Tag: Clifford Reis

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Clico and the related crisis: Confusion continues

Introduction
It has been an incredibly hot week in Guyana. In fact so hot that the President who was directly or indirectly involved with every single financial decision made in the public sector for the past sixteen years decided it was just too hot and took off for a change of climate engagement. He asked his Finance Minister Dr Ashni Singh who has carried statutory responsibility for the operation of the Insurance Act and therefore supervision of Clico for more than two years as well as of the National Insurance Scheme, the biggest single potential loser in the Clico debacle, to make a statement to the National Assembly.

Clearly stung by the revelations of what may prove to be a major loss to the country there has been heightened activity by the government. Even as lower-level letter writers were at work, the government called into their corner big guns like Messrs Yesu Persaud and Clifford Reis for a panel discussion with the Minister of Finance. We heard again from the Bank of Guyana not on whether it has continued to track and assess “every bit of information being provided on the issue as it develops” but to “dispel the misrepresentations” by persons whom the Bank did not name. We heard as well from Ms Maria Van Beek, the Commissioner of Insurance/Judicial Manager of Clico, witnessed a press conference by the directors and management of Hand-in-Hand Trust, TV interviews with economist Ramon Gaskin and TUC President Gillian Burton and disturbing but not surprising fears expressed by insurance broker Mr Bishwa Panday and leaders of the teachers’ union. By the end of the week it was clear that there was little confidence in everything said by the government and the regulator in relation to Clico. Having done next to little so far, the Minister of Finance rather than the Judicial Manager is impressively rushing papers to The Bahamas to prove our debt. We all hope it is not too late.

Red herring
The Bank of Guyana and the big guns were called out mainly to speak about the strength of the banking system, as if that was the issue. There are currently many questions about the banking system but not about its strength. Yes, different persons in varying degrees and sometimes with varying justification question many things, such as the role of the non-bank cambios in the underground economy, the absence of any meaningful interest or effective efforts to stamp out money laundering, the interest rate policies and the conservative approach inherent in banking, and the increasingly troubling failure of the Bank of Guyana and the government to bring the New Building Society under the Financial Institutions Act. But the strength of the banking system has not been an issue to academics or depositors who place increasing sums with the sector, which must surely be a big test. Raising it was a pure red herring.

Experience has taught that the public is more sensible than it is given credit for. It knows that failures do not arise only in weak systems, with Globe Trust being a good case in point. It knows how toxic assets can contaminate good ones akin to Gresham’s law and money. It is concerned that the NBS has just invested some $1.5 B in the Berbice Bridge, hardly on the grounds of an investment but more as a bail-out using poor people’s money. It would still be sceptical about the optimism of the Board of HIHT to withstand a near billion dollar loss in Stanford and wonder whether the Bank of Guyana was too soft in allowing such a concentration of assets. None of these issues was raised by the moderator of the panel or by the Bank of Guyana. It is wrong to believe that because the public does not have access and opportunities it is voiceless or does not understand.

Revelation
Much of what was said by our men of learning had little impact. What really had the country and the Minister of Finance going was a statement by the Prime Minister of The Bahamas that “there appears to be no record available at this time” of Clico (Guyana)’s investment in Clico (Bahamas). That is contrary to everything accepted by all including the company’s auditors Deloitte and Touche and the Commissioner of Insurance. In fact the Minister of Finance confidently told the press that there was “a plethora of correspondence, including wire transfers of substantial amounts, dating as far back as 2004” supporting the investment.

I have looked at the 2006 and 2007 financial statements of Clico (Bahamas) and these seem to support the qualified statement by the PM. In the books of the Bahamian company, note 12 (2007) and note 10 (2006) show the following (in Bahamian dollars which is equivalent to US dollars):

20090308_table1

And note 22 (2007) shows that the figure of $212,723 at December 31, 2007 is made up of amounts owing to Barbados, Suriname and CL Financial Limited which is the parent company. Nothing is shown as owing to Guyana. Over the three years 2005-2007 the only year shown with a balance with Guyana is 2006 where the amount was stated at $275,317.

