Today we continue our review of the 2008 financial statements of the state-owned corporation which are contained in its 2008 annual report tabled in the National Assembly late last year. We noted last week that while 2008 revenue fell by 8.5%, to approximately the same level in 2006, the corporation suffered a staggering loss before tax of $6.2 billion. Anticipating that there would be enough income against which to set-off the losses in the foreseeable future, the accounts show a tax credit – the opposite of a tax charge – of $2.1 billion for 2008. Instead, therefore, of carrying forward the full loss of $6.2 billion, the loss carried forward is $4.1 billion.
Usually, in making such a decision, the directors would have to consider all the available evidence, both positive and negative, to determine whether, based on the weight of that evidence, there should be a valuation allowance for all or some portion of a deferred tax asset. One has to assume that the directors considered this and concluded that no allowance is necessary.
Interestingly, the Chairman’s Statement contained in the annual report is presented by former Chairman Mr. Ronald Alli, Chartered Accountant while the financial statements are signed by his successor Dr. Nanda Gopaul. In seeking to explain the poor 2008 performance, both the former Chairman and the Chief Executive emphasise the wetter than normal weather conditions experienced by the corporation during the year. Even accepting that flood conditions affected East Demerara and East Berbice in the latter part of the year, this still invites the question why production at 226,268 tonnes would have been lower than it was in 1992 when the PPP took control of the country and industry, and 2006, the year most affected of the Great Flood of 2005. To add to this dismal performance, hectares harvested in 2008 were greater than in 1992, 2005 and 2006.
It therefore seems hard to believe that weather alone can explain the one-year turnaround in fortunes that saw production declining from 266,267 tonnes to its lowest production in seventeen years. I should say this however: unlike the corporation, I think we should be emphasising productivity rather than production and I will explain this when I review the Blueprint for Success, or what the current board describes as a turnaround plan. I pause to thank the unnamed persons who sent me copies of that document following publication of last week’s Business Page. I am impressed by the real willingness among us to have information of public interest and importance, publicly available.
The report
Unfortunately the annual report is not very helpful in explaining in any but a rather generalised way the performance of the corporation, whether in a good or bad year. It is left to the reader to ferret out, if at all possible, the information necessary to understand the corporation’s performance, or state of health. For example, the Chief Executive’s report gives the tonnage of exports and domestic sales while note 15 provides information on the revenue earned by geographical source. But the former also deals with product and market types while the latter deals only with dollar value, so that any average figures are merely indicative. But even these make for interesting reading.
Take for example the European market from which the corporation has earned substantial market benefits for decades. The export quantities to that region under the EU Protocol and CU (sic) amounted to 185,549 tonnes, 11,440 tonnes less than in 2007. Earnings to that region however fell from $27,198 million to $26,488 million, so that on average the price earned per tonne in that market actually increased from $137,998 per tonne to $142,677 per tonne. Whether this was exchange rate related or for any other reason can only be speculated. Exports to Caricom and the region fell from 34,139 tonnes to 18,547 tonnes at an average price per tonne of $108,211, up from $104,748 per tonne in 2007. And the domestic market where the volume sale of 23,345 tonnes was just below the sales in 2007, the average price per tonne went up from $138,074 in 2007 $147,997 in 2008.
Cost, hidden costs and terminated costs
Despite the loss of the EU preference, with the Corporation entering the final era of the Sugar Protocol from July 1, 2008, average revenue earned per tonne of sugar produced increased from $130,426 to $140,583 or 7.8%. So yes, production volumes were a major problem, but it is the cost that is the fatal problem. The financial statements show that the average cost of producing a tonne of cane rose from $92,075 to $130,582, a 42% increase! And that is not all. Administrative and other expenses such as marketing and distribution added another $7,554 million, slightly more than the $7,505 million in 2007.
Translating these to cost per tonne produced, the average in 2008 is $33,033 per tonne, up by 19% over 2007. Readers may be aware that the corporation enjoys considerable tax subsidies on some of the compensation payments to employees, including the weekend overtime and production incentives. These costs to the taxpayers are not usually considered or quantified when the viability of the industry is considered.
Similarly, there is no explanation for the decline in administrative expenses of more than half a billion dollars, or indeed what constitutes such expenses, a comment that also applies to marketing and distribution expenses. What is apparent is that the management fees paid to Booker Tate limited under their now terminated contract declined by $61 million, largely due to the favourable change in the sterling exchange rate. The savings in Administrative expenses have been offset by increases in Marketing and Distribution, which includes shipping costs and a cess paid to the Sugar Association of the Caribbean. Indeed over the three years 2006, 2007 and 2008, as freight costs sky-rocketed with no spare capacity in shipping, marketing and distribution costs have jumped from $3.1 billion to $4.8 billion, despite the decline in volumes.
The cess paid to SAC is based on the country’s contribution to the organisation’s budget and the money is used mainly to finance research. On the other hand, research done locally is negligible with the average annual cost over the past three years amounting to $238 million. This policy of farming out its research certainly needs a review since research needs to take account of differences in soil and weather conditions which cannot be replicated in any laboratory.
I will return to some of the income statement issues – which accountants now refer to as the statement of comprehensive income – when I look at the Blueprint for Success, but for now suffice it to say that a repeat of the 2008 performance would be the death knell of the industry.
Balance Sheet
As I turn to the balance sheet – now called the statement of financial position – I should emphasise that the two are related and affect each other. For example, the depreciation of the property, plant and equipment which appear in the balance sheet, is a charge in the income statement. All this down time on the new Skeldon Factory adds real economic costs to the project, and one shudders to think what the depreciation charge on the Skeldon Project will be. Similarly if and when that and other old plants are retired, their book values would be written off to the income statement.
The table below shows a condensed balance sheet extracted from the audited financial statements. Like with the Income Statement, there is barely any discussion on the balance sheet items which include the assets, liabilities and equity of the business. It is worth noting the bulk of the land used for cane cultivation – 72% – is held on lease at a pepper corn rental of the equivalent of $1,000 per acre per year, representing another valuable subsidy to the corporation by the government and the taxpayers. The Corporation could not survive if it had to pay real economic rent for those lands leased from the Government.
Of the total equity of $57 billion, $51 billion represents revaluation reserves while the assets include $9 billion of deferred tax assets. Both standing cane and product stock at the end of 2008 were considerably less in 2008 than in 2007 so that the corporation would in 2009 have to re-invest in these two asset categories. But this would be taking place even as the corporation confronted a weak liquidity situation, diminishing cash balances and increasing payables. During the year, the corporation was unable to pay its tax obligations of close to $2.5 billion, short-term borrowings had increased in 2008 by $1.5 billion, and cash and cash equivalents had declined during the year by a dramatic $3.5 billion!
Damp future
And as it looked forward even to two to three years, all it could see were loan obligations crytallising, plant needing replacement and a less than enthusiastic workforce. Here are some of those contracted obligations from which the corporation would almost certainly have to be rescued:
1. From 2012 – Government of Guyana Skeldon Project presumably financed by China (US$56 million) – US$1.8 million six monthly;
3. From 2010 – Government of Guyana Skeldon Project CDB (US$18.7 million) – interest rate not specifically stated so instalment cannot be calculated. Likely to require minimum repayment of at least US$1.5 million annually;
4. From 2010 – Government of Guyana Skeldon Co-generation Project China (US$25.8 million) – Interest rate not stated so instalment cannot be calculated. Likely to require minimum repayment of US$2.0 million annually.
The source of the amount of $636Mn (approximately US$3.1 million) shown in the notes to the financial statements as repayable in years 2010 to 2013 is not justified by the information contained elsewhere in the report.
The indications are that the government will be assuming most of these obligations from the Consolidated Fund. Meanwhile, the corporation was unable to make any payment to the Sugar Industry Welfare Fund in 2008 and less than half of the amount payable to the Government for lease rental, the accuracy of which I questioned in last week’s column.
Conclusion
The success and or survival of Guysuco over the years has had a lot to do with subsidies – with preferential access to a lucrative market, effectively free use of thousands of hectares of some prime land that the corporation claims is valued at billions of dollars, and in the cost of production. Some estates would obviously have higher production costs than others. But for some reason, the estate-by-estate performance is not stated in the report. That significantly limits the quality of this or any other independent analysis.
To be continued.