GT&T share sale line runs cold

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.

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.

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.

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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