Category: Public sector

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Contrary to what Luncheon claims NICIL is a government company

I find the earlier pronouncements of Drs Roger Luncheon and Ashni Singh and now Mr Winston Brassington that National Industrial and Commercial Investments Limited (NICIL) is a private company with the legal right to withhold public moneys annoying, self-serving, misinformed and mischievous. It is sad, and even dangerous, that individuals with the power to make major decisions over the resources of the country and the lives of its people can be so deficient in their knowledge and reckless in their actions.

Dr Luncheon wrongly informed the media that there are “20-something articles that underpin the creation of NICIL and none of them says that money from NICIL has to be put in the Consolidated Fund.” Mr Brassington adds his share of vacuity with his pronouncement that “proper accounting requirements dictate that money from the sale of government assets should first be placed in the company account, provided it can adequately discharge all of its liabilities.” In my 42 years as a professional, I have never heard anything so absurd and facile.

In fact, the Articles of Continuance of NICIL comprise nine articles (see attached) and it operates under, and is classified by the Companies Act 1991 as a “Government Company.” The Act imposes on NICIL the following obligations over and above those imposed on companies generally:

1. that sections 48 and 49 of the Public Corporations Act dealing with accounts and audits apply;

2. NICIL is required to submit to the Minister of Finance an account of its transactions and audited financial statements no later than June 30 of the following year; and

3. the Minister of Finance is required to lay in the National Assembly the statement of transactions and the audited financial statements no later than September 30, ie, within 90 days of receiving them.

The public is reminded that the Chairman of NICIL is Dr Ashni Singh and the Minister to whom he must submit the report and accounts is the same Dr Ashni Singh. If it was only these breaches of which he is derelict, it would still be a serious matter. But there are more, and worse. The Government of Guyana “vests” lands and other properties in NICIL – on whose Board also sit Drs Luncheon and other Cabinet members – which then sells the assets and pockets the money. The government also uses NICIL to collect dividends from Guyoil, GT&T and other investments which are also retained by NICIL.

This scheme, which assumed scandalous proportion under the Jagdeo-Ashni Singh duo, has become a ruse to get around Article 216 of the Constitution which requires “All revenues raised or received by Guyana to be paid into and form one Consolidated Fund.” By their own boasts, NICIL has collected tens of billions of dollars and not paid these into the Consolidated Fund.

To any ordinary person, so far as the land transactions are concerned, NICIL is merely an agent for the government. Therefore, the moneys it collects should be paid over to the Ministry of Finance to be deposited into the Consolidated Fund. Instead, in an arrangement which in neighbouring Trinidad would be considered criminal, NICIL’s board uses the funds as a second budget to do the things which the Finance Minister would not be comfortable in bringing to the National Assembly, like the Marriott Hotel, like getting involved in Pradoville 2 and for miscellaneous purposes including secret overseas trips, etc. Article 217 of the Constitution dealing with spending public moneys does not allow any of these.

Now, to go back to the absurdity about state companies being subject only to the company laws, I refer the financial doctors to the following two documents: 1) the Report of the Working Party on the Harmonization of Company Law in the Caribbean Community, and 2) the Report of the Review Committee on the Companies Act of Guyana.

This is what the Working Party Report under the heading Public Accountability has to say in paragraphs 19.142 [in part] and 143:

“Whether the company is a mixed enterprise or wholly State owned, public funds are employed for the capital of the company. In the view of the Working Party, this introduces an important dimension with which existing company law does not deal….”

“With respect to companies with capital drawn from public funds, however, the State shareholder is in theory the party which should ensure that proper use of those funds is taking place. In practice, this cannot provide a system of accountability to the public for the effective use of public funds. It by no means follows that the assessment of the State as shareholder with respect to the running of the company will stand up to scrutiny when viewed as a public investment. Increasingly, arguments are made in this context for some additional mechanism whereby the performance of the company in relation to the investment of public monies is subject to accountability beyond the company itself.” And the Guyana Review Committee appointed by the Hoyte administration to consider the report of the Caricom Working Party proposed the adoption of its recommendation that “wholly-owned government companies should be constituted under the Public Corporations Act.

