Author: ChrisRam

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Transparency, accountability underpin Guyana and Norway MOU

Introduction
President Jagdeo was obviously pleased about the Memorandum of Understanding (MOU) signed by him and Norway’s Minister of the Environment and International Development Erik Solheim under which Norway agrees to provide defined financing for Guyana’s evolving Low Carbon Development Strategy (LCDS). For the President it is vindication of his huge investment in time and money pursuing LCDS funding, in exchange for a commitment to drastically restrict the exploitation of the country’s forests, described by him as the country’s most valuable resource. The signing comes within three weeks of a United Nations Conference scheduled for Copenhagen, Denmark to consider a replacement for the international treaty on the environment called the Kyoto Protocol. In fact President Jagdeo was so excited at a post-signing press conference that he called the MOU “our Copenhagen.”

Under the MOU, Norway will pay US$30 million (approximately $6.2 billion) next year and potentially up to US$250 million ($51.7 billion) by 2015 for Guyana to preserve its forests. According to the President the figure committed by Norway “is more than the combined loans and grants Guyana receives on an annual basis from the World Bank, the Inter-American Development Bank, the Caribbean Development Bank and the European Union.” If not inaccurate, that statement is terribly misleading since it compares an annual amount with a five-year sum. We have also had debt write-offs, loans and grants from countries and institutions in some years, in net present terms, in excess of the total amount committed by the Norwegians. Notwithstanding this, the agreement is indeed an achievement and needs no exaggeration or misrepresentation, even if it comes at a huge cost to the country. Some time soon we will need a thorough evaluation by the experts, academics and economists to assess the cost/benefit of the agreement to the country.

McKinsey and the US$580 million
In response to the President’s comparison between Norway and the rest of the donor community – excluding significantly individual countries and the International Monetary Fund (IMF) – his critics might add that the agreement comes with more strings than those that have ever been imposed by the International Monetary Fund, the World Bank, the Inter-American Development Bank, the Caribbean Development Bank and the European Union, all combined. More significantly, the critics might suggest that a far more meaningful comparison is between what the Norwegians have committed and what McKinsey, the government’s LCDS consulting guru, has told them, quite unrealistically, that our forests are worth to the world.

Essentially the LCDS is arguing that since the world benefits, according to McKinsey, by US$40 billion dollars per year from the conservation of our forests, and since to Guyana the annual worth of the forest in economic terms is US$580 million, then the world must pay us that sum. Accordingly McKinsey, in a document which has not been released despite calls for this to be done, has appears to have convinced the government of the country’s entitlement of annual payments by the international community in the following four phases.

Phase 1 (2009) – No sum indicated but the Draft LCDS refers to interim payments to launch the LCDS and funding for Monitoring, Reporting and Verification (MRV).

Phase 2 (2010 – 2012) – US$60 million to US$350 million annually for capacity building, human capital development and the investment required to build a low carbon economy.

Phase 3 (2013 – 2020) – US$350 million to US$580 million annually for essentially the same purposes in Phase 2 and for payments to avoid deforestation and climate change adaptation.

Phase 4 (2020 [sic] and onwards) – Greater than US$580 million annually, providing incentives at or above the McKinsey’s annual economic valuation of the country’s forests.

Who will join Norway?
Critics should not however jump to the conclusion or their calculator to prove that the amount committed by Norway is negligible and a mere fraction of what McKinsey had led the government to believe it should receive from the world in return for strict limits on forestry exploitation. The total amount committed by the Norwegians through to 2015 is indeed US$100 million less than the amount of the lower range McKinsey told the government it should expect during the seven-year Phase 3. In fairness, however, the LCDS is premised not only on inflows from Norway but from other countries that either historically caused much of the world’s pollution, such as the US, Europe, Japan and Russia or the newer, large-scale polluters such as China and India.

That is why I think President Jagdeo is wrong to have exulted that the deal with Norway is “our Copenhagen.” Perhaps the President is not optimistic that much will come out of Copenhagen and in any case for the first time he told the nation this week that even if agreement is secured in Denmark, it would take almost four years before funds would flow to countries like Guyana. What that means is that unless there are other ‘bi-laterals’ such as the Guyana-Norway deal, Guyana cannot look forward to similar funding for at least another four years.

Under the Draft LCDS, Guyana had identified more than US$1 billion in “essential capital projects” that can be fully or partially funded through private investment assisted by an in-country infrastructure investment fund built from forest compensation payments. The Norwegians are clearly not interested in any such in-country fund, and if we accept the President’s four year prediction, then there is a huge financing gap to be filled. Now that the Norwegians have put down their marker, the Government of Guyana has a lot of work to revise the LCDS and make it more realistic. Hydro-power which appears as a centre-piece of the LCDS will now have to be financed from other sources, the private sector will have to come up with quite a lot of money and the government too can do its part. The money pledged in the first year equates to less than 6% of the national budget for 2009 and with proper financial management and a commitment to collect the taxes legally due by the army of tax evaders out there, we can easily raise more than what the Norwegians have committed in the first year of their programme.

The options for achieving that are available, but are not new, neither has there been any commitment to a national response to global warming or to responsible financial management. Only this week we saw the Minister of Finance presenting his mid-year report that was due at the end of August but conveniently misdated. We have never been an environmentally conscious people and the economy is based on the most inefficient and unfriendly use of energy whether in vehicle fuel consumption or electricity; we have no policy on recycling and fail to manage our water resources efficiently or exercise proper flood control measures.

