Author: ChrisRam

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Poor IMF Consultation Paper predicts brighter future for Guyana

Introduction
A report compiled last November by the staff of the IMF in which two officials of the World Bank participated predicts a brighter future for Guyana despite the challenges, risks and threats to the economy. The exercise is done annually under Article IV of the IMF’s Articles of Agreement which requires it to hold bilateral discussions with members, usually every year.

The report was based on information available at the time of these discussions and completed on January 5, 2011 some days before the 2011 National Budget. Surprisingly it took close to six months for the report to wend its way through the IMF bureaucracy – and perhaps discussions with the Guyana Government – before it was published last month.

What is even more surprising is that despite the hands through which the report would have passed and the time it took before release, the report contains some remarkably elementary mistakes.

These reflect poorly on the team and the IMF despite its usual disclaimer about the views expressed being those of the staff team and not necessarily those of the Executive Board of the IMF.

The report included extensive coverage on the Amaila Falls Hydro Electricity Project and the National Insurance Scheme, but in critical areas it seems to have suffered from the absence of proper and independent research and critical analysis.

The shortcomings in those areas make the report less than helpful to someone seeking an objective evaluation of the state of and prospects for the economy. Its attention to oil and its impact on the economy was helpful but its reference to private estimates of Guyana’s potential reserves (15.2 billion barrels of oil) that places it among the top twenty countries seem far too optimistic.

In its introduction the report indicated that the team met with President Jagdeo, Prime Minister Hinds, Minister of Finance Dr Ashni Singh, Central Bank Governor Lawrence Williams, representatives of the private sector, labour, and the donor community, and members of the political opposition.

Yet the report reflects – if only coincidentally – the official line while none of the more frequently expressed concerns about the economy such as the illegal economy, the impact of the drug trade, corruption and governance gets any mention.

Business Page today presents a summary of the main findings and conclusions and offers its own comments where necessary.

Overall assessment
The report reflects a generally positive macroeconomic outlook in the medium-to-long term. It exults that Guyana is on the “cusp of major changes,” led by the government’s Low Carbon Development Strategy (LCDS) and private sector investments in gold, oil, and gas sectors and supports the large PPP (private-public sector partnership) associated with the construction of hydroelectric plant at Amaila.

It notes that the operating surplus of public enterprises is projected to rise from 0.6 per cent of GDP in 2010 to 1.9 per cent in 2011, supported by an expected surge in sugar production. It goes on to quote the authorities’ estimate that GuySuCo’s production in 2011 will rise by about one third to 300,000 tons. The results of the first crop suggest that this is most unlikely and that even the official target of 280,000 tons may not be achieved. While the report avoided any direct indication of the fiscal cost of keeping the sugar company intact or the high cost of production it did include the company as posing a risk.

Under risks, the report identified global uncertainty, volatile commodity prices, delays in grant disbursements, a widening external current account deficit and potential trouble with the NIS. In this connection, it suggested that the authorities would need to pay careful attention to balancing infrastructural needs with fiscal and debt sustainability. In the IMF song book, governance, crime and corruption do not seem to exist.

Amaila
The report notes that the Amaila Falls Hydroelectricity Project will have the capacity to generate electricity – which it states at approximately 154 megawatts – an output far in excess of present demand.

Ignoring the cost of mothballing and the need for redundancy, it predicts that Amaila should enable “a significant reduction” in the electrical tariff rates charged by GPL and lead to a sharp rise in electricity sales as self-generators would be attracted to the lower rates charged by GPL.

The authors note that based on current information, AFHP would eventually result in a 20-40 per cent reduction in the cost of generation as the switch from oil to hydro takes hold, but places the caveat that the precise extent of the pass-through of these savings to the end-user would depend on the PPA and its impact on GPL’s operations.

The report also states that GPL will have an equity interest in the hydroelectricity company, something that Guyanese are hearing for the first time. This would be an act of incurable insanity and would place GPL in a conflict situation and consumers at a real disadvantage.

While the report calls for the impact of the Amaila Falls project to be carefully monitored, both during construction (end 2011-14) as well as at the operational stages (2015 onward), its failure to do any independent examination of key elements of the arrangement leads it into unfortunate and misleading generalizations. The report does not seem to have any familiarity with the statutory procedures for the grant of a final licence and the obligation of the licensee to have power purchase agreements in place before the construction begins.

Incredibly, the report, “welcomed the high level of transparency and public disclosure of the project to date”! Without being ungracious to the team, one has to ask whether they read the independent press or used Fip Motilall as their source.

