Month: August 2009

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On the Line: GBTI Half-year and Stockfeeds 2008

Introduction
In today’s Business Page we look at two reports – one on full year 2008 of the Guyana Stockfeeds Inc, published under the Companies Act 1991, and the other the half-year report of the Guyana Bank for Trade and Industry (GBTI) published under the Securities Industry Act, 1998. Because of the significantly different nature of the operations and the nature of the financial information and period ends of the two entities, no useful comparisons can be drawn and the appearance of the two reports in the same column is entirely co-incidental. Indeed, if any comparison can be drawn it is the poor quality of the editing that goes into these reports, leaving major errors, sometimes in the financial statements themselves, at other times in the narrative reports and yet others in both. For GBTI some of these were pointed out in a guest column in these pages by Robert McRae CPA on the 2008 Annual Report of the bank.

Such errors are often attributed to difficulties with printers but neither the management nor the auditors can absolve themselves from their duty to members and the public to have annual reports and accounts that meet minimum quality standards.

Guyana Stockfeeds Inc.

Highlights

2009.08.23_table1

Despite what the Chairman referred to as “enormous challenges” the company recorded an increase in turnover of some 38% with sales of rice doubling while feed sales and hatchery sales increased by a more modest 29% and 21% respectively. As expected the Chairman was particularly pleased about the performance of the company’s brand of parboiled rice ‘Angel’ on the export Caricom market.

Of the net income for the year of $123M, after allowing for deferred taxation, the company proposes $60M in dividends or 49%. Dividends of $96M in respect of 2007, of which 50% is payable in additional shares, remain outstanding. The payment of dividends by the issue of shares was not effected as a result of a court matter with the National Industrial and Commercial Investment Limited.

How the company intends to fund the cash portion of dividends totalling over $100M is, however, not quite clear as the company’s liquidity position has deteriorated with the bank overdraft more than doubling to just under half a billion dollars and current liabilities other than dividends increasing over the 12-month period from $597M to $1,069M. Interestingly note 12 of the financial statements indicates that the company had exceeded its overdraft limit of $440M by more than $40M.

As is so common with public companies in Guyana, there is no mention in the annual report or the Chairman’s Report on the performance on the Stock Exchange of the company’s shares, although this may be entirely due to the fact that there is practically no trading in the company’s shares and that the company is developing into a family company with three of the top positions – CEO, corporate secretarial and finance – being held by members of the same family, which also holds some 69 million of the 80 million shares issued. This company is evidence of the permanent failure of the government’s privatisation policy, driven more by maximising short-term returns than long-term economic democracy. In all the government’s boast about macro-economic fundamentals, it does not appear to recognise that it has divested some highly profitable entities and has little to show for the proceeds. It is too late now for it to review the Privatisation Policy Paper issued under the presidency of Dr Cheddi Jagan, although it was under his presidency that we first saw the departure from policy under then Finance Minister Asgar Ally.

Accounting weaknesses
An observer of accounting and other disclosure requirements would find much of interest in terms of the contents of the Annual Report and the quality of the financial statements, even ignoring an obvious error of $400 million on the face of the balance sheet, which some may regard as the most important of the financial statements. These relate to the dating of the auditor’s report before the financial statements were even approved by the board, inconsistency in particulars about who the company recognises as key management personnel, disclosure about shareholdings, actuarial valuations and tax reconciliations.

That the company continues to pay US$50,000 management fees to a similarly named Trinidad and Tobago company for the payment of expenses on its behalf has continued to attract negative comments, since the logic and business purpose is not immediately apparent. On the other hand, the low effective tax rate suggests that the Revenue accepts the charge as reasonable having regard to the company’s business.

GBTI
In contrast to the financial statements discussed above, those of the GBTI are unaudited and cover the half-year only. In addition, there is no requirement for an Accountant’s Review or notes explaining the policies and judgmental matters relating to key financial statement items, and it is probably these limitations that explain the apparent lack of interest by the public and the business community in such half-yearly reports. Such statements should not be disregarded, since it must be assumed that they result from the accounting records prepared, subject to the limitations identified, in accordance with acceptable accounting standards.

