Introduction
Berbice Bridge Company Inc. (BBCI) was incorporated on April 1, 2005 under the Companies Act 1991. On January 31, 2006 then President Jagdeo assented to the Berbice River Bridge Act making provision for a privately financed Berbice River Bridge and conferring regulatory authority over the company to the Minister of Public Works. In the exercise of that power, the government signed a Concession Agreement with BBCI for the construction and operation of the Bridge. And by Order No. 42 of 2008 the Government granted to BBCI, among other things, a twenty-one year concession beginning on June 12, 2006 and expiring on June 11, 2027.
It is of course interesting that while the Act was passed in 2006 the company was incorporated on April 1, 2005. The process was then led by Bharrat Jagdeo and Winston Brassington who, like true salesmen, made all kinds of public and generous commitments. And like true politicians changed their stories about costs, revenues and investors in response to demands for more and better information.
The Concession Agreement referred to above contains what I call the “Brassington clause”. This clause binds all persons engaged in the design, construction, development and operation and maintenance of the Bridge to deal with all information in the Concession Agreement as secret and confidential. You would not think for a moment that this was about a monopoly operator granted exclusive control of a principal part of possibly the country’s second most important waterway and which by law is designated a Toll Bridge.
Performance
Source: 2011 Audited Financial Statements
The financial performance of the company BBCI in 2011, the sixth year into the Concession period, improved significantly over 2010 with a 58% profit increase. This is perhaps the high point of the audited accounts of the company appended to the 2011 annual return filed with the Registrar of Companies earlier this week. However, it is not without serious questions.
Turnover for the year of $1,193.4 million, comprised entirely of toll charges, represents an increase of 7% over 2010, compared with a 17% increase in 2010 over 2009. With other income of $7.7 million derived mainly from insurance claims received, total income for 2011 of $1,201 million was its highest ever, a 5.4% increase over 2010. The company demonstrated good expenditure management with expenditure increasing only marginally from $287 million to $291 million. While Wages and salaries increased by 26.8%, the absolute amount as a percentage of overall expenses was fairly modest. It did not therefore unduly affect profitability. The two significant expenses were Depreciation of $140 million and interest of $693.3 million which is $21.2 million down from 2010. There was a decrease of $140 million in amounts outstanding on loans, loans stock and corporate bonds, although this could hardly explain the entire reduction in interest expenditure.
Source: 2011 Audited Financial Statements
IFRS?
Note 3 to the financial statements claims that the “statements have been prepared in accordance with International Financial Reporting (sic) and the requirements of the Companies Act.” In their audit opinion, the company’s auditors TSD Lal & Co also make the same claim. They are both wrong, very wrong. In my Business Page column last year reviewing the company’s 2010 financial statements I pointed out that the basis of accounting used by the company to account for its principal asset or right was not consistent with the rules of accounting or IFRS.
Under the Concession Agreement, the company has the right to operate the Bridge for a period of twenty-one years from June 12, 2006. Note 1 to the financial statements describes the principal business activities of the company as the construction and operation of a floating bridge. This is the classical Build-Operate-Transfer arrangement. While the company has given to lenders a debenture over the Bridge, its real right is not ownership but one to operate the Bridge. It cannot do as it wishes with the Bridge. Such a right is an intangible asset subject to amortisation over the period of the concession.
The issue of accounting for that right having been raised publicly last year, the company and its auditors might have been expected to consider and reconsider the accounting treatment of the largest asset and its implication for the profit and loss account. They did not and have allowed very misleading accounts to have passed as IFRS-compliant. Incredibly they recognise the Concession period as 21 years but yet allow a depreciation period of 38 years. Surely, some explanation or justification is called for. The Bridge Act states clearly that all rights title and interest in and to the Bridge passes to the Government at the end of the concession period. The company will have to treat the cost of the Bridge as a disposal come June 11, 2027.
The only other explanation, which I have to discount, is that the company’s income statement cannot bear the required annual amortisation cost and that the directors of the company are engaged in a numbers game to arrive at a desirable outcome. Whatever outcome that may be, it is not IFRS-compliant as the auditors have so confidently stated. I now return to the Income Statement.