Oil
Noting that the Guyanese economy relies exclusively on imports for its oil consumption, the report observes that in 2010, oil-related imports represented some 16 per cent of GDP and were a main driver in the widening of the external current account deficit. It calculates that this makes the country vulnerable to oil price shocks and reckons that a 10 per cent increase in oil prices widens the current account deficit by 1¼ percentage points of GDP.

Changes in oil prices also have a significant impact on the fiscal accounts. Under the assumption that changes in the excise tax absorb half of any given increase, a 10 per cent rise in world oil prices boosts tax revenue by 0.6 percentage points of GDP.

Other issues

Poverty reduction
Out of the blue and from the IMF, Guyanese learn that their government in late 2010-early 2011 was currently preparing an outline of the Poverty Reduction Strategy Paper (PRSP) for discussion with the Cabinet Committee on Finance by July 2011. It notes that the architects of the outline are assessing the costs of achieving the Millennium Development Goals with technical donor support. Yet, this important step did not even warrant a mention in the Budget speech of the Minister of Finance presented to the National Assembly only a few days/weeks later.

NIS
Missing the correct date of the establishment of the NIS by nine years, the report dealt extensively with the risks posed to the sustainability of the Scheme with projections showing that after 2011, NIS will shift from small surpluses to growing deficits, largely as a result of rising benefit payments. It identifies as causes, what it calls a mismatch between pension benefits and contributions; contribution arrears and evasion by both workers and employers; and the additional challenge of the large investment of 18.6 per cent of total assets, or 1.3 per cent of GDP that the NIS has in the Clico conglomerate. Whether the team was told this by the government is a matter of conjecture, but that the government has guaranteed the indebtedness is false, wrong, misleading and dangerous.

What is more absurd is the comment that the Clico investment is “due to mature in a few years.” Professionals must do a fact-check of vital information, not repeat nonsense. Clearly they did not inform themselves about the nature of the investment or are aware that once liquidation was ordered by the court, the investments became immediately payable subject to the rules of priority of debts.

Unwilling to attribute direct responsibility for the challenges facing the Scheme to the failure of successive administrations to act promptly on the recommendations of the actuary, the report recommends “more actions” to restore its medium-term financial viability. They apparently did not ask Dr Roger Luncheon, the Chairman of the NIS Board and more importantly Cabinet Secretary to explain the failures of both Cabinet and the Board to address the problems.

The future
According to the report, the country’s future looks brighter, despite identified challenges. It predicts that with a fifth consecutive year of economic growth, Guyana is beginning to lock in gains from recent years of fiscal consolidation. It notes that prudent and sustained macroeconomic policies have developed resilience in the face of external and domestic shocks and notes that there are growing indications that the private sector is building up major plans for the exploitation of Guyana’s sizeable natural resources. One wonders whether they read Appendix G to the National Estimates which tells a different story.

The report predicts that over the medium term, the LCDS should help Guyana compete better on the global stage and unleash opportunities for lowering poverty. The report did not state what competitive advantages would accrue from the LCDS, but one can put that down to the government and the team themselves not being too clear about this.

As far as the team and the IMF are concerned, they have complied with Article IV and have said little that would ruffle the sensitive and preened feathers of the administration and have not given anything to the political opposition.

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Making the audit report more useful and the auditor more accountable

Introduction
Even though auditors sell their services, the profession of auditing – certainly of the financial kind rather than the forensic type – is unlikely to feature in the list of top one hundred most sexy professions in the world. Not because auditors themselves are not attractive or because they live boring lives. I am sure that a thorough research into the profession over the past seventy years will uncover a few auditors who have been involved in interesting activities, vocations and affairs of a non-financial nature. But the first problem is that a researcher is more likely to be attracted to a thesis on the why babies cry than on the life and times of an auditor. The second is that auditors seem to reserve their shenanigans to financial affairs that in extreme circumstances can result in the break-up of more than a domestic family. This was the case with Arthur Andersen LLP, up to 2001 one of the ‘Big Five’ but which in 2002 voluntarily surrendered its licences to practise as auditors after being found guilty of criminal charges relating to the firm’s handling of the auditing of Enron. It was subsequently cleared by the US Supreme Court but by then all its clients had fled to safer havens.

A profession whose major identifiable product – the audit opinion – remains fundamentally unchanged for seventy years has to attract the rare ISTJ type of personality and can hardly be expected to be anything but boring. In fact I recall at an Annual General Meeting a couple of years ago the Chairman, a member of the self-described learned profession no less, proposed that the auditor’s report be “taken as read” since the reading of the report by the Secretary would “turn members off.” Little does he know that that kind of disrespect for our professional output is one of the principal reasons why the audit fee always includes a premium, akin to damages for defamation!