Transactions with Guyana over the same years are shown as follows:

20090308_table2

The Guyana books showed investments at 31 December 2007 in Clico Bahamas of $5.95B and accrued investment income of $329M. Can it be that the balance owed by the Bahamas company to the Guyana company is shown somewhere else in the accounts? That is possible, but given that the accounts are both audited and in both cases by the same auditing firm − but by different offices − it is hard to understand why the Minister chose the route of the plethora of documentation rather than having the Judicial Manager call in the auditors for an explanation, to be followed by the paperwork. After all, the auditors would respond quickly, bringing their audit working papers files, anxious to avoid the implications of what seems on the face of the financial statements to be a major discrepancy which routine audit procedures should have revealed. Yes the paperwork is necessary, but surely the persons who have given their stamp of approval on the accounts would be a good place to start.

Different strokes…
One of the very striking features of the still far-from-over saga is how the two countries have treated the matter at the regulatory and more so at the political level. The Prime Minister of The Bahamas made an early and clear statement to their Parliament on the whole issue including offering advice to affected persons. Our President has chosen to make several statements including one before he departed these shores repeating his assurances about meeting all valid claims against Clico. From reports of a meeting Mr Panday had with Ms Van Beek and the information conveyed to the teachers, it does not appear that Clico is relying on those assurances.

There is also some discrepancy about the timing of Mr Jagdeo’s contacts with his counterpart in The Bahamas with the latter saying that it was after the announcement of the move to liquidate the Bahamas company that President Jagdeo called him. But what is more significant is Mr Jagdeo’s revelation that he had proposed as (part) settlement of the debt by Clico (Bahamas) to Clico (Guyana) to take over the Florida real estate in which the Bahamian funds were invested through one of its subsidiaries. It is not clear whether his intention is that our politically-controlled Privatisation Unit would then sell the asset, but surely our President, who is never hesitant to pronounce on matters legal, ought to have realised that that was not possible as a potentially fraudulent preference. The suggestion by a columnist in another newspaper that our President say nothing further in this matter has a lot of merit and was reflected in the call by the Finance Minister to “ensure that the court appointed process is allowed time to exhaust all avenues to protect the assets of CLICO Guyana.” Regrettably there is too much at stake for the public to wait on the necessarily cautious and deliberate court process.

Huge costs
Liquidation costs are enormous and are a first call on the proceeds of any sale of company assets. Many of the assets of the Bahamas company are pledged to secure debts other than deposits, and we therefore need to prepare ourselves for a substantial loss by Clico (Guyana) of its investment in the Bahamian company, assuming that there is such an investment. This then raises the question about Mr Jagdeo’s assurances which the Commissioner of Insurance through GINA initially reaffirmed, ie that all polices held in CLICO (Guyana) will be protected. This of course, whatever form it takes, will have to come from the taxpayers.

The Commissioner as Judicial Manager has to act independently and professionally. She has been instructed by the court to return promptly to them with a plan and no court will accept such vague assurances as those given by President Jagdeo and later repeated by her. She should not be unmindful that medical service providers have refused to extend further credit to the company while holders of short-term policies are already looking elsewhere for their coverage. In repeating the President’s assurance about guarantee, Ms Van Beek will recognise that this cannot be open-ended. If we care about our constitution and the Fiscal Management and Accountability Act, any such guarantee has to be given by Parliament.

In this regard, it seems a fair assessment that the President has not been sufficiently informed of the liabilities which his assurances that “all claims” will be met are interpreted to guarantee. The motion submitted by the PNCR calls on the government to take all necessary steps “to guarantee the savings, pensions and investments of all CLICO (Guyana) investors including the National Insurance Scheme (NIS), depositors, policyholders and contributors.” That would cost the government billions of dollars even if Clico’s actual and contingent assets are taken over. In Trinidad and Tobago Mr Lawrence Duprey had to give up huge chunks of assets in exchange for the government’s assumption of liabilities. Assuming we take over the liabilities, what do we get in return and how? It seems that Clico (Guyana)’s main assets – other than the Bahamas investment, are the loan to Caribbean Resources Limited ($1B), shares in the Berbice Bridge Company with a book value of less than $80M and any remaining bonds in the Berbice Bridge Company.

