Tag: Guyana Sugar Corporation

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Guysuco needs drastic surgery to ensure survival – part 4

Introduction
In part 3 last week dealing with GuySuCo’s 2008 annual report, I opined that Ms Geeta Singh-Knight’s role in the collapse of Clico the insurance giant, and the loss to Guyana of close to G$7 billion made her unfit to be a director of the state-owned entity. Co-incidentally, the editorial pages in two of that day’s newspapers carried a report of President Jagdeo’s defence of Ms Singh-Knight, excusing her conduct as Clico’s CEO, and effectively the keeper of the company’s finance, as an “error of judgment.” Those pages also carried a letter by Mr Keith Burrowes, a director of GuySuCo, responding to criticisms about the qualifications and suitability of the directors.

These are relevant to this series on GuySuCo because directors set the benchmark for competence, integrity, professionalism, and independence, key elements for corporate governance and success in any organisation. Directors, as persons charged with turning around GuySuCo, need the wisdom of Solomon, the strength of Sampson, the courage of Shadrach, and the integrity of Mandela.

Impeccable integrity
Let us see how the directors measure up, starting with Mr Burrowes who I have known for many years in a professional, client-auditor relationship. I admire his exemplary capacity for hard work, dedication and commitment to country. I believe his integrity is impeccable, but wonder how he reconciles his personal integrity with serving as Chairman of the board of the Guyana Chronicle. He can be neither unaware of, nor insensitive to, the lack of journalistic professionalism of the Chronicle which is never reluctant to engage in or promote personal attacks on the government’s perceived opponents, or of the paper’s lack of fairness and balance, and of its sometimes undisguised propaganda. If I can fault Mr Burrowes, it is not only for his lack of courage in ensuring to all Guyanese access to our nationally owned and financed newspaper, but for his failure to recognise that by lending his credibility to what is essentially a political job, he undermines the other commendable work he does and service he offers.

Notwithstanding his lack of any experience or expertise in agriculture or sugar, I believe that in a team of complementary skills, Mr Burrowes can make a valuable contribution to GuySuCo. But only if he recognises his limitations in relation to the massive challenge facing the industry and the corporation, and can demonstrate the courage to stand up for what he knows is right, even as a minority of one. As I will discuss later in this series, I believe that that reservation is not without good reason.

Special skills
In defending Ms Singh-Knight, President Jagdeo says she brings special skills to GuySuCo, and excuses as errors of judgment, her role in Clico. This simplistic assessment invites speculation on the possibility of other reasons, since no rational person would describe as mere judgmental mischance sustained actions by a chartered accountant and business executive, causing losses to the NIS, policy-holders and pension schemes, of close to seven billion dollars. Forget for a moment that the President showed such antipathy towards the directors of Globe Trust who, in response to an order by the regulator for an increase in the capital base of the fledgling financial institution, put up their houses as security for a book entry loan. By contrast, Ms Singh-Knight ignored letters from the Commissioner of Insurance (COI) about her company’s non-compliance with the Insurance Act, and could consider herself doubly fortunate that the COI acted with such excessive – and as it turned out – costly restraint and tolerance. Forget too that Mr Steve Backer – and this is no defence of him – had to leave the company in an adversarial legal controversy over benefits to which he claimed he was entitled. By contrast, Ms Singh-Knight is back in the position and control of key company records of potentially legal interest and significance, even though a Judicial Manager has been appointed. Forget too, that the President was prepared to travel the Caribbean to beg for fungible sums of billion of dollars to correct Ms Singh-Knight’s “misjudgments.” By contrast, the depositors of Globe Trust received empty promises, but no money.

The list, the list
President Jagdeo seems to be unaware of the role and duties of a director under the Companies Act, and of the penalties under the Insurance Act. The duty of care, diligence and skill developed and established by the common law has evolved into a statutory form. It is reasonable to expect that Ms Singh-Knight would, in executing her duties as a director and officer of Clico, apply those skills which the President bestowed on her. The general principle is that what is expected of a corporate director in matters of conduct and judgment depends on the particular qualifications as well as the size and structure of the corporation, the composition of the board of directors, and the distribution of duties among the directors and officers, among other things. In relation to the Guyana company, Ms Singh-Knight was more than a director and an officer of Clico. Her powers seemed more akin to that of a corporation sole, or the President/ Chairman/ CEO /CFO wrapped into one.