The Americans
If the American audit regulator PCAOB (the Public Company Accounting Oversight Board) – set up under the Sarbanes-Oxley Act of the USA in response to the Enron/Andersen fiasco – has its way, the auditor’s opinion is likely to undergo its first major overhaul in seventy years, probably unique for any profession. But not before the auditor feels compelled to divert from poring over some unfathomable trial balance which s/he is ticking with a green or purple ink pen (the preserve of the profession) to write several letters stoutly defending the status quo. It is easy to imagine the accounting profession inventing the aphorism “if it ain’t broke, don’t fix it”!

So what exactly is the PCAOB recommending? Before addressing the question it may be useful to note that the audit report presented to shareholders is not the only product of the audit. In fact while that is the statutory output, the discussions which the auditor has with the client during the course of the audit, and the advice and recommendations contained in what is referred to as a management letter, are of immense if not greater benefit to the client. In the USA the auditors are required to communicate with the Audit Committee of the Board on several specific, high level issues, such as disagreements with management, consultations with other accountants on auditing and accounting issues, major issues discussed with management prior to retention and difficulties encountered in performing the audit.

They also send to the management a letter, unimaginatively called a management letter, in which they set out the findings arising from the audit, the implications of those findings to the operations and the financial statements and the auditors’ recommendations thereon. These are mainly intended to improve the efficiency and effectiveness of the client’s operations.

Guyana
Guyana subscribes to international rather than US standards, the former of which also have two separate standards on communicating following the audit, one named Communication with Those Charged with Governance and the other Communicating Deficiencies in Internal Control to Those Charged with Governance and Management.
My experience is that the two sets of issues are merged into a single management letter which goes initially as a draft to management for its comments which are incorporated into the final version of the management letter to the directors.

International
Almost simultaneously as the US has begun its initiative, the International Auditing and Assurance Standards Board (IAASB), which is supported by the International Federation of Accountants and whose pronouncements the Institute of Chartered Accountants of Guyana subscribes to, has come out with its own Consultation Paper Enhancing the Value of Auditor Reporting: Exploring Options for Change. This paper once again discusses the age old question of the expectation gap, that is the difference between what users expect from the auditor and the financial statement audit, and the reality of what an audit is.

The current consultation both in the US and internationally goes beyond this expectation gap. There is a perception that there should be more transparency about the entity and its financial statements, particularly key financial reporting risks and how they are being addressed; and how the audit is performed, including key areas of audit risk. One only has to consider the case of Enron in the US and our own Enrons such as Stanford and Clico to appreciate how inadequate a bald audit report and inadequate communications by auditors are to the users of financial information.

The information gap
Serious users of corporate financial information – not the little old ladies and gentlemen for whom attendance at an AGM is a highpoint of their social calendar – point to the existence of an information gap, described by the IAASB as the information users believe they need to make informed investment and fiduciary decisions, and what is available to them through the entity‘s audited financial statements or other publicly available information.

Any deficiency in the existence or presentation of such information could have serious implications for the efficiency of capital markets and the cost of capital – matters which are like oxygen to the capitalist world. For everyone, this information gap increases the challenges of understanding how corporate financial information, including the audited financial statements and related disclosures, reflects the overall picture of the entity‘s financial condition, performance and sustainability of its business.

Bridging the gap
What then do they believe can help? In a concept release the PCAOB has come up with four Approaches to Changing Auditor’s Report. A fact sheet released by the Board of PCAOB states that the four potential changes, which it describes as “alternatives,” are not mutually exclusive, so that any revised auditor’s report could include one or a combination of the alternatives, elements within the alternatives, or alternatives not currently presented in the concept release. The four are:

An Auditor’s discussion and analysis (AD&A) as a supplemental narrative report to the auditor’s report in which the auditor discusses his or her views regarding significant matters, such as audit risks identified in the audit, audit procedures and results, and auditor independence.

Required and expanded use of emphasis paragraphs. This would require inclusion of an expanded emphasis paragraph (currently optional) in all audit reports. The emphasis paragraph would highlight the most significant matters in the financial statements and identify where these matters are disclosed in the financial statements.

Auditor assurance on other information outside the financial statements. This would require auditors to provide assurance on information outside the financial statements, such as management’s discussion and analysis (MD&A) or other information (for example, non-GAAP information or earnings releases).

Clarification of language in the standard auditor’s report. This would involve clarifying what an audit represents and auditor responsibilities. Language and concepts that the PCAOB believes could be clarified include: reasonable assurance, auditor’s responsibility for fraud, auditor’s responsibility for financial statement disclosures, management’s responsibility for the preparation of the financial statements, auditor’s responsibility for information outside of the financial statements, and auditor independence.

