Category: Private sector

Posted on

‘Subsidies’ is an economic concept which takes many forms

I wonder whether, if Mr R Ravie Ramcharitar had understood the terms “benefit from” and “subsidized,” he would have written a letter (‘The Guyana Times competes in an open market for advertising, including government advertising’ SN, September 30 ), so laced with misplaced venom and ill-advised reasoning. The term “benefit from” referred to the use of facilities subject to subsidised rentals, duty, and other illegal tax concessions given by President Jagdeo to the Ramroop company Queens Atlantic Investment Inc. (QAII). Mr Ramcharitar should tell us whether Guyana Times Inc is paying market rent, in which case QAII is improperly and immorally exploiting concessions granted by the state – as done by another prominent investor – or is charging rent based on cost which included subsidies in various forms. It is a case of lose-lose for Mr Ramcharitar and his principals.

Second, ‘subsidies’ is an economic concept which takes many forms, including cash disbursements, tax exemptions, preferential exchange rates, governmental contracts with special privileges, and other favourable treatment. Is it not obvious then that advertising by a government to a start-up newspaper that dares not disclose its total circulation, let alone the components of its circulation, falls into that category? What are these prestige advertisements that Guyana Times attracts? Are these the 20% GINA advertisements – in addition to direct government ads – which cannot be justified and certainly not on the basis of any normal circulation criteria?

And what is this about superior circulation and readership among the business and professional community? Since Mr Ramcharitar is so confident about his “facts,” I am sure he would not hesitate to share them with his “superior readership.”

I am disappointed that Mr Ramcharitar would put his name to a letter that so casually deems others as malicious, fearful or jealous. Of whom or of what? Of the real beneficiaries of the PPP/C and President Jagdeo’s largesse, including subsidised land at Pradoville, but who dare not sign such a letter? And was it fear that caused Mr Ramcharitar not even to acknowledge that the identical letter by me appeared in the Kaieteur News as in the Stabroek News? Is his company afraid of the Kaieteur News or is there a more dangerous subliminal prejudice against Stabroek News at work here?

Finally let me say how much I am looking forward to examining a copy of Guyana Times’ annual return and accounts for 2008 which I had hoped the directors would have filed by now. Or is exemption from the statutory filing another concession enjoyed by the Ramroop companies?

Posted on

IFRS for SMEs: One cheer for the accounting profession!

Introduction
After more than six years of drafting, consultations, redrafting, deliberations, field testing and debates across a number of countries of the world, the International Accounting Standards Board (IASB), the body responsible for international standard-setting for the accounting profession, has issued an International Financial Reporting Standard (IFRS) designed for use by small and medium-sized entities (SMEs). Guyana is a member of the International Federation of Accountants and such standards automatically apply to Guyana.

The accounting regulator in Guyana, the Institute of Chartered Accountants of Guyana is now considering adoption. While it has not pronounced on the new standard it is expected that the standard would be available for use in the 2009 financial statements of all Guyanese SMEs. While not the most satisfactory situation, some members of the accounting profession have opined that even in the absence of such pronouncement, businesses and their auditors should take the lead and apply the new standard immediately.

The release of the new IFRS should be seen as one of the most welcome developments and contribution of the accounting profession in modern times. It simplifies many of the rules governing the preparation, contents and presentation of financial statements for all but a dozen or so of our companies. Up to this time the same rules that applied to the multi-billion dollar company like Demerara Distillers Limited also applied to the small one person operation – a requirement that is expensive, impracticable and nonsensical. The financial sector would be particularly gratified as the new standard removes one of the excuses of the profession about the cost, time and complexity involved in the preparation of financial statements submitted to them in support of credit applications and renewal.

The IFRS for SMEs is a self-contained standard of about 230 pages tailored for the needs and capabilities of smaller businesses. Many of the principles in full IFRSs for recognising and measuring assets, liabilities, income and expenses have been simplified, topics not relevant to SMEs have been omitted, and the number of required disclosures has been significantly reduced.