Highlights

2009.08.23_table2

The bank’s performance for the half-year continues a run of excellent results not only for GBTI but indeed for all the commercial banks over the past three years. As the table above shows the bank has increased both deposits and loans, but with a barely discernible increase in the loan to deposit ratio. Our banks are performing so well that any observer of our banking sector would be bemused if told about a global financial crisis, although the anecdotal and empirical evidence is that the non-financial sector is having a lean time. We should therefore be anticipating with interest the publication of the 2009 mid-year report by the Minister of Finance which is unfortunately again late.

Net income before taxes has increased by a whopping 26% over the corresponding period in 2008, while the amount of $164.8M stated as Corporation Tax is the equivalent of 23% of net income. This represents a significant increase in corresponding equivalent percentage for 2008 when it was less than 9% and in the low teens for full-year 2008. This increase is so significant both for the corresponding period in 2008 as well as full year 2008 that we can only wait on the audited full year for some more evidence of such a dramatic swing over such a short period.

Tax policy
Robert McRae, CPA who did a guest column on the bank’s 2008 annual report had drawn attention to the bank’s effective tax rate and how little our economic managers seem to know or care about tax policy. A significant part of the problem is the VAT, a tax borne not by businesses but by consumers of goods and services. Guyana is stuck with a hugely miscalculated VAT rate that has masked any other concern that the government may have had about revenue collection.

In his column McRae had also raised the ire of the bank and the Bank of Guyana when he drew attention to a transaction between the bank and the Bank of Guyana, particularly in the context that the bank had for a second straight year had a significant deficit on its statutory reserve with the central bank.

The Bank of Guyana with unusual speed and generalisation reacted to the column but significantly has refused to answer some specific questions raised publicly by McRae. While commercial banks are, and indeed every person is, entitled to responsible financial reporting, they have a duty to respond to legitimate questions from the public on issues touching on their operations.

GBTI’s Chairman Stoby was noticeably pleased with the results and is upbeat about the bank’s performance for the second half of the year. Those results will certainly be eagerly awaited, but before then we will have some of the other banks including Republic Bank which has a September 30 year end. It will be an interesting period.

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A review of the Low Carbon Development Strategy – Conclusion

Introduction
Today we conclude our review of the Low Carbon Development Strategy (LCDS) announced by President Jagdeo to the international community and now the subject of consultations taking place across Guyana. The first two parts of this series appeared in these columns on July 19 and July 26 and both before and since that time the reading public have had the benefit of a series of letters on the strategy both supportive and critical of it. More significantly, the Stabroek News has been carrying a ten-part review by Ms Janette Bulkan in which she addresses some of the more technical questions about forest carbon and our own forests about which she is extremely knowledgeable.

Not surprisingly, Ms Bulkan has drawn from a representative of the Guyana Forestry Commission and from the Office of Climate Change set up in the Office of the President strong criticisms, some of which have crossed the line into personal attacks. Ms Bulkan’s contribution has stood out for its scholarship and her responses to the criticisms have been measured and responsible. She and other critics have also been attacked for pointing out the serious weaknesses in the document and for not offering recommendations to improve it. That is regrettable for a number of reasons.

Confusion
One would expect those who are now employed as full-time specialists to recognise from the identified weaknesses the implicit recommendations for improvements. They cannot expect those from the outside to do their work for them. For all the money that is being spent on the LCDS, there seems to be no official voice and the structure of the website hardly fills the breach. As a result one is confused by the ambiguity created by the government’s assurance to the domestic audience that the country will not cede our sovereignty while the highly respected international weekly Economist informs the world that the Guyana President has committed the country to ceding to the world the stewardship of the country’s entire forests by outsiders.