The cost
In return for the less than required funding for the LCDS the country is giving up a lot, including control over the money we receive and sovereignty over our forests, contrary to what the government had been assuring Guyanese. The Norwegians have obviously been tougher in their negotiations than many feared they might be, and may have taken on board several of the concerns raised by the groups and individuals from the political parties and civil society whom they canvassed or who canvassed them. While the documents they have signed stay clear of the domestic issues such as the improper and unlawful use of funds, it is quite likely that those issues have informed some of the conditions they have imposed, conditions that show that the Norwegians are not taking any chances with the money they are prepared to give to Guyana.

Financial safeguards
The deal is a carrot and stick arrangement but with more emphasis on stick than carrot. The maximum we can receive under the MOU is fixed but the stick is that the amounts which we will receive are results-based according to how well we measure up to the terms and conditions set out in the document which themselves require considerable resources to ensure compliance. In fact, in the early stages of the implementation of the deal, a disproportionate amount of the funds will be used to set up the administrative and oversight arrangements which could see huge sums going to consultants. The costs to be met in the first two years include those for the establishment of the Project Management Office; the Office of Climate Change (operational costs); the multi-stakeholder consultation process and annual verification by neutral experts that the enabling activities have been completed.

What is particularly noticeable are the financial conditions set out in the Joint Concept Note (JCN), conditions that might otherwise be considered draconian but which many Guyanese bloggers seem to welcome. The JCN covers not only the Norwegian funds but other similar funds as well, raising the possibility that the Norwegian conditions are baseline, to be supplemented by any conditions imposed by other donors. The funds will go into a Guyana REDD-plus Investment Fund (GRIF), managed by a reputable international organisation and responsible for ensuring full oversight of the GRIF’s operations, including fiduciary obligation as trustee, and providing technical support as agreed with Guyana. Significantly the Joint Concept Note specifies that the GRIF must be operational before any contributions can be disbursed from Norway (emphasis mine). Safeguards, including social, economic and environmental safeguards, as well as the fiduciary and operational policies of the organisation selected, will apply, as appropriate, to all activities to be financed by the GRIF.

Technical conditions
The conditions applying to the technical, forest-related issues are no less stringent. Before any money is disbursed Guyana will have to take formal steps to establish independent forest monitoring by a credible, independent entity. Almost immediately the government is required to prepare an outline of Guyana’s REDD-plus governance development and no later than October 2010, a more detailed plan setting out clear requirements and timelines for its implementation. Additionally the country is required to show evidence of entering a formal dialogue with the European Union with the intent of joining its Forest Law Enforcement, Governance and Trade (FLEGT) processes towards a Voluntary Partnership Agreement (VPA), with its resonance with the EU EPA which the President had railed about. Government also has to show evidence of its decision to enter a formal dialogue with the Extractive Industries Transparency Initiative (EITI) or an alternative mechanism agreed by Guyana and Norway to further the same aim as EITI.

Conclusion
Transparency and accountability underpin the entire arrangement and the JCN requires that information regarding the initiative be publicly available. As if to show its immediate commitment to these concepts, the government has posted both the MOU and the JCN on the Guyana LCDS website.

One of the questions that none of our journalists appears to have raised with the President is whether he consulted with anyone – including his Cabinet, the Leader of the Opposition and the LCDS Steering Committee – before agreeing to the terms set by the Norwegians. That of course is not the President’s style and he might have considered that given how much he had invested in the LCDS, he needed something – anything – to show for his efforts. He has expressed confidence that Guyana will be able to meet its obligations both under the technical as well as the financial provisions of the deal. Recent experiences with the UK on security sector reform and the EU on funding to agriculture suggest that more than words will be necessary.

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Financial lawlessness on the increase

The Fiscal Management and Accountability Act, 2003 (FMAA), along with the Integrity Commission Act and the Audit Act, are often advertised by the government as proof of its commitment to transparency and accountability. This trilogy of legislation is underpinned and intended to give effect to a constitutional provision for the proper accounting of public moneys. To prevent any doubt about what public moneys means the FMAA defines it as “all moneys belonging to the State received or collected by officials in their official capacity including tax and non-tax revenue collections authorised by law and… grants to the Government…”. That clearly includes money from Lotto and privatisation and any funds received from the Norwegians and other sources towards the Low Carbon Development Strategy (LCDS).

Not only that. The various acts referred to above are all part of the commitment of the Government of Guyana to the international donor community – the IMF, the World Bank, the IDB, the EU, Canada, the US and others – for good governance including transparency in accounting, in exchange for financial support. The Minister of Finance is the member of the Cabinet designated by law for ensuring that the constitutional and statutory requirements are complied with and is empowered by the act to take punitive action against those who breach its provisions. Having played a major role in the passage of the accountability legislation, the donors are assumed to be familiar with the main provisions of the legislation and must therefore be aware of the major infractions of the legislation by the very Minister bound to ensure compliance.

Spend, baby spend
The national budget continues to grow at a considerable rate helped by VAT producing immoral windfalls to the government. With a penchant for huge numbers and throwing money after problems, for President Jagdeo the policy has been ‘spend, baby spend.’ Like the World Cup money and the flood funds, accountability and audit will come later, if at all. No one would have identified Dr Ashni Singh, Minister of Finance with the ‘spend, baby spend’ attitude, or given his background as a professionally qualified accountant and former Deputy Auditor General, have expected that he would treat accountability and the audit of the books of the state with such disdain. It is neither excusable nor understandable.