The Companies Act 1991 substantially upgraded the common law requirement for diligence, raising the bar to that of a reasonably prudent person. Shipping out all that money to a dubious related party hardly qualifies as an exercise of diligence, particularly when the regulator writes to you on more than one occasion, putting you on notice. But apart from the reckless disregard for the Insurance Act and of the principles of prudential investing demonstrated by the company under her stewardship, questions have been raised about the payments made out of the $1.5 billion the company received from the sale to the New Building Society (which co-incidentally is chaired by GuySuCo Chairman Dr Nanda Gopaul) of its investments in the Berbice Bridge Company Limited of which she is the President’s hand-picked Chairperson. More than any presidential endorsement, the publication of the list of persons who were the recipients of the pre-collapse payout by Ms Singh-Knight would answer many of the nagging suspicions that linger about the real reasons why the President is resisting an investigation into Clico’s demise, as well as allay concerns about the “special skills” she brings to the board of GuySuCo. Failure to provide such a statement can be interpreted that transparency is not an ingredient or yardstick for governance in GuySuCo.

Political choices
Another of the directors who are part of the turnaround leadership is Mr Donald Ramotar, General Secretary of the PPP/C and the longest serving post-1992 director, although his exact qualification, role, or representational interest for a board position, and as a survivor after the recent housecleaning, is far from clear. Then there is Dr Rajendra Singh, who is reported to be associated with the ruling party from afar, but whose worth to the corporation is considered so valuable that he is flown in to attend meetings of the board. In 2008 the corporation paid to Dr Singh fees of $70,000 and expenses of $2,020,000. That was smaller only to the $13,335,000 in expenses paid in the same year for Mr Errol Hanoman, CEO and $3,387,000 in expenses for Chairman Ronald Alli.

The only director with any field operations experience is Mr Jangbahadur Raghurai, who at 74, has been brought out of retirement to help work on the turnaround plan and to join the board. He is the only one of scores of former managers, many younger than he, who are available and might have responded to a recall to help revive and restore an industry and company they served for the better parts of their lives. That would have been at least as cost-effective as the expenditure on new recruits for whom the first five years with the corporation – if they stay that long – is an investment.

Chairman of the board is Dr Nanda Gopaul of the Office of the President, a top political public servant, whose regard for good corporate governance at the New Building Society has been an issue for some members whom he told, “We have Region 6,” in reference to the election of the directors. His appointment as Chairman will ensure that the President for the time being, is represented in the boardroom, and that his wishes can be directly conveyed to the directors.

On the other hand, the CEO’s relationship with the sole shareholders has never been an easy one, and he is generally regarded as more closely associated with Booker Tate than with the corporation. It is understood that his contract will expire within a year, with another succession issue to deal with. Except for the CEO, the board is a political board, likely to bow to the wishes of those who appointed them, rather than bring their own expertise, and exercise their own judgment, in managing the affairs of the corporation. In passing, one recalls the agreement between Hoyte and Jagdeo that the opposition should have a seat on the board. That held for a while, but through default and lack of interest by the PNCR, that agreement is now ignored, to the detriment of all.

Unprecedented threat
Confronting the gravest threat unprecented in its centuries of existence; the failure of sugar in several regional countries and across the world; the global downturn and uncertain recovery; and radical shifts in demand, industrial capacity, and market prices, all required the turnaround team to address the industry and the corporation’s future honestly and boldly.

It required the application of some of the most sophisticated approaches and strategic tools in management science, economics, marketing, human resource management, and managerial accounting. The last thing it needed were elementary spreadsheets and assumptions more appropriate to business planning for an individual enterprise, prepared in a matter of a few months, and acting largely on political directives.

My view is that, not only have the directors accepted a basket to fetch water, but individually and collectively they lack the necessary ingredients to stem the decline of the industry and cash drain of the corporation, let alone return them to success. All the persons referred to above were deeply involved in the Blueprint for Success, the so-called turnaround plan. Sugar is grown in the fields, processed in the factory, sold in the marketplace and accounted for in the office. As we shall see over the next couple of articles, that schematic appears to have had insufficient attention in the document that contains several conceptual flaws, some naive assumptions, and elementary mistakes.

According to the plan, the workers have lots of obligations for the success of the industry, but and instead of corresponding rights, they are expected to accept a decreased share of the corporation’s revenue. In ‘Appendix 1, Impediments for Success,’ the “union and workers” are required to co-operate with management to stop the decline in attendance and incidence of strikes. The “union” is required to convince members to adjust to rewards for production, while the “unions” must support cost rationalisation. Is it a mistake that in two cases only the singular union is identified, while in the other it is more than one? And if it is not, which is the one union that has been singled out to carry such responsibility?