Profit and taxes
Taking the total expenses from total income gives a profit before tax of $216.8 million, up from $137.3 million or 57.3%. Then it gets a bit murky. The company completely ignores the question of taxes.
It is not clear whether the corporation tax exemption on which the company is relying is by virtue of the Berbice River Bridge Act which provides for “corporation tax, income tax and withholding tax” exemptions for the duration of the Concession Agreement. Or whether it is the Income Tax (In Aid of Industry) Act which requires a tax exemption letter from the Minister of Finance. The Financial Administration and Audit Act provides that tax remissions, waivers and concessions are only valid if expressly provided for in a tax Act or subsidiary legislation. The Bridge Act is not a tax Act and it seems that concessions purported to be granted under that Act are invalid.
But the Income Tax (In Aid of Industry) Act seems hardly any more helpful. The Act sets specific criteria which any successful applicant must satisfy including activities that “demonstrably create new employment in infrastructure development…” The Bridge, socially and economically beneficial as it is, cannot be said to have demonstrably created new employment. If anything, it has displaced employment. It can also be argued that the construction of the Bridge was infrastructure development but its operation is not.
Even more ridiculous, the financial statements of the company actually claim that the company is exempt from “income, corporation, property (emphasis mine) and withholding taxes”. What absurdity!.
Except that NICIL is involved, BBCI would be in a dilemma. The concession under the Berbice Bridge Act violates the Fiscal Administration and Audit Act and in any case does not exempt the company from Property Tax. And in respect of the Income Tax (In Aid of Industry) Act, the Bridge activity does not seem to satisfy the criteria under section 2 of the Act. Maybe Mr. Brassington and NICIL will engineer an amendment to the Act to accommodate BBCI, just as the Government did when it recognised that the Ramroop group was granted tax concessions which were unlawful.
Queens Atlantic Investments Inc. again
Now let us turn to the balance sheet in which the principal asset is the Bridge which is stated at $8,783 million. Cash and bank at December 31, 2011 was $163 million, a much more comfortable level than the $24 million one year earlier. The main providers of the finance are the investors in ordinary share capital of $400 million, preference shares of $950 million and various loans amounting to $7,275 million. The holders of the ordinary shares are NIS, New GPC, Queens Atlantic and Secure International Finance Company each having $80 million each, and Hand-in-Hand and Demerara Contractors each holding $40 million.
Well during 2011, Clico’s Liquidator sold to Queens Atlantic (the Ramroop Group) the 80 million ordinary shares previously held by Clico. I have had cause before to question the conduct of the Clico’s liquidation. Given the history of the government’s dealings with Queens Atlantic, the public must be forgiven their extreme scepticism over any transactions with that group.
Outside of any role of the Clico’s liquidator is the shocking failure by BBCI to disclose in the 2011 Annual Return, the fact of the transfer. Even if, charitably, the “omission” was not deliberate, it would surely rank as reckless incompetence that an improper return was submitted. But there are other grounds for suspicion as we look at the preference shareholders. The holders of those shares are NICIL, the company of which Winston Brassington is the CEO. He is paid to represent the interest of the Government as holder of the $950 million in preference shares and the single special share.
Brassington’s pretence
Brassington was also the company secretary of BBCI and in that capacity signed the 2010 annual return. Yet, he inexplicably failed to report the preference shares or the identity of the owners – the Government – of those shares. In other words, for the public records he pretended that they did not exist. And the Government assumed anonymity in the financial statements as well, the holder of the preference shares being described simply as “an investor”. Mr. Brassington is the Chairman of Guyana Power and Light Inc. That company has preference shareholders and has reported properly the information the annual return requires about preference shares.
But to report accurately and completely on Government’s shareholding in BBCI would have exposed a scheme by the BCCI, its Secretary Winston Brassington and NICIL which he represents. Next week, we will discuss how that scheme has been executed by NICIL to the costly detriment of the taxpayers of Guyana and how that affects the country’s public revenues. We will examine too whether BBCI found itself insolvent in 2013, how it manipulated itself out of the situation and finally what governance is like in this so-called private company.
Even before we get there it is fair to say that given the suspect accounting, the uncertainty surrounding the application of the tax laws to the company and the non-disclosure of material information in the financial statements, the claim that the financial statements comply with the requirements of the Companies Act is surely a stretch.