Yet Dr Ashni Singh has breached several of the statutory duties and professional obligations imposed on him in defiance of public opinion and the rule of law, and confident of no warning letter from the President, his political boss. Dr Singh’s apparent contempt for good governance and accountability makes many hesitate to support the LCDS which places the centre of the LCDS in the Office of the President, the very office that now unconstitutionally (mis)appropriates the Lotto Funds, using it for all sorts of improper purposes at the fancy of the President.

Lotto
Article 217 of the Constitution of Guyana – the country’s supreme law – requires that “all revenues or other moneys raised or received by Guyana (not being revenues or other moneys that are payable, by or under an Act of Parliament, into some other fund established for any specific purpose or that may, by or under such an Act, be retained by the authority that received them for the purpose of defraying the expenses of that authority) shall be paid into and form one Consolidated Fund.” I do not believe that the term “for any specific purpose” can be interpreted so widely as to allow an Act of Parliament to defeat the main constitutional objective to ensure that moneys coming in to the state go only into the Consolidated Fund and any spending done out of that Fund is on the basis of appropriations by the National Assembly.

In defiance of the constitution the 24% of gross takings collected by the government from the Guyana Lottery Company are made available to the President who seems to exercise total control of how it is spent with only any unspent balance being put into the Consolidated Fund. I have heard this practice defended under the second parenthetical exception to Article 217 and that the money should go to the Government Lotteries Control Committee under the Government Lotteries Act Cap. 80:07. That argument in my view falls at the first hurdle since that act deals only with lotteries “organised and conducted by the Government Lotteries Control Committee.” The Lotto Funds as they are infamously referred to, represent the government’s share of the gross takings from a private lottery run under a contract between the Canadian operator and the government. It is a tax/levy and should rightly go straight into the Consolidated Fund. The President’s misuse of these funds is a clear breach of the constitution which he has taken an oath to uphold, while the failure by the Minister of Finance to bring these moneys into the Consolidated Fund constitutes a dereliction of his duty and obligation and contrary to section 48 of the FMAA which makes it unlawful for any minister or official to misuse, misapply, or improperly dispose of public moneys.

The mid-year report
The Fiscal Management and Accountability Act 2003 imposes on the Minister a mandatory duty to present to the National Assembly, no later than August 30 of the half year, a report on the year-to-date execution of the annual budget and the prospects for the remainder of the year. This column has been at pains to point out that not only is the Minister in breach of this statutory duty with regard to timing, but even when he belatedly submits the report, it is frequently misdated to minimise the delay and omits key information prescribed by the act. The act requires the report to include “an update on the current macroeconomic and fiscal situation, a revised economic outlook for the remainder of the fiscal year, and a statement of the projected impact that these trends are likely to have on the annual budget for the current fiscal year.”

This is a practical proposition and the report should comment on emerging issues such as the alleged $300 million fraud at the GRA, the President’s $2 billion housing fund for the vulnerable, the gains from the LCDS and any unbudgeted expenditure incurred in the first half of the year. This kind of information is not only for the business community and the citizenry but also the kind of information any Finance Minister as the country’s Chief Finance Officer needs for his short-term planning.

Unintended consequences
The delay by the Minister causes the Bank of Guyana (BoG) to delay the publication of its own half-year report until the Minister releases his. I understand the BoG’s report has been ready for some time and while the Bank is an independent statutory body, it comes within the ministerial control of the Finance Minister, a choice between losing its reputation for independence and offending the Minister.

A similar situation exists with the Bureau of Statistics. This entity has received several millions of dollars to enhance its professional competence and secure its independence. I think it was in 1991 that an act was passed to make the bureau a body corporate, independent and effective. The minister responsible for the act is the Minister of Finance who in the absence of a chairman appointed by him is automatically the chairman. There is nothing to indicate that a board was ever appointed and by default the bureau remains as a unit of the Ministry of Finance, mistakenly described on its website as a “Government of Guyana Agency.” It should not therefore come as a surprise that the bureau is far from effective in how it carries out its mandate, selectively choosing if and when to publish important statistical information, a decision apparently not unrelated to the wishes of the Minister.

Perhaps more out of frustration than from a practical consideration a source close to the Bank of Guyana has suggested that these two bodies should report direct to the National Assembly. This may very well be a suggestion that the Speaker of the National Assembly or the Public Accounts Committee may wish to take up, even if in the first instance it is done privately. What is clear is that the failure of these bodies to discharge their statutory duties does little to contradict those who argue that what Guyana has is paper accountability only.

The Office of the Auditor General
Not only is this office subject to its own act but it is also a constitutional body with serious responsibilities and functions. One of the first but fundamental points to note about the head of this office is that the constitution makes no provision for an acting Auditor General and the job description clearly requires a professionally qualified accountant. In fact the incumbent has no such qualification and it would be a travesty for him to be appointed substantively to the position. It may be convenient for the government to have him there, but surely it is dangerous for the taxpayers of the country and severely compromises the quality of its reports. By retaining him the government is aware that the real authority in the Audit Office is no less a person than the spouse of the Minister of Finance. It is hard to believe that neither of them nor anyone in the government, nor in the international donor community that keeps putting money into the Office, recognises this obvious conflict of interest or simply is not interested even in token accountability.