Main features
The following principal changes to existing accounting rules for SMEs arising from the new IFRS are highlighted:

1. Some topics in IFRSs are omitted because they are not relevant to the typical SMEs. These include: earnings per share; interim financial reporting; segment reporting; and special accounting for assets held for sale. To the extent that they do apply, non-mandatory reference could be made to the existing IFRS’s, which does compromise the stand-alone precept.

2. Some accounting policy options permitted under full IFRSs are not allowed under the SME IFRS because a more simplified method is available under the new standard. These include: financial instrument options including available-for-sale, held-to-maturity and fair value options; the revaluation model for property, plant and equipment and for intangible assets; proportionate consolidation for investments in jointly controlled entities; for investment property, measurement is driven by circumstances rather than allowing an accounting policy choice between the cost and fair value models; and various options for government grants.

I have highlighted the revaluation issue because this has become a common practice in Guyana following our experience with hyper-inflation in the late seventies and eighties.

3. Recognition and measurement simplifications: The main simplifications to the recognition and measurement principles in full IFRSs include the accounting principles and disclosure rules for financial instruments; goodwill and other indefinite life intangible assets which must be amortised over their estimated useful lives (ten years if useful life cannot be estimated reliably); research and development costs which must be recognised as expenses; borrowing costs which must be recognised as expenses; property, plant and equipment and intangible assets; and defined benefit plans the past service cost of which must be recognised immediately in profit or loss while all actuarial gains and losses must be recognised immediately either in profit or loss or other comprehensive income.

4. Substantially fewer disclosures: No longer should the financial statements look like a formidable book written in a language to confuse rather than inform. Pro-forma financial statements compatible with the new IFRS have been developed and published by the IASB and are available on their website.

5. Simplified redrafting: A significant feature of the new standard is that it will only be subject to triennial reviews so that there is more certainty and uniformity in the preparation and presentation of financial statements. No need to worry about annual reviews and changes and the implications for comparative figures. Hopefully as well, instead of spending a whole lot of time on what was essentially non-added value work, auditors will assist their clients in offering advice on internal controls and business issues.

Definition
One of the main questions that obviously came to mind in developing the new standard is what will be considered an SME, since there was no agreed or universally accepted definition. SMEs come in many shapes and shades and it would be a challenge for the profession and the law to capture in a single definition the range of such entities. An SME in a developed country could be a major player in a developing one and therefore a definition based on quantitative factors such as number of employees or level of sales was rejected.

An SME is defined in the standard as an entity which publishes general purpose financial statements for external users but does not have public accountability. An entity has public accountability if (a) its debt (borrowings) or equity (shares) instruments are traded in a public market or it is in the process of issuing such instruments for trading in a public market; or (b) it holds assets in a fiduciary capacity for a broad group of outsiders as one of its primary businesses. All companies traded on the Guyana Stock Exchange, banks, insurance companies, securities brokers/dealers, unit trusts, etc, would be considered to have public accountability and cannot therefore prepare their financial statements using the IFRS for SMEs.

What about those SMEs that seem to be neither fish nor fowl and how do we deal with the public interest companies for which special reporting requirements are desirable? Where for example does a Guysuco, a GPL or a GT&T come, and are consumers any less important than investors?

The IASB considered whether to include in the definition of public accountability those companies which provide an essential public service such as a public utility. Respondents to the discussion paper however felt that in many jurisdictions such entities could be very small.

Consideration was also given to those entities which were economically significant in their home jurisdiction but the IASB felt that “economic significance may be more relevant to matters of political and societal accountability” and therefore felt that the final decision should be left to the individual jurisdictions.

Time for action
The issue of this standard should be addressed not only by the accounting profession in relation to its clients but by the Ministry of Finance, the Guyana Revenue Authority and the lending community. The Companies Act envisaged that the Minister of Finance would set certain levels of income, assets or staff below which the requirement of the audit of a company could be dispensed with. The act has now been on the law books for eighteen years but no such pronouncement has been done. It is time that this be done.

