Posts

Posted on

A look at the Trinidad and Tobago Budget 2008-09

Introduction
It was like a baptism of heat for new Minister of Finance Karen Nunez-Tesheira of the twin island state of Trinidad and Tobago as she presented the first budget of the re-elected Patrick Manning government and more personally, her first since her surprise appointment as the country’s first female Minister of Finance.

Surprising because despite being the holder of an Executive Masters of Business Administration from the Arthur Lok Jack School of Business of the University of the West Indies, Nunez-Tesheira is better known as an attorney at law who has spent more than twenty years at the Hugh Wooding Law School as Senior Tutor and writer of two recommended books on the syllabus of the school.

Indeed as she announced measures inherited from or incomplete from earlier years she was teased with perhaps the most damaging accusation against an academic – plagiarism. Uncomfortably for the Minister, one opposition front bencher closely followed her speech, shouting out the page and paragraph number if she repeated something which was in the previous speech.

For Budget 2008-09 it was all about billions of TT dollars which at today’s rate of exchange is approximately US$1 = TT $6.24. The budget was presented against rapid developments in the financial sector in the US − the bail-out of Bear Stearns a few months ago, more recently of mortgage giants Fannie Mae and Freddie Mac and insurance titan American International Group and public disquiet at a call by the Bush administration for US$700 billion to buy what is now being referred to as toxic mortgage loans. The Minister had earlier said in a statement issued by her ministry that it was difficult to anticipate exactly how the ongoing turbulence in financial markets would impact T&T but that the country’s central bank was examining the developments on the economy of T&T.

In that statement the Minister indicated that the Governor of the central bank had informed her that the bank has no holdings of paper issued by any of these institutions and that the very small proportion of the bank’s foreign assets managed by US institutions are “ring-fenced” and were not on the balance sheets of these institutions.

The PNM government has however announced a number of measures to amend various acts, including the Financial Institutions Act and the Securities Act to strengthen the regulatory framework.

Budget highlights
Total revenue is estimated at $49.465B of which $20B (40%) is expected to come from the energy sector with the remaining coming from other taxes on income and Value-Added Tax.

Total expenditure net of capital repayments and Sinking Funds is projected at $49.445B giving a surplus of $19.5M. As a percentage of total expenditure, education receives some 14.4%, infrastructure 13.3%, health 8.78%, security 9.6%, agriculture 4.5% and housing 3.3%.

External reserves have increased to US$8.5B or the equivalent of eleven months of import cover while the Heritage and Stabilisation Fund has some US$2.4B representing 10.2 % of GDP and higher than the level of the country’s external debt which stands at 6% of GDP.

The growth in the economy was 3.5 % which − despite the substantial increases in energy prices – saw the non-energy sector growing faster than the energy sector.

Inflation has taken a hit with commodity food prices and headline inflation rate having risen to 11.9% over the twelve months to August 2008 which makes the sustainable inflation rate of 6 % a formidable challenge.

Increases for senior citizens, those on public assistance and disability and retired public servants.

Other positive features by the Minister include free access to textbooks and other school material, free meals and transportation for students, 2% mortgage interest rate for low income earners, no VAT on all basic food items, one of the lowest rates of personal income tax “anywhere in the world” (25% after an allowance of US$10,000 per annum).

Developed country status
As would be expected, the Minister was upbeat about the medium-term prospects for the country that aims to achieve developed nation status by 2020. The Minister was not bashful in announcing that her government was putting in place special arrangements to bring benefits to the country beyond the tax take and added that they propose to increase the government’s ownership of assets in the natural gas market.

One of the measures attracting the most comment is the announcement of an increase in tax on premium unleaded gasoline which the Minister controversially predicts “will affect the high end of the market.” This measure will require those affected to pay $4 a litre for premium unleaded gasoline — an increase of $1 or 33 per cent, a move which some see not as a revenue matter but one to ease the traffic congestion that sees jams in the morning, at noon and nights and choking entry and exit points not only in Port of Spain but in the other major urban areas such as San Fernando and Chaguanas.

The government’s long-term plan is the reintroduction of a rail system involving two express train lines covering 105 kilometres while more immediately the government-owned Public Transport Service Corporation is expanding and modernizing its fleet of vehicles to 400 while the Coastal Water Taxi Service project will, beginning in phases from December 2008, connect by boat the principal cities cutting travel time from 2 hours to 45 minutes in the Port of Spain-San Fernando link.

Guyanese and Colombians
Aided by increased revenues from the export of oil, LNG and petrochemicals, unemployment has fallen to a historic low of less than 5 % and the construction industry is now using increasing numbers of nationals from non-Caricom countries including Colombia and as far away as Nigeria. Guyanese would therefore feel justifiably aggrieved that so many of our hugely productive nationals are turned away by immigration officials when they try to enter the country. I understand that part of the reason for the difference is that many of the Guyanese try to do it on their own while others are brought in mainly by international contractors.

Apart from its willingness to remain involved in the economy the government also plays a leading role in the housing sector though some critics see the not too thinly disguised hand of politics involved. Many of the schemes are located in marginal seats (T&T has the constituency system), and the distribution pattern can shift the electoral balance significantly in favour of the ruling party even as the opposition continues to founder for any strategic line of challenge on the Government’s Achilles Heel such the markedly arrogant and autocratic style of the Prime Minister, corruption, crime, weak governance and failure to deal with inflation.

Crime and inflation
In fact with Trinidad and Tobago challenging its sister countries for the title of crime capital of the Caribbean, it remains a mystery why more attention was not spent on measures to address the out of control crime situation in the country. Deputy leader of the main opposition party Kamla Persad-Bissessar’s comment that “the programmes the government has put in place will continue to overheat the economy” was shared by some of the TV commentators in the hours after the presentation of the budget. Not many people would agree with her that the country was heading for a meltdown.

While the Minister announced that the government was trying to deal with increased food prices by treating agriculture as a priority sector and therefore dealing with high food prices from the supply side, Persad-Bissessar lamented that the low allocation to agriculture hardly reflected this priority status.

As a part-time visitor to the country, my observation is that T&T’s economic challenge is how to tame the inflation tiger with the depreciation of the TT dollar in line with the US dollar against non-US dollar currencies adding cost pressures to inflation fueled by sharply escalating food prices. Bank governor Ewart Williams has advised that the only way to reverse food price inflation on a sustainable basis is by increasing domestic agricultural supply and containing demand. There is an obvious contradiction between this objective and the government’s policy of buying political and public support by increasing the amount of money pumped annually into the economy.

Agriculture
Last year, as Finance Minister, Partick Manning announced an agricultural policy following a two-day national food consultation that fourteen agriculture initiatives, involving the conversion of sugar lands to food crops, were earmarked to be implemented at a total cost of $1.2 billion.

Minister in the Finance Ministry Chartered Accountant Mariano Brown has told the public that only four of these have come to fruition, attributing the blame to the private sector for not taking up the challenge. That those have not succeeded in making a dent in prices obviously raises the question as to the prospects for success of the initiative in the light of more money being put into the economy by the government. Another initiative which may be instructive for us is the bulk purchase by the National Flour Mills of staple products in non-traditional international markets and selling those items at cheaper prices locally. This was abandoned after NFM racked up huge losses.

Rating and comparison
Despite the challenges the country received a good review by the International Monetary Fund which last year described its economic performance as “remarkable in a regional context and in comparison to other energy producing economies.” More recently, the country’s credit rating has been raised making it more attractive to investors who seem unmindful of the crime situation that plagues T&T.

I have consciously avoided any comparisons or contrasts between Guyana and Trinidad where there are both similarities and differences, but for me some do stand out. The first is the willingness of the government in Trinidad to engage in the economy while in Guyana we are prepared to leave it to the private sector that has but one motive only. The second is the take of revenue that comes from natural resources.

In Trinidad it is 40% while in Guyana, as a result of a range of tax incentives our share is negligible, if not negative in economic terms. We tax the salaried and the poor in the form of income tax and VAT at punitive rates, while those are considerably less in Trinidad. The Audit Office in Trinidad has already published its report on the 2007 Accounts of the Government while in Guyana the 2006 has only just been released with warts galore.

Like Guyana, the government in Trinidad is not hesitant to use the economy for political causes and we share places of dishonour with Trinidad on the Transparency International scale of corruption. We are 126 while Trinidad is 72. Trinidad and Guyana both believe in big governments and political favours are not unknown. We also share similarities of demographics and the penchant of our nationals to migrate. Do I need to go on?

Posted on

Crisis in the USA: Is America too big to fail?

Introduction
September has been a disastrous month for the US whose leading presidential candidates like to refer to it jarringly as the greatest country on earth. Natural disasters with hurricanes coming one after the other pale into insignificance compared with the meltdown in that country’s housing and financial sectors. The country that boasts of the triumph of the free market is now adopting some of the most extreme forms of government intervention normally associated with the socialist system – the very antithesis of the free market. In fact, haunted by the ghosts of the Great Depression, the US government is considering bailing out the entire banking system as one by one the banks and other financial houses collapse like a pack of cards.

While it may have originated in the mortgage crisis that has been brewing for the past two years, the wave of nationalisation in the US began on September 8 when the Treasury took over Fannie Mae and Freddie Mac, two companies which hold or guarantee more than half of the US mortgage debt, together owning assets of over $5 trillion or five million million!

In a month when it seemed that Usain Bolt could break just about any record, Lehman Brothers overtook WorldCom as the largest bankruptcy filing in US history. The firm which was founded in 1850 and boasts that its growth in having over $600 billion in assets and 25,000 employees parallels the prosperity of the US, describes itself on its website as “an innovator in global finance,” serving the financial needs of corporations, governments and municipalities, institutional clients, and very wealthy individuals worldwide. To understand the scale of this bankruptcy, consider that WorldCom’s assets prior to bankruptcy were just over $100 billion.

A week is a long time
Then earlier this past week the US central bank, the Federal Reserve, took a 79.9% share in American International Group (AIG) in exchange for a two-year, $85 billion credit facility at the penal rate of LIBOR plus 8.5%. AIG has assets of over $1 trillion and over 100,000 employees worldwide – bigger than either Lehman Brothers or Fannie Mae. And just announced is an ambitious plan for the government to buy seven hundred billion dollars of illiquid debt from ailing American financial institutions to save the sector from further shocks. Those in this region may well recall a similar approach by Jamaica government when in response to the financial sector meltdown of the 1990s that country’s government established FINSAC “to guide the banking sector through the recovery process.”

The one underlying reason with all the failures or near failures in the US was their inability to attract or retain further financing. Fannie Mae and Freddie Mac were set up as the bedrock of the housing market to guarantee mortgages meeting certain conditions. To do this they issued debt effectively backed by the government. But they were poorly regulated and went over the line when they bought securities secured by what has come to be known as subprime mortgages. Clearly the government could not allow them to collapse and ended up taking them over. In Lehman’s case, it was rolling over some $100 billion in short term-debt each month − more than it could bear; its borrowing costs increased and its share price fell to a record level following a massive write-down and credit losses occasioned by the financial crisis.

AIG too was the victim of the subprime crisis writing down some $57 billion of insurance contracts with the real possibility of further losses if the housing market did not improve. AIG’s credit rating was downgraded making it all the more difficult for it to borrow.

Begging the question
Now all of this begs the question what caused the subprime crisis in the first place? Identifying this is the easy part. The explanation is harder and takes us back to the early part of this decade. During that time there was an unrealistic increase in house prices and the belief by prospective and existing homeowners that the prices of their homes would keep rising allowing them to continue borrowing. With their risks creatively reduced, lenders eased their standards and permitted borrowers to buy more expensive homes than they could afford. There was also the phenomenon of adjustable mortgage loans which in simple terms transferred the greater part of a risk from the lender to the borrower. Greed stepped in as brokers found they could charge excessive commissions on such loans. A combination of a flagging economy, deregulation, poor oversight and equally, carelessness by banks and other lending institutions meant that borrowers were unable to carry and could not refinance their debt. This resulted in a mounting number of foreclosures and an extreme decline of house prices.

The subprime loans meanwhile were packaged into “derivatives,” part of creative but unreal wealth which the smart guys in Wall Street conjured up as assets which were sold and resold among the banks and financial institutions. Readers will recall from the series I did on Enron in 2002 that such “derivatives” were equally prominent in the demise of that giant. Sadly such assets are hardly regulated by the central bankers and are far too complex for the simple minds of the accountant to understand, let alone value for purposes of accounting. No wonder the investor guru Warren Buffett describes these as “financial weapons of mass destruction.” Players engaged in this game are as likely to succeed as the optimist in the Casino – yet they still play.

Darwin questioned
That was capitalism at its creative best or destructive worst, depending on whether you are the recipient of millions of the new wealth created by the free market or the victim of just another in the long line of bubbles. But an integral part of such a market is the Darwinian principle – the survival of the fittest, promoted with the usual American arrogance to the entire world since the end of WWII. The question is whether the fundamentalist adherence to such dogma excludes any interventionist action. The US government which has been preaching the mantra of liberalisation, lecturing the Asians and the Europeans to abandon their own economic model and adopt the US’s New Economy in which the ‘D’ word was not the dreaded ‘depression’ but ‘deregulation’  has found itself once again in a dilemma. It ignored the fact that the savings and loan crisis was sparked by the same deregulation and weak accounting standards, as was the Dotcom bubble which took with it not only Enron and WorldCom but the accounting giant Arthur Andersen well.

Too big to fail
Why then are some allowed to fail such as Lehman Brothers but not Bear Sterns, AIG, Freddie Mac and Fannie Mae? There is the principle, ‘too big to fail,’ that if the consequence of failure is too great it must be avoided at any cost. With their stake in the mortgage market so huge, the collapse of these institutions would threaten the whole system of finance for American housing, endangering those American banks that put money into the housing market and precipitating a catastrophic fallout across the world.

Globalisation means that the central banks of China and Japan have indirectly invested billions of dollars in the US housing market through Fannie and Freddie’s bonds, while commercial banks from South Korea to Sweden hold investments linked to American mortgages. Not only would there be huge worldwide losses if the credit crunch in the US escalated, but the very global financial system could be imperilled. In the process of looking at all of this an even more visceral possibility has been raised by Peter Goodman in the International Herald Tribune – is America too big to fail? With the USA being by far the largest economy in the world, the mere thought of that is spine-chilling.

Paradoxically the very decision to save the financial sector can lead to reckless conduct by dealmakers knowing that there will be a safety net sometimes referred to by critics such as Alan Greenspan as “moral hazard.”

Guyana
There is also the irony and the glee of many Guyanese (and Hugo Chavez) that America is being humiliated by it all. For decades the USA and its surrogates like the IMF and the World Bank have used their preeminent position − particularly since the fall of the Berlin Wall and the triumph of the West − to dictate the conditions for accessing assistance, loans and capital. The first item on the prescription was the surgical removal of weak companies as we saw with our own Development Bank and GNCB, among others. The double irony for us is that we were proud to be paraded by those countries and institutions as “success stories,” even as our economy has continued to sub-perform.

According to the Governor of the Bank of Guyana the current crisis in the US is not likely to have any direct impact on Guyana. Our banks are all very liquid and profitable and for the first time Guyanese may have to concede that the ultra conservatism of the local banks has had one good effect. I am only aware of one company that has direct insurance placed with AIG, but it is quite likely that indirectly some of our insurance companies’ reinsurance business is placed with AIG.

Remittances will be one of the immediate casualties as the cost of the bailouts of the American banks and financial businesses are borne by the rest of the economy and taxpayers, among whom would be members of the Guyana diaspora. Investment flows into Guyana are likely to reduce and high value projects like hydroelectricity would find financing hard to come by and therefore very expensive. The international and regional financial institutions will have less soft money to lend and further justification to stall support to Guyana if the government is perceived as having little interest in regulation and accountability.

Our larger exporters may also be impacted because the uncertainty over jobs overseas will ultimately lead to a contraction in spending, so those who export consumer items will feel the squeeze. Any of our major industries which must necessarily tap into overseas markets for large sums of US dollar financing may have to shelve any major expansion plans. What this signifies for the power and agricultural sector is yet to be determined, but it does not look good. We must be thankful that Guyana does not have the kind of creative financing as the US. Tax evasion and money-laundering are the preserve of the privileged and the connected while regulations are seen as things to be ignored and resisted. The Companies Act 1991 is honoured more in the breach while even our more prominent companies feel that they are at liberty to challenge the Securities Council and the insurance regulator at will.

But it would be foolhardy to be complacent or to try to predict the outcome of all of this over the next year or so, when a week seems such a long time. The most we can do is fasten our seatbelts.

Posted on

Coping with the EPA

Introduction
Over the strident objections of President Jagdeo the Caribbean countries and the Dominican Republic will sign the Cariforum-EC Economic Partnership Agreement (EPA) some time within the next few weeks. The record will show that Guyana stood alone in its last minute efforts to have the region pause “to scrutinise further the trade services aspects of the deal.” After an unusually strong exchange involving the leaders of Barbados, Jamaica and Guyana, Guyana is in the most isolated state it has ever been for close to forty years. During that period and not least because of the grand vision of Forbes Burnham and the efforts and impact of Sir Shridath Ramphal and a long line of talented foreign ministers, Guyana was among the leaders of not only CARICOM but the Non-Aligned Movement, the commemoration statue of which is proudly displayed at Company Path Gardens in downtown Georgetown. We were respected by the much more powerful ACP group of countries with a generation of outstanding personalities like Mrs Gandhi, Manley and Kaunda, offering hope to the hundreds of millions of their people. And let us not forget at this sombre hour that the very seeds of the Lomé Convention were sown on the lawns of the Prime Minister’s Residence in Guyana in 1972.

The first Lomé Convention (Lomé I) came into force in April 1976 and provided a hard-won framework of cooperation between the then European Community (EC) and developing countries of Africa, the Caribbean and the Pacific regions, in particular former British, Dutch, Belgian and French colonies.

Lomé had two main aspects. It provided for most ACP agricultural and mineral exports to enter the EC free of duty. Preferential access based on a quota system was agreed for products, such as sugar and beef, in competition with EC agriculture. Secondly, the EC committed ECU 3 billion for aid and investment in the ACP countries.

The fiction of free trade
It was not a perfect agreement – General Gowon of Nigeria had earlier told the Heads of the Commonwealth that “it is a fiction to speak of a free trade area between developed and developing countries,”  but for a quarter of a century Lomé remained the cornerstone of trade and aid between Europe and the developing world. It was, however, affected by major developments in the configuration of states and their economies in the European Community  necessitating changes in the economic relationships between the countries of the Europe and those of the ACP.

Another major shift in the world paradigm was the dramatic enlargement of the World Trade Organsation (WTO) which was the club from which all, rich and poor, market based and state-driven, North and South, would consider exclusion akin to being an international pariah. In theory, the WTO is strongly committed to creating a level free-trade playing field, promoting trade without discrimination and fair competition among the countries of the world through rules to prevent unfair behaviour like dumping. If there was a sign of things to come, however, the WTO provided that sign with several major violations by the rich countries in areas where they mattered most to the poor and undeveloped countries. In agriculture, textiles and clothing protectionism, subsidies and unfair practices persisted in the developed countries while the poorer countries were compelled to open their economies in a liberalisation frenzy and remove subsidies on their products.

In 2000, Lomé was finally replaced by a new trade and aid agreement known as the Cotonou Agreement, transforming the previous convention into a system of trade and cooperation pacts with individual nations. The signs were already surfacing that ACP solidarity was being weakened and with the IMF’s influence and dominance, one by one under-developed countries were picked off and brought into the fold of the capitalist world against which they had railed for decades. Even those countries that had shaped their foreign policy along socialist lines soon spent their time and measured their success by how much development assistance they received and the amount of debt write-off they obtained.

Long gestation
How did we in the region and Guyana fare? No question that we should have been better prepared to avoid the embarrassing contretemps earlier this week in Barbados over the EPA. As long ago as 1997, even before Cotonou, CARICOM had set up its Caribbean Regional Negotiating Machinery (RNM) to handle the post-Lomé trade negotiations not only with Europe but with other countries as well. The RNM was initially headed by Sir Shridath who had presciently noted that “we have to be prepared in our minds for a world in which our markets will be open increasingly to competition and not only at the level of goods but also of investment and services.” I am not sure whether President Jagdeo, then Finance Minister was listening, but it is more than passing strange that these are some of the very issues (as well as government procurement) that are now being objected to by him as President and as a leader of CARICOM.

Arguing that it is unlikely that we would be afraid of banks and insurance companies entering our small markets, one  cynic suggested that President Jagdeo’s main objection to any EPA with a services component was in relation to government procurement which as we have seen over the past several weeks is treated as a closed shop by his government. Would an EU pharmaceutical company with a right to bid to supply drugs to the government have sat back as idly and watched the government break the law to help its friends? I doubt it. At the very least therefore President Jagdeo needs to tell the nation exactly what his concerns are, not in politically charged language but in a way the people and the private sector and civil society in particular can understand. He needs to tell us whether the support we receive from the EU as a body and the United Kingdom will come to an end and what might now be the opportunities in the EPA for our own services sector.

The lone national voice
The EPA has been on the table for several years and although President Jagdeo now claims that he has always been opposed to the deal which he will now have to sign “involuntarily” as he puts it, there is nothing in the communiqué coming out of the December 2007 meeting of CARICOM heads at which the decision to sign was made, indicating that he was opposed to signing. His major public rumbling on the EPA was voiced in an exchange with Carl Greenidge of Guyana and the RNM at the GBTI Business Forum 2008 (see Business Page of June 8, 2008, ‘President, scraps and concessions’) but any further discussion had to wait until the Carifesta party was over.

Professor Clive Thomas had for months in his Sunday Stabroek column laid out a compelling case against several features of the EPA but no one in the government took any notice and it was left to a few letter writers to join whatever little debate there has been on this issue which we are now told would affect our country’s very future. A scheduled two days “consultation” that comprised mainly speeches but little information and lasting less than one day was attended by representatives from the private sector and civil society, who clearly knew little or nothing about the EPA on which they were being consulted. The seriousness of the consultation was surely compromised by the PSC which the day before had met with the President and announced their support for his stand. It was no surprise, therefore, that  they along with civil society felt comfortable enough to give Jagdeo the mandate to tell the regional heads that Guyana would only be prepared to sign a “goods only EPA.” The problem for the President was that his mandate was too narrowly defined and it was success or failure – no win-win.

But more ludicrously he could not sign a goods-only agreement simply because none was on the table and the President must have known that.

Neglect
The years of neglect by the government of the reports coming out of the RNM whose head had ministerial rather than ambassadorial rank, the government’s abandonment of diplomacy as a main tool of regional and international negotiations and its failure to have meaningful consultations both at home and abroad now leave us in perhaps the weakest state we have been in since independence.

Machismo may make good domestic politics but our stance would have caused us some loss of face and respect among colleagues and donors. Whatever may be our views and prejudices, the EU representative did not deserve the discourtesies he received at the consultation, not only because he is a guest of our country but also because the EU is still a big donor to Guyana as successive Budget speeches would testify.

Instead of boasting about standing tall we need to take a serious look – if that is not being too optimistic − at whether our policies and actions are developmental in nature. While abusing the EU our country and economy continue to depend on rice, rum and sugar sales to that region. Our forestry and bauxite resources are exploited by foreigners in uneven investment arrangements and little returns to the country, not even with development assistance from the source countries. We have abandoned the National Development Strategy that embraced increased trade with our South American neighbours and have downgraded our diplomatic efforts to boost trade. Only this week the President announced that he is replacing one of the country’s last career diplomats with another pastured minister of the government in what could and should be our largest trading partner, Brazil. The President pleaded with his regional counterparts to wait until a meeting of the ACP Group of States in Ghana before making a final decision, but undermines the seriousness of that plea by his decision to send a junior minister to that meeting because he has a speaking engagement in China.

Let the consultations begin
If the EPA will be as disastrous for Guyana as President Jagdeo asserts with such passion and certainty, then he needs to tell the nation what steps we can and should take to counter those eventualities. Clearly our relations with CARICOM need to be reviewed and rebuilt and if, as both Jagdeo and Ramphal fear, the CSME is in further jeopardy (there is sufficient and justified uncertainty about the commitment of many of its members), then as a regional country we have to contribute to reducing that danger even as we seek to widen our trade relations with non-EU countries.

A useful framework for ascertaining the views of Guyanese and incorporating such measures would be a new Development Strategy based on the earlier version that is accumulating dust on the shelves. Let the (real) consultations begin.

Posted on

The Auditor General’s report for 2006 (conclusion)

Introduction
Today we conclude our 3-part review of the Auditor General’s report for 2006. I apologise for presenting a rather disturbing picture of the financial management of the country that stands in stark contrast to the oft-repeated boast of financial probity and accountability. What makes matters worse is that measured by tax to GDP, Guyanese pay considerably more taxes than any other country in Caricom and these are among the highest in the world. And for VAT alone, Guyana stands out among the Caricom countries with the share of GDP that is collected in the form of VAT being three times that of Trinidad and Tobago, a country which has had VAT for over fifteen years. This is no doubt, in part due to the required rate of VAT to meet the revenue-neutrality commitment by the government being considerably more than it should be. The government knows this and has been reminded of it on a number of occasions but has simply ignored it. After all, it considers the press as financially illiterate so what does it think of the rest of us Guyanese?

It is almost pointless identifying all the weaknesses in the report itself, in the scope that it appears to consider adequate to make a proper conclusion, and in its findings. We note that the Office of the Prime Minister which spent one hundred million dollars in 2006 does not warrant any mention in the report, but what about the Privatisation Unit/NICIL as the Ministry of Finance chooses to call it, and which does not account for hundreds of millions of dollars it collects and spends unlawfully year after year. There is not a single mention of this fundamental breach of the constitution that ranks and rankles with the infamous Lotto Funds.

Yet in paragraph 325 the report finds space and time to commend the GDF for achieving a Nil balance on its salaries account for four of twelve months in 2006! That a failure rate of eight out of twelve in respect of this most elementary principle of book-keeping is regarded by the Auditor General as “commendable” is an indication that the bar set by the report for accountability is so low that it can cause even the walker to stump her/his toe!

The GRA
The report indicates a poor understanding of the laws and operation of the Guyana Revenue Authority by its failure to address some real and fundamental issues, and even when it does present some findings it is unable to put a meaningful interpretation on them. Take for example the section of the report dealing with Customs and Trade Administration. Eleven of the thirteen paragraphs deal with “Prior year matters which have not been fully resolved,” with the adverb seeming overly generous. The report appears oblivious to the several scams that take place in that division costing the state billions of dollars in funds which could have gone to reduce the prohibitive VAT and PAYE borne mainly by low-income taxpayers.

The story is not too different with the Internal Revenue Department, which according to the report has not taken steps to have all delinquent self-employed persons comply with the Income Tax Act, one of the reasons given for the merger of the tax-collecting agencies in 2000. The report tells us that there are 22,682 persons who have been identified by the GRA as self-employed, but it does not bother to tell us how many filed returns. There is no reason why the GRA with the technical, IT and legal professionals, and the enforcement and penal provisions at its disposal could not achieve a 75% filing performance. But let us assume a 50% rate of filing, the average tax collection per person is a mere $7,500 per month per taxpayer or the equivalent of about $50,000 per month of profit! Is it not time that the GRA prosecute those accountants and tax consultants who aid and abet the criminal act of tax evasion? I do not believe that any serious Audit Office and GRA would find this credible, but I am surprised that the report does not highlight it and give any indication of the steps proposed to deal with what is obviously a scandalous situation.

The QAII debacle and the preferential treatment of New GPC should have alerted the Auditor General to the need and the statutory requirement for a proper audit of the tax concessions given under various acts. The Auditor General would know that in the absence of Goods Received Records he could have applied alternative methods of testing the purchase of these items with a value in excess of $600 million, including obtaining from the supplier, the New GPC, copies of their invoices and delivery records. Failure to do this reflects very poorly on him.

The report ignores this and does not deal with the fact that the system of tax refunds is a joke and an injustice to the taxpaying public. And should the report have noted that there has not been a Board of Review for several years or that the last Chairman, Mr Brindley Benn, is not known to have any expertise in this crucial area? One only has to read some of the decisions coming out of the Board of Review of other Caribbean countries to recognize the calibre of persons who should be appointed to such a body.

Unreconciled
If one is serious about the finances of the country the two entities charged with managing and accounting for these funds – the Accountant General’s Office and the Ministry of Finance cannot be allowed to be the featured stars in this tragic-comedy of errors and incompetence. Many of the discrepancies highlighted (and not highlighted such as the requirement to submit to the National Assembly a mid-year report by August 30 each year), in the report can be traced directly to one or the other of these two entities. Only a sprinkling of examples is required to show the scale of the problem: no financial statements produced for audit in respect of the State Planning Commission for 1992-2006, $6.513 billion shown as advances from the Dependants Pension Fund Deposit Fund outstanding at December 31, 2006 could not be substantiated and the old Consolidated Fund bank account NO 400 not reconciled since 1988. And what has been the solution by the new breed of financial literati? Open new accounts and do not bother to reconcile those either. So you now have an untold number of bank accounts, most of which are not reconciled and 108 accounts which are listed as inactive.

Of the $16.5 billion available to Ministry of Finance, only $3.6 billion was spent, which reflects either incredible money-management skills or a hopelessly flawed budget process, which prior to his elevation as Finance Minister was under the control of Dr Ashni Singh as Budget Director. A loan of $2.617 billion from the International Development Association was placed into an account in December 2003 for “investments in human capital under the health and education sectors; (b) strengthening of public institutions and improvement of governance (c) expansion and improvement in the provision of basic services under the water sector; and (d) broad-based job-generating economic growth.” Laudable projects, all except that there have been no transactions on this account since and the country must surely be paying interest on that loan. This ignores the even greater price in the loss of benefits that would have been generated by implementation of the initiatives contemplated when the loan agreement was signed.

Not only are all the issues raised under the section dealing with the National Procurement and Tender Administration (paragraphs 108-122) and that dealing with the Integrated Fiscal and Management Accounting System (IFMAS) matters coming forward from previous years, but these are matters for which the Minister of Finance is responsible. Not only has the constitutional body, the National Procurement Commission, not been set up, but as we see from paragraph 116 of the report, the Minister of Finance did not insist that the Chairman of the National Board submit the annual report required by the Procurement Act on the effectiveness of the procurement process!

The AG’s opinion
Despite all the weaknesses, omissions and failures, the opinion expressed on the report is a mixed opinion involving one in which the Auditor General (ag) claims that “subject to” the massive errors and omissions some of the statements present fairly the financial transactions and positions on some of the accounts and statements, but in relation to others he could not form an opinion.

Among the former is that relating to the Receipts and Payments of the Consolidated Fund and Receipts and Payments of the Contingencies Fund. As an auditor who first entered a profession which I have practised in several jurisdictions since September 1974, I simply cannot see how a “subject to” opinion can be issued where there are such fundamental breaches of the constitution and other laws and where billions of dollars are not properly accounted for. These would include funds collected by the Georgetown Public Hospital Corporation, foreign missions, royalties, privatization proceeds and Lotto Funds.

And imagine that the government which has retained VAT funds from the consumers is unable to reconcile the majority of bank accounts and that the balance of $8.774 billion “represents the best available estimate of the cash position of the Government as at December 31, 2006.” Should this amount be $50 billion or $50? The answer is that no one knows for sure. The unfortunate remarks by our President referred to in the first two weeks of this analysis send the message that knowing how much money the country has is unimportant. The absence of control over the bank accounts appears to substantiate that belief.

Where do we go from here?
No useful purpose would be served by listing the many unacceptable conditions cited in the report. Suffice it to say that this report should be a wake-up call to all Guyanese and more particularly the parliamentary opposition and the government of the need to address an untenable situation. We keep hearing that scarcity of resources constrains the effectiveness of financial oversight, and we are now painfully aware of the persistent failures of the Accountant General’s office, the Audit Office and the Ministry of Finance. As previously mentioned these are the entities tasked with the responsibility of managing, accounting for and ensuring that the nation’s resources are adequately protected. Immediate reforms in the way they do business (and it is business) are needed. The first statement of intent would be the allocation of resources to enhance the capability of the entities. Despite all the cries of scarce resources, this report highlights the abuse and misuse of resources and the critical need for strengthening the capability of the three entities. If accountability is job number one, then the President as the Chief Accountable Officer must ensure that the Accountant General, the Auditor General and the Minister of Finance are given the tools needed to discharge their constitutional and statutory responsibilities.

The system requires the ministries and other government entities to respond formally by way of a Treasury Memorandum to the report of the Public Accounts Committee following its own review of each Auditor General’s report. When after several years of non-compliance by the PNC and itself, the government published the first such memorandum in 2006 there was much crowing, so it is troubling that the government has failed to respond to the last report done by the PAC. Taxpayers and citizens have a right to know the proposed measures to address the deficiencies in accounting, accountability and governance. Having done a mere superficial review of the report, as a taxpayer I am appalled at the way in which my taxes are spent. I would willingly pay anyone for advice on the legal recourse I have as a citizen and it is truly time for the country to wake up from the party which it financed to the tune of hundreds of millions of dollars and get serious.

Faced with this scandalous financial situation, the Public Accounts Committee has gone into recess, but it too needs to recognize that it cannot be business as usual. It needs to get the technical expertise to assist it in its work, and it needs a full-time secretariat in order to exercise its constitutional authority. It should call the Auditor General to discuss his report, the capability of his department and the glaring shortcomings that have surfaced as a result of his continued inability to carry out his constitutional mandate. Business Page can hardly wait to see whether the situation provokes as visceral a response by the President to correct the situation as was his reaction to perceived criticism of the report. It will be a true barometer of the seriousness of his administration about accountability.

Posted on

The Auditor General’s report for 2006 (continued)

Update
In the first part of this review (BP 24.8.08) of the Auditor General’s report for 2006 we examined the several statutory obligations of the Audit Office under the constitution and several other statutes. We noted that the office has failed to carry out a substantial and perhaps a majority of its duties including the audit of entities and funds amounting to billions of dollars, noting specifically the Sugar Industry and Welfare Fund which has not been audited for over ten years. During the week I learnt that this fund amounting to approximately $1.25 billion was subject to a major fraud. This should cause an auditor not only to advance the statutory audit of the financial statements but to carry out a fraud investigation as well. While the Audit Act allows the Auditor General “complete discretion” such discretion surely does not extend to whether or not he can choose to carry out the audit of any entity, and the Public Accounts Committee needs to press him on this.

Two of the most important powers of the Auditor General are those of access to information to carry out the audits for which he is statutorily responsible and the freedom (and duty) to report to Parliament on such matters as he considers necessary. To wait for five years before inserting almost as a footnote to his report that such audits are outstanding, amounts to a dereliction of his duty. It would seem as well that there is a fiduciary obligation on the part of the National Assembly to withhold funds until the audits are brought up to date, as the government has done with certain other entities.

On the President’s statement that the bank balances are not real cash but a book entry, the records show that at the end of 2006 the government had over three hundred bank accounts of which one hundred and eight were dormant, but with balances amounting to hundreds of millions of dollars. These accounts were held exclusively with a third party and represent real cash running into billions of dollars. When the President misspoke in relation to the tax laws, the task of cleaning up fell on Winston Brassington. Now it is the turn of Finance Minister Dr Ashni Singh who has been mandated to educate those described by the President as “financially illiterate” even as the President mistakenly identifies the Minister as the authority for the appointment of the Auditor General. In fact the constitution confers that power on the President acting in accordance with the advice of the Public Service Commission, instead of logically that of the National Assembly through the Public Accounts Committee (PAC).

Independence
In this second column in the series we look at some of the other provisions of the Audit Act and their implications for professional quality work by the Audit Office. The first is the duty to act independently. The role of the Auditor General is primarily to provide Parliament, the people and donors with independently derived audit information about the executive arm of government. Parliament exercises its oversight role of the office by way of the Public Accounts Committee chaired by the opposition which from time to time laments its narrow mandate, while Parliament seems to think its own involvement ends with the handing over of the report by the Auditor General to the Speaker of the National Assembly, often several months late.

The Audit Office cannot act independently if it is strangled for funds by the Ministry of Finance, arguably its primary client. Parliament needs to be far more forceful in securing resources for the Audit Office which would be one way to secure its independence of the executive and ensure the effectiveness of the office’s work. The Auditor General’s independence is also compromised because his is an acting position, though as we shall see presently it would not be possible for the acting holder to be confirmed in the post.

This lack of independence was most tellingly demonstrated by a press statement in 2005 referring to instructions by the President to the Audit Office in relation to the long promised flood account. Perhaps not too many people are surprised that three years later the Audit Office has gone silent on this matter. More recently we saw the Auditor General being summoned to the Office of the President in connection with another Customs corruption scandal but will this report too never see the light of day despite the requirement of the law that all reports of the Auditor General be submitted to the National Assembly?

Conflict of interest
The second provision is the prohibition of any conflict of interest between the Auditor General’s official role and that in any private or professional entity or activity with which he is associated. The problem is not only that this limitation is narrowly defined but that it applies to the Auditor General only. The second paragraph of the audit report just published correctly assigns responsibility for preparation of the statements and accounts to the Minister of Finance and Head of Budget Agencies. Those who would wish to defend the situation whereby the wife of the Finance Minister in her role as number two and the most professionally qualified person in the Audit Office, is not bound by this narrow conflict of interest limitation simply do not understand how the audit profession works, what conflict of interest means and the damage done by its very appearance. Any such appearance will mean that the report coming out of the Audit Office will be viewed with scepticism.

Qualifications
The third point is in relation to what would seem to be the required qualification for the post of Auditor General. Could Parliament in enacting the Audit Act 2004 giving to the Auditor General the same conditions of service and benefits including tax free salaries as the Chief Justice have intended that the Auditor General would not have to hold a first degree or a professional qualification? That is the case of the current holder of the post of Auditor General whose audit responsibilities dwarf those of all the professional auditors in Guyana combined.

Depleted
The vacancy rate in the Audit Office averages about 50% with a considerably higher rate at the senior levels.

The website of the Australian Auditor General in discussing its role notes that to be seen to be competent, key stakeholders must view the Auditor General as being the right person for the job and must also have the means to acquire resources according to the skill requirements of the job to be done. Without these characteristics, the assurances of the Auditor General would certainly lack credibility, even if the independence of the office was not significantly compromised.

In his 2002 report, then Auditor General (ag) Mr B Balram referred to the “depleting staff situation in the Audit Office” as a result of which he could only adopt a selective approach in his audit. Consequently he warned against relying “upon the findings of his report to reflect the results of a comprehensive review of the financial operations of Government,” adding that he thought such a review desirable. While four years later the situation is now much worse, there is an absence of similar frankness by the incumbent leaving the uninformed reader with a false sense of security about the state of the government’s finances.

Basic
No wonder then that the Audit Office has chosen the most basic areas of cash and bank, purchases and stores and the maintenance of vehicle log books as his focus for the shortened audit report for 2006. This reminded me of a medical client some time ago who chided me for not paying enough attention to petty cash and postage stamps amounting to less than $5,000 but seemed far less concerned about whether his billing system which accounted for hundreds of thousands of dollars in revenue per month was effective! While Value for Money (VFM) audits are indeed very useful and necessary, there are not enough staff for the more routine functions involved, and many audits go undone for several years. Yet, the Auditor General is diverting his limited resources to set up a VFM Unit whose only progress to date “is presently in the initial stage of formulating its first VFM audit plan,” whatever that means in practical terms.

Sadly, the several limitations are reflected in the scope of his audit and the quality of the report which at times uses language more suited to a newspaper column than a professional report. For example, what must the reader assume from paragraph 6 (iv) of the report that refers to “The balances of 66 inactive bank accounts, of which eight had balances in excess of $100M.” It is standard practice that audit reports should not assume financial literacy and should as far as possible state actual values. And more than once the report gives the impression that the introduction of the new system IFMAS was done during 2006 – in fact this was introduced in 2004, and how too does the Auditor General explain his statement that IFMAS operates a single bank account when some 194 active accounts are maintained?

Trinkets and the wood for the trees
And in paragraph 8, the report repeats the “continued lack of reporting for all gifts to Ministries, Departments and Regions” as if we are talking about trinkets. In fact some “gifts” represent hundreds of millions of dollars and the Auditor General only needs to refer to successive Budget speeches and the newspapers to see some of the cases of huge sums of money. In one paragraph the report noted a UNDP grant of US$4.373M, but why not the others, not only out of a professional obligation but also so that readers can see the full cost of running the country and where the money comes from.

And in the same vein, how could the report not even mention the huge sums being collected by the Privatisation Unit/NICIL that are not being properly accounted for, or why the royalties collected from OMAI are not being deposited into the Consolidated Fund as required by the constitution? The value of special funds not accounted for and spent without any parliamentary approval has gone way beyond the infamous Lotto Funds despite the howls of protest over the years.

To be continued