Truth Made-off leaving trail of cooked books

Over the years this column has reported on its fair share of scandals in the financial world, often in the biggest this and biggest that. Today we report on two such biggest – one from, you would have guessed, New York and the other India. The ingredients that make up these frauds are the usual suspects – persons too clever for their own good; greed; an unsuspecting public; poor oversight and accountants sleeping on the job. The historical economist and author Charles Kindleberger expressed it in slightly more elegant language, writing that “swindling is demand-determined, following Keynes’s law that demand determines its own supply, rather than Say’s law that supply creates its own demand. In a boom, fortunes are made, individuals wax greedy, and swindlers come forward to exploit that greed.”

Whatever it is, the vehicle used in the Madoff scandal is one that came to be known as a Ponzi scheme, a swindle offering unusually high returns, with early investors paid off with money from later investors. The scheme got its name from the Italian-born American resident who promised clients a 50% profit within 45 days, or 100% profit within 90 days.

While Ponzi was a known itinerant crook who served time on more than one occasion, Bernard Madoff, was a star of Wall Street, former chairman of the Nasdaq Stock Market and founder of Bernard L Madoff Investment Securities LLC, which had operated successfully for over four decades. And to support Kindleberger’s theory, the victims of what may turn out to be a US$50 billion swindle were not the small-town residents buying postal coupons, but top names in banking, show business, the intellectual class and many on the list of the wealthy. HSBC said its losses were about one billion US dollars while the Royal Bank of Scotland estimates its losses at US$600 million.

Investigators estimate that it will take more than two years to complete their work, but it is unlikely that they will ever come up with even reasonably precise figures. It is the nature of a Ponzi scheme that early investors do benefit, quickly receiving their initial capital from subsequent investors.

What must surely annoy is that once again there is failure of regulatory oversight. Last month, SEC Chairman Christopher Cox expressed grave concern at the “multiple failures over at least a decade to thoroughly investigate these allegations [at Madoff] or at any point to seek formal authority to pursue them,” ordering belatedly an internal review into the agency’s failure. And it is the same SEC that facilitated a three-employee accounting firm to audit Madoff on an annual basis. Brokerage firms like Madoff Securities are required to be audited by firms that were registered with the Public Company Accounting Oversight Board created after Enron to help prevent frauds.

Amazingly, the SEC allowed a waiver, which it extended on numerous occasions, to the audit requirement in respect of privately held brokerage firms. It is not surprising therefore that the auditors Friehling & Horowitz failed to detect the large Ponzi scheme run by Mr Madoff. Ironically, in its latest extension of the rule, issued December 12, 2006, the SEC said it had determined that allowing such firms not to register was “consistent with the public interest and the protection of investors.” Well, well, well.

Now to India
India was not too long ago held up as the country where the Beatles would go to seek spiritual renewal. The country lost its innocence with the Indira Gandhi emergency of 1975, but still the myth of innocence prevails with former Australian cricket captain writing in the aftermath of the Mumbai bombing in November that India had been “robbed of its innocence.”

Now in a twist of irony, one of its top information technology companies that have led the way in the in-sourcing credited with the country’s economic boom, Satyam Computer Services Ltd, has found itself embroiled in a scandal dubbed by commentators as “India’s Enron.” The word ‘Satyam’ in Sanskrit means ‘truth.’ Last week the company’s founder and chairman, B. Ramalinga Raju, resigned amid revelations of widespread accounting fraud in the company.

Mera Naam Raju
The resignation came in a five-page letter to the company’s board in which Mr Raju apologised to the shareholders, taking personal and sole responsibility for the fraud involving bogus accounting over several years, including inflating profits by more than tenfold between July and September of last year. As if making a concession the soft-spoken Raju with trademark paternal charisma, said he was prepared to face the law.

Raju was like a corporate deity in India, not only for having built a $2 billion IT empire bringing in foreign currency, but also for launching the Emergency Management and Research Institute, a national, not-for-profit 911-like emergency-response service funded by $50 million of his and his family’s money. Three months ago his company received the Golden Peacock award from a group of Indian directors for excellence in corporate governance.

Juxtaposed against Satyam or Mr Raju’s personal accounting misdeeds, such benevolence raises doubts about human nature and the philanthropy with which we associate businesspersons. In his letter Mr Raju disclosed that Satyam had inflated its operating profit for the three months ended September 30, 2008 to 6.49 billion rupees ($136 million) from 610 million rupees reported previously, while revenue was inflated to $565 million from $443 million. It had reported an operating margin of 24 per cent which was actually 3 per cent. On the asset side, Satyam’s balance sheet as of September 30 had a non-existent cash balance of over $1 billion (remember Parmalat?); nonexistent accrued interest of $79 million; an understated liability of $258 million and an overstated debtor position of $103 million.