Second, it is often easier to re-write than try to improve a document containing fundamental flaws; third, the government has refused to publish important information relevant to the strategy such as the McKinsey Study on which so much seems to hang, as well as the agreement the President signed with the Prime Minister of Norway which it seems will constitute some kind of model for developed countries to pay rainforest countries for drastically restricting forest operations. And there should be no valid reason for the government’s spokespersons being unwilling to concede the very valid points being made by others, and offering a commitment that these would be incorporated into the final document. Indeed no one is sure – and that seems to extend to the members of the LCDS Steering Committee – of the process for accepting and rejecting the submissions made by others.

Extravagant assumptions
In Part One of this series we said that the success of the LCDS would not be determined in Guyana but by what happens in Copenhagen in December this year, and in the more powerful countries of the world who the strategy expects to pay Guyana as much as US$580M per year for keeping our forests intact as our contribution to fight global warming. This column believes that there will be some money available but nothing on the transformative scale worked out by McKinsey. One has only to look at Exhibit 4 of the strategy which places the projections of expected government revenues for fruits and vegetables within a spread of US$40M–US$110M in 2013, an investment of US$80M–US$100M in 2009 and net exports of US$250M–US$350M after 2011. The estimate for aquaculture products seems even more exotic with a projection of 2013 government revenue of US$150M–US$200M, an investment of between US$135M and US$175M in 2009 and net exports after 2011 of US$500M–US$1,000M after 2011! It borders on the reckless to estimate government revenue in the form of taxation to be 30% of gross revenue, ie before expenses. Whoever did those numbers clearly does not understand our tax culture or the range of tax allowances including export allowances that are available for particular businesses.

I fail to see why anyone would not want to question seriously these projections, and inevitably the value arrived at by McKinsey of US$580M as the value debt owed to Guyana for keeping its forests intact. With Guyana having just 0.5% of the world’s standing forests, that figure which translates to a value of $116,000M, for all the rainforests is a huge sum indeed. No wonder even persons supportive of the LCDS do not believe that Guyana would receive anything like the sums quoted in the document.

And it is that kind of doubt that makes the proposed spending sound a mere wish list. There is nothing in the strategy that indicates how the government will adjust its proposed spending programme if the sums received are less than McKinsey tells us our forests are worth intact. And does the expenditure mean that the government will be engaging in these businesses or giving to particular businesses the money which should be for the country as a whole?

Poor accounting and accountability
As a columnist who has witnessed the bad accounting, misspending and unlawful spending which has become a defining trait of the Jagdeo administration, I shudder at the thought that this or a government with similar tendencies would have control of huge sums of money extracted from international donors to spend as they please. Our under-resourced Audit Office, minimal accountability, gross wastage, unprecedented extravagance, increasing corruption, widespread non-compliance with the financial regulations and poor accountability will hardly impress the international community, and it seems unjust and immoral to ask Norway or any other country to give us money to spend in a manner which their own taxpayers would find completely unacceptable. It is ironic that the LCDS may itself be an example of the absence of accountability. The 2009 Budget had no provision for all the structures, the huge consultancy fees, the costs of travel both locally and abroad being spent on the LCDS, and one has to wonder where the money is coming from (Lotto?) and who is controlling the spending. What we need to accompany any strategy is an accountability strategy that finds favour with our population.

Another reason for doubts about the strategy is that it is not rooted in the culture and habits of this government or in any strong commitment to the environment. For nearly two decades, Asian and Chinese logging companies and local chainsaw operators have been allowed to do almost as they wished with the forests, and efforts to reverse those practices will take time to produce results. The government imports for itself and allows the importation, often duty free, of large numbers of gas-guzzling vehicles; we have unlimited numbers of ministries and departments, no policy on recycling; we tolerate mining practices that are detrimental to the environment and dangerous to some communities and practise not big, but huge government. President Jagdeo most eloquently demonstrated that lack of commitment when he threatened to continue cutting down our forests if the rich countries do not pay up. Blackmail as Plan B can hardly be described as a strategy.
What if the money does not flow?