It would be merely a personal matter if the plan simply reflected the professional competence of those involved in its preparation. It would be unfortunate if it was done with such haste as to ignore the real problems, causes and structural weaknesses of the industry and the corporation. But that the plan is being used by the Jagdeo administration as the basis to plough into the corporation further billions of dollars of subsidies which the rest of the economy can ill afford, makes it a disaster of national proportions.

To be continued

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Guysuco needs drastic surgery to ensure survival – part 3

Introduction
In the two preceding parts of this series on the state-owned sugar entity, my focus was on the 2008 financial statements which are contained in the annual report tabled in the National Assembly in late 2009. Those accounts told a story of a company in serious trouble and in danger of terminal decline, whether measured by profitability (it had a pre-tax loss of $6.2 billion); liquidity (by its own admission it experienced cash flow difficulties requiring working capital for the fourth consecutive year from the UK based ING Bank and a lifeline of $3.2 billion from a consortium of local commercial banks); or solvency (it was practically insolvent and requires Government support to keep it afloat). In the course of the earlier parts, I touched on some of the disclosures and omissions in the annual report, the principal use of which is to tell the story behind the numbers, offer some explanations, sometimes excuses, and indicate how the directors intend to take the road to recovery.

As a state-owned entity, the corporation has filing and reporting obligations under both the Companies Act, as well as the Public Corporations Act (PCA) which requires that the accounts and report be tabled in the National Assembly within nine months of the end of the accounting year. Allowing for a few weeks delay, the reporting obligations of the corporation are met, which is more than can be said for the majority of publicly owned enterprises and budget agencies.

But the combined effect of these two acts creates for the corporation a recipe for confusion, if not disaster. Following the wave of privatisation and the new post-1992 dispensation, many of the provisions of the PCA, including the establishment of a Public Interest Committee consisting of workers, women, youth, students and consumers, have fallen into disuse. The directors’ powers and duties under the Companies Act are effectively overridden by the PCA which gives to the Minister immense powers over the corporation, and for good measure, also to the President. With such conflicting reporting obligations and so many bosses, it should surprise no one that the corporation seems incapable of dealing with the myriad of problems that cause it such massive losses and public embarrassment, as we witnessed this week over procurement in the corporation.

The annual report
For now, let us turn to the annual report. The then Chairman Mr. Ronald Alli in his report restates the mantra that sugar makes a significant contribution to the country’s GDP and is our largest foreign exchanger earner. The data do not support these bold assertions.

Measured in terms of constant prices, in 2008 sugar contributed 5.9% of GDP, placing it seventh in ranking, while in terms of export earnings it earned the country considerably less than the earnings from gold. In 2009, contribution to GDP was unchanged, but in terms of export earnings, sugar earned less than half of that of gold. With respect to taxes, sugar makes a negative contribution, receiving from the treasury a host of subsidies, exemptions and concessions. Of course, production and prices of sugar and other commodities can change the equation from year to year but the underlying trend is not encouraging and indeed, if you can believe it, in the GDP league, sugar is not too far ahead of Other Crops, which does not include rice.

The table below, taken from the 2010 Budget Speech, shows the value of exports in millions of Guyana Dollars for the five years 2005 – 2009.

It may be excusable if the statements in the annual report were made by persons with less access to information. It is perhaps merely regrettable that these statements about the greatness of sugar are made without any attempt at fact checking. But what is not excusable and is more than regrettable is that such uninformed thinking is often advanced as justification for billion dollar investments and subsidies which the working poor and the unemployed can ill afford.

The annual report devotes scarce space to describing the efficacy of the movement of inventory among estates, the procurement of goods, and the concerted efforts made by the “hard pressed staff” of the procurement department. Yet months after the publication of that report the corporation is now reporting systemic misconduct and losses in the department. Since no one in the corporation will reconcile these clear conflicts, the public will remain confused.

Corporate governance
Here again reality confounds theory, the walk differing from the talk. The directors assert that the corporation is committed to high standards of corporate governance. Yet, neither its annual report nor its website states the names of persons heading and constituting the various governance committees. My efforts at finding out left me with the distinct impression that the corporation does not understand what corporate governance means. The office of the Corporate Secretary advised me that for the information, I should call the Chief Executive. The response from his office was that I should call the Chairman Dr. Gopaul. That was that.