Even with that major weakness the Audit Office is operating at half its required manpower and this helps to explain why it keeps falling back and down on many of its public commitments. Like the Minister of Finance’s mid-year report, the Audit Office’s report on the Government accounts for 2008 is also late. By law this must be submitted to the National Assembly within nine months of the end of the accounting year. We are now in the eleventh month without any word about when this report will be available.

One of the mandates of the Office is to conduct Value-For-Money (VFM) audits and it must now be coming on to a year or more since the Office has been due to issue its report on a VFM audit conducted on the financially miniscule Palms.

Even with expensive Canadian assistance the Office has been unable to deliver. VFM audits are of less value where the expenditure is unavoidable, as it is with the Palms, the main expenditure on which comprises staffing (it is understaffed) and meals (which are as low-cost as one can get). VFMs are useful in the case of discretionary expenditure such as Cabinet Outreach and the choice of newspapers for government advertisements. With weak and compromised leadership, the Office is clearly not in a position to deliver on its mandate.

Conclusion
Transparency and accountability are not esoteric or theoretical concepts but are practical, part of the democratic landscape and help to ensure that money is properly accounted for and sensibly spent. Our national budget exceeds $100 billion and if we take the most conservative estimate of 10% as lost through poor financial management, the country loses $10 billion per year. Think what that can do to reduce taxation or enhance social spending. The Minister of Finance has a wonderful opportunity to redeem his reputation.

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Mounting losses by GPL

Introduction
If everything goes according to plan and the new Kingston Power Plant finally comes into operation within the next week or two, Guyanese can expect a reduction in the spate of blackouts that for the better part of 2009 have been plaguing the business sector, torturing households, arousing tempers and making any planning almost impossible. So bad and widespread has the situation become that it is non-discriminatory in its impact – affecting with equal effect rural and urban Guyana alike; children at school and housewives at home; commerce and industry, successful and loss-making. The financial statements inform us that the company has spent some $3.1 billion in capital expenditure for 2008, obviously with more to come in 2009, though the level of capital commitments has not been disclosed. Whatever the technical (de)/merits of these massive sums, all borne in the final analysis by the long-suffering, impoverished consumers, any kind of relief will surely be welcome, not least so that Guyanese can have a lit, if not bright Christmas. This will indeed be good news even as the Guyana Power and Light Inc. (GPL) continues to haemorrhage money for the state and the taxpayers of this country.

According to GPL’s financial statements for the year ended December 31, 2008 posted on its website, the company racked up losses before tax in 2008 of $2.9 billion, a 23% increase over 2007 and close to double the corresponding loss two years earlier. What makes this loss even more significant is that over the same period the company has shed hundreds of employees even as a handful of senior staff are paid several millions of dollars each. The financial statements show the Government advancing to the company, cumulatively, more than $7 billion, much of it interest-free, whether authorised by the National Assembly or not being another matter. It is obviously hard to understand what drives this financial irrationality and one must wonder whether the Government is satisfied with the results following changes at the top of the company.

Haemorrhage
The past few years have seen a number of changes in the company including the replacement of former Chairman Chartered Accountant Ronald Alli with privatisation czar Mr. Winston Brassington, the appointment to the Board of PPP member Desmond Mohammed and Mr. Rajendra Singh, recently appointed Deputy CEO of Guysuco. Sitting on the GPL Board as well is Mr. Carvil Duncan of FITUG, who does not seem uncomfortable at the loss of hundreds of jobs under his watch. The shedding of jobs has taken place over the token, tepid opposition from Mr. Kenneth Joseph, President of the government-friendly National Association of Agricultural, Commercial and Industrial Employees (NAACIE) to an earlier proposal to lay off 250 workers. Mr. Joseph may not have noticed but that number has been exceeded by more than 25%! It is hardly reassuring to the members of NAACIE that in the two entities in which the Union has historically been most effective – sugar and electricity – workers have seen their numbers shrink and influence reduced.

But it is not only money that the company has been losing. It is losing approximately one out of every three units of electricity it generates under the rubric of Technical and Commercial Losses, losses which have to be borne by consumers. In the past couple of years, it has also lost key management personnel including former Chief Executive Officer Rabindranath Singh, Deputy CEO Martica Thomas, Commercial Services Director Kesh Nandlall, Legal Officer Neil Bollers, and Human Resources Director Donna Tucker. Such a situation makes for depressing reading by consumers who in both absolute and relative terms pay some of the highest rates and receive some of the poorest service for electricity in the region.

Financial Highlights

2009.11.01_table1

Source: GPL’s Audited Financial Statements 2008.

But back to the finances
Total assets of the corporation increased in 2008 by $6 billion or 32%, even as inventory declined from $2.1 billion to $1.6 billion or approximately 25%. The largest drop in this asset group was in the value of fuel stock but disturbingly, the value of spares declined by 25%. Normally, as the value of plant and equipment increases, the spares to support them should increase as well, but this did not happen. Another major item in assets was what the accounts refer to as Deferred Tax Assets of $2 billion, of which a large proportion is in respect of the tax value of losses carried forward. It is open to speculation whether consumers are as optimistic as the company’s management and its auditors about the prospects of these losses being reversed any time soon and these tax losses realizing any value to the company.