The discussion paper put out by the IAASB lists eight issues of which the first is the risk facing the business while others include changes to accounting policies that have a significant impact on the financial statements, the methods and the judgments made in valuing assets and liabilities and significant unusual transactions.

Conclusion
It is early days yet and any decision will be some time in coming since the process has to consider the range of opinions and submissions which the PCAOB and the IAASB will receive, many of them self-serving and representative of vested interests. Both the Americans and the international board have set a time of September 2011 for the submission of comments. I hope that the Guyanese accounting profession that has distinguished itself by its avoidance of any issue of substance or significance will make some contribution to the discussion, even if it does so as part of the regional umbrella body.

Of course no one should draw the wrong inference: the fundamental nature of the audit opinion will remain the same – to report on the truth and fairness of the financial statements. What will change are the contents of the report which should just make auditors a bit more accountable and their product more useful.

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The biggest budget ever – and more!

Introduction
Five months after the passage of the largest budget ever, Minister of Finance Dr Ashni Singh has gone back to the National Assembly for an additional $6.3 billion for spending this year. Some sketchy information for this sum is contained in Financial Papers Nos 1 and 2, the first being a Supplementary Provision to replenish the Contingencies Fund to the tune of $1,978 million and the second a Supplementary Provision of $4.3 billion for additional spending. Today’s column looks at the information and questions whether they meet the statutory requirements governing such additional expenditure.

The law relating to such spending and approvals is contained in the constitution and in the Fiscal Management and Accountability Act 2003 (FMAA). There are two types of supplementary provisions permissible under the Act: those that come before the spending takes place and those that come after such spending and in which case would have been spent out of advances from the Contingencies Fund. If the nature of the expenditure does not qualify it for payment out of the Contingencies Fund, then any such payment would be unlawful, constitute an indictable offence and carry a maximum penalty of two million dollars and imprisonment of three years.

Law’s weakness
The weakness in the law is that the offence can only be committed by an “official,” which by definition does not include a minister. In other words, for purposes of the FMAA a minister seems to enjoy some form of immunity and any action may have to be brought for misfeasance in public office. The self-accounting ministries are like laws unto themselves and while by law the Permanent Secretary is the accounting officer, there is only one power in the ministry and that is the minister(s).

The general rule is that only a supplementary appropriation Bill can finally authorise an allocation for expenditure. The Act requires that on the introduction of a supplementary appropriation bill, the minister is required to present to the National Assembly the reasons for the proposed variations and “a supplementary document describing the impact that the variations, if approved, will have on the financial plan outlined in the national budget.” Papers Nos. 1 and 2 presented to the National Assembly do not seem to meet these requirements.

Contingencies Fund
The Contingencies Fund is a special fund for special purposes and is described as a sub-fund of the Consolidated Fund. Article 220 of the constitution permits the establishment of a Contingencies Fund by paying into it from the Consolidated Fund a specific amount, the quantum of which is determined and, therefore, limited by law in respect of any year. The article goes on to authorise the minister responsible for finance to make advances from that fund, if he is satisfied that there is an urgent need for expenditure for which no other provision exists.

The Contingencies Fund is limited to two per cent of the estimated annual expenditure of the previous financial year or such greater sum as the National Assembly may approve. It is fixed for each year, either by way of the formula or an Act of Parliament and the minister cannot increase it without parliamentary authority. Advances from the Contingencies Fund must be cleared by a supplementary estimate laid before the National Assembly as soon as practicable, thus replacing the amount so advanced. Section 41 of the FMAA gives effect to Article 220 by providing the detailed procedures.

The overriding test for an advance from the Contingen-cies Fund is threefold: urgent, unavoidable and unforeseen. Further, the Minister can use this fund only where no or inadequate sums had previously been appropriated, or where reallocation under the FMAA is not possible, or finally, where delay would cause injury to the public interest. He cannot use the fund because he failed to budget properly, or because some budget agency was careless.

The Minister must report at the next sitting of the National Assembly all advances made out of the Contingencies Fund, specifying (a) the amounts advanced; (b) to whom the amounts were paid; and (c) the purpose of the advances.

Paper No 1: Spending from the Contingencies Fund
The following were the principal payments reportedly made out of the contingencies fund and for which replenishment was approved:

1. Provision for Japan’s earthquake recovery – $20M.

2. Payments to Linden municipality workers for the years 1999 to 2010 – $27.3M. After a period of eleven years this payment became urgent, unavoidable and unforeseen, in an election year.