Presciently, the authors of the Working Party Report, including our own Bryn Pollard, were saying thirty years ago, that there could be no accountability under the NICIL-type model, even if it did not have the degree of egregiousness practised by Drs Singh and Luncheon and Mr Brassington.

And finally, with respect to the chorus that it is for the directors to decide if and when NICIL would pay any dividends to the government, let us recall that in 2009, the government, a mere 20% shareholder in GT&T, caused that company to pay more than $6 billion in dividends. And guess who the Finance Minister was and who was the government director on the Board of GT&T when that “persuasion” took place? Dr Ashni Singh and Mr Brassington respectively.

Now the same Messrs Luncheon, Singh and Brassington are bold enough, in respect of a 100% government company in which public property is routinely vested, and which has a 100% Cabinet Board, to plead impotence in calling for a dividend which the country badly needs to help the working and the non-working poor.

To show how reckless and ridiculous it has become, only a couple of years ago the government forced the Geology and Mines Commission to pay $1.8 billion to NICIL to build/repair roads in the hinterland communities, all done by way of a Cabinet directive signed by Dr Luncheon.

For too long constitutional violations, financial improprieties, mis/malfeasance in public office and breaches of fiduciary duties have been tolerated by this bleeding country. It is time for the talking to stop and for the courts in Guyana, and if necessary the Caribbean Court of Justice, to be invited to address these matters. Sooner rather than later some Guyanese will decide that enough is enough.

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The GT&T share sale

Introduction
Even before the debate on the 2012 Budget begins, it is overtaken by an event not outside the control of the government, but well within it, an event that has been in the pipeline for years. Drs Jagdeo and Ashni Singh and their loyal servant Mr Winston Brassington had been speaking about, offering and negotiating to sell the government’s 20% shareholding in the telecommunication company Guyana Telephone and Telegraph Company Limited (GT&T) for at least three years. Yet the Finance Minister could not find a place in his 87 page speech to alert the plebians that an investment that brought in around US$2 million per year was in the final stages of disposal.

Guyanese must thank Cabinet Secretary Dr Roger Luncheon for the timeliness of the announcement at a press conference just one day after the decision by Cabinet to sell the pearl of the cacique crown for US$30M ($6B) to a “Chinese company” whose name, incredibly, Dr Luncheon could not remember. Guyanese would find it difficult to accept that Dr Luncheon, who also sits on the Board of NICIL under the chairmanship of Dr Ashni Singh and which is legally the owner of the shares, does not know the identity of the buyer!

NICIL
For close to two decades NICIL has acted like it does not know that it is subject to an Act called the Companies Act with which it ought to, but does not comply. As a result, NICIL has practically zero experience in complying with the law and may need to be reminded that the certificate representing the 20% shareholding in GT&T is in fact held by NICIL which must also sign the transfer form to pass ownership to the Chinese company.

The CEO of NICIL is Mr Winston Brassington who has been at the centre of all the major sales/disposals of state assets and who has impressed the Guyanese public with his ability to carve up transactions in which the Guyanese taxpayers are often the biggest losers. Except that in the case of the Berbice Bridge Company, Mr Brassington’s iconic show of private-public sector partnership, the big losers are both taxpayers and commuters. The taxpayers suffer as a result of the excessively generous concessions which have been given to the investors in the Bridge Company, and the commuters, as a result of some of the most exorbitant rates for a river crossing anywhere in the world. Just by way of reminder, NICIL recently waived hundreds of millions of dollars of interest (payable to NICIL) so that the private investors could be paid theirs!