Several investors in Satyam were considering suing PricewaterhouseCoopers LLC, the company’s auditors, which like all the top auditing firms benefited from the fall of Enron’s auditors, Arthur Andersen. The investors say the auditors are supposed to check on the accounts and that they rely on the auditor’s report. In a careful meaningless statement PWC said that they had worked “in accordance with applicable auditing standards and were supported by appropriate audit evidence.” That statement really says nothing since it is no more than a repetition of the standard words used in any audit report.

Creative explanation
While the firm was right to explain that their obligations for client confidentiality precluded the possibility of commenting on the alleged irregularities, how do they expect the public to have any confidence in a profession where top auditing firms repeatedly fail to detect massive frauds year after year? Like Raju, Pricewaterhouse’s assurance that it “will fully meet its obligations to cooperate with the regulators and others,” seems neither a concession nor an option.

Raju’s explanation was a bit more interesting and philosophical, even if far too defensive. His letter which will go down as one of history’s most creative and longest resignations states in part that what had begun as a small gap between real and reported profits continued to grow over the years, like “riding a tiger, not knowing how to get off without being eaten.”

It is probably too early to assess the impact of the scandal described by PC Gupta, the federal minister for company affairs as a “shameful act” while Jagdish Malkani, country head at TAIB Capital Corp described it as “a monumental scandal [that] is terrible for the Indian IT industry.”

Some things, however, are fairly certain. There will be calls for more oversight and regulation of public companies, which happened in the aftermath of Enron and the other Dotcom failures. Indeed Mr Gupta has already said that government would take coordinated action with the Securities and Exchange Board of India. Meanwhile and more immediately, there are two major risks making India very uncomfortable – the likelihood that the Satyam is not unique in creative accounting and the same thing is happening in other public companies. That would scare away foreign investors. Equally serious is the potential disruption of services to the lucrative US outsourcing market. The timing could not be worse. As the Obama administration responds to the highest unemployment rate in the US for decades, tempted by protectionist instincts, outsourcing must be high on the agenda.

Satyam was already facing a World Bank ban for improper financial dealings with a top bank official. Along with the World Bank, Satyam’s clients include General Electric Co, General Motors Corp, Nissan Motor Co, Applied Materials Inc, Caterpillar Inc, Cisco Systems Inc. and Sony Corp. Will the other Indian IT firms be chosen to take up any slack or will these customers go elsewhere?

The almost co-incidental revelations of Madoff and Satyam have no doubt come about because a bear market drives the chickens home to roost while no one cares about corporate governance in a bull market. In Guyana here in the nether world – neither bull nor bear – we never seem to care. The scandals show that those who appear as good guys may be putting on a front. Madoff is described on his company’s website as having “a personal interest in maintaining the unblemished record of value, fair-dealing, and high ethical standards that has always been the firm’s hallmark.” Raju was the personification of piety and generosity.

On the line: Banks DIH Annual Report

Banks DIH, the giant food and beverage company will be holding its 53rd annual general meeting on Saturday, January 17, 2009, close to four months following the end of its financial year of September 30, 2008. As a public company Banks is a reporting issuer for purposes of the Securities Industry Act, 1998 although like other domestic public companies in Guyana it is listed not on the Stock Exchange’s official list but on its Secondary List which consists of those securities that have not sought admission to the official list. Such securities are eligible for trading merely by virtue of being registered with the Guyana Securities Council.

Inclusion on the Official List on the other hand, according to the Stock Exchange website, indicates that that the, “stocks and shares that are listed are freely transferable and validly issued – not non-transferable, or forged, or otherwise tainted; it also means that the issuer meets the requirements of law and regulation in the management of its business and in the disclosure of adequate, timely and accurate information about its business to investors.” This distinction seems harsh, although companies’ silence on the reasons for their unwillingness to seek admission on the official list clearly does not help their cause.

The Barbados connection
The annual report to be put to shareholders at the meeting includes the financial statements of the company as well as the group. The group is made up of the company as the holding company, Citizens Bank Guyana Inc, a 51% subsidiary, and a dormant subsidiary Caribanks Shipping Company Limited, which appears to have little or no assets or income. The company also has two associated companies, ie companies in which it has significant influence but not control. The two such companies are BCL (Barbados) Limited and B&B Farms Inc.