President Jagdeo is right that we need to protect the environment, but for the wrong reasons. By protecting our forests and our environment we are also protecting our present and future interests. He is also right that we need a strategy to lift the economy from its sub-par performance of below 2% since he became President to a level where the economy provides valuable jobs so that our artisans do not go knocking at the doors of our less-endowed neighbours only to be used and humiliated. He is wrong to believe that such a limited document can provide the blueprint for the economic growth and development of the country.

Guyana does not need a Development Strategy – it has one. Millions of real dollars was spent on versions 1 and 2 of the National Development Strategy (NDS) financed by the Carter Center during the last decade. It brought together the best that Guyana could offer in terms of time and talent and remains a sound document that could drive national development while caring for the environment. It recognised the value of the country’s forests, flora and fauna to eco-tourism which warrant mainly footnotes in the LCDS. It advocated a national forest policy with “guidelines for environmental protection and sustainable resource utilization.” President Jagdeo is half-right when he states that our forests are our most valuable resource – in truth it is the people – but the greatest value of that wealth can be derived if we sustainably manage them. It is not as the President seems to think, all or nothing. The NDS which President Jagdeo praised for its inclusiveness and comprehensiveness has languished largely unimplemented because of his own lack of commitment and attention span.

On the other hand, the LCDS is mainly a document for raising money. As such, it comes with too many shortcomings.

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Those GT&T shares: To sell or not to buy; that is the question

Introduction
The decision by the Government of Guyana to sell its 20% holdings in the Guyana Telephone and Telegraph Co Limited (GT&T) has caused its fair share of discussion and debate in Guyana. That is not unusual or strange. Ever since the US Virgin Islands-based Atlantic Tele-Network, Inc took over GT&T, it has fascinated, annoyed, excited and generated intense interest among the public. It may have had to do with the process of the sale by the Hoyte administration of the highly profitable, foreign exchange earner under circumstances that still arouse some suspicion. It may have had to do with the revelation that the company was sold with hundreds of millions of Guyana dollars in the bank. It may have had to do with the distrust of multinationals of the late President Cheddi Jagan which seems to have been handed down to his party and some of the Guyanese public. Yet, like it or hate it GT&T has played a significant role in the modernisation of the telecommunication sector in Guyana.

The company boasts of the billions of dollars it has contributed to the national coffers. It is a major employer as well and appears to have had a very good relationship with its workers and their representatives. It has invested hundreds of millions of US dollars in new and modern plant and equipment and its service has reflected continuous improvement which may have been partly driven by the competition from the aggressive and agile newcomer Digicel in the cellular phone market. Of course none of this is due to altruism but to hard decisions about money. The company has also kept our courts busy and its conflicts with the Guyana Revenue Authority are legion.

FITUG and PNCR agree
Now the debate surrounding the company is about the sale of the government’s holdings with the government-backed FITUG and the opposition PNCR arguing against a sale and the government saying it would welcome a debate in the National Assembly. Business Page today considers the offer, which ATN has already refused, and some of the implications for a sale. From a review of my files (in the most innocuous sense of that word), the rights and obligations of the government as minority shareholder were never really clear and that is likely to muddy things a bit.

As a company incorporated under the old Companies Act Cap. 89:01, the company’s shares were under the control of the directors, and like any private company, GT&T was permitted to impose conditions and limitations on the transfer of its shares. Indeed Article 24 of the company’s Articles of Association gave the directors absolute powers to refuse to register the transfer of any shares in the company. Even though the new Companies Act takes a more enlightened view of the right of a shareholder to dispose of his property as he sees fit, sections 334 and 335 of the new act recognise as valid any of the old act’s provisions which may be inconsistent with the new act.

In 2007 I wrote that the government was not as free as it thinks it was to dispose of its 20% holding and that it would have to obtain the agreement of its senior partner if it wished to do so. I still hold that view. Unfortunately, no one appears to have given any attention to that first hurdle.