I later understood that the Audit Committee is headed by Ms. Geeta Singh-Knight, the CEO of the insurance giant Clico which collapsed spectacularly in 2009. The government has resisted calls for an investigation into this collapse amidst evidence that the law – the first ingredient of corporate governance – has been breached, and suggestions that there may have been collusion between the company and some key political and other persons in the society. The resistance to such calls appears to have as its objective, the protection of those persons, and to conceal as much and as long as possible, regardless of the cost and consequences. The public’s confidence in Ms. Singh-Knight has been totally lost as a result of her direct involvement in all the major decisions of Clico up to and even after its collapse. In any other situation such a person would not be considered a fit and proper person for appointment as a director. With this government, the rules are more tolerant.

There is too a Remuneration Committee that would have approved the huge salaries and millions of dollars of expenses paid for some directors and senior staff. Yet there is no coherent wages and salaries policy in the corporation, even as industrial relations stumble from one crisis to another. The other committees established by the board are the Central Tenders Committee and a Lands Committee with responsibility for land disposals. My understanding is that this committee was side-lined in the controversial Diamond land deal in which two ministers stand accused of improper conduct in the National Assembly.

Interestingly the directors stated as their primary function the generation of “sustainable wealth for the shareholder as the key stakeholder in the business.” This rather controversial assessment is hardly likely to find agreement among the workers who have to perform the back-breaking tasks under some of the worst modern day conditions, and among taxpayers who increasingly are keeping the corporation from going under. But the directors, including one leading presidential hopeful, challenges this primary function by categorically re-stating a policy not to declare or pay dividends. It is not often that in a single annual report that one finds such contradictions. In the case of Guysuco these are on the same page. No wages policy, no return on capital threshold, and a make-no-sense dividend policy. Perhaps the directors charged with the turnaround of the company will tell the stakeholders what is the real policy of the corporation.

Political loyalty over professional competence
The disaster which has befallen the corporation is the fatal triumph of politics over business, of expediency over planning, of political loyalty over professional competence. For any turnaround there needs to be a transformation in how the corporation is run. The stages of good practice are at the basic level, statutory compliance with laws and regulations, followed by good corporate governance and later, by corporate social responsibility (CSR). As a state-subsidised entity that touches on the environment, food and finance, and that directly employs thousands across the coast, the stakeholders extend beyond the shareholders. This would normally demand the formulation and application of CSR. How the corporation moves from its pre-level 1 stage to stage three is anyone’s guess. The Public Corporations Act permits performance contracts involving the corporation. Those who are now asking for billions more in subsidies should be asked to sign such a contract before any money or further concessions are granted.

To be continued

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These two ministers misled Parliament on the $4B request and should be taken to the Privileges Committee

I refer to the article titled, (Manning admits error on UNC land gift – SN March 16) that described a parliamentary incident in neighbouring Trinidad. I do this to draw attention to an example of the egregious misconduct practiced in the parliament of this very country. The Guyanese example reeks of misrepresentation and deception; of what has become the norm and that which should be found most intolerable.

In the SN article, which relied on original coverage in the Trinidad Express, it was reported that the T&T Prime Minister Manning expressed his regret in the Parliament for an earlier statement which, after subsequent enquiry, he found to be false. The report stated that if one gives false information to the Parliament, “it is the proper parliamentary thing to do, to return to the Parliament as soon as possible and correct the inaccuracy.” It goes without saying that this incident was characterised by standards and conduct of a truly higher calibre.

Just a few weeks ago, our own National Assembly was apparently deliberately misled by the Ministers of Finance and Housing concerning the specific matter of a payment of $4 billion to the state-owned GuySuCo. The occasion was the presentation of Bill No. 1 of 2010 on January 11, 2010, in which the Minister of Finance sought approval to pay [in the future] that sum of money into the Corporation, while the Minister of Housing, Mr. Irfan Ali, added to the deception of the timing of the payment when, in answer to a question by AFC MP Sheila Holder as to how soon he could spend the $4 billion, he replied, “we are ready.” Notwithstanding the title of the bill, Supplementary Appropriation (No. 3 of 2009) Bill 2010, the two ministers, through both submissions, pretended-and led the parliament to believe-that this payment to GuySuCo had not been effected, and that such payment was an event in the future.