Some 27% of the total assets of the company are financed by capital contributions from the Inter-American Development Bank, the Government of Guyana and private customers. GPL is one of the few service providers which can insist that its customers pay for the infrastructure to supply them which the supplier then owns, to share with other consumers as it chooses. Now it is telling those customers that they must prepay for their electricity consumption as well!

The gross amount of receivables from customers is $8.2 billion against which there is a whopping $5.2 billion Provision for Bad Debts or 64%. In other words, for every three dollars owed by customers, the company is confident of receiving only one dollar. Yet, only a couple of weeks ago, the company was boasting in one of its PR moments that the company has achieved a 100% rate of collection. That too makes little sense.

Who are the auditors?
The website financial statements bear an audit report signed by the Auditor General suggesting that he has audited the company’s financial statements. In fact the statements were audited by PKF, Barcellos, Narine & Co. to whom the audit was subcontracted. This is no simple legal technicality of principal and agent and it is entirely incorrect and highly misleading for the Audit Office to make such a misrepresentation. These statements are circulated to a wide group of users who may rely on them for a number of purposes. Unvarnished truth is therefore necessary.

Subject to that, the public would have better been able to understand the numbers if the directors act properly and post on the web the Annual Report as well. That report is ready but responding to my request for a copy, a senior member of the company told me that the report which was presented to the company’s annual general meeting some weeks ago could not be released until it has been authorised by Cabinet! Yet, only recently the company hosted media personnel over dinner and announced the appointment of Mr. Ron Robinson as its public relations consultant. The press persons should have asked about that Report and Mr. Robinson’s first piece of advice to the directors is that the best PR for any service provider is good service, transparency and accountability and that the annual report is a major PR tool. It has taken letters and several calls to the Chairman for me to have a rotting pole at my residence replaced. After about one year a new pole was planted but the old pole is still there, leaning precariously, while my calls to the GM find him always at meetings.

Prepaid meters
Another development announced by the company is the prepaid meter which would require the consumer to pay in advance for the electricity supply s/he receives. This I understand has received support from some quarters of the consumer movement and at least one prominent businessman.

I discussed the matter of prepaid meters with the relevant persons and I believe that they now realise that they may have too readily accepted the company’s arguments about the virtues of the proposed arrangement. One issue that arose during our conversation was whether the proposed arrangement falls within the Standard Terms and Conditions for Electric Service and that any amendments will have to be approved by the Public Utilities Commission.

GPL has touted its proposed move as benefiting customers since the “prepaid metering system … will allow them to manage their consumption of electricity” and that “through the new system consumers will become more knowledgeable about their electricity use and a significant reduction in demand is expected.” If the company truly believes that there will be a significant reduction in demand, one must wonder why the company is bothering to expand its capacity. I was told that the company has told a consumer representative that the system will remove the opportunity for theft! Worse, the person actually believed. The truth is that the company sees its proposed move as helping it to resolve one of its perennial problems – the collection of receivables. If every consumer is required to have prepaid meters, amounting in effect to paying for their supply in advance, the company will collect some $2 billion upfront, interest free, helping it with its cash flow problem.

The company has preferred not to engage the public in any meaningful discussion on the use of such meters but if it had it would no doubt have sought some guidance from South Africa, New Zealand, India, Philippines and Singapore where such a system has been introduced. In South Africa a number of unanticipated problems surfaced and there is universal agreement that the system often militates against the poor, just like VAT does. It is unthinking to assume that electricity can work on identical principles as cell phones and the PUC needs to consider very carefully the conditions under which it will approve any amendments to the regime under which electricity is supplied and paid for.

State of the Art v Common Sense
The company has also announced that it is implementing a US$2.8M automated Customer Information System (CIS) which it claims will boost the accuracy of the cash receipting process, improve customer service by giving prompt responses to billing requests and allow new payments to be immediately credited to a customer’s account. Not only is this an extra-ordinary amount of money for such ordinary benefits but it seems untimely that this is being done when the company is moving to prepaid meters which will reduce the need for as many accounts.

Throwing its own money, or that of its customers or shareholder, behind problems is certainly not the way a modern, large public enterprise should be run. The company is indeed a complex operation but any attempt to solve its myriad problems will first require an examination of its business model. Is it planning sufficiently long in advance and is it taking account of potential developments such as hydro in a couple of years as the President has promised?

I recall my thought in reaction to the announcement about the new software constituting a state of the art billing system. I could not help thinking that what the company needed was nothing state of the art, but simple courtesy and common sense management that does not leave a rotting pole for more than one year or allow losses to keep mounting, year after year.

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Revisiting Corporate Governance

Introduction
Even accountants can benefit from a periodic encounter with history and as this column revisits the never ending journey to arrive at the Nirvana of Corporate Governance, it is good that we recall a few facts. For example, that the modern quest for good CG began in the UK in 1992. And that the reasons for that search are at least as important as the initiators of the Cadbury Report – the Financial Reporting Council, the London Stock Exchange, and the accountancy profession.

The report came on the heels of the death of Robert Maxwell while cruising on the Canary Islands in 1990, which saw the spotlight coming down on his business empire. It soon emerged that like his modern day counterpart Bernie Madoff, he had been tampering with pension funds to service huge and expensive debt burdens. Like all Ponzi Schemes that one was doomed to failure and soon after, Maxwell’s companies filed for bankruptcy protection in the UK and US. At around the same time the Bank of Credit and Commerce International, at the time the 7th largest private bank in the world with assets of US$20 billion, went bust and lost billions of dollars for its depositors, shareholders and employees. Another company, Polly Peck, received a clean report from its auditors showing healthy profits one year only to declare bankruptcy the next.