BCL is owned equally by Banks Barbados, Valley Manufacturing Company Limited of Belize, Banks (DIH) Limited in Guyana and Blue Waters in Trinidad, all of whose export development needs BCL seeks to promote. Readers will recall that the Guyana-Barbados link-up was a defensive move by the local company reacting to a perceived hostile take-over about four years ago by the Trinidad conglomerate Ansa McAl. Under the deal the Barbados company was given 20% of the shares in the local company in exchange for 8.59% of the shares in the Barbados company, based on the respective book values of the shares at the time of the share exchange. Two of the directors of Banks Barbados sit on the board of Banks DIH while Mr Azam Khan represents the Guyana interest on the Barbados board.

Note 29 to the financial statements indicates that DIH purchased finished goods valued at $53 million from the Banks Holdings but made no sales to it. On the other hand sales to BCL amounted to $45 million and purchases amounted to $30 million.

The group accounts include mainly a manufacturing entity, a financial services institution and less significantly, laundry and hotel services, a combination which does not make the group accounts easily understandable to the ordinary shareholder. While the company is separately accounted for, any member wishing to ascertain exactly how the very significant banking arm has performed would need to refer to the bank’s annual report which unfortunately is not posted on its website.

One criticism that this column has made of the company’s financial statements – that it does not include the very important statement of cash flows for the company – has been addressed and this is now contained on page 26 of the annual report. This is commendable. Also commendable is the greater level of disclosure about corporate governance although one has to wonder why an enlightened company like Banks DIH cannot have at least one female director in a board of twelve. Where is the gender-consciousness in a company of which perhaps a majority of the employees in the food division are female, as are many of its customers and shareholders?

Inadequate information
The unusually brief Chairman’s report on pages 8 and 9 of the annual report (including picture and graphs) gives very little information on the company’s operations and even in that limited space, Chairman Clifford Reis concentrates mainly on the group results with one paragraph reporting on the profits earned by the banking subsidiary and the longest paragraph dealing with the arrangement with Barbados. The annual report of the Barbados company presents a stark contrast with respect to the discussion which the management shares with its members. Significantly, in the Barbados company, the roles of Chairman and CEO are separate with both persons presenting separate reports to the members. There, the Chairman’s report runs to just two pages while that of the CEO covers more than ten. Structures and culture are different, but the amount and quality of information offered to Banks DIH shareholders is far too sparse to enable any understanding of the performance of the various divisions.

The company v the group

Source: Annual Report 2008

The table shows in the left half the performance of the company for the year ended September 30, 2008 with comparison for 2007. On the right hand side of the table are the group results ended on the same date, with H1 representing the first half of the year and H2 the second half. The first half numbers come from the unaudited half year report published under the Securities Industry Act while the second half numbers are derived from the audited financial statements.

The company’s sales for the year increased by 5.1% over 2007 to reach $13.565 billion. Profit from operations, ie before finance cost and other income including dividends received from Citizens Bank, increased by 6.4%, considerably less than the 27.12% for the group. As a percentage of sales, profit from operations increased marginally from 9.74% to 9.9% but it is not possible to determine how much of this is attributable to the company’s branded products, those it produces under licence and bought in products. After charging taxation of $570 million including a mix of property, withholding and capital gains taxes of $79 million, the company realised a net profit of $850 million (2007 – $793 million) of which dividends paid or to be paid amount to $420 million.

Profit from operations for the group increased by 27% over the preceding year to $1.922 billion with other income net of financing cost resulting in profit before tax of $1.968 billion. After taxation of $710.9 million of which property, withholding and capital gains taxes amount to $107 million, the profit for the group was $1,257 million, an increase of 22% over 2007. H1 accounted for 49% of sales but 55% of profit after tax, while in the second half of the year 51% of the sales produced only 45% of profit after tax. No explanation is given for this apparently anomalous situation but the unaudited first half would have included estimates while the second half of the year coincided with increased costs of raw material and fuel which the company may not have been able to pass on in higher prices.

Profits after tax of Citizens Bank amounted to $437.7 million, an increase of 66% over 2007. Of the amount of $437.7 million only 51% belongs to the group, the rest attributable to the shareholders who own the remaining 49% of the shares in Citizens.

The very important measure of Earnings Per Share for the group jumped by 16% from $0.90 to $1.04 but for the company the increase, which is not stated in the annual report, is a more modest 7.6% after accounting for dividends from its banking subsidiary. Perhaps this explains why the price of the company’s share was almost static throughout the year. Once again we note that there is no information or discussion on this vital factor.