Conclusion
The President in his typical style has threatened prosecution against the directors and management of Clico if fraud were found. The President may not be aware, as disclosed by Business Page of February 8, that there is only one Guyanese director who is also the CEO who less than ten weeks ago he lavishly praised and made a director of his revamped GuySuCo Board. We are now paying the price for our failure to take governance seriously, not only in what I have referred to as public interest companies but in all public and state-owned companies.

Next week I will continue looking at the implications of this debacle but for now, please if we are thinking of selling off any of the policies to other companies, remember that there will have to be actuarial valuations done. From what I have seen we have not even begun to deal with this problem.

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On the line: Banks DIH Annual Report

Introduction
Banks DIH, the giant food and beverage company will be holding its 53rd annual general meeting on Saturday, January 17, 2009, close to four months following the end of its financial year of September 30, 2008. As a public company Banks is a reporting issuer for purposes of the Securities Industry Act, 1998 although like other domestic public companies in Guyana it is listed not on the Stock Exchange’s official list but on its Secondary List which consists of those securities that have not sought admission to the official list. Such securities are eligible for trading merely by virtue of being registered with the Guyana Securities Council.

Inclusion on the Official List on the other hand, according to the Stock Exchange website, indicates that that the, “stocks and shares that are listed are freely transferable and validly issued – not non-transferable, or forged, or otherwise tainted; it also means that the issuer meets the requirements of law and regulation in the management of its business and in the disclosure of adequate, timely and accurate information about its business to investors.” This distinction seems harsh, although companies’ silence on the reasons for their unwillingness to seek admission on the official list clearly does not help their cause.

The Barbados connection
The annual report to be put to shareholders at the meeting includes the financial statements of the company as well as the group. The group is made up of the company as the holding company, Citizens Bank Guyana Inc, a 51% subsidiary, and a dormant subsidiary Caribanks Shipping Company Limited, which appears to have little or no assets or income. The company also has two associated companies, ie companies in which it has significant influence but not control. The two such companies are BCL (Barbados) Limited and B&B Farms Inc.

BCL is owned equally by Banks Barbados, Valley Manufacturing Company Limited of Belize, Banks (DIH) Limited in Guyana and Blue Waters in Trinidad, all of whose export development needs BCL seeks to promote. Readers will recall that the Guyana-Barbados link-up was a defensive move by the local company reacting to a perceived hostile take-over about four years ago by the Trinidad conglomerate Ansa McAl. Under the deal the Barbados company was given 20% of the shares in the local company in exchange for 8.59% of the shares in the Barbados company, based on the respective book values of the shares at the time of the share exchange. Two of the directors of Banks Barbados sit on the board of Banks DIH while Mr Azam Khan represents the Guyana interest on the Barbados board.

Note 29 to the financial statements indicates that DIH purchased finished goods valued at $53 million from the Banks Holdings but made no sales to it. On the other hand sales to BCL amounted to $45 million and purchases amounted to $30 million.

Improvements
The group accounts include mainly a manufacturing entity, a financial services institution and less significantly, laundry and hotel services, a combination which does not make the group accounts easily understandable to the ordinary shareholder. While the company is separately accounted for, any member wishing to ascertain exactly how the very significant banking arm has performed would need to refer to the bank’s annual report which unfortunately is not posted on its website.

One criticism that this column has made of the company’s financial statements – that it does not include the very important statement of cash flows for the company – has been addressed and this is now contained on page 26 of the annual report. This is commendable. Also commendable is the greater level of disclosure about corporate governance although one has to wonder why an enlightened company like Banks DIH cannot have at least one female director in a board of twelve. Where is the gender-consciousness in a company of which perhaps a majority of the employees in the food division are female, as are many of its customers and shareholders?

Inadequate information
The unusually brief Chairman’s report on pages 8 and 9 of the annual report (including picture and graphs) gives very little information on the company’s operations and even in that limited space, Chairman Clifford Reis concentrates mainly on the group results with one paragraph reporting on the profits earned by the banking subsidiary and the longest paragraph dealing with the arrangement with Barbados. The annual report of the Barbados company presents a stark contrast with respect to the discussion which the management shares with its members. Significantly, in the Barbados company, the roles of Chairman and CEO are separate with both persons presenting separate reports to the members. There, the Chairman’s report runs to just two pages while that of the CEO covers more than ten. Structures and culture are different, but the amount and quality of information offered to Banks DIH shareholders is far too sparse to enable any understanding of the performance of the various divisions.