Apparently intending to impress the media, Dr Luncheon whose performance as Chairman of the National Insurance Scheme has been exceptional for all the wrong reasons, volunteered to the media that the Chinese company had “conducted its due diligence and decided to purchase the shares.” What the public needs to know is not what the Chinese did but what the government did in arriving at a fair price for the 4,125 shares which it has owned for more than twenty years. Under a 1991 agreement between the Hoyte administration and ATN of the US Virgin Islands, the government received a 20% stake in the new company that took over the assets and liabilities of the Guyana Telecommunications Corporation in a process that itself raised eyebrows. To put the latest transaction into perspective, what the people need to know is how NICIL/Cabinet arrived at the sale price, not how the buyer arrived at the purchase price.

The changing profile of the international investor
The experience in many countries is that the Chinese – and one assumes that this is neither a phantom nor a pseudonym – are more likely to sell, rather than buy, a pig in a poke. They will have looked after their interest and we ought to have looked after ours. The question is, did we?

Unless Guyana is becoming the playground for Chinese investors, the nationality of the investor is surely intriguing, since we now have a picture of one set of Chinese investing in GT&T and another investing in the competing LTE GoG network. There must be something that the Chinese know about Guyana that the ordinary Guyanese does not, but hopefully it is not too late to learn. It is well known that the Government of China invests abroad, ostensibly through private individuals and companies. With their unimaginable reserves, a managed exchange rate and a colonizing mentality, China has been throwing its power around the Third World including Guyana.

They seem willing to get involved in sugar, bauxite, hydro-electricity, airport expansion, Guyana Power and Light, ferries and bauxite, many of which have benefited the Chinese disproportionately.

Led by Mr Jagdeo, there has been a fundamental shift in the profile of investors in Guyana. The implications for Guyana in the medium term can be fundamental, although this is not to suggest that the GT&T share sale is part of some bigger picture.

The strange silence of the Minister of Finance
GT&T is regulated under the Public Utilities Act, and one wonders whether the government had notified the PUC of the proposed sale of its holding in the company and whether, in view of the nature of the company, the identity of the buyer ought to have been similarly communicated.

Unfortunately, there are too many persons of influence and power who think that the law is an ass, and need not be observed or obeyed. Hence, it may be wrong to assume that the buyer has taken advice that as a substantial shareholder under the Companies Act 1991 (10%) it must give written notice to the company within fourteen days of becoming a shareholder.

Given this scenario it is not beyond the realm of possibility that in doing its “due diligence,” the Chinese may not have met with GT&T and might have relied on assurances from the same Mr Winston Brassington, the second-in-command negotiator-in-chief for the government.

What is more disturbing is that the share sale agreement was concluded on Wednesday April 4, less than one week after the Minister of Finance presented the 2012 National Budget to the National Assembly. By then, the discussions with the Chinese – in which the Minister would have played a major part – must have already arrived at the framework of an agreement including the price to be paid to the government.

But the Minister of Finance chose to remain silent on this major development and the budget he presented did not include any income from the sale of these shares.

NICIL again
The frightening possibility is that this money will be put into NICIL’s hands, later to be paid into the Consolidated Fund only if and when the Board of NICIL – which is chaired by the Minister of Finance and which includes Cabinet ministers and as said above, Dr Luncheon – decides to pay a dividend. The law does allow for the payment of interim dividends by all companies, but if NICIL’s directors choose not to pay any dividends, there is little recourse available short of court action.

Meanwhile, NICIL will be free to spend the $5 billion dollars it receives from the Chinese as it pleases, including on the Marriot Hotel which NICIL is bent on financing whatever the perceived risks associated with the industry and the project. It is clear that NICIL has now abandoned any pretence of being the Privatisation Unit of the Ministry of Finance which ensured that proceeds of privatisation transactions went direct to the Consolidated Fund.

By interposing NICIL in the mix, that direct relationship no longer exists, and Dr Singh as Minister of Finance must wait until Dr Singh as Chairman of NICIL’s board of directors decides to pay a dividend before he could bring any money into the public coffers. That just does not sound kosher.