I am now in possession of irrefutable evidence that when the Bill was presented by Dr. Singh for approval, and the supporting/corroborating statement was made by Mr. Ali, the money had already been paid to GuySuCo. Repeat: it had already been paid. Given the amount involved, the forum, the appropriation bill procedure, and the collusive ministerial effort, it appears that a crass subterfuge of the lowest order was perpetrated. It was where a known occurrence in the past was being capriciously parlayed as a future event; one requiring the attention and action of members of the highest body in the land; and one then unknowingly and inaccurately inscribed in the records.

There seems no doubt that the two ministers have committed a grave transgression for which they should be taken before the Privileges Committee of the National Assembly. In view of the evidence, there can be no reprieve or safe harbours of procedure, timing, semantics, misunderstanding, communication gap, or ignorance. The ministers knew what they knew, and very deliberately foisted what rises to the level of a blatant falsehood on the parliament.

To the detriment of this country, deception in public life has become unexceptional, and casual everyday, among our politicians; it is time that we start to root this out. In the circumstances, the acceptable options open are limited, unambiguous, and mandatory. The two ministers must: first, apologise to the parliament and the nation; and, second, immediately tender their resignations. Such mitigating actions would be decent and honourable. It is timely to recall that Dr. Singh is the person who persisted-and succeeded-in bringing his parliamentary colleague Ms. Deborah Backer before the Privileges Committee, for a statement she made about torture by members of the Guyana Defence Force.

In the interests of fairness and consistency, the two ministers should be subject to the same process.

I stand ready to participate in any truth finding procedure or inquiry.

And while I am committed to protecting the confidentiality of my source, I am prepared to present this evidence to the Speaker of the National Assembly, under the condition of credible commitments to information and source security. Still, the actions along the lines contemplated should not be left solely to a private citizen. It would be a most heartening development for parliament to activate forthwith available mechanisms to have this issue investigated as a matter of urgent, national importance.

Anything less would be a travesty; would pave the way for future misconduct; and could expose this deliberative body to further ridicule, and total irrelevancy.

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Guysuco needs drastic surgery to ensure survival – part 2

Today we continue our review of the 2008 financial statements of the state-owned corporation which are contained in its 2008 annual report tabled in the National Assembly late last year. We noted last week that while 2008 revenue fell by 8.5%, to approximately the same level in 2006, the corporation suffered a staggering loss before tax of $6.2 billion. Anticipating that there would be enough income against which to set-off the losses in the foreseeable future, the accounts show a tax credit – the opposite of a tax charge – of $2.1 billion for 2008. Instead, therefore, of carrying forward the full loss of $6.2 billion, the loss carried forward is $4.1 billion.

Usually, in making such a decision, the directors would have to consider all the available evidence, both positive and negative, to determine whether, based on the weight of that evidence, there should be a valuation allowance for all or some portion of a deferred tax asset. One has to assume that the directors considered this and concluded that no allowance is necessary.

Interestingly, the Chairman’s Statement contained in the annual report is presented by former Chairman Mr. Ronald Alli, Chartered Accountant while the financial statements are signed by his successor Dr. Nanda Gopaul. In seeking to explain the poor 2008 performance, both the former Chairman and the Chief Executive emphasise the wetter than normal weather conditions experienced by the corporation during the year. Even accepting that flood conditions affected East Demerara and East Berbice in the latter part of the year, this still invites the question why production at 226,268 tonnes would have been lower than it was in 1992 when the PPP took control of the country and industry, and 2006, the year most affected of the Great Flood of 2005. To add to this dismal performance, hectares harvested in 2008 were greater than in 1992, 2005 and 2006.

It therefore seems hard to believe that weather alone can explain the one-year turnaround in fortunes that saw production declining from 266,267 tonnes to its lowest production in seventeen years. I should say this however: unlike the corporation, I think we should be emphasising productivity rather than production and I will explain this when I review the Blueprint for Success, or what the current board describes as a turnaround plan. I pause to thank the unnamed persons who sent me copies of that document following publication of last week’s Business Page. I am impressed by the real willingness among us to have information of public interest and importance, publicly available.

The report
Unfortunately the annual report is not very helpful in explaining in any but a rather generalised way the performance of the corporation, whether in a good or bad year. It is left to the reader to ferret out, if at all possible, the information necessary to understand the corporation’s performance, or state of health. For example, the Chief Executive’s report gives the tonnage of exports and domestic sales while note 15 provides information on the revenue earned by geographical source. But the former also deals with product and market types while the latter deals only with dollar value, so that any average figures are merely indicative. But even these make for interesting reading.