3. $36 million for payments by the Ministry of Agriculture to farmers and households in Regions 2, 3, 4, 5 and 6 who were affected by the La Nina weather conditions. The sums were for the following organisations identified only by their acronyms: NAREI – $14M, GLDA – $6M, GMC – $5.9M and MMA – $10M. Like 2, this may also have an election element in it.

4. A further $10M appears to have been paid out to the same groups for the same purpose but under a Drainage and Irrigation Support project.

5. The Ministry of Agriculture again was allocated an additional $500M for consultancy services, drainage and irrigation works and procurement of four excavators for the Aurora land development project. In the absence of a project document and considerably greater details, it would be difficult to assess whether this sum is reasonable. What is equally troubling is that the sum would already have been spent and it should therefore have been subject to the strictest controls. Surely details should have included particulars on the tenders and each cost element should have been identified.

6. Other major sums include (a) $522M for rehabilitation of roads in Georgetown and Linden, (b) improvement of water supply in hinterland communities – $252M and (c) $280M to the Ministry of Education for computers in school laboratories.

Usage and abusage
Two things are clear from this. The contingencies fund continues to be used and abused in the most unlawful manner with practically no regard being paid to basic principles of financial management. It is not without some irony that it is the serial violators of the precepts of proper financial management and controls who continue to be provided with increasing sums of money to be spent without regard for the interest of the country’s taxpayers. While the Report of the Auditor General often makes adverse comments on the use of the Fund, it never deals with some of the most troubling questions that the public would wish to see answered. Hopefully the Public Accounts Committee will at some time insist that these be addressed.

GPL, losses and Amaila
Three billion, nine hundred million dollars has been requested and approved as a provision for a 15.6 megawatt plant at Kingston under the Electrification Programme. This is in addition to the sum of two billion eight hundred million voted under this programme in the 2011 budget, bringing the total to $6.7 billion. Guyanese have recently had to face blackouts with some frequency and severity and while the situation appears to have improved recently there are far too many reports of the losses sustained by consumers due to the poor quality of electricity.

The request for additional funds suggests that the state-owned Guyana Power and Light continues to rely on public funds for its capital programme, despite the high tariffs that consumers continue to bear. The company will remain tied to the national budget until it can curtail the theft of electricity which results in “line losses” of more than thirty per cent. While the company has been successful against many small consumers it has signally failed against the bigger thieves, among them businesses and persons who by no stretch of the imagination can be considered poor and therefore unable to afford. It is okay to go after persons in Sophia and Albouystown, but the theft by one business can cause more losses than fifty to one hundred households. Clearly more focus should be given to those groups in a way that does not allow the persons and their clever lawyers to free them to ‘Go and thieve some more.’

The other issue for GPL is of course how all the billions that are being pumped into the company fit into the longer term plans for electricity with Amaila hydro scheduled to come on stream in four to five years. This is not an idle comment since capital costs carry with them depreciation, and the fear must be that if and when the hydro is realised consumers will have to bear the depreciation costs not for one but two plants.

Public Works
The Ministry of Public Works and Communications gets another $400 million for Highway Improvement on the East Coast Demerara, on top of the $100 million voted earlier to make a four lane from Better Hope to Golden Grove. Now do we have any idea how much the whole project is going to cost and whether we are engaged in highway quality or highway robbery with the eye on the elections?

Conclusion
It is a safe bet that this is not the last supplementary we will see this year. It is after all, elections year, and the traditional splurge will be on – Norway or not. Opposition MPs and others need to do much more to protect us from the reckless spending by the government for which electoral defeat will be more than a political loss

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The Clico fallout – Duprey, Monteil and Geeta Singh-Knight

Introduction
The Duprey name is legendary in Trinidad and Tobago. Cecil Duprey, a member of an ordinary local family in a matter of decades rose from practically nothing to become a household name in his country. He founded a successful conglomerate, established a business that would probably have been considered too bid to fail and his grandson Lawrence Duprey had visions of taking the company global. He was street smart and while living his vision – first in the Caribbean and then further afield – played the political field as a major supporter of the corrupt Basdeo Panday government. Duprey seems to have won President Jagdeo’s confidence here in Guyana which seems to have made available to him and his company CLICO endless opportunities to invest in Guyana. For example, CLICO’s forestry subsidiary Caribbean Resources Limited was allowed to retain concessions over huge swathes of Guyana’s forests even though it had for years defaulted on its obligations to the Guyana Forestry Commission. Duprey was preferred to DDL for GuySuCo’s molasses and was negotiating for an investment in an ethanol plant.

