President should have informed himself that the authority for such concessions seems to be limited by section 6 of the Financial Administration and Audit Act (FAAA) which stipulates as follows:

(1A) Except as provided in subsection (1C) [dealing with the duty of the Minister of Finance to make subsidiary legislation to waive any tax payable due to the taxpayer’s inability to pay such tax because of natural disaster, disability or mental incapacity etc.], no remission, concession, or waiver is valid unless the remission is expressly provided for in a tax Act or subsidiary legislation;

(1B) No remission, concession, or waiver of tax by Order or other subsidiary legislation is valid unless the Act under which the subsidiary legislation is made expressly permits the Minister to provide such a remission, concession, or waiver.

The President and the Minister of Finance, who like the group have been silent on the issue, must now consider whether they were properly advised of the relevant provisions of the law including the limitations under the FAAA, and that section 2 of Cap 81:02 does not recognise the “pioneer industries” referred to by the President.

The Finance Minister Dr. Ashni Singh has an obligation to the nation to indicate whether any cabinet paper submitted under his name recommending the concessions quantified the cost to the country of the concessions granted to the investors. If there was no such paper it would be a serious indictment of the President, the Minister and the entire cabinet.

And the rent
While much attention has been paid to the tax holidays and the government boasts how attractive a deal it won with annual rental of $50 million dollars per year, the government has been careful to avoid the real value of this rent.

Remember that there is a 99 year lease and there is nothing to indicate that there is a rent escalation clause providing for periodic increases in rent based on inflation and other economic factors. This then is how the figures look if we place a time value on the rent the country will earn from this deal and assuming discount rates of 10% and 5%, with the former being the more likely:

Discounted at 10% 5%
by the 10th year $21M $32M
by the 15th year $13M $25M
by the 20th year $8M $20M
by the 25th year $5M $16M
by the 50th year $0.5M $4.6M
by the 75th year $43K $1.4M
by the 99th year $4K $0.4M

In other words, by the half-way stage of the agreement, using a discount factor of 10%, the amount of the rent expressed in today’s dollars will be $39,043 per month! Assuming the unlikely scenario that a discount factor of 5% is justifiable, the monthly rental at the same point would be a princely sum of $381,516.

Now look further down the road to the end of the lease period and see that the rent using a 10% discount factor would be, in today’s prices, $365.85 per month! So just what is this about an option to buy for US$3.5 million in three years time?

Do those who tout the benefits of the deal really believe that the investors are so ‘ignorant’ as to choose to spend US$3.5 million dollars when they are the beneficiary of the giveaway of a century minus one year?

Conclusion
The dilemma we now face is what happens if the government has granted concessions that are not ‘valid,’ as they would appear not to be under the FAAA. Would the taxpayers have to bear for 99 years, the burden of government’s decision?

The President had earlier announced that he left the meeting when the matter was being discussed by cabinet. Perhaps he should have stayed and advised his colleagues about the state of the laws and the limits of their powers.

He may have saved his friends and colleagues from possible embarrassment and the taxpayers of the country the waste of resources.

Still, I hope I am invited to the Privatisation Unit’s Tax Seminar to which I recommend that the members of the cabinet, the President’s advisers and investor friends be invited as well.