The company continues to honour a commitment it made to shareholders to pay three dividends, which of course carries an administrative cost but also allows for better cash flow management. Total dividends paid and proposed for the year are $0.45 per share compared with $0.42 per share in 2007 – an increase of 7.14%. The payout ratio which measures the share of after-tax profit paid to the shareholders was 49.41% compared with 50.44% in 2007.

The company’s balance sheet remains strong with cash resources of $1.3 billion, an increase of $1.2 billion in 2007 while net trade receivables, a function of sales and credit management increased by 24% on sales which increased by 5%. Total assets of the company grew by 5.53% while those of the group increased by 6.63%.

Mr Reis is one of the private sector voices that can still command attention, and he was known to advocate fearlessly on behalf of his company and the private sector. At this time, his reasoned and constructive views on issues on direct and indirect taxation including VAT would have been particularly useful above the din of often uninformed rhetoric and opinion that seems dominant. The company should be leading in the advocacy for the zero-rating of bottled water (at least locally produced) – one of life’s greatest necessities and what some may even consider a public good. Water from GWI which few would want to drink without boiling is zero-rated, but that of the private producers is taxed at 16%. That policy certainly needs revisiting and offers an opportunity to the company to join with consumers to have the tax removed. This I should add is only one of several areas that need reform sooner rather than later.

Like the other commercial banks, Citizens has had a very good year and its results have embellished the group’s performance. But even banking can be cyclical and the core business of the company – particularly its beverage arm – needs to become more dynamic and be positioned to take up any downturn.

Chairman Reis in his report titled ‘Building on Traditions of Strength’ did not address the future prospects of the company. He referred briefly to the impact of the global financial crisis on remittances and the economy and expressed a commitment to be “optimistic, proactive, and to pursue a vigorous approach towards maintaining and improving the performance of the business.”

The group may need more than just commitment as the world enters the most challenging year of the company’s illustrious history.

Our World in 2009

Certainly the most authoritative publication which predicts the grand occasions and developments of the following year is the widely circulated Economist, published in the UK. Even by its own admission many of its predictions for 2008 were way off target. That of course is true of all other publications that engage in this annual crystal ball-gazing. But then the Economist is no ordinary weekly – it is the weekly on economics and political issues of the day. Yet it got the US presidential elections wrong and like everyone else did not foresee the financial meltdown which started in the US and saw the nationalisation of nine banks across the US and Europe and the injection of more than a trillion US dollars. Incidentally, economists by a margin of 2 to 1 supported Barack Obama for the presidency of the US.

The US, therefore, is as good a place to start any prediction for 2009 when come January 20, Barack Obama will be sworn in as the first black President of the USA, the world’s only superpower. That is an occasion of historic proportions in a world that has for centuries been defined by colour and class. The world has changed dramatically since Obama began his campaign for the White House on the winning slogan, ‘Yes, We Can.’ The problem for him is how he can persuade the Americans that that statement comes with the unstated qualification, “but not now.” The truth is not even Superman could right the wrongs of US economy in one year.

America’s hope
Yet there are positives from an Obama presidency. He is one reason why the world will start looking at the US through changed lenses. The other is why they should. America accounts for some 20% of global GDP, ie one out of every five dollars spent. It is the willingness of the American consumer to spend – often money it does not have, on goods it does not produce – which has driven China and India, two of the most populous nations of the world to record growth lifting hundreds of millions out of poverty.

But then there are some contradictions. Some economists are troubled that a President Obama, committed to righting the US economy will adopt protectionist measures. He has signalled as much with the promise to give tax breaks to American firms that stay at home. He is also on record as describing NAFTA as “devastating” and “a big mistake,” although he later back-peddled and indicated he would not unilaterally reopen negotiations on NAFTA as he had earlier threatened to do. As increasing number of jobs are perceived to be lost to Mexico, Canada, India and China, the unanimous support which Obama has received from US labour may start to unravel. Already faced with the worst economy ever to have been inherited by an incoming US President, Obama will find that he has one of the shortest honeymoons on record with a zero margin for error.

Obama has also indicated that he would go full steam in a stimulus package designed to slow and then reverse the rate at which the economy is contracting. Estimates of the decline are anywhere between 3-5%, a catastrophic rate indeed, that would spell trouble for the rest of the world. If not the US, can the BRIC countries − Brazil, Russia, India and China − prevent the world economy nose-diving?