Ability to pay
The PNCR and FITUG have raised another hurdle and that is the sale of the shares to the employees of the company, which suggests that they are willing and able to pay for the shares, since they must know that the government has abandoned everything else for the maximization of sale price. But the PNCR and FITUG seem to have paid no attention to what a reasonable sale price per share could be. That could be huge. GT&T is in law a private company which means that its shares are not traded on a stock exchange and so the value of the share has to be calculated on what may be considered no better than an educated guess, using a range of factors and making a number of assumptions. Even in the best of circumstances there are at least six factors to be considered, but in the context of Guyana and the company, the number is considerably greater. Yet, one cannot escape the following six:

1. the nature of the business and the history of the enterprise from its inception;
2. the economic outlook in general, and the condition and outlook of the specific industry in particular;
3. the book value of the shares and the financial condition of the business;
4. the earnings capacity of the company;
5. the dividend paying capacity;
6. the market price of shares of corporations involved in the same or similar line of business, having their shares actively traded on the free and open market, either on an exchange or over the counter.

An uncertain future
While the computation of a price may be considered a mathematical exercise, it is based largely on the future, rife with its uncertainties. Consider, for example, the rapid changes in technology in the telecommunications industry, the not unreal possibility that the monopoly enjoyed by GT&T may soon end and the increasing and intense competition which Digicel poses to the company, and the uncertainties certainly mount up. The fact that ATN refused the government’s offer may very well be an indication that even the principal shareholder considers the future of the company far too uncertain for any further investment. In publicly filed documents the company’s parent has drawn attention to the uncertainty about the company’s licence resulting from action both by the government itself and the regulator. It would have been surprising as well if ATN did not consider that its 80% is as good as 100%. It really does not need any more shares in the company, so why not invest its money elsewhere? That is exactly what ATN has been doing and GT&T now accounts for less than half of the group’s revenues. The rest is all outside of Guyana.

So how much is one GT&T share worth? The Earnings per Share in GT&T exceeds $200,000 dollars, and if one values the share at a conservative P/E ratio of 8:1, the value per share is over $1.5 million. And if one uses the book value of the net assets of the company, which is generally considered a minimum price, the value per share is about $1.4 million. These are extremely rough numbers and it is likely that the value of each share on a more sophisticated basis, all things being equal, is an amount well outside the reach of the average worker in the company or the average member of the public.

Why sell a good thing?
Another issue is whether the government should be selling its interest in a company which has a guaranteed rate of return of 15% and which enjoys a monopoly in a still developing sector. There are arguments on both sides. The returns are clearly lucrative and the government does not seem to have any urgent need for funds given the continuous windfalls from VAT. Guyana must be one of the very few countries in the world which is recording increased government revenues in the crisis-prone 2009. High inflows from the Low Carbon Development Strategy are predicted, there are no pressures from its workers and the IDB seems to be as generous as ever, even in the face of increasingly costly and pervasive corruption in the public sector.

Will the government’s proposed regulations for the sector which it has so far not made available to the public have an adverse impact on the company and its share value? Is the proposed share sale more a jump-ship and the real intent of the government is to cash in while the going is good? These questions alone should cause potential buyers to hesitate and leave the government stuck as an unwilling partner to ATN while the value of its holdings depreciates.

On the other hand, the government has been remarkably negligent in managing its investment in GT&T. Under the Government of Guyana-ATN Agreement the government is entitled to board representation consistent with its percentage ownership, meaning that it can nominate two directors. Incredibly, the government has not taken up even one of these positions for the past five years, but yet complains about ATN’s management of the company. It is mind boggling that our NICIL/Privatisation Unit could have been so busy over the past five years that it was unaware of this gross dereliction of its duty to the nation to protect all the country’s investments.

What future for the shares?
It seems highly unlikely that the sale of these shares will take place any time soon. The government has clearly not thought through or prepared itself for what is a major and high value step; the calls by FITUG and the PNCR seem to be based more on emotion and politics than on the consideration of hard facts; and the potential for ATN to raise challenges cannot be underestimated. The government will continue to do nothing while the President spends the next few months looking for money from the ‘rich’ countries leaving the company to manage in the face of increasing uncertainties. If this government cannot mend an arrangement with a partner of close to twenty years, it is hard to see how it will deal with all the environment-friendly international businesses the President hopes to attract.