There is some hope from a precedent from a couple of years ago when dividends payable by GT&T to NICIL went into the Consolidated Fund, bypassing NICIL. Parliamentarians, the public, the University of Guyana and the country’s pensioners await with interest the course of the Budget deliberation and whether the Minister of Finance will follow that course and amend the revenue numbers in the Estimates to include the $5 billion.

If he does not, we know then that the fears that the Minister administers at least two budgets – one for the Consolidated Fund and the other for NICIL – are in fact justified.

The agreement
Now back to the agreement. It was always incongruous for the government to be a player (shareholder) in a sector as well as the regulator (PUC), a principle that applies as much to telephones as it does to the media, or any other business.

On that basis, the sale is welcome, although there are disturbing signs that the previous administration has been paving the way, at taxpayers’ expense, for its associates to enter the sector and enjoy major benefits.

In the disposal of shares, a sensible negotiator would contract a price that is cum div or ex div, meaning whether or not outstanding dividends go to the buyer or the seller. GT&T would be concluding its 2011 financial statements in time for April 30 filing deadline. It will probably have its AGM shortly thereafter at which the question of dividends for 2011 will be considered. Since the government-Chinese agreement is made in 2012 the government as the seller could have done one of two things about the 2011 dividends: agree for the buyer to receive the dividend but paying for this in the purchase price, or selling the shares while retaining the right to the dividend.

Dr Luncheon did not mention whether this was considered, nor, unfortunately, did any of the media ask him the question.

We will look at this in the concluding part next week.

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Mr. Brummell’s purported appointment as acting Commissioner is unconstitutional

From the press, the public has learnt the Mr. Leroy Brummell DSM has been appointed as acting Commissioner of Police. It seems, once again, that the country is being treated with casual if not reckless disregard with respect to constitutional positions.

Article 211 of the Constitution provides for the Commissioner and Deputy Commissioner of Police to be appointed by the President after meaningful consultation with the Leader of the Opposition and the chairperson of the Police Service Commission. Specifically, Article 211(2) makes the appointment of an acting Commissioner subject to the same constitutional requirements as the Commissioner.

I am advised that there has been no consultation on the “appointment” of Mr. Brummell. It is therefore my opinion that Mr. Brummell’s purported appointment is unconstitutional, null and void.

For good measure Mr. Henry Greene who is the substantive Commissioner was required, under Article 211 (3) to vacate office when he attained age fifty five (55). He did not do so because according to Dr. Luncheon the government has entered into an agreement with him to continue until age 60. That agreement too is unconstitutional.

So we are in the unique position where both the substantive Commissioner (Greene) and the acting Commissioner (Brummell) exist in a constitutional illegality. What a country!

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Mr Ramnarine was exercising a right and duty under Article 32 of the Constitution

There has been a call from high-up for the disciplining of senior police officer David Ramnarine for exposing certain practices in the Guyana Police Force, and for claiming that his constitutional rights trump the Force Orders. The practice he identified was in connection with the payment of $90 million from Contingencies Fund to feed the Police over the November 28 elections period. On the question of the constitution, Mr. Ramnarine was in fact not only exercising a right but rather carrying out a duty which Article 32 of the Constitution imposes on every citizen. And as just about everyone by now knows, the Constitution is the supreme law of Guyana and not even the Parliament can make a law that is in conflict with it.

I cannot see then how some Force Order purporting to restrict a right could abridge a duty imposed by the Constitution. I would therefore like to receive from the Minister of Home Affairs an informed opinion on which instrument – the Constitution or the Force Orders, or which interest – secrecy of the Police Welfare Fund or the protection of public property – his Government considers paramount.

For, as Article 32 states: “It is the joint duty of the State, the society and every citizen (emphasis mine) to combat and prevent crime and other violations of the law and to take care of and protect public property.”

The country is fortunate and grateful that circumstances forced the lone Mr. Ramnarine to exercise his constitutional duty under Article 32. It is frightening to reflect on the several others in the Police Force, some more and others less senior to him, the GDF, the ministries and departments, and the hundreds of thousands of Guyanese who daily fail in their Article 32 duty.