The Guyana Revenue Authority too has to consider whether it should be insisting that a one-man company with a small turnover and few assets should require an audit but the multi-billion dollar self-employed person does not. Yes, it is a legislative matter but it is up to the GRA to make recommendations based on practice and experience.

The lending community now has an opportunity to decide whether it will continue to accept some of the sloppily and inaccurately prepared financial statements submitted in support of lending applications or whether it will now sit with its clients and the accounting profession and insist on a higher standard of accounting and reporting. The accounting profession locally has generally been very slow and a ditherer on the occasions on which leadership was required. It should now piggy-back on the initiative of its international brotherhood – for that is what it is – and take decisive action on this matter to justify the wide powers it enjoys under statute.

Conclusion
The new IFRS is clearly both an opportunity and a challenge and to use that overdone term, every stakeholder should see and use this to rectify many of the serious mistakes that have been perpetrated and tolerated for decades.

Mistakes that have caused the loss of billions of dollars of revenue to the state, the loss of reputation of a profession that has become associated with tax evasion and aggressive tax planning and the inability of the layperson to read and understand financial statements, an important requirement for a developing capital market.

At the same time, the new IFRS is not a panacea and outstanding issues such as corporate governance, money-laundering, tax evasion and poor and unethical standards of accounting and auditing will remain to be addressed. This new IFRS is however welcomed by Business Page as a useful development. One cheer for the accounting profession!

Posted on

What’s happening at the New Building Society?

Introduction
How can a financial institution that just a few months ago boasted about a “liquidity of 40% of the total assets or 47% of members’ funds, a position exceeding the approved industry standard” – whatever that means – suddenly start telling current and potential loan customers to come back in six to eight months time? That is what a staff member of Ram & McRae was told after he had applied for a modest loan from the New Building Society. When he related this to me I thought he had it wrong and suggested that he return to the Society and seek confirmation and some details. He came back with the same message. Then someone contacted me from abroad complaining that his mother had a similar experience. I said that I had heard of reports of the NBS restricting lending. Then I received a letter dated September 15, 2009 purportedly from a member of the staff complaining generally about the state of the Society and that “since August the Society had stopped giving loans and has been telling loan applicants to go to GBTI or Republic Bank.”

I have independently confirmed this, which the commercial banks have found a dramatic reversal from the position not too long ago, where the NBS was actually poaching the banks’ commercial customers with the lure of lower interest rates made possible by the tax exempt status of the Society. What then is the cause of this development whereby the Society has ceased or severely restricted loans, described only a few months ago by the Society’s Chairman Dr Nanda Gopaul as its core business? In fact Dr Gopaul had earlier gone further, boasting of the reduction of mortgage rates from January 1, 2009 to 6.95% and 4.95%, in the case of low income loans.

Again quoting the Chairman from the 2008 Annual Report, “the Society has always adopted responsible and prudent approaches to its operations to counter any adverse development in the economic and financial environment.” What indeed could have gone so wrong so quickly that persons are now seeking advice on whether or not to withdraw their money from the Society and why the inaction from the ever so silent Bank of Guyana and the not usually silent Chairman Dr. Gopaul?

Bad governance
I wrote the Society’s Director Secretary asking him to provide me with unaudited half-year financials for this column but he has not even acknowledged my letter. He is part of the same board that complains that commentators and analysts should first contact them before writing.

So, is it that the rules are so restrictive that the Society cannot lend or is it the result of what concerned members of the Society have feared as bad governance by a team of seven with no prior experience of a private sector organisation let alone a multi-billion dollar financial institution? Forced by the media to comment on the development, Dr Gopaul gave as the reason for the sudden and unannounced development “the result of a One Stop Shop campaign by the Ministry of Housing and Water wherein numerous persons are being issued with house lots.” The reality of course is that the ministry has been giving many more house lots for more than a decade and there was no cessation of loans to existing members, so that explanation has a hollow ring about it.