Mr Lawrence Duprey surrounded himself with some bright accountants, including Andre Monteil, a classmate of mine at South West London College from 1970 to 1973. Monteil is credited with being a key architect of CLICO’s expansion and some of its more aggressive and possibly illegal activities. While Monteil’s role in some transactions made him quite unpopular in Trinidad and Tobago, for the better part of two years, it was felt the Mr Duprey was untouchable. That belief was shattered this past week in Trinidad and both gentlemen are now in some real problems.

Double whammy
Reports emanating from Trinidad and Tobago suggest that the government of that country is moving against Lawrence Duprey and Andre Monteil for civil and or criminal conduct in the collapse of the insurance giant CLICO and its parent CL Financial. A civil lawsuit was filed last Tuesday by Trinidad’s Central Bank and CLICO against Duprey and Monteil for alleged mismanagement and misappropriation of CLICO assets which led to the fall of CLICO in January 2009. Then one day later Attorney General Anand Ramlogan directed that all files coming out of the probe into the collapse of insurance giant CLICO should be forwarded to Director of Public Prosecutions (DPP) Roger Gaspard to determine if criminal charges should be laid against Duprey and Monteil. The two hundred page suit should make interesting reading indeed.

Under normal circumstances the authorities in Guyana and the former key officers in CLICO Guyana should be taking great interest in the developments taking place in Trinidad. While the architects of the financial misadventure that has placed our National Insurance Scheme at risk were those in Trinidad, they found compliant Guyanese to carry out the Guyanese leg of transactions, even willing to ignore the country’s laws and defy its regulator. This column had previously called on the Bank of Guyana which has taken over responsibility for regulatory control of the insurance sector to work closely with its counterparts in Trinidad in the investigations and prosecutions of the region’s most expensive financial failure.

Deafening silence
So far we have heard nothing but a deafening silence from the Bank of Guyana whose Governor has, probably dangerously, been appointed the company’s liquidator. I say dangerously because it is not unusual for legal actions to be brought against a liquidator and the person most likely to do so would be the regulator. That is not going to happen even as the liquidation has in essence been contracted out! Indeed my understanding is that CLICO’s former CEO Ms Geeta Singh-Knight is still playing a paid role in the liquidation. We are truly an incredible country.

The CLICO debacle in Guyana has been addressed to some considerable degree in these columns before. I do not intend to do so again. Suffice it to say that the company had breached the provisions of the Insurance Act which require companies carrying on long-term insurance business to invest a base of 85% of its statutory fund in Guyana. In clear contravention of that legal requirement CLICO took the billions of dollars in the Fund and placed it in a related party in The Bahamas, incorrectly claiming that it was invested in Fixed Deposits, a matter that appeared to have escaped the diligent notice of CLICO’s auditors. The directors and officers of CLICO did not comply with a demand/request by the regulator to repatriate the Statutory Fund.

Trouble
Enter the law. Section 19 of the Insurance Act provides that any person who contravenes any provision of the Act, or any of its regulations or any direction or requirement made by the Commissioner of Insurance, is guilty of an offence. Unlike the normal presumption in law where the prosecution has the burden of proving beyond reasonable doubt the guilt of the accused, the Insurance Act shifts the burden to the “person” to prove that s/he did not knowingly commit the offence of omission or commission.

Sub-section (2) of the section provides that where an offence is committed by a company – in this case CLICO – and the offence is proved to have been committed with the consent or connivance of, or to have been facilitated by any neglect on the part of, any director, principal officer, or other officer or an actuary or auditor of the company, he, as well as the company, shall be deemed to be guilty of the offence. Ms Singh-Knight was both a director and principal officer of the local company and most certainly it would have been to Ms Singh-Knight that the Commissioner of Insurance would have been addressing correspondence and directions.

There is no doubt in my mind that as the new regulator the Bank of Guyana should have long initiated action against the officers and directors of CLICO Guyana, and that the failure by the BoG amounts in my view to a serious dereliction of duty. Now when the regulator fails, for whatever reason, to protect the public interest, there is trouble indeed. That is the situation we face.

Duprey and Monteil
The question has been posed to me whether Guyana can take similar action here against Duprey and Monteil. That is a question for really seasoned attorneys to answer. The Insurance Act recognizes that insurance may be offered in Guyana by persons who are not in Guyana. In fact the Act defines a person as including “a natural person and any corporation or other entity which is given, or is recognized as having legal personality by the laws of any country or territory.”