Cadbury is sweet
The financial community and the accounting profession recognised that their reputation and that of London as a world financial centre was at stake. They had an interest to act – and so they did, initiating a report that by its very name – Financial Aspects of Corporate Governance – suggest this common interest. The name also confirms that the report was concerned only with the financial aspects of CG and it was left to others to take up the non-financial elements of corporate governance. That continuous effort has been taking place across the world from America to Africa and the most recent revision of the code on corporate governance is in South Africa with the King 3 Report on Corporate Governance.

Developments in Guyana have progressed far more slowly and some very fundamental issues remain to be addressed. We will deal briefly with these in today’s column, influenced by an event abroad which touches directly on an ongoing issue in Guyana – that of having the role of the chairman of the board and the company’s CEO being performed by the same person. But the search for an appropriate corporate governance model for Guyana is bigger and wider than this. There is no one-size-fits-all solution. The search has to be informed by and takes account of the social context and legal framework of the country.

One-man shows
Our very own constitution seems to feel that there is nothing wrong with combining a host of roles burdening us with an Executive President that chairs Cabinet but not accountable to the National Assembly or to the people other than by periodic elections. GECOM also has an entrenched Executive Chairman; while the private sector organisations have structures and chairpersons or presidents who for all practical purposes are also the CEO. To be fair, there is no hard evidence that splitting the functions automatically makes for a more successful company. As the Economist of October 17, 2009 reminds us, academics over the past two decades have produced more than 30 studies comparing the financial performance of companies that divide the two roles with those that combine them. Enron and WorldCom of which readers of this column are all too familiar both split the two jobs, and so too did the Royal Bank of Scotland and Northern Rock, which had to be bailed out in the 2008/2009 financial crisis in the UK.

Principle and pressure
The case for the splitting of the jobs which started with Cadbury is however based strongly on principle – some may even say theory – democracy, and widespread practice in Canada, Australia, much of continental Europe and Britain where 95% of companies in the FTSE 350 list have an outside chairman. The corresponding number among America’s Standard & Poor’s top 1,500 companies is 47%. Yet, the economic crisis that has hit and cost the US trillions has put the defenders of the joint role on the defensive. Earlier this year, shareholders forced Ken Lewis to surrender his second hat as chairman of Bank of America.

More recently, following on their success in persuading Sara Lee – the American global fast moving consumer goods company with one of the world’s best-loved and leading portfolios of food, beverage, household and body care products – to split the two jobs, the managers of (Norway’s) Norges Bank Investment Management which manages a state pension fund of $400 billion, are trying to persuade four American companies—Harris Corporation, Parker Hannifin, Cardinal Health Incorporated and Clorox—to do likewise. They may yet succeed.

Some companies are taking action rather than be pushed. One of the first things that some of America’s troubled banks, including Citigroup, Washington Mutual, Wachovia and Wells Fargo, did when the crisis hit was to separate the two jobs. It did not matter whether the losses they suffered could have been averted by separation or that their action may be purely cynical – something had to be done and the least cost option that offered up itself was the split.

A skit
Yet the theory or the logic cannot be dismissed and therefore bear repeating. It can well be demonstrated by a skit in which the chairman who instructs the company secretary on the contents of the Agenda, calls the meeting to order and soon calls on the CEO to present the report on operations for the preceding period. At that point the Chairman takes off one hat, puts on another and addressing fellow directors through the Chairman begins “Thank you, Mr. Chairman, …..”. Since the most informed and powerful person in the room is (also) the Chairman he then directs all the questions to himself. If the boss is chairing its meetings and setting its agenda, the board cannot discharge its basic duty under the Companies Act 1991, nor can it act as a safeguard against corruption or incompetence when the possible source of that corruption and incompetence is sitting at the head of the table.

Huge Personalities
There are only a handful of public companies in Guyana with a few of them having separated the functions of chairman and those of the CEO, mainly the commercial banks. Banks DIH, DDL, Stockfeeds and Guyana Stores have not, either because of history or in the case of the latter two because of the overwhelming stake the chairman and CEO has in the company. Messrs. Clifford Reis and Yesu Persaud are such huge personalities that it is hard to expect or imagine them other than as supremo, despite the potential dangers and obvious conflicts of interest. America has not ignored the problem and its boardrooms are now more democratic than they were when Jack Welch, described by Warren Buffett as the Tiger Woods of management, ran General Electric. To reduce the concentration of power and authority in one man (it is hardly ever a woman), more than 90% of S&P 500 companies have appointed “lead” or “presiding” directors to act as a counterweight to a combined chairman and chief executive. This person is invariably chosen from among the independent directors, referred to by Cadbury as Non-Executive Directors.

The problem for us is that there is no culture of independence and directors are more often than not selected rather than elected. If a vacancy arises on a board, the directors are empowered under the company’s rules and the law to fill it as a “casual” vacancy and on every case I know of, that person’s election is a formality at the next meeting of the shareholders.

And that selection is done under the majoritarian concept known in politics as winner takes all. In business once a shareholder controls the votes at the AGM, s/he has almost unfettered powers over the company, notwithstanding the minority protection mechanisms in the Companies Act. Better, or worse for the other shareholders, if the shareholder has 51%.

The independent director
Directors’ powers derive from section 59 of the Companies Act while their duties are set out under section 96 of the Act. This requires them to act honestly and in good faith with a view to the best interest of the company, including the interest of the employees in general as well as the shareholders. In a country where it appears that the President is unaware of the provisions of the Constitution, members of the National Assembly argue about basic procedures, and leading attorneys-at-law argue over whether a magistrate can hold a voir dire, it is not unlikely that the majority of directors may never read, let alone understand the Companies Act and the “fiduciary duty” the Act imposes on them.

Non-executive directors are mainly drawn from the shareholders’ other companies and the community to bring some particular expertise or even an element of acceptability to the company. Only the most sophisticated company encourages or tolerates real independence of its independent directors who are hardly ever known for engaging publicly in controversial issues.

The price of failure
Yet with a market for share trading that is far from transparent; a media that is generally not interested in or au fait with the jargon of investing; a consequently under-informed public and under-resourced regulators including in some cases professional bodies, the non-executive directors have an important duty and function to perform. Unfortunately conflicts of interest brought on by self-interest often mean that that function is not only not discharged but more seriously is often compromised. A most telling and very recent case of this compromising of the role and duty of the non-executive director involved a Chartered Accountant who one day after clearing key directors of a company of a complaint about financial impropriety, accepts a position on their board. That not only hurts the shareholders of the company but it undermines confidence in the company and loses further respect for the accounting profession.

There are of course other issues relating to corporate governance that will require attention. These include: their application to non-public companies and if so, how; whether or not corporate governance is better dealt with under principles or guidelines; whether the Companies Act and its administration will be improved by bringing into operation the Deeds Registry Act; the nature of sanctions given that they often hurt the small shareholders who are already victims; and whether there should be protection for whistle-blowers.

For us in Guyana, the dawn may have broken in 1992. We have made little progress since.

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Take from the Poor and Give to the Rich

Introduction
Perhaps not surprisingly the only feedback I received to last week’s column on tax evasion and tax avoidance was from persons who would generally be considered among the better off. And who want more from the society and the tax system because “they work hard, create jobs and have a choice.” Those comments are filled with arrogance, self-importance, self-interest and self-delusion. As though the stevedores, the public health workers, the cane-cutters and others do not work hard, or do not have a choice. They have a choice and that is why they daily flock the Passport Office in Camp Street from 5.30 AM for a passport to go to the Caribbean, North America, to anywhere, to work harder, to earn and to enjoy the fruits of their harder work.

In Guyana the tax system is heavily weighted against the poor and the commentator and columnist was only mildly exaggerating when he said that workers pay a total of 49% of their income in taxes – 33 1/3% income tax and 16% VAT. In fact that commentator forgot to mention the employees’ 5% NIS contribution which in public finance is a form of tax while the rough calculation of 49% ignores the range of zero-rated VAT items and the personal allowance of $35,000 per month. Overall however, the tax burden is very much around the 50% tax to GDP which makes Guyana one of the most heavily taxed countries in the world.

Soaking the Poor
Yet, for some reason there is no real commitment to tax reform about which we have been hearing since 1992. Tax reform is rat poison, for all practical purposes off the table, better understood by those who pay taxes than those who impose them. This is ironic, for some of the most important steps in the march to democracy involved taxation. The Boston Tea Party has to be given pride of place for its inspiration to the independence movement in the US and the iconic statement “no taxation without representation”. How can those of us who were around in the sixties, forget Peter D’Aguiar’s Axe the Tax Campaign when then Premier Dr. Cheddi Jagan sought to introduce a measure of tax reform? Ann Jardim, one of the leaders of the UF carefully ignored the introduction of new taxes but rallied the working class against a miniscule increase in the rate of the personal income tax. Today those who have followed her in the UF are part of the new scheme that takes from the poor to give to the rich, in taxes and state assets.

In the sixties, the political classes were on different sides of the political divide – a left-leaning government seeking to achieve a more equitable sharing of the benefits and responsibilities of citizenship by the trader and business class. Today while the ruling party may have vestiges of working class preferences, its Government seems beholden to the business class whose position of influence – whether at the head table at the Office of the President or at the Pegasus Poolside on Friday evenings – has come to be the defining feature of the Jagdeo Administration. We no longer hear about equity in the tax system, let alone the distinction between horizontal versus vertical equity. Indeed, any acceptance of the concept of tax reform by this Government is not out of conviction but out of a commitment made as a precondition to receive more and more gifts and grants from the donor community.

Stranglehold
Businesses’ stranglehold on the agenda is not peculiar to Guyana. The current wave of globalisation, driven first by the Reagan-Thatcher axis and adopted and sold by the international multilateral institutions across the developing world like snake oil salesmen of old, has witnessed a concentration of wealth and income and a widening of the socio-economic divide. The effect has been a corresponding increase in business’s ability to set the agenda for political discussion and its effective veto over public policy. In Guyana, under the agreements made by the Administration with the donor community any semblance of economic policy is driven by the National Competitiveness Council that is dominated by business interests rather than national interests. The NCC has been more successful at stalling in the interest of the status quo than at achieving any meaningful changes.

Recent research under President Bush revealed that elected officials tend to be unresponsive to the policy preferences of low-income citizens and that they disproportionately favour business interests and the wealthy in all areas of public policy. Like their counterparts in the US, those interests in Guyana also opt out or are favoured by a tax system set up in 1929 for the ruling plantation and trader class and only episodically reviewed subsequently for reform. Indeed, since 1929, there have been only two or three events that could qualify as tax reform and with only one being targeted at getting the rich to pay a fair share of the tax burden. The first of the reforms took place in the early sixties when Dr. Cheddi Jagan brought in Hungarian-born world-class economist and socialist thinker Professor Nicholas Kaldor, to overhaul the country’s tax system. Those reforms included the introduction of the Capital Gains Tax, the Property Tax and steeply progressive but at the highest end, counter-productive, marginal tax rates that went up to 75% from a base 5%.

Burnham and Hoyte
In 1970 the Burnham Administration enacted the Corporation Tax Act which introduced a separate regime of companies while incorporating over seventy sections of the Income Tax Act into the new Act. The next wave saw the abolition of dividend taxation and pensions, unification of the corporate tax rate, the abolition of the progressive income tax and the abolition of allowances – all pro-business and anti-worker in their effect. The PPP/C before President Jagdeo has the distinction of reversing the unification of tax rates and introducing the Minimum Corporation Tax on all, and then only on commercial, companies. Jagdeo has to his credit the immoral imposition of the 16% Value-Added Tax. Now, if tax evasion is illegal then we have to find a word for the imposition of a tax at a rate that is knowingly and admittedly excessive and wrong.

Barring one or two exceptions, every reform then has favoured the wealthy and the powerful at the expense of the poor. Here are some of the starkly contrasting provisions in the tax legislation.

1. Wages and salaries are fully taxed. Dividends are fully exempt.

2. Income from personal exertion is taxed at 33 1/3%. Capital gains and interest income are taxed at 20%.

3. The employer-provided vehicle, and sometimes more than one, driver(s) and security are fully exempt from tax. A travel allowance to the worker to help her defray the cost of getting from home to work is fully taxed.

4. The entertainment allowance paid to the executive is fully exempt; the meal allowance paid to the worker is taxable unless a strong case is made for it to a skeptical and uncompromising revenue officer who will claim that a meal is a private expense. As if entertainment does not include a high level of private benefit as well.

5. There is no limit to the pension that is tax-free. Most workers on retirement have to make do with under $20,000 per month. The retired top-executive receives hundreds of thousands tax free.

6. Overseas passage assistance – a throwback to the British planter class, is exempt for all but can only be enjoyed by those with spending power.

7. The working poor are taxed at source; the self-employed with all their benefits and concessions, can decide how much tax they want to pay.

8. There are ethnic and gender biases in the tax system that no one even wants to whisper, let alone acknowledge or debate.

9. The wage earner gets no deductions or allowances; business can deduct most expenses, whether it be the magazine or the business trip.

10. Duty and tax concessions favour those who have economic or political power over those who do not. Just look at the beneficiaries of the duty-free vehicles.

11. Businesses get tax holidays; their workers’ earnings are fully taxed.

12. The entrepreneur has a choice between taxable and tax-exempt business activities; the employee’s only choice is not to work.

No vision, no tax reform
The above, is a brief review of the relative position of the workers versus the executives and the “entrepreneur” under our tax laws. Those laws clearly cry out for reform. But then as the late Richard Musgrove, public finance specialist said, tax reform needs a clear and detailed vision of where we are going – a vision that is sadly lacking in President Jagdeo. That is why he could be so easily diverted to the LCDS as a tunnel-vision strategy for development and even as he heads CARICOM, could be completely sold on a Continental Destiny with neighbouring Brazil. If what he said in a recent speech he gave at a private function is to be believed, he is now looking to Brazil to help us with our rice industry even as his Government pumps $400 million in what by implication is an inefficient industry.

The cry for reform, no matter how compelling or loud, is unlikely to be heard or to win support from those of power within and influence without. A review I saw recently by a leading donor to the Guyana economy, actually praises the country’s fiscal performance, completely ignoring the tax burden that the citizens of the countries making up that donor would regard as completely unacceptable given the low level of public benefits available in Guyana. In many of those countries the entertainment allowance is now denied at the corporate level and in Australia the Keating Tax Reform Package dealt an effective blow at non-cash fringe benefits.

Conclusion
But at the domestic level there simply is no need or pressure for reform. With perhaps a single exception, the top tier of the opposition political parties has shown no interest in tax reform, confirming the view that there is no ideological or class difference among the political elites. Labour has been emasculated by personal interests and petty rivalry exploited by, again, the politically powerful while Ann Jardim’s successor is just another of that elite.

The Ministry of Finance has been depressingly slow at taking any initiatives in tax policies. It has left these to the tax administrators, a fundamentally flawed position – the two roles and functions being obviously different. We need lower rates of tax both on individuals and corporate, removing not the loopholes but the chasms that in some cases discount the nominal rate of tax by as much as 75%. We need a society in which the fiscal benefits and obligations are shared and borne fairly by all and in which relief must not be sought in tax evasion.

Similarly, the President has allowed elements in the private sector to hijack the social and economic debate including tax reform. If any progress is to be made, then the hijackers will have to be brought into line. Failing that, we are left with an inequitable and dysfunctional tax system, high tax rates and massive evasion. That is in no one’s interest.