Take for example the European market from which the corporation has earned substantial market benefits for decades. The export quantities to that region under the EU Protocol and CU (sic) amounted to 185,549 tonnes, 11,440 tonnes less than in 2007. Earnings to that region however fell from $27,198 million to $26,488 million, so that on average the price earned per tonne in that market actually increased from $137,998 per tonne to $142,677 per tonne. Whether this was exchange rate related or for any other reason can only be speculated. Exports to Caricom and the region fell from 34,139 tonnes to 18,547 tonnes at an average price per tonne of $108,211, up from $104,748 per tonne in 2007. And the domestic market where the volume sale of 23,345 tonnes was just below the sales in 2007, the average price per tonne went up from $138,074 in 2007 $147,997 in 2008.

Cost, hidden costs and terminated costs
Despite the loss of the EU preference, with the Corporation entering the final era of the Sugar Protocol from July 1, 2008, average revenue earned per tonne of sugar produced increased from $130,426 to $140,583 or 7.8%. So yes, production volumes were a major problem, but it is the cost that is the fatal problem. The financial statements show that the average cost of producing a tonne of cane rose from $92,075 to $130,582, a 42% increase! And that is not all. Administrative and other expenses such as marketing and distribution added another $7,554 million, slightly more than the $7,505 million in 2007.

Translating these to cost per tonne produced, the average in 2008 is $33,033 per tonne, up by 19% over 2007. Readers may be aware that the corporation enjoys considerable tax subsidies on some of the compensation payments to employees, including the weekend overtime and production incentives. These costs to the taxpayers are not usually considered or quantified when the viability of the industry is considered.

Similarly, there is no explanation for the decline in administrative expenses of more than half a billion dollars, or indeed what constitutes such expenses, a comment that also applies to marketing and distribution expenses. What is apparent is that the management fees paid to Booker Tate limited under their now terminated contract declined by $61 million, largely due to the favourable change in the sterling exchange rate. The savings in Administrative expenses have been offset by increases in Marketing and Distribution, which includes shipping costs and a cess paid to the Sugar Association of the Caribbean. Indeed over the three years 2006, 2007 and 2008, as freight costs sky-rocketed with no spare capacity in shipping, marketing and distribution costs have jumped from $3.1 billion to $4.8 billion, despite the decline in volumes.

The cess paid to SAC is based on the country’s contribution to the organisation’s budget and the money is used mainly to finance research. On the other hand, research done locally is negligible with the average annual cost over the past three years amounting to $238 million. This policy of farming out its research certainly needs a review since research needs to take account of differences in soil and weather conditions which cannot be replicated in any laboratory.

I will return to some of the income statement issues – which accountants now refer to as the statement of comprehensive income – when I look at the Blueprint for Success, but for now suffice it to say that a repeat of the 2008 performance would be the death knell of the industry.

Balance Sheet
As I turn to the balance sheet – now called the statement of financial position – I should emphasise that the two are related and affect each other. For example, the depreciation of the property, plant and equipment which appear in the balance sheet, is a charge in the income statement. All this down time on the new Skeldon Factory adds real economic costs to the project, and one shudders to think what the depreciation charge on the Skeldon Project will be. Similarly if and when that and other old plants are retired, their book values would be written off to the income statement.

The table below shows a condensed balance sheet extracted from the audited financial statements. Like with the Income Statement, there is barely any discussion on the balance sheet items which include the assets, liabilities and equity of the business. It is worth noting the bulk of the land used for cane cultivation – 72% – is held on lease at a pepper corn rental of the equivalent of $1,000 per acre per year, representing another valuable subsidy to the corporation by the government and the taxpayers. The Corporation could not survive if it had to pay real economic rent for those lands leased from the Government.

Of the total equity of $57 billion, $51 billion represents revaluation reserves while the assets include $9 billion of deferred tax assets. Both standing cane and product stock at the end of 2008 were considerably less in 2008 than in 2007 so that the corporation would in 2009 have to re-invest in these two asset categories. But this would be taking place even as the corporation confronted a weak liquidity situation, diminishing cash balances and increasing payables. During the year, the corporation was unable to pay its tax obligations of close to $2.5 billion, short-term borrowings had increased in 2008 by $1.5 billion, and cash and cash equivalents had declined during the year by a dramatic $3.5 billion!