Whether by accident or intent, Article 32 is a Whistleblowers protection in the public service. I would like to see some enabling legislation aimed at giving effect to Article 32, and to wrong-doings in the private sector as well.

I draw attention also to a further development from the same issue. In the process of his revelation, Mr. Ramnarine implicitly exposed a weakness in the State audits to which I have been drawing public attention: that a bare statement in the Audit Report that drawings from the Contingencies Fund did not meet the criteria set out under the Fiscal Management and Accountability Act was not enough. The Audit Office needs to go further and by a scientific sample, audit Contingencies Fund transactions for accuracy, authority, authenticity and completeness from what auditors call cradle to grave: in this case from the issue of the drawing right by the Minister of Finance to his timely request to the National Assembly for replenishment. The Minister of Finance has only up to the next sitting of the Assembly to seek approval.

I have noticed that the Auditor General (ag.), against a background of public concerns, has announced a special investigation into the $90 million fiasco. I should remind him that Dr. Ashni Singh’s Supplementary Appropriation for expenditure during the parliamentary break involved $5.7 Billion, of which $2.4 Billion was judgmental. I doubt that the public and the parliamentary opposition will be satisfied with another limited scope, incomplete and therefore inadequate exercise.

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Time to consider new accounting rules

Introduction
The brouhaha over Financial Papers 7 and 8 in the National Assembly has served to expose the state of the public financial management in Guyana. The issue is a natural consequence of the new configuration in the Assembly which compels the Minister of Finance to demonstrate some accountability to the country. In that sense November 28, 2011 is potentially a blessing as prior to that date and that event, a request to the National Assembly for approval of Supplementary Appropriation of any number of millions would have been a non-event and automatic confirmation.

This column had written ad nauseam about the several breaches of the Fiscal Management and Accountability Act which was intended to address all matters concerning the preparation and execution of the annual budget; the receipt, control and disbursement of public money; the accounting for public money; and all other matters to bring transparency and efficient management of the finances of Guyana. While the Act requires some amendments, it was an improvement over what it replaced and should have brought greater accountability to the country. It did not, and it has become progressively worse as state and party lines become blurred.

But Guyana is not alone in this situation. A recent article in the World Economic Journal said that government accounting makes Enron look good. According to the article, accounting practices employed by many governments around the world are not only deficient but “sometimes fraudulent”. The rest of this column is based on that article.

Remembering Enron
The informed observer will recall the spate of corporate failures just over a decade ago. While the major problems were in the USA in which Enron was the worst face, in Europe a company called Parmalat was able to get a clean audit report even though there was huge $3 billion hole in its balance sheet. As is so often the case, governments reacted swiftly with legislation to remedy identified shortcomings in the financial reporting and assurance of publicly listed companies. The most significant legislation was the Sarbanes-Oxley Act (SOX) in the United States, which – in the context of already robust reporting requirements – imposed detailed requirements for the assessment of internal controls over financial reporting.

SOX also imposed stricter independence requirements on auditors, who became subject to closer scrutiny and inspection by government regulators. Perhaps because the Act had a number of extra-territorial effects, modified elements of it became a template for government action in many jurisdictions around the world.

Both in the USA and elsewhere, these measures were aimed at restoring confidence in capital markets, which had been dealt severe blows by the misreporting of corporations and the associated audit failures.

Not for governments
But there are some double standards when it comes to making rules by governments and their own practices. The seriousness of the situation was brought home very strongly in the instance of the Greece basket case in which self-interested politicians and public servants were keen to ensure that an accurate picture of the country’s finances was not made available. While changing reporting arrangements and processes will not of itself ensure that fraudulent reporting is eliminated, implementing a system that is based on a structured, robust framework permits reported information to be audited – that is, it allows independent assurance about the reliability of the information presented, and whether it is free from material misstatement.

Of course, one of the reasons is that politicians and public servants do not always act in the public interest – hence the explanation why governments do not want transparency, why they do not want anyone else setting their financial reporting standards, and why ministries of finance generally do not advocate for better accounting. Indeed, we have seen in Guyana a strong reaction against the calls for better accountability to the point where no less a person than the President, less than four months following one of the most expensive elections anywhere, wants to go back to the polls for a majority that would stifle calls for greater accountability. Of course the President tells the taxpayers that those calling for greater accountability are anti-development!

The countries of Europe and more directly Portugal, Ireland, Italy, Greece and Spain (PIIGS) have made it abundantly clear that not only in the Third World but in northern countries as well, government debt cannot be considered ‘risk free’. Private-sector organisations must provide detailed, audited financial reporting and disclosures to banks and credit providers so appropriate risk premiums and the price of borrowing can be determined. Once the ‘risk-free’ assumption can no longer be made, investors in public debt require similar detailed information from governments, and for the same reasons.

The cons
Arguments against enhanced public-sector financial reporting, disclosure and financial management typically involve arguments that superior methods are either not available, or that they come at a prohibitive cost. The former is patently untrue for governments that continue to use traditional, cash-based methods of accounting; while the latter can be countered – perhaps with a little more effort – through careful examination of the costs of making, and of not making, such improvements.

The unexpected costs of poor decision-making and fraudulent reporting are currently being felt in not-so-uncertain terms.

Citizens and investors deserve more reliable and complete financial information, and greater transparency and accountability, from governments. The costs of not doing so are just too high.

The Chairman of the International Accounting Standards Board noted recently that “without transparency, neither can there be trust or accountability”. Governments that employ traditional cash-based public-sector accounting cannot be transparent; their reporting necessarily presents only part of the total picture. Traditional methods of government accounting – cash-based accounting are simply insufficient to allow governments to discharge accountability to the public, or to permit investors and potential investors to make fully informed decisions. Better accounting practices are required.

Cash-based versus accrual accounting
The cash-based accounting which Guyana and most other countries practice, reports cash inflows (eg from taxation receipts, interest earned on investments, and proceeds from sale of assets) and cash outflows (eg spending on government programmes, interest on borrowing, lending, asset purchases, public-sector salaries and wages).

A major weakness in that system is its failure to distinguish between the economic characteristics of different types of transactions since it treats the sale of public property in the same manner as cash raised through taxation. Likewise, government lending – a cash outflow – is treated the same as the payment of public-sector salaries.

Not that cash-based accounting does not have its use. It clearly does – both in the private as well as the public sector. Any entity, whether an NGO, government or a commercial entity needs to know its cash position, inflows and outflows, borrowing requirements, and liquidity position. But cash is not all and in fact cash-based accounting can be significantly misleading, if not plain creative accounting.

A government faced with the difficult decision of balancing its budget may find it expedient to dispose of the crown jewels rather than cutting expenditure or raising taxes. But what happens when there are no further assets to sell? In other words, cash-based accounting allows politicians to delay and defer the tough decisions to subsequent years and generations of taxpayers.

Conclusion
As the Minister of Finance prepares his 2012 Budget, he may just spare a thought about the manner in which the government accounts are kept and whether the existing cash-based system serves the long-term interest of the country. Both the United Nations System of National Accounts (SNA) and IMF Government Finance Statistics (GFS) – promote the use of accrual-based reporting.

As an accountant himself, the Minister of Finance may find it a relatively straightforward exercise to remedy the reporting deficiencies of government accounts: introduce a robust accrual-based financial reporting framework.

There is already a framework called IPSAS (International Public Sector Accounting Standards) developed and issued by the International Public Sector Accounting Standards Board. To do so requires two important things: (i) the existence of such a framework; and (ii) the will by politicians to make the decision to improve government transparency and accountability, and therefore enable greater scrutiny of their decision-making. While the former exists – in the form of IPSASs – the incentives provided to politicians in most countries mean that the latter is very difficult to achieve.

And that is why I do not hold out much hope for change any time soon.