The company v the group

Source: Annual Report 2008

The table shows in the left half the performance of the company for the year ended September 30, 2008 with comparison for 2007. On the right hand side of the table are the group results ended on the same date, with H1 representing the first half of the year and H2 the second half. The first half numbers come from the unaudited half year report published under the Securities Industry Act while the second half numbers are derived from the audited financial statements.

The company’s sales for the year increased by 5.1% over 2007 to reach $13.565 billion. Profit from operations, ie before finance cost and other income including dividends received from Citizens Bank, increased by 6.4%, considerably less than the 27.12% for the group. As a percentage of sales, profit from operations increased marginally from 9.74% to 9.9% but it is not possible to determine how much of this is attributable to the company’s branded products, those it produces under licence and bought in products. After charging taxation of $570 million including a mix of property, withholding and capital gains taxes of $79 million, the company realised a net profit of $850 million (2007 – $793 million) of which dividends paid or to be paid amount to $420 million.

Profit from operations for the group increased by 27% over the preceding year to $1.922 billion with other income net of financing cost resulting in profit before tax of $1.968 billion. After taxation of $710.9 million of which property, withholding and capital gains taxes amount to $107 million, the profit for the group was $1,257 million, an increase of 22% over 2007. H1 accounted for 49% of sales but 55% of profit after tax, while in the second half of the year 51% of the sales produced only 45% of profit after tax. No explanation is given for this apparently anomalous situation but the unaudited first half would have included estimates while the second half of the year coincided with increased costs of raw material and fuel which the company may not have been able to pass on in higher prices.

Profits after tax of Citizens Bank amounted to $437.7 million, an increase of 66% over 2007. Of the amount of $437.7 million only 51% belongs to the group, the rest attributable to the shareholders who own the remaining 49% of the shares in Citizens.

The very important measure of Earnings Per Share for the group jumped by 16% from $0.90 to $1.04 but for the company the increase, which is not stated in the annual report, is a more modest 7.6% after accounting for dividends from its banking subsidiary. Perhaps this explains why the price of the company’s share was almost static throughout the year. Once again we note that there is no information or discussion on this vital factor.

Dividends
The company continues to honour a commitment it made to shareholders to pay three dividends, which of course carries an administrative cost but also allows for better cash flow management. Total dividends paid and proposed for the year are $0.45 per share compared with $0.42 per share in 2007 – an increase of 7.14%. The payout ratio which measures the share of after-tax profit paid to the shareholders was 49.41% compared with 50.44% in 2007.

The company’s balance sheet remains strong with cash resources of $1.3 billion, an increase of $1.2 billion in 2007 while net trade receivables, a function of sales and credit management increased by 24% on sales which increased by 5%. Total assets of the company grew by 5.53% while those of the group increased by 6.63%.

Outlook
Mr Reis is one of the private sector voices that can still command attention, and he was known to advocate fearlessly on behalf of his company and the private sector. At this time, his reasoned and constructive views on issues on direct and indirect taxation including VAT would have been particularly useful above the din of often uninformed rhetoric and opinion that seems dominant. The company should be leading in the advocacy for the zero-rating of bottled water (at least locally produced) – one of life’s greatest necessities and what some may even consider a public good. Water from GWI which few would want to drink without boiling is zero-rated, but that of the private producers is taxed at 16%. That policy certainly needs revisiting and offers an opportunity to the company to join with consumers to have the tax removed. This I should add is only one of several areas that need reform sooner rather than later.

Like the other commercial banks, Citizens has had a very good year and its results have embellished the group’s performance. But even banking can be cyclical and the core business of the company – particularly its beverage arm – needs to become more dynamic and be positioned to take up any downturn.

Chairman Reis in his report titled ‘Building on Traditions of Strength’ did not address the future prospects of the company. He referred briefly to the impact of the global financial crisis on remittances and the economy and expressed a commitment to be “optimistic, proactive, and to pursue a vigorous approach towards maintaining and improving the performance of the business.”

The group may need more than just commitment as the world enters the most challenging year of the company’s illustrious history.