Damp future
And as it looked forward even to two to three years, all it could see were loan obligations crytallising, plant needing replacement and a less than enthusiastic workforce. Here are some of those contracted obligations from which the corporation would almost certainly have to be rescued:

1. From 2012 – Government of Guyana Skeldon Project presumably financed by China (US$56 million) – US$1.8 million six monthly;

3. From 2010 – Government of Guyana Skeldon Project CDB (US$18.7 million) – interest rate not specifically stated so instalment cannot be calculated. Likely to require minimum repayment of at least US$1.5 million annually;

4. From 2010 – Government of Guyana Skeldon Co-generation Project China (US$25.8 million) – Interest rate not stated so instalment cannot be calculated. Likely to require minimum repayment of US$2.0 million annually.

The source of the amount of $636Mn (approximately US$3.1 million) shown in the notes to the financial statements as repayable in years 2010 to 2013 is not justified by the information contained elsewhere in the report.

The indications are that the government will be assuming most of these obligations from the Consolidated Fund. Meanwhile, the corporation was unable to make any payment to the Sugar Industry Welfare Fund in 2008 and less than half of the amount payable to the Government for lease rental, the accuracy of which I questioned in last week’s column.

Conclusion
The success and or survival of Guysuco over the years has had a lot to do with subsidies – with preferential access to a lucrative market, effectively free use of thousands of hectares of some prime land that the corporation claims is valued at billions of dollars, and in the cost of production. Some estates would obviously have higher production costs than others. But for some reason, the estate-by-estate performance is not stated in the report. That significantly limits the quality of this or any other independent analysis.

To be continued.

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Guysuco needs drastic surgery for survival – part 1

Introduction
For more than a year, the state-owned Guyana Sugar Corporation Inc has been in the press, mostly for all the wrong reasons. Its 2008 annual report tabled in the National Assembly shows a staggering loss before tax of $6.2 billion, following a gain of $2.2 billion in 2007. Its Skeldon Sugar Modernisation Plant, touted as the saviour of the industry, has been stumbling from problem to problem; reports of excessive salaries paid to some senior managers were sensationalised, even as the corporation stoutly rejected demands from its main workers’ union for increased compensation and benefits. There were reports too, of one very senior officer – a director no less – resigning from the company after being locked out of a meeting, while another with huge experience in the industry, was given marching orders.

More recently the corporation was the subject of a very heated exchange in the National Assembly surrounding the actual date of payment of $4 billion made to enable the corporation to meet debt obligations. With the government side facing a dilemma of its own making – risking later embarrassment, or admitting that its Finance and Housing Ministers have by their silence misled the National Assembly while engaging in a breach of the law and a clear bail-out – this matter will not go away.

All change
Changes at the top of the corporation saw the termination of the much maligned management contract with Booker Tate after two decades; the resignation and replacement of the Chairman Ronald Alli by Dr Nanda Gopaul, former sugar unionist and political leader now at the Office of the President; a clean-out of the boardroom with the principal survivor being the ruling party’s General Secretary and now presidential aspirant, Mr Donald Ramotar; a new Chief Executive Officer, chartered accountant Mr Errol Hanoman with a mixed history with the corporation, brought back from the UK to take charge of the industry; the appointment of a new Deputy Chief Executive Officer with no prior work experience in the industry; and an Interim Management Committee that includes Ms Geeta Singh-Knight, local head of the failed insurance giant Clico.

For better or worse, they now carry the responsibility for the future of one of the country’s major industries, and by extension, determining the number of billions which taxpayers will have to pump yearly into the corporation, before the country can see any returns.

The result of these changes is an industry that is headed mainly by accountants, with field operations, marketing, and industrial relations coming after.

It has led too, to another study and recommendations for the industry, referred to optimistically as a ‘Blueprint for Success.’ Unlike the earlier Business Plan for the industry, the Blueprint is as secretive – and elusive – as the Holy Grail, precluding any widespread discussion or consultation among key stakeholders. One can only speculate about the reasons for the secrecy, and wonder whether the information in the document is considered too explosive for public knowledge.

Accounts quality
Starting today, Business Page will carry out its own assessment of the industry, beginning with the 2008 annual report and accounts which bear the audit imprimatur of Mr Deodat Sharma, the country’s Auditor General (ag), and his sub-contractor Deloitte and Touche, now TSD Lall and Co. I will consider the available options to preserve salvageable parts of the industry, the implications and costs of delays.