The elephant and the dragon
Not too long ago conventional wisdom was that the Chinese and Indian economies could do just that. But more recently, the pessimists have been in the ascendancy. The close of 2008 finds India sabre-rattling with its long-term rival Pakistan following the Mumbai bombing last month. Suddenly the Indian star is losing its brightness with the ever-present political uncertainties resurfacing. Elections predicted to be held in the first half of the year will almost certainly see the governing party paying a huge political price for its failure to respond quickly and decisively to the attack which India blames on Pakistan. The country that has had an average annual growth rate in the past five years in excess of 8% with the major share coming from services is almost certain to slow. The most direct impact will be on the poor, with tens of millions falling back into poverty.

This columnist for one has never been comfortable with an economic philosophy in which economic growth must necessarily be accompanied by a widening of the income and wealth gap. And that is what has been taking place in India. The World Bank reckons that in 2005 the number of persons living below the poverty line was 456 million compared with 420 million in 1981, although when measured as a percentage of the population there was a drop of some 18%. India’s infrastructure is poor, foreign investment is declining and the value of business on which the country’s hugely successful outsourcing information technology sector has been built has also declined.

China too will have its own problems. Its economy and rapid growth have been driven by exports which for seven years until November 2008 kept rising at rates so phenomenal that they astounded economists around the world. Then in November the Chinese reported the first year on year decline in exports of 2.6%. That is as bad for the economy as for the psyche which had started to entertain dreams of a Chinese century. But China’s fortunes in 2009 are bleak only by its own stratospheric standards.

The safest bet to weather an economic storm is to have lots and lots of money. China certainly does. It has re-invested upward of $1 trillion, mostly earnings from manufacturing exports, into American government bonds and government-backed mortgage debt. Its challenge is on choosing between further lending to finance American consumption of China goods or risk a further slowdown of exports on which it has built a modern economy that is the envy of the rest of the world. Its greatest challenge in 2009, however, is not the meltdown itself but how it responds to it. And there the signs for the Year of the Ox in the Chinese calendar are not good. Its instinctive response was a return to censorship.

Brazil and Russia
That takes a huge chunk out of the BRIC countries which some leading thinkers consider as having the potential to challenge the West as the most powerful economies, all within the next few decades. This may seem wishful thinking but those countries cover over twenty-five per cent of the world’s land and forty per cent of the world’s population. But Brazil too is experiencing its own challenges and its Congress recently approved on Thursday a cut of 10.3 billion reals ($4.38 billion) in the government’s 2009 budget to cope with an expected decline in tax revenues as a result of the global economic slowdown.

That leaves Russia. Judging by Putin’s swagger and the short uneven war with Georgia, one gets the impression that Russian power, pride and influence are rising. But with oil prices falling, Russia will have its own economic problems in 2009 with the usual mix of reduced foreign investments, rising imports and declining exports, restrictions on credit and inflation reducing real income.

Here at home
The end of 2008 of course was highlighted by the opening of the bridge across the Berbice River. It was a tremendous Christmas gift not only to Berbicians but to Guyana, and the government should be complimented on the achievement. But as the government looks at the prospects for 2009 it can do so only with at best guarded optimism. Forty years after Independence, Guyana is still mainly a commodity producing country which has only just graduated from being a country subject to the strictures of the IMF.

We are still without any real plan or direction. After more than two decades of allocating the nation’s forestry resources mainly to foreign investors, the country now wakes up to the possibility of carbon credits with President Jagdeo so convinced that he is prepared to make fundamental changes to the use of our forests, all without consultation.  The problem is that so much of our forests have already been allocated that any decision by the President on the use of the forests will require the agreement of the licensees. We could then be in a situation similar to that with GT&T where the government is unable to negotiate out of a lop-sided agreement following years of dithering.

The shelving of any plans for hydropower leaves the consumers at the mercy of the Guyana Power & Light Company which is easily the most inefficient operator of its kind in the region. Perhaps because GPL is state-owned and managed it has escaped the kind of criticism to which GuySuCo has been subjected, sometimes unfairly. It should not escape the attention of the decision-makers that none of the growth sectors of the economy rely on power by GPL for their operations. Until GPL can become an efficient producer and transmitter of electricity, the country’s economic progress will be retarded.

Over the past few years there has been a boom in commodity prices but the national budget has little to show for it. In fact in the midst of the boom, our national sugar company continues to rely on Government for support. National performance like growth in GDP is distorted by the role of international operators in bauxite, rice, gold and forestