Author: ChrisRam

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Mid-year report and the Debt party (no pun intended)

Introduction
Almost invariably in discussing recent mid-year reports which the Minister is required to present to the National Assembly under Section 67(1) of the Fiscal Management and Accountability (FM&A) Act 2003, I have made two broad prefatory comments. The first is that it is always misdated.

The Act requires that the report be presented “within sixty days” after the end of the half-year. The second is that comparing it with the half-year report of the Bank of Guyana submitted to the Minister of Finance long before he completes his own report, is like comparing cheese with brick. In content, comprehensiveness and quality they are poles apart.

In 2007, the first full year of tenure of this Minister of Finance the mid-year report was not presented until late November. Subsequent years have seen some wide disparity, none of which however met the deadline, notwithstanding the mis-stating of the date on the reports themselves.

This year the Minister, who was cited by AFC MP attorney-at-law Khemraj Ramjattan for misleading the National Assembly in the small matter of the payment of $4 billion to GuySuCo, dates his report August 27, 2010 two days before the statutory deadline. Until I’m convinced, I shall withhold my congratulations for timely presentation.

As readers are aware the Speaker of the National Assembly Mr Ralph Ramkarran said he did not find a prima facie case against the Minister in the GuySuCo matter although he did find one against the Minister of Housing and Water, despite the Minister of Finance being at least an accessory if the accusation is in fact upheld.

However, it must also be said that the Minister does his reputation no good by the wide disparity between the dates he places on the reports and the dates on which they are tabled.

Breaks and gaps
Since it is routine for reports to be lodged with the Parliament Office between recesses, the Minister would be well advised to lodge the report as soon as it is completed, and issue a press statement to that effect. He can add that “unfortunately, the contents of the report cannot be released until I have had the opportunity to lay it in the National Assembly.” He must also not issue any instructions to the Bank of Guyana or the Bureau of Statistics to withhold their own publications until his report is tabled.

To place in some context what the report should include but does not, I can only draw attention to the concluding part of my commentary on the 2009 mid-year report published in December 2009. I noted there that the mid-year report required more than the year-to-date execution of the annual budget. It requires the report to set out the prospects for the remainder of the year. It also mandates the inclusion of a revised economic outlook for the rest of the year, a statement of the projected impact of the trends on the remainder of the year, and very importantly, a list of major fiscal risks for the second half of the year with likely policy responses that the government proposes to take to meet the expected circumstances.

It was clear then and is more egregious now that the report presented by the Minister falls very short of the requirements of the Act. The result is a report of very limited use and, for any serious reader, when compared with that of the Bank of Guyana, of no practical use.

The best and the brightest
As if to prove that one can fool some of the people all the time, some time in early July, the Parliamentary Sectoral Committee on Economic Services suggested in its fifth Periodic Report that it was likely to recommend that the National Assembly extend the deadline for the submission of the mid-year financial report by the Finance Ministry.

The report suggested that a recommendation be made to the National Assembly that the FMAA be amended to allow for the extension of the deadline for submission to October 9 to coincide with the end of the parliamentary recess. In fact, the committee noted that all the data necessary to compile the mid-year report would not be available by the end of June/early July. Well how much more misinformed can a parliamentary committee be! The deadline is the end of August, not June or July and the committee must have heard of the billion dollar software (IFMAS) in which the government has invested that allows for considerable real time data availability.

And while that ill-informed suggestion would have been music to the ears of the Minister, it is clearly not reading from the same song-sheet as the Chairperson of the Public Accounts Committee Chairperson, Ms Volda Lawrence, who in relation to the 2007 report called the delayed report scenario “gross disrespect” for the people of Guyana and said that it was time people stopped taking such behaviour sitting down.

For purposes of this column and for reasons mentioned in the first paragraph, this column relies on the report of the Bank of Guyana rather than that of the Minister, although it must be said that unlike 2009, the two reports agree on the GDP growth statistics.

Growth
The economy showed what the Bank of Guyana described as modest growth of 2.8 per cent during the first half of 2010. Significantly, the government has now revised the budgeted growth in 2010 from 4.4% to 2.9% for the full year. This would represent the lowest rate of growth in the economy since 2006. In his report, the Minister gave no reason for the significantly lower growth projections, a lacuna that pervades his entire report. And to ensure that they rhyme this year, the Bank of Guyana also projects a 2.9% growth for full year 2010 without indicating whether this is its own estimate of merely a repetition of the Minister’s.

The National Income Accounts was last year rebased to 2006 and until some pattern has emerged it is difficult to assess any one of those indicators.

It would have been useful for the Minister to comment on the impact of the rebased national accounts on the growth statistics particularly in the light of the attention and issues raised by Professor Clive Thomas in his recent columns under captions such as ‘Magnification or manipulation’ and ‘Statistical illusion or real changes’ in the Sunday Stabroek of October 3 and 10, 2010 respectively.

The growth in the economy was attributed to improved performances in the agriculture and services sectors. The livestock and bauxite industries experienced a decline in output while a stable performance was registered in the manufacturing sector.

Bitter sugar
For the first half of the year sugar output was 81,864 tonnes, 1.8 per cent lower than the level at end June 2009 – the year of the turnaround plan – and represented 29.0 per cent of the 280,000 tonnes targeted for 2010. The Bank of Guyana explained that the adverse outturn was due to unfavourable weather conditions in the first quarter of the year which affected cane transport, replanting and irrigation of planted canes.

From an original 2010 target of 280,000 tonnes, the Minister of Finance has announced a revised target of 260,000 tonnes, which would confuse the GAWU members who are being told that their target is 264,000 tonnes. This is not the only confusion in the industry. While the Minister of Finance announces that “works continue on the turnaround plan which would see the realisation of increased acreage under cultivation and improvements in the cane to sugar ratio, the President is expressing fears about the future of the industry due to the failures of “a few individuals.”

Rice output was 168,267 tonnes, 4.6 per cent more than the corresponding 2009 level and represented 49.0 per cent of the 343,373 tonnes target for 2010. The improved performance has to be seen however against the significant amount of “government assistance,” a euphemism for subsidy to the sub-sector, to cushion the effects of the dry weather spell.

Bauxite, another industry that receives wide and valuable government support, saw a decline in its performance which helped to produce in the mining sector a 4.1 per cent decline in growth in real terms. The Bank of Guyana explains that the outcome reflected the decrease in bauxite and diamond output, due to the fall in demand and the “decline in motivated workers.” One cannot but help notice the contrasting attitude of the government to rice/sugar and bauxite, although the government would stoutly challenge any suggestion that ethnicity and politics play a part.

Gold and dollars
Gold again remains an outstanding contributor to the economy and but for its performance the real economy would more than likely have experienced negative growth. Yet, the government continues to hem and haw and dilly-dally on recognising that gold-mining is a key sector that warrants serious attention.

Total gold declarations increased by 8.1 per cent to 142,212 ounces and were 46.0 per cent of the 311,816 ounces targeted for the year. Gold remains by far the largest single export earner with export receipts amounting to US$146.7 million, 22.4 per cent or US$26.8 million more than the June 2009 level. The average export price per ounce increased by 26.3 per cent to US$1061.2 per ounce while export volume declined by 3.2 per cent to 138,242 ounces.

After a much-hyped improvement in the exchange rate of the Guyana Dollar to its US counterpart, the Guyana dollar, vis-à-vis the US dollar, depreciated by 0.25 per cent compared with an appreciation of 0.37 per cent at end-June 2009. According to the Bank of Guyana, the relative stability of the currency is supported by an adequate flow of foreign exchange to the market. It did not add however that the US Dollar itself has been depreciating against some major countries, so the comparison of the Guyana Dollar to the US Dollar is not an accurate measure.

A seemingly unrelated issue is the attraction to keep money in Guyana rather than converting and exporting it to another currency. Interest paid to holders of bank deposits decreased by 17.0 per cent in 2010, showing increases in domestic expenditure. This means that while depositors’ funds in the banking system are increasing their returns are decreasing. That cannot be good news either for the exchange rate or depositors, though it must be added that the extent of the decrease is quite surprising.

Other issues
The NIS also gets a mention by the Bank of Guyana but not the Minister under whose portfolio it falls. The National Insurance Scheme’s (NIS) receipts grew by 12.3 per cent to G$5,328 million as contributions rose by 9.7 per cent to G$4,633 million, and receipts from debtors grew by 91.3 per cent to G$437 million. While the decline in investment income by 10.8 per cent to G$259 million gets a mention, nothing has been said of the increased benefit payments and the status of the 2008 financial statements and annual report. These are languishing on the desk of the Minister of Finance and not being tabled in the National Assembly as the law requires, an indirect casualty of the Clico debacle.

And the debt spree continues as both domestic and external borrowings continue into the stratosphere. The stock of domestic and external public debt increased by 13.2 per cent (to G$94,760 million), and 12.1 per cent (to US$966 million), respectively from end-June 2009 level. The former is attributed to an increase in the issuance of treasury bills to sterilize excess liquidity, while the latter is due to disbursements from the IDB and bilateral credit delivered under the PetroCaribe Initiative. Both domestic and external debt services were higher on account of higher principal and interest payments.

External debt service increased by a substantial 80.4 per cent to US$12 million from its end-June 2009 level, made up of principal and interest payments amounting to US$6.4 million and US$5.8 million respectively.

The cost of carrying GuySuCo and other public sector entities while the government itself engages in some seriously costly and wasteful expenditure, is borne out by the overall cash deficit of Non-Financial Public Enterprises (NFPEs), including the Guyana Power & Light (GPL) and the NIS. This increased to G$5,026 million at end-June 2010 compared with a deficit of G$721 million in June 2009.

The result of these is that current operating cash balances of the NFPEs moved from a surplus of G$2,298 million to a deficit of G$2,097 million at end-June 2010. This decline was mainly due to a 26.7 per cent increase in expenditure which more than offset a 14.0 per cent growth in revenue.

That perhaps, even more than over-taxing the people of this country, is the story of the financial management of the public sector of Guyana in the first half of 2010.

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GT&T share sale line runs cold

Introduction
The deadline for submission of tenders for the purchase of the government’s 20 per cent stake in the Guyana Telephone and Telegraph (GT&T) company is fast approaching. Indications are that with the exception of workers’ groups, there is remarkably little interest in an investment that has produced for the government huge returns in dividends, fees, taxes and other income. At one and the same time, government’s shareholding in GT&T has been by far the most successful investment ever undertaken by the government and also the most criticised, controversial and in some quarters, most condemned.

Contrast this with bauxite, which is largely a net beneficiary from the state with all the concessions and remissions it receives, and Barama in forestry and Omai in gold, which never reached the threshold for the payment of corporate taxes, all of which have received far less attention and scrutiny. Indeed, but for the harm done to the industry by interventionist politicians, sugar, also the recipient of billions of dollars of state funds, might itself have attracted little public attention. In terms of public attention, scrutiny by the fiscal and industry regulators, presence in the courts and the object of political exchanges, GT&T is in a class of its own.

No huge interest
It might have been expected then that the decision by President Jagdeo that his government had decided to dispose of its shares in GT&T would have attracted huge interest. And that NICIL, which serves the government in so many and diverse ways, would have been more active in the exercise. Despite reservations in many quarters, President Jagdeo seemed determined to divest the shares, “[hoping] that the money that we can realize from this sale can go back to developing the ICT sector; that we can get more people access [to the internet]… we are trying to get more computers [and]… bring down the cost of bandwidth.”

Why has there been so little interest and how will Jagdeo now find money to deliver on his promises? Experience has taught us that Jagdeo’s financial management must not be under-estimated; that he has the ability to make money turn up from unknown and/or undisclosed sources, of which the unconstitutional lottery funds are only one of the better-known examples. It is therefore unclear what effect any delay on the sale of the shares will have on Jagdeo’s plan or how he will magically pull money from one of those hats to buy the computers and meet the other uses of the sale proceeds. Indeed a number of computers have been acquired and made ready for distribution, although the exact source of those funds has not been disclosed. If they were not included in the 2010 Budget, then it has to be assumed that it is not from the Consolidated Fund.

The reason for the lack of interest seems to have been driven by several factors, but for the present, the following are considered critical: 1. changes in technology and the marketplace; 2. the government’s direct participation in the sector; 3. the announced intention to liberalise the sector; and 4. a price for the shares.

Technology
Not only has the newcomer Digicel demonstrated its marketing capabilities but together with a limited opening up of the market, it (Digicel) has proved a worthy competitor and has challenged GT&T aggressively for market share. This means that GT&T is no longer a giant which prick it as you might, you could not harm or hurt. The advent of Digicel changed that. Compounding the challenge is new technology that allows subscribers to make international calls at a fraction of the cost charged by the company. It is a safe assumption that the medium of choice for a large share of international telephone calls is Skype, a US-based service that is used directly or indirectly by thousands of persons in Guyana.

The result is that the company’s international long-distance revenue has declined from $10.1 billion in 2007 to $7.9 billion in 2009, a drop of more than 20% in two years. Partly in response to this challenge, the company entered into a joint venture with Telesur of Suriname to link Suriname and Guyana through a state-of-the-art 1,200 kilometre (700 mile) submarine fibre optic cable connected to a worldwide network of similar cables through a landing station in Trinidad. The new cable offers 3,000 to 4,000 times more bandwidth than is currently available through the Americas II cable and satellite link.

Any new investor in GT&T is effectively taking a chance that the financial rewards from the new cable and from new products and services it will be offering will stem the decline from one of the company’s most profitable sources.

Government competition
Over the past two years the government has invested hundreds of millions of dollars to land a new fibre optic cable, ostensibly exclusively dedicated to e-governance. By December last year, the government had already advanced about $400 million to a contractor for the installation of fibre optic cables and terminal equipment. Not many people have been convinced by President Jagdeo’s explanation that the cable would be “dedicated purely to e-governance” and the linking of institutions like schools, hospitals and police stations.

Interestingly while the 2010 mid-year report refers to the GT&T cable, there was no comment on the government’s, and it would be wrong to assume that we have heard the last of the government’s re-investment in the sector or its impact on GT&T. One challenge to the government in trying to sell this as a commercial service is the absence of any redundancy in case of failure. That, however, can easily be met by the government compelling GT&T and any other private supplier to provide the government with back-up service.

It has to be remembered too that President Jagdeo has not been entirely unequivocal or unambiguous about the intent of the government with regard to this cable. For example, in comments made to the media in May 2009 on the cable, he spoke of the need to bring down the cost of bandwidth without saying that this was in relation to the government as a user of bandwidth.

The present intention and future use of this cable have unforeseen ramifications for GT&T and therefore both its majority and minority shareholding.

Liberalisation
This term has been widely used but hardly defined or explained in relation to the telecommunication sector generally, or GT&T in particular. Many thought it might have simply been the removal of GT&T’s monopoly in relation to certain defined services as was the case with cellular services. The word around is that draft legislation making some sweeping changes is now being circulated and provides for at least two persons with close party connections being granted status as Internet Service Providers. Another significant possibility is that the facilities now owned by GT&T may have to be shared with other service providers. How this encourages innovation and rewards investments is anyone’s guess but until the draft is circulated for wider discussion, it would be difficult to assess its potential impact on GT&T.
For now, it is safe to speculate that if the new provisions adversely affect the existing rights of GT&T, then unless there is agreement on compensation, the matter will end up in the courts.

A reasonable price for the shares
The current shareholding in the company is that GT&T has 16,500 shares and the government has the remaining 4,125. The net assets of the company at December 31, 2009 amounted to approximately $24 billion so that on an asset basis each share is worth about $1.2 million. On an earnings basis using a (technical) price/earnings ratio of 8:1, the share price per share would be about $1.3 million.

But the notes to the financial statements indicate that there are what are called contingent liabilities arising from rulings by the Public Utilities Commission and the Guyana Revenue Authority amounting to several billions of dollars. A potential buyer of the shares would need to look carefully at the financial statements of the company and do an assessment of the likelihood of all or any of those contingent liabilities materialising.

Such an exercise is fraught with some real challenges.

Conclusion
No one buys a cat in a bag. This is not a share sale by the company requiring a Prospectus or an Offering Memorandum with all the warranties, assurances and projections by the company and its directors. Like any ordinary holder of shares in a company, the government could make no representations about the future of the company.

The absence of takers for the government’s shares should therefore not surprise anyone, and least of all the government. It would be strange for it to expect any interest when as the seller, the legislator, the regulator and fellow shareholder it has created such uncertainty and confusion about the company. An investment in the shares of any business is a calculated evaluation about the future. As it is in the case of GT&T.

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Predictions of sugar’s demise premature and exaggerated

Introduction
President Jagdeo can be extremely unpredictable if not irrational at times. He must be a speechwriter’s worst nightmare and make his PR people nervous, although he is a gift to newscasters and reporters. He does not like delivering set statements, and even when one has been prepared for him, his extemporaneous and ad lib comments are often the ones that attract more attention and draw more comments. How serious and dangerous that can be from a head of state was on full display with Jagdeo’s recent pronouncement about the prospects for sugar.

There was the President commissioning a water treatment plant in Corriverton, Berbice two Thursdays ago. Here was an opportunity for the President to rally his troops, mobilise his party’s supporters and strike at the opposition seemingly engaged in its own ‘goat-aint-bite them’ circus. It was an opportunity to tell the people, one and all, what the $1.4 billion water investment by the government would do for them, and that it was the keeping of another promise; and to reassure them that they can expect the same level of services as the people in far away Georgetown in terms of access to higher education, state of the art medical facilities, house lots and computers. That while Demerara has only one bridge, he Jagdeo had already delivered one over the Berbice River and that but for the short-sighted constitution, under his watch the country would see its first international bridge, this time linking with Suriname. It was an opportunity of which political dreams are made. He could have dazzled. After all, he was in the party’s home, its playground and base, where he could count on an even more adulatory welcome than that orchestrated for him in Buxton recently.

Sugar in trouble
Instead the President surrealistically misused the opportunity to lament that the Skeldon Factory was not delivering the expected results and as a result the “sugar industry is in trouble.” He did not stop there. Speaking about the US$200 million Chinese-built factory that has had more than its fair share of birth pains, the economist said somberly if it “doesn’t work well the sugar industry is dead.” In case anyone had missed the profound and grave pronouncement he repeated: “It’s dead. It’s as simple as that….”

Responding to the Stabroek News report on the pronouncement, bloggers’ explanations for the President’s outbursts were wide-ranging, not many of them particularly flattering. But perhaps the President might have been told something by one of his unofficial sources in the area, something which he felt he should deal with immediately and publicly. Or that he realises that the failure of the Skeldon factory, the centerpiece of the Skeldon Sugar Modernisation Project is his baby, for which he was prepared to defy the World Bank, informed local public opinion, stark realities and risk US$200 million.

When persons like Professor Clive Thomas, Tony Vieira and Ramon Gaskin were raising doubts about the project – rather than just the factory – and its potential consequences, the President lined up former Guysuco top brasses Messrs Vic Oditt, Ronald Alli and Dr Ian McDonald to sing its praises and the underlying vision. They could not accept that the British would shed their much vaunted decency and cut the Caribbean loose, exposing us to the vagaries and realities of the marketplace. The latter group of gentlemen ignored the clear signs that the preferential markets could not and would not survive a globalised world, that the younger leaders in Britain and France do not recognise or feel constrained by any historical bloodlines, that the Caribbean does not really matter. Most significantly, however, they completely ignored the elementary point that sugar comes from cane grown in the fields. Absent that element, the factory can do little. Fixing that will not serve the problem.

Irrational
Even now the President seems to demonstrate some irrationality by referring to the 36% cut in the preferential price, something that was on the cards long before his government took the plunge and moved into the investment. It was the President who had a big hand in the choice of the Chinese as the preferred suppliers and contractors of the plant, over the more experienced Indians, for reasons that make fascinating speculation. We are learning to our great cost that while the Chinese are good at low-cost production, their mark-ups are huge and when they deliver shoddy or even dangerous products, their powerful and assertive government is ready to stoutly defend.

The President is also bringing fresh insights into the factors and influences that drove the Skeldon Project. He noted in his speech that the government had hoped that it would have produced sugar at a lower cost so that the average cost would have allowed them to “to break even at least at the world market level.” The careful reader would notice that when speaking of successes the President speaks of “my government” but in failures it is “the government.”

But it is his adventure into costs that I find astounding and misinformed and that sent me back to schooldays. Break-even analysis is indeed a necessary management tool used in investment appraisal to determine the minimum level of revenue or sales from production that would be required to cover all the fixed costs like rent, office salaries, insurance, property taxes, obsolescence, etc, and the variable costs like material input, production wages, etc.

Breaking the point of confusion
The relevance of break-even analysis in the sugar industry is to determine the minimum level of production of cane and sale of sugar at their expected costs and prices which would have to be met to avoid a loss. Using assumptions about costs and revenue, the management accountant would prepare a break-even chart to show the break-even point, ie the point at which total costs just equal total revenue. For the President, and no doubt his immediate Berbice audience, that appears to have been a point of confusion.

In a business like Guysuco’s, where there are several estates with their own levels of fixed and variable costs, a break-even chart – even with the limitations inherent in projections and assumptions, both about costs and revenue – is an absolute necessity. Or rather charts, since one should be prepared for each estate to serve as the basis for decision-making in the corporation’s boardroom and the cabinet room of its sole shareholder. The problem is that Guysuco has more than its fair share of financial accountants who can tell you all about the latest IFRS but not since the highly regarded Sugrim Mohan left the corporation decades ago, has there been any management accountant of note to speak with knowledge and authority about costs, their behaviour and their consequences.

Even – or perhaps when – confronting dangers, the President can be rather daring, sometimes recklessly so. So he went on to assure his audience, that even if it meant personally, he would get involved to fix the problems created by a “few people,” to ensure that the factory delivers the kind of results that it should deliver. In 2009 when he announced the turnaround plan, the President also used the word “personally” to describe his actions. Yet, a final copy of the turnaround plan was hardly off the photocopier when it missed its projected targets for the first period and it is on track for doing so again this year. In darts, the chances of hitting the bull’s eye recede with distance from the board. It must be the same with sugar.

Choosing the whipping boys
The President could hardly tell the nation that the plan was an exercise in unguarded optimism, given the prominent role in its preparation played by directors handpicked by him such as Mr Keith Burrowes and Mrs Gita Singh-Knight. Nor could he blame the corporation’s longest serving director Mr Donald Ramotar, the ruling party’s General Secretary and the person who will likely decide on the role Mr Jagdeo will play in Guyana’s affairs post 2011. Nor the Chairman of the Board and the President’s Permanent Secretary Dr Nanda Gopaul, who is only one person away from Jagdeo’s personal involvement in the corporation.

Perennial whipping boys Booker Tate were given marching orders more than a year ago, while Mr Errol Hanoman, appointed CEO after Booker Tate’s departure, left not too long after. Usually, the corporation’s production problems and operational performance have been attributed to unfavourable weather conditions to which we can now add climate change. Conditions have been rather favourable recently so this must wait for another time. Corriverton in pre-election season would not have been a good time and place to blame the workers, whose role as voters is far more important now. And we are no longer hearing about legal action against the Chinese to enforce the clauses in the contract to compensate for poor and late performance. This time, according to President Jagdeo, it is a few people “messing up.” Of course he did not even entertain the possibility that some politicians, including himself, may have been the ones who have messed up. That would be expecting far too much.

Jagdeo’s message
From Georgetown, it did not seem good politics to have been as dramatic and careless as he was, but what is more troubling is the message that the President sent to the Demerara estates, that they cannot survive without Skeldon, their drip and lifeline; to the other stakeholders directly involved in sugar at Skeldon, that the future is far, far from certain; to the workers, that they need to rethink their occupational choices; and to the country, that a PPP/C would not allow Skeldon to fail, no matter what it costs the public purse.

This column was never convinced about the glowing claims about Skeldon but will not be included among those who are now tempted to say, “I told them so.” It has described Guysuco as too big to succeed but I am yet hopeful that the situation is not irretrievable, that we can yet be saved from President Jagdeo’s apocalyptic fears. But it would be if we fail to recognise and accept that the problem goes beyond the factory and its managers. Agriculture Minister Robert Persaud announced during a surprise visit to the factory last week that foreigners would be imported from India to work along with the Chinese in the factory.

That will solve part of the problem while adding significantly to the salaries bill of the corporation and creating more problems with the sugar unions.

It will not solve the problems in the fields which many think are as serious.

Conclusion
If the President does get involved as he has said he might, then he needs to do some housecleaning and would have to rethink his dream team of directors and their turnaround plan. He will need to see how the factory can be organised within the limitations and prospects for the filed operations in Skeldon. He will have to consider how much more money the country can afford to plow into the industry. He will need to ensure that he is advised by at least one competent management accountant and a sugar economist, relying less on spreadsheets done by his financial accountants.

One thing the management accountant will tell him is that there is in that field of accounting a sacred principle that says that sunk costs are irrelevant, that if future inflows and benefits do not exceed future outflows, then cut your losses, and put your money elsewhere. The economist will put it more intelligibly: do not throw good money after bad money.

But then neither of them would understand the overriding consideration of the p word – politics!

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Liquidating Clico: Avoiding the pitfalls

Introduction
When I started this series on the failed insurance company I chose the title because of a sincere belief that those who were entrusted with powers and duties for the liquidation of Clico would act responsibly and professionally, and would ensure, at a minimum, full compliance with statutory requirements and ethical standards. Part 1 appeared before the court amended its original order making the Bank of Guyana the liquidator, the amendment appointing in its place, Mr Lawrence Williams in his personal capacity. The significance and ramifications of that change did not seem to affect the conduct of Mr Williams and the Bank of Guyana who together have operated not in accordance with the law but as a cheque-writer seemingly carrying out the publicly announced wishes of the chief politician. That was what the President seems to have expected of Mr Williams as Governor of the Bank, acting as the court-appointed liquidator. He and his team appear to have acted on those wishes rather than in conformity with Part V of the Companies Act under which the liquidation was ordered.

This effective impunity exists because of the way the court normally operates. Once it has pronounced on a matter, either by an order or a decision, it has no further role in the matter. Lawyers, who have historically and almost invariably used Latin to encapsulate major legal principles – and to sound learned – refer to the judicial officer becoming functus officio. The Chief Justice could cringe at how the law in the case of Clico is being abused, but he has little power to do anything about it. The law has detailed provisions regulating the conduct of the liquidator, mechanisms for accounting, accountability and oversight, and a role for the Official Receiver. None of these is being observed. In fact as I pointed out in a letter to the press earlier this week, the process has been handed to or taken over by unauthorised persons who legally have no role in the matter.

Just pay the cheques
It is not that any of these is being done surreptitiously or under the radar. No, they are done in the full glare of publicity and with a disdainful disregard for the law, even by lawyers. And condoned and encouraged by well-meaning individuals arguing that persons have waited long enough to get back their money so the law or some columnist must not get in the way! Just pay the cheques.

The major starting point for the liquidation after due notification would be the statement of affairs summarising the assets and liabilities of the company and indicating their relative ranking. This has not been done and the liquidator has failed to carry out his first major duty. Unauthorised persons have been inserted in the process while the Official Receiver has either been shut out or has stayed out. That is more than personality or formality. It has to do with reporting to the court and investigating into conduct, including frauds.

So what might the financial picture have looked like in the statement of affairs, a document that is required to be filed on the public records? The reality is that the public will never know since the liquidator has chosen not to file one. The Judicial Manager did present to the court a statement of net assets as at February 28, 2009, more than eighteen months ago. The picture presented then was as follows:

Value of net assets
The difference between the carrying values of the liabilities and their best and worst case scenarios is that the liabilities of $4.9 billion did not include the actuarial values of the outstanding policies, those that were genuine insurance policies and those high interest earning instruments that were being sold Ponzi-like and bought by unthinking but often educated individuals looking to make more than an average buck. Those so-called policies were described in the recent court papers as illegal.

Measuring of the loss
What the figures mean is that if assets are sold for the values shown as best case and liabilities met at those values, Clico’s depositors and policyholders would lose $8.1 billion. If they realise and are met at the amounts shown as worst case, the loss climbs to $11.9 billion.

We got lucky and received roughly $3 billion from the Caricom Petroleum Fund, thereby reducing the potential loss on the best case scenario to $5.1 billion and $8.9 billion on a worst case.

The liquidator needs to go after every asset of the company but he may find that there will be pluses and minuses. For example, there are some 4,285,224 shares in Banks DIH Limited valued G$51,422,688 not in the name of Clico and therefore excluded from net assets. Similarly excluded from the value of net property is a property located at 19 Smythtown, New Amsterdam, Berbice with an estimated value of $2 million.

On the other hand, the Judicial Manager has optimistically included a forced sale value of the Camp Street palace at $1.2 billion on a best case and a value of $750 million on a worst case. In fact it seems that the realised value on an arm’s length forced sale may be more around $500 million. President Jagdeo, an economist who has found novel and sometimes illegal means of granting subsidies, has suggested that the government might be interested in buying the asset at a premium!

Another source of inflows is from the various inter-company balances with companies that may have assets on which the liquidator can put his/their hands. Clico Bahamas is dead while CRL, a Clico subsidiary located in Guyana, owes Clico Guyana some $2.2 billion on a loan on which neither capital nor interest was being paid but which the auditors Deloitte and Touche have shown at their unimpaired values. In the statement of net assets at February 28, 2009 prepared by another accounting firm, the CRL balance is shown at nil value, because of doubts about the guarantee. But the loan is secured by a guarantee from the parent CL Financial and a first debenture over the assets of CRL so there may be some assets which can be sold and some money recovered by the liquidator. And on the other side of the balance sheet, Clico Guyana owes Clico Trinidad $941 million, which I think it is safe to say they will not have the gall to claim and which in any case should not be paid.

Priority of payments
Where the assets of a company being wound up are not sufficient to pay the liabilities, the order of payment is crucial. In such a case, who should be paid first is governed by the Companies Act which provides that in a winding up, there shall be paid in priority to all other debts (emphasis mine):

(a) all local government rates and all public taxes of every description due from the company within the period of twelve months before the relevant date and not exceeding in the whole one year’s rates and taxes;

(b) all wages and salary of any employee in respect of services rendered to the company during the period of four months before the relevant date;

(c) all wages of any employee, whether payable for time or piece work, in respect of services rendered to the company during the period of four months before the relevant date; or [sic]

(d) contributions payable under the National Insurance and Social Security Act.

The GRA
These persons/entities including the NIS and the GRA have statutory priority, but indications are that the liquidator is ignoring this, and it has gone unchallenged by these statutory bodies. In fact, the GRA is doubly affected because its staff pension scheme which is administered by Clico is in no different position from the other schemes with Clico. It has been told that the liquidator and the team to which he has unlawfully delegated his statutory function will look at them after the first set of money has been exhausted. And to make the bad worse, the first cheques that are being written are not to entities such as the legal and proper pension schemes with possibly tens of thousands of members but to unsecured creditors whose policies even the company now admits were illegal.

The NIS
The amount of the deficit in the best case scenario is within the range invested in Clico by the National Insurance Scheme whose 2008 financial statements show close to one hundred million dollars in accrued income and six billion dollars of unimpaired assets. Admitting that this six billion dollars investment is no longer earning any income for the Scheme, NIS chairman Dr Roger Luncheon is quoted in the Stabroek News as expressing confidence of full recovery since that is what the President promised. It might have been useful for Dr Luncheon to consult with another of his board members, the delegated liquidator Mr Maurice Solomon to get some idea if and when this money will be recouped.

The reality facing the NIS is that its fund is now impaired even as the President tries to fill the hole created by the unlawful conduct of the directors of Clico. Does it matter to him and those who so carelessly invested in the Ponzi-like scheme offered by Clico that they are being rewarded at the expense of the NIS? No wonder then that several months after its completion, the Minister of Finance is contravening the law and withholding the tabling of the 2008 NIS Annual Report in the National Assembly.