Debt/mortgages
Senior staff members of the Society have been advancing a totally different reason which can have serious implications for the Society – and that is a hardly ever considered provision on the New Building Society Act. A proviso to section 7 of the act restricts to no more than two-thirds, the relationship between the aggregate of deposit and loans raised, and the amount of mortgage loans by the Society. In other words if there is $100 out on mortgages, the Society should take in on deposits and/or raise by way of loans, no more than $66. Mortgage loans at December 31, 2008 amounted to $19 billion so that amount of deposits (there were no loans raised by the Society) at that date should have been no more than $12.7 billion. The rest it seems should be raised by way of equity. Under what appears to have been the broad definition used by the Society over the decades, deposits amounted to $30 billion at December 31, 2008, an excess of $17 billion, if the proviso is applied.

As I sought to assimilate this provision I realised that it was as elegant a formulation of the thin capitalisation rule as I have ever seen. The problem it was designed to prevent is the Society having customers’ deposits and lenders’ loans tied up in long-term assets beyond a certain level, so that even a significant level of withdrawal should not have a fatal effect on the Society’s operations.

Logic and rationale
To understand the logic one also needs to understand the rationale behind the New Building Society Act. It certainly was not to support any government policy or to make commercial loans, as this current Board seems to think. Under section 6 of the NBS Act the Society is a “Housing Association for purposes of the Housing Act” which defines a housing association to include a society whose objects include the construction, improving or managing or facilitating or encouraging the construction or improvement of houses for the working class.” These are not my words but those of the act and it was on that basis – referred to in taxation jargon as mutual trading – that the NBS has been granted tax-exempt status. One has to wonder whether the Minister of Finance Dr Ashni Singh considers this provision when he authorises increasing lending limits well beyond the reach of the working class. An earlier statement by Chairman Gopaul calling for a significant increase in the lending limit “in an effort to meet the demands for the construction of more middle income houses” shows that he is not too familiar with the NBS Act or its mandate.

Aggressive management
And this is, if not entirely, certainly a big part of the problem. In 2005, the largest loans accounted for $105 million; now it is $234 million. More dangerously, they now include what are patently commercial loans granted to persons with good connections, but at least one of whom left a bad record with the GNCB. Because the Bank of Guyana seems impotent in regulating the Society there is, unlike for the commercial banks, no single borrower restriction so that one borrower can abuse the single loan limit. Had the rules which apply to the banks applied to the Society, it would not have been able to make the Bridge investment, plain and simple.

Another development is the spirited efforts to attract deposits with offers of rates of interest that suggest that the Society is willing to offer very high rates on borrowed funds. That is never a good sign and one only has to look at recent experiences at Clico and Stanford to appreciate the inherent danger. In fact the rates currently being offered by the Society are almost in line with what is being charged on the low-cost housing loans, so that on a total cost basis, those loans have minimal or no profitability. Not only is this strategy dangerous, but it also means that sooner rather than later, the rates charged even on existing loans and mortgages would escalate with consequences for affordability and considerable bad debts. Again we note the lack of urgency with which the Bank of Guyana has approached the NBS which operates without any statutory deposit or loan provisioning guideline to which commercial banks are subject.

The Bridge and the Head Office
Then we come to that other serious and questionable matter – the purchase of Berbice River Bridge Bonds of $1.5 billion dollars to help bail out the sinking Clico whose CEO and the NBS Chairman are fellow directors on the Guysuco Board. The Bridge has not achieved the optimistic revenues projected and many suspected that the belated payment of interest on its bonds for 2008 was made to stem concerns about its viability. Let us recall that Mr Winston Brassington who used some very unorthodox methods to raise money for the Bridge Company was a prominent attendee at the NBS’s Annual General Meeting (AGM) in Cotton Tree earlier this year at which he played up the performance of the Bridge. Nothing more has since been heard about that performance and efforts to obtain a copy of the company’s 2008 annual report from Mr Brassington and the Bridge Company’s Vice-Chairman were referred to its CEO who did not take or return any of my calls. So much for transparency and accountability.

The NBS Board, made up almost entirely of persons close to the ruling party, has shown a remarkable stubbornness that in normal circumstances would guarantee their removal. The way the NBS is run is certainly not normal. The directors have illegally refused to carry out the mandate of the last AGM for the repatriation of the Society’s Pounds Sterling investments and more than likely, the setting up of a Loans Sub-Committee, both of which may have helped to prevent or at least minimise the current problems in the Society.

They are persisting with the construction of a new Head Office with no firm arrangements for the disposal of the current one. With the large network of branches being constructed the pressure on the existing Head Office would have reduced significantly but the Society is set to spend close to $900 million on a spanking new structure with no customer parking! The combination of the politically expedient investment in the Bridge Bonds coming right on the heels of the $900 million Head Office and the unwillingness to repatriate the Sterling Investments explains why the Society is in its current mess.

Another misjudgment of the board is yet to be made public but members should worry about developments following the decision by the board prior to the last AGM to change the long-standing auditors Jack A. Alli, Sons & Company in preference for a relatively new auditing partnership, Solomon and Parmessar. This partnership is splitting up even before it can complete a single audit and the board, which has not a single accountant among its seven, would now have to decide whether to go with one or the other of the partners, or indeed go back to its former auditors, the reason for whose removal was never shared with the members.

Conclusion
It is hard not to worry about the sloth of the Bank of Guyana in relation to the NBS. The central bank appears to have learnt nothing from Globe Trust and Clico which it now supervises. It has categorically refused to meet members of the Society whose fears have proved more than justified and it has been promising for close to ten years to bring the NBS under its supervision.

Members of the Society may need to consider how best to protect their funds and the Society from those whose management of it seems dangerously lacking. I would caution against any precipitate action by members however and am yet hopeful that the directors would get to grips with reality. The board needs to do something to reassure members that they have the situation under control.

Note: I am a former member of the Board of the NBS.

Posted on

The boring auditor

Introduction
The stereotypical auditor as a fat, prematurely aging, bald, boring and unenterprising man probably says as much about the audit profession as it does about its practitioners. For many forced to use their services, they are just a necessary cost imposed by the law, spending several weeks at great inconvenience to the management and staff, to write a single page report for which they charge a bomb. They are not even worth a good joke, and the most famous but yet barely quotable one is how many auditors it takes to change a light bulb, with the answer being the question: How many did it take last year? It is also true that on most occasions when we consider the auditor, it is to ask the question, but where were the auditors? Where were they in the Enron saga or the spate of frauds that rocked America in the early part of this decade? Where are the auditors when a government squanders billions in corruption, nepotism and mismanagement? It is not entirely unfair to say that the profession is often perceived as concerned more with self-protection and self-preservation and limiting its liability for negligence than in adding value to its clients. This column is really not about the audit profession but only incidental to it, with a view to showing that the profession can be interesting for the practitioners (and hopefully their clients as well).

A week is a long time
After more than thirty-five years, I still find the profession interesting, so much so that I look forward to a visit I make annually to Berbice on audit business to meet not only with the clients of Ram & McRae, but with the business community and ordinary, everyday folks as well. To say that this year was the most interesting would be unfair to those staff of Ram & McRae, who were holed up in a small room while the heavily armed bandits created havoc at the Republic Bank Rose Hall branch a couple of years ago. But this year too had its own interest, even without guns or bandits. I learnt for example that in Guyana we still have cocoa tea and coffee tea and Milo tea. I was greeted by a businessman who made an unsolicited offer for my old-model car with the assurance that payment will be all in cash! I also had to fetch my suitcase up three flights of stairs in what described itself as a business hotel, even though there was no writing desk or telephone in the room in which I stayed. When I complained to the proprietor he lamented that the guard did not come to work that afternoon and that “no one wants to work these days.” Like his Georgetown counterparts he could not recognise that people want to work in a job that offers a remunerative salary, self-respect and dignity. That an economy built on plantation-type businesses is a backward concept, even though it is now being embraced by no less than our Russian-trained President.