The challenge is that the laws of Guyana are generally only enforceable in the country’s courts and the question is under what law can the courts of Guyana compel Mr Duprey to submit to its jurisdiction. Article 38 of the revised Treaty of Chagauramas imposes an obligation on member states of Caricom, within defined limitations, “to remove discriminatory restrictions on banking, insurance and other financial services.”

Oddly, the treaty created a single economic space but left territorial jurisdictions intact, impervious to each territory’s domestic laws. The Caribbean Court of Justice only has original jurisdiction in relation to the treaty and the CSME and appellate jurisdiction from national courts. It may seem commonsensical that crimes or contraventions of provisions of the treaty committed in any territory should be dealt with in that territory. It is certainly worth further consideration and one only has to look at how the US used the long arm of its laws to bring to justice ‘Sir’ Alan Stanford for financial crimes committed in Antigua which defrauded Americans back home.

Local directors
But back to the directors of the local company and in particular Ms Gita Singh, its CEO who was at the centre of the questionable and disastrous transactions. In addition to the infractions of the Insurance Act there were clear breaches of the Companies Act (CA) which governs all companies incorporated or registered in Guyana. S 96 of the Act imposes on every director and officer of a company a duty to (a) act honestly and in good faith with a view to the best interest of the company; and (b) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.

In the discharge of their particular duties which they have assumed, directors are bound to take reasonable care. Failure to exercise such care constitutes negligence. While the normal legal principle is that directors owe their duty to the company and to no one else, directors may be liable to outsiders for their own wrongs. This means that directors who are parties to a fraud or the commission of any other wrong are personally liable on the general principle that a servant or agent who commits a wrong is liable for damages resulting therefrom as well as the company.
Time to act

We should long ago have started an enquiry into CLICO for possible criminal conduct and the Bank of Guyana should, like their counterparts in Trinidad and Tobago, have begun civil action against them and their Trinidadian masters. This would have been an excellent opportunity to expand on our jurisprudence while penalizing those who break our laws and cause our people and country huge losses.

It may be that the Bank of Guyana is afraid to take action because President Jagdeo has stood by Ms Singh-Knight while he throws red herrings about investigating Globe Trust and CLICO. There must be some good reason for him to want to do so but his failure sends the wrong signal that some people can do no wrong and if they do, there will be no consequences.

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Amaila Falls: Deals within a deal

Correction and apology
In an earlier piece, relying on section 25 of the Hydro Electricity Act Cap 56:03 which provided that the assignment or transfer of a licence without the consent of the President, I had questioned the authority of the Prime Minister Mr Samuel Hinds to transfer the Interim Licence from Synergy to Amaila Falls Hydro Inc (AFHEP). While that section was not explicitly amended, there were two later Acts – The Guyana Energy Authority Act and the Energy Sector (Harmonisation of Laws) Act 2002 – that transferred the functions from the President to the Minister who in this case would be the Prime Minister. I extend apologies to the Prime Minister and to readers for this. Without offering any qualification to this apology, I can state that the Prime Minister has failed to exercise his duties and responsibilities under the Act in relation to Mr Fip Motilall and his company Synergy Holdings Inc.

Introduction
Last week’s column concluded with a restatement of the obligations of a licensee under the Hydro Electricity Act. The tenth supplementary AFHEP licence is scheduled to expire this year and that means that the current licensee Sithe Global has about seven months to complete the development works set out in the Licence, a pre-condition for the application for a final licence. Sithe has a lot of work to do and from their own public utterances it seems that they are far from prepared for any serious and public criticism of their plans, clearly more comfortable with dealing with our Prime Minister. That is understandable after having been stung and embarrassed by their performance on what has been a near disastrous Bujagali Hydro Electric Plant in Uganda.

From all appearances and from the Prime Minister’s utterances, Sithe was chosen not by the government but by Mr Motilall whose competence, judgment, marketing skills and political connections have been on public display with regard to the Amaila Falls Road Project awarded to his company by the government against all informed advice. Incidentally my information is that work on the road project has been practically halted and that Mr Motilall is out of the country. There must now be doubts whether Mr Motilall will be in a position to complete the road, a fear that was expressed in a court challenge to the award of the contract to Motilall and by everyone else except the government. Already parallels are being drawn between Burnham and Jagdeo’s adventures with hydro.

‘Bigging up’
But back to Sithe which is expected to be around for some time, although for how long is another matter. Readers will recall that Business Page of May 29 sought to deal with issues raised by Mr Rafael Herz who has been identified as the Project Manager of the Amaila Falls Hydro project. Naturally he and the company want to ‘big up’ themselves but sometimes the results are not what they intend. Here are some claims made by Sithe Global on its website:

1. That it strives to be “among the best in the world at implementing large scale, socially responsible power generation projects, often in places where success has proven challenging.” If that is indeed the case then Guyana should consider whether Sithe is the most appropriate fit for us with our small-scale Amaila and whether the project’s price tag means that Guyanese have to pay Sithe for its name and reputation.

2. Its award of the 2007 EuroMoney Africa Power Deal of the Year for the Bujagali Project. Its website does not state that in 2009 the World Bank recommended a 5 per cent increase in tariffs that year and a similar percentage increase in 2010 in order to avoid “shocking” Ugandans with the inevitable price increase that was expected once the Bujagali dam was completed, despite earlier claims that power tariffs would decrease once the project became operational.

3. That its projects currently total nearly 7000 megawatts with a total capital investment potential of $15 billion. That works out at US$2.142 million per mega watt, or half the cost of Amaila.

Bujagali
On the Bujagali project, Sithe “partnered” with a division of the Aga Khan Fund for Economic Development and formed a company called Bujagali Energy Company Limited to develop the project of which the lead contractor was Salini, an Italian construction company. With Sithe’s most recent experience bordering on a disaster, it would be the most compelling thing in the world for any serious government to do serious due diligence of the Bujagali experience and Sithe’s role in it. They would want to know why the key players in the project including Sithe could have got a major element in the project so wrong; whether the problem was with the contractor or Sithe; whether there was adequate and appropriate consultations; the role and responsibility of the government; the supervision by the regulator, if any, and the scale of the project cost overrun and whose judgment and estimates were at fault.

For Sithe to simply change contractors for the Amaila project is not enough. It must be challenged and must show that it was not culpable in the debacle of Bujagali. Civil society and the press must get answers before the Amaila project gets the green light. Glib talking and throwing around numbers and self-praise are not acceptable. We are suffering from that type of behaviour in connection with the road project in which one name is common.

China Railways
Now that Business Page has revealed that China Railways’ own website shows no expertise in hydro projects, we are told that real expertise resides in China Railway’s partner, Northwest Hydro Consulting Engineers (NWH), described by Mr Herz as “one of the pre-eminent hydro firms in China.” Interestingly Mr Motilall had once described Synergy in similar terms and my research indicates that Northwest is a hydropower consulting company which carries out various levels of engineering studies of hydropower schemes and helps carry out techno-financial analyses of medium and large hydropower projects.

Mr Herz rejected a suggestion in these columns that the debt interest rate could be as high as 30% and volunteered that “in addition to the several million dollars in cash which Sithe Global has already contributed to developing this project, the company expected to invest approximately $200 million of equity towards the total project cost.” Such generalizations are not a substitute for solid information. At December 31, 2009 Sithe had advanced to AFHEP about US$800,000 which was spent on the project development expenses (US$325,000) and general and administrative expenses (US$480,000). What Mr Herz needs to do is not tell us what is not so, he should tell us the facts.

To be fair to Mr Herz he did not say that Sithe’s equity is in the form of cash and it now seems that the project is already being charged for Sithe’s time and expenses on Amaila. Does this include any payment to Mr Motilall who for several years breached practically every condition of the interim licence he was carrying around in his briefcase looking for a buyer?

Investment
Guyanese have a right to know how much cash Sithe will be investing in the project and Mr Herz might care to tell us why the company which will carry out and own the project has been capitalised with a mere US$2,500! We expect too to know the nature of the expenditure of “several million dollars in cash” spent by Sithe in developing the project and whether and how much was paid to Mr Motilall. Mr Hinds and the PUC would be discharging their duty to consumers and taxpayers by letting them in on all the costs they will eventually have to bear in electricity rates.

On the question of the cost of the AFHEP, Mr Herz had stated its “the cost per kilowatt for the construction of the hydro facility will be comparable to the cost of other hydro facilities of similar scope.” I have done a survey of the cost of projects and have come up with the information set out below, with the caveat that some of the costs are budgeted rather than actual. There are savings in terms of capacity but the relationship is not as direct or linear as might seem logical. Every project is different and where there is a displacement of persons that can be a major cost. For Amaila, population displacement is not likely to be significant.

What makes the Jirau and San Antonio plants so much more expensive than the proposed Belo Monte Dam is substantial expenditure on technically complex and expensive ship locks, as well as environmental remediation. If we exclude those expenditures the remaining cost of construction and transmission falls more within the range of the Belo Monte Dam. Sithe’s most recent Bujagali project has been described as one of the most expensive hydro electricity projects in the world. Amaila will now surpass that.

Back next week with a discussion of the request by the Minister of Finance for more money.