No legal sanctions
It is all now history and the public is willing to forget that the NIS was part of the arrangement with Mr Lawrence Duprey, our own Allen Stanford, under which the NIS would invest in Clico to allow the latter to invest in the Berbice Bridge Company Inc (BBCI). Some ghosts do come back to haunt us even as Clico’s director Ms Gita Singh-Knight remains not only an integral part of Clico but also chairperson of BBCI.

Despite all the laws and the rules governing liquidations, nothing will come out of the illegalities that have characterised Clico’s operations over the past several years. There are too many secrets to hide and personalities to protect. Breaking the laws by the Jagdeo administration is commonplace, and if the President can delegate his immunity as he seems to have done at the cultural centre, what is there to prevent Mr Lawrence Williams delegating his in personam duties? After all, this is how things operate in Guyana and this region.

Bet
Without placing anything on the table, I would bet that no one will be brought up under section 446 of the Companies Act 1991 dealing with fraudulent trading and operating Clico “with reckless disregard of the company’s obligation to pay its debts and liabilities; or with reckless disregard of the insufficiency of the company’s assets to satisfy its debts and liabilities.”

Or under section 447 of the Companies Act which provides in part that if any past or present officer or liquidator of the company is guilty of any misfeasance or breach of trust in relation to the company, the court can order the person to contribute such sum to the assets of the company by way of compensation in respect of the misapplication, retainer, misfeasance or breach of trust as the court thinks just.

But it is section 448 that provides the reason why there will be no investigation into Clico’s affairs. It would mean that the court, either on the application of any person interested in the winding up or on its own motion, direct the liquidator to refer the matter to the Director of Public Prosecutions. Sections 446 to 448 clearly do not apply to Clico.

All that is being done illegally could with some imagination have been done legally. For now, Business Page will give up on thinking that it can persuade those involved to mend their ways. It will turn its attention to other things.

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Bank of Guyana disposed of Clico assets on Friday

I learnt to my consternation that at the Clico Head Office last Friday, the Bank of Guyana (BoG) purported to dispose of assets of the beleaguered insurance company. Consternation because by that time the BoG and its attorneys should have been notified or ought to have known that it was unlawful for it to act as liquidator, and that under section 449 (b) of the Companies Act 1991, it was guilty of an offence.

Consternation too because among the high officials participating in the activities last Friday were Ms Marcia Nadir-Sharma, attorney-at-law and Deputy CEO of NICIL, which should have no hand in matters relating to the liquidation of Clico assets, or any other Clico matters, period. Instead Ms Nadir-Sharma acted as the co-ordinator of the proceedings. Commissioner of Insurance (ag), Ms Tracey Gibson, also an attorney-at-law, and Mr Maurice Solomon, Chartered Accountant, were also among those present.

My understanding is that the government might be interested in the huge building in Camp Street to house government ministries, and NICIL which has earned quite an unfavourable reputation over the past few years, would be in a conflict of interest. This building has a market value of $1,503M. I understand, however, that the highest bid was $450M.

Ms Gibson has been unavailable to perform her statutory duty under section 150 of the Insurance Act to allow members of the public to inspect documents filed under that act, but presents herself at a liquidation process in which her office has no legal, statutory or moral role. In fact, had her office acted as the law required it to in relation to Clico, we would not now be in this eleven billion dollar mess. It must be said, however, that Ms Gibson was not Commissioner while policyholders’ money was being shipped unlawfully out of Guyana and took no active part in Friday’s proceedings. If she was there at all, then it ought to have been to see that no hanky-panky took place. Now, let us see what she is going to do about the improprieties she witnessed.
For his part, Mr Maurice Solomon is a long-standing director of the board of NIS which is responsible for the ill-advised and poorly supervised multi-billion dollar investment in Clico, the timing, probabilities and consequences of full recovery of which are in considerable doubt. My information is that at the proceedings, Mr Solomon was variously described as the “BoG representative” and as “the Liquidator.” Interestingly, Mr Solomon’s firm is also the auditor of the New Building Society to which Clico sold its shares and which is now to be brought under the FIA!

At the apex of this, is the Bank of Guyana and its Governor Mr Lawrence Williams, prepared to ignore section 449, other provisions of the law and an order of the court.

Today, days after the issue of the amended order by the Chief Justice (ag) revoking the appointment of the Bank of Guyana as liquidator, the Deputy Governor of the Bank is quoted as making official pronouncements regarding Clico’s liquidation, not only compounding the section 449 offence but acting in contempt of the order by the court. But this is Guyana – where the law is routinely, casually and flagrantly breached, where professionals abandon the rule of law in favour of silence and profits, where the press is missing at crucial times, and where all of this is sanctioned or permitted by those responsible for upholding and enforcing the law. It is time to say that Guyana ‘really gone,’ that there is no hope for our bleeding country.