As I carried my suitcase up those stairs I reflected whether our under-worked and over-exposed Ministry of Tourism has ever thought that these facilities should be rated so that potential guests can inform themselves in advance of the type of premises and services they can expect for the price they are called upon to pay. Many of these facilities that describe themselves as hotels are no more than guest houses, fit for nothing more than a few hours, and hardly the type of place for the businessperson or to take the family.

Guyana Times and Chronicle
At 10.30 am one working day, I could only find the Guyana Times and the Guyana Chronicle and wondered whether the Kaieteur News and Stabroek News, unblessed with state resources could not have vendors on the Corentyne. I learnt instead that the latter two were already sold out, while the Times and Chronicle were slow sellers, even in the strongholds. The vendor even offered to sell me these two at a discount! Seems that even the ordinary person on the street understands the principles of business better than those who manage and control the state-owned or state-friendly papers, which ignore any ideas of journalistic independence, impartiality and balance.

I experienced first hand as well the difference in the cost of living between what we in Georgetown pay and those in the countryside. I had a full, fairly balanced meal and a beverage for half the price of what one would expect to pay in Georgetown. I was so struck by what appeared to have been a mistake by the person who served me that I challenged the price charged. No, it was not a mistake.

In all of this I was an interested observer, noting some of the differences between rural and urban life. The one incident in which I was just more than an observer was when I went into a shop to buy an item and was given a small piece of square cardboard with the price written on it and told to go pay the amount stated to the cashier. I approached the cashier with money in hand and asked for a bill/receipt. It was just as if an alien or a bandit had entered the store! Some other person who I assume was the proprietor was summoned, and I found myself explaining that I needed the bill so I could claim back my expense from the office, which was not quite true.

One of those generic receipt books was then pulled out from somewhere and I left the store convinced that I had just become complicit in a tax-evasion scam.

The Republic
Berbice of course is not unique for its tax-evasion but it certainly has a reputation. Many years ago one senior politician well known for his creative language, described Berbice as a Republic with its own laws, customs and practices. Seems that nothing has changed. A Georgetown-based client of the firm recently told us customers and potential customers in Berbice were refusing to do business with him if he issued any invoices to them since they did not want to be part of the official records. I confirmed this with a Corriverton businessman who lamented the unfairness of a system in which the honest businesses are driven out by the tax-dodging ones.

The Berbice business person of course feels protected and special. With the knowledge that they are the home of the ruling party, they demand and receive anything they want, whether it is a bridge, a university, the removal of a police officer or a disproportionate share of the national budget. The businessman who hoards millions in his home to evade taxes expects the police to protect him and to respond at a minute’s notice to his call in an emergency. There are some homes in Berbice which would make you forget that you are in Guyana, because of their extravagance and opulence which borders on vulgarity. One wonders how the owners of these properties would account, if in fact they do, for such wealth in their Property and Income Tax Returns.

Berbice is very much part of Guyana and deserves to have services like everyone else. And should the rest of the nation begrudge that part of the country because it seems to be favoured by the ruling party and the government? But is it not right for the rest to expect that the Berbice businessman should be willing or if not, be forced to contribute to the coffers of the state? Some years ago I was told that one of the tax offices in this country did not bring in enough revenue to pay salaries for its own staff, and am aware that some senior owner-managers earned no more than the tax-free threshold. That would no doubt have changed by now, but by how much is anyone’s guess.

TRIP them up
That does not mean that I do not understand that a tax office may not collect all the taxes that arise from the businesses in a particular area or region, with GuySuCo being an obvious case in point. But I still do not understand the failure to make the annual reports of the Guyana Revenue Authority more informative and meaningful. We hear of the marvellous flexibility and capability of the multi-million dollar new computer programme TRIPS now used by the GRA. Could it not produce information by tax offices, regions, sectors, types of taxes, etc?

Part of the problem as well is that the GRA is too Georgetown-centric so that the best of its resources are devoted and dedicated to the better-equipped offices in Georgetown with staff in the regions being far less qualified and capable, comparatively, than their Georgetown counterparts. Corriverton is generally regarded as the smuggling capital of Guyana, but only the Georgetown Customs Officers have been the objects of presidentially-directed investigations.

And I continue to wonder why the GRA continues to issue so-called tax accountants and consultants with tax practice certificates to go out there and aid and abet businesses to evade taxes. In fact these certificates amount to licences to cheat and to rob the revenues of the country at the expense of the working poor and the unemployed, who have to pay PAYE and VAT at a rate that the government knows was wrongly calculated. In fact on the question of VAT I have heard of discussions among businessmen that they are better off with VAT, since only they know how much they collect and can therefore decide how much they share with the government. In practice, it makes them look better to the GRA because they use some of the VAT money they improperly withhold to pay their other tax liability. Let me not hesitate to state that such collusion is not restricted to the “tax consultants” but to the qualified accountants as well, who enjoy statutory exclusivity but many of whom seem not to understand that there should be corresponding professional and ethical integrity.

Posted on

Those GT&T shares: To sell or not to buy; that is the question

Introduction
The decision by the Government of Guyana to sell its 20% holdings in the Guyana Telephone and Telegraph Co Limited (GT&T) has caused its fair share of discussion and debate in Guyana. That is not unusual or strange. Ever since the US Virgin Islands-based Atlantic Tele-Network, Inc took over GT&T, it has fascinated, annoyed, excited and generated intense interest among the public. It may have had to do with the process of the sale by the Hoyte administration of the highly profitable, foreign exchange earner under circumstances that still arouse some suspicion. It may have had to do with the revelation that the company was sold with hundreds of millions of Guyana dollars in the bank. It may have had to do with the distrust of multinationals of the late President Cheddi Jagan which seems to have been handed down to his party and some of the Guyanese public. Yet, like it or hate it GT&T has played a significant role in the modernisation of the telecommunication sector in Guyana.

The company boasts of the billions of dollars it has contributed to the national coffers. It is a major employer as well and appears to have had a very good relationship with its workers and their representatives. It has invested hundreds of millions of US dollars in new and modern plant and equipment and its service has reflected continuous improvement which may have been partly driven by the competition from the aggressive and agile newcomer Digicel in the cellular phone market. Of course none of this is due to altruism but to hard decisions about money. The company has also kept our courts busy and its conflicts with the Guyana Revenue Authority are legion.

FITUG and PNCR agree
Now the debate surrounding the company is about the sale of the government’s holdings with the government-backed FITUG and the opposition PNCR arguing against a sale and the government saying it would welcome a debate in the National Assembly. Business Page today considers the offer, which ATN has already refused, and some of the implications for a sale. From a review of my files (in the most innocuous sense of that word), the rights and obligations of the government as minority shareholder were never really clear and that is likely to muddy things a bit.

As a company incorporated under the old Companies Act Cap. 89:01, the company’s shares were under the control of the directors, and like any private company, GT&T was permitted to impose conditions and limitations on the transfer of its shares. Indeed Article 24 of the company’s Articles of Association gave the directors absolute powers to refuse to register the transfer of any shares in the company. Even though the new Companies Act takes a more enlightened view of the right of a shareholder to dispose of his property as he sees fit, sections 334 and 335 of the new act recognise as valid any of the old act’s provisions which may be inconsistent with the new act.

In 2007 I wrote that the government was not as free as it thinks it was to dispose of its 20% holding and that it would have to obtain the agreement of its senior partner if it wished to do so. I still hold that view. Unfortunately, no one appears to have given any attention to that first hurdle.

Ability to pay
The PNCR and FITUG have raised another hurdle and that is the sale of the shares to the employees of the company, which suggests that they are willing and able to pay for the shares, since they must know that the government has abandoned everything else for the maximization of sale price. But the PNCR and FITUG seem to have paid no attention to what a reasonable sale price per share could be. That could be huge. GT&T is in law a private company which means that its shares are not traded on a stock exchange and so the value of the share has to be calculated on what may be considered no better than an educated guess, using a range of factors and making a number of assumptions. Even in the best of circumstances there are at least six factors to be considered, but in the context of Guyana and the company, the number is considerably greater. Yet, one cannot escape the following six:

1. the nature of the business and the history of the enterprise from its inception;
2. the economic outlook in general, and the condition and outlook of the specific industry in particular;
3. the book value of the shares and the financial condition of the business;
4. the earnings capacity of the company;
5. the dividend paying capacity;
6. the market price of shares of corporations involved in the same or similar line of business, having their shares actively traded on the free and open market, either on an exchange or over the counter.

An uncertain future
While the computation of a price may be considered a mathematical exercise, it is based largely on the future, rife with its uncertainties. Consider, for example, the rapid changes in technology in the telecommunications industry, the not unreal possibility that the monopoly enjoyed by GT&T may soon end and the increasing and intense competition which Digicel poses to the company, and the uncertainties certainly mount up. The fact that ATN refused the government’s offer may very well be an indication that even the principal shareholder considers the future of the company far too uncertain for any further investment. In publicly filed documents the company’s parent has drawn attention to the uncertainty about the company’s licence resulting from action both by the government itself and the regulator. It would have been surprising as well if ATN did not consider that its 80% is as good as 100%. It really does not need any more shares in the company, so why not invest its money elsewhere? That is exactly what ATN has been doing and GT&T now accounts for less than half of the group’s revenues. The rest is all outside of Guyana.

So how much is one GT&T share worth? The Earnings per Share in GT&T exceeds $200,000 dollars, and if one values the share at a conservative P/E ratio of 8:1, the value per share is over $1.5 million. And if one uses the book value of the net assets of the company, which is generally considered a minimum price, the value per share is about $1.4 million. These are extremely rough numbers and it is likely that the value of each share on a more sophisticated basis, all things being equal, is an amount well outside the reach of the average worker in the company or the average member of the public.

Why sell a good thing?
Another issue is whether the government should be selling its interest in a company which has a guaranteed rate of return of 15% and which enjoys a monopoly in a still developing sector. There are arguments on both sides. The returns are clearly lucrative and the government does not seem to have any urgent need for funds given the continuous windfalls from VAT. Guyana must be one of the very few countries in the world which is recording increased government revenues in the crisis-prone 2009. High inflows from the Low Carbon Development Strategy are predicted, there are no pressures from its workers and the IDB seems to be as generous as ever, even in the face of increasingly costly and pervasive corruption in the public sector.

Will the government’s proposed regulations for the sector which it has so far not made available to the public have an adverse impact on the company and its share value? Is the proposed share sale more a jump-ship and the real intent of the government is to cash in while the going is good? These questions alone should cause potential buyers to hesitate and leave the government stuck as an unwilling partner to ATN while the value of its holdings depreciates.

On the other hand, the government has been remarkably negligent in managing its investment in GT&T. Under the Government of Guyana-ATN Agreement the government is entitled to board representation consistent with its percentage ownership, meaning that it can nominate two directors. Incredibly, the government has not taken up even one of these positions for the past five years, but yet complains about ATN’s management of the company. It is mind boggling that our NICIL/Privatisation Unit could have been so busy over the past five years that it was unaware of this gross dereliction of its duty to the nation to protect all the country’s investments.

What future for the shares?
It seems highly unlikely that the sale of these shares will take place any time soon. The government has clearly not thought through or prepared itself for what is a major and high value step; the calls by FITUG and the PNCR seem to be based more on emotion and politics than on the consideration of hard facts; and the potential for ATN to raise challenges cannot be underestimated. The government will continue to do nothing while the President spends the next few months looking for money from the ‘rich’ countries leaving the company to manage in the face of increasing uncertainties. If this government cannot mend an arrangement with a partner of close to twenty years, it is hard to see how it will deal with all the environment-friendly international businesses the President hopes to attract.