Given the inanimate nature of the patient, it is unable to consent to life-saving surgery, and its political and professional guardians need to act quickly, decisively and rationally, or face losing the industry once considered too big to fail. Perhaps the real question is whether Guysuco is too big – and too costly – to save as taxpayers are called upon to pump dollars like water into the fields, merely to keep the industry afloat.

Before going into the details of the financial statements, a few general points of accounting are worthy of mention:

1. But for some clever presentation of information, the company’s financial position is worse than it is shown to be. For example, nowhere do the financial statements disclose that at the end of 2008, the corporation had overdraft balances of $3.2 billion. In fact, the balance sheet misleadingly shows cash and cash equivalents of $960 million.

2. Amounts due to the Government of Guyana in respect of lease rentals are shown as having decreased by $104M, while amounts due to the Sugar Industry Labour Welfare Fund as increasing by $525M. The notes to the financial statements indicate that these should have increased by $218.5M and $870M respectively. If that is so, the liabilities in the balance sheet are understated by $667.5M.

3. Note 9 to the financial statements presents cash and bank balances net of overdraft balances, understating assets and liabilities and distorting ratios and measures. Guyana dollar balances were presented as a $1,895M payable, masking the true cash and overdraft balances. This also calls into question the positive foreign currency balances with a Guyana dollar equivalent of $2,855M.

4. The balance sheet carries deferred tax assets of $1,169M which seems overly optimistic having regard to the corporation’s prospects in the foreseeable future. The effect is to understate the after-tax loss in 2008, and overstate the net equity of the entity.

5. No deferred tax liability has been recorded in respect of the revaluation of property, plant and equipment, as required by International Financial Reporting Standards.

6. The consolidated accounts of a holding company must eliminate inter-company assets, liabilities and transactions. The amount due from the corporation’s subsidiary, Lochaber Limited, was not eliminated on consolidation.

7. Note 12 shows a convertible Government of Guyana debenture, but conversion terms or diluted earnings per share are not stated or presented.

8. In note 22, which states the foreign currency risk arising from a change in exchange rates, liabilities were added to assets to arrive at the net exposure. As a result, the level of net foreign currency assets in United States Dollars and GB Pounds is overstated by $12,276M.

9. Commodity Market Update published by the Ministry of Agriculture for the month of September 2009 noted that “The Euro rate at the end of the August 2009 averaged 1.439Euro/US$. In the same period in 2008, the rates were 1.4795. GuySuCo, however, has hedged a number of its shipments for 2009.” The financial statements for the year 2008 make no disclosure on hedging.

The Income statement

All figures in millions of Guyana Dollars

Source: Audited Financial Statements

Revenue in 2008 fell by 8.5% to $32,148M, which is less than revenue earned two years earlier. Guyana Dollar sales to Europe declined by 2.6%, to Caribbean countries by 44%, and were almost wiped out in North America. In terms of volume, export sales under the EU Protocol was about the same as in 2007 (152,229 tonnes) and US bulk was zero. Exports of bagged sugar to Caricom and the region declined from 31,160 tonnes in 2007 to 14,421 tonnes in 2008, while exports of packaged sugar to the region increased from 2,979 tonnes to 4,126 tonnes.

The decision to scale back on sales to the Caricom region was taken to enable the corporation to meet its commitment to the EU, resulting in waivers under the Common External Tariff being granted to several Caricom countries to import from outside of the region. Indeed, in November 2008, Guyana advised Caricom that it would be unable to supply the region with sugar in 2009, a development which would seriously affect our reputation as a reliable supplier, introduce a non-regional product at world prices, and make competition for us all the more difficult.

Ah na me, dis time
Cost of sales has jumped from 70.6% of sales in 2007 to a whopping 93% in 2008, but the report fails to explain or analyse why the cost of sales increased by $5,067M or 21%. The immediate suspect and whipping boy of the industry is wages and salaries, but the accounts show that in 2008, wages and salaries increased by a mere $50M, or 0.33% over 2007. What the report does show is that despite the corporation’s poor performance, the workers were given 8 days pay as Annual Production Inventive while their unions, GAWU and NAACIE, were paid 0.79 day per employee. The stated purpose of this latter amount is “to assist” two of the country’s most financially secure unions in their educational programmes; others will see this as a novel way to neutralise workers’ representatives.

Next week we will explore further the causes for the dramatic decline on operating profit and proceed to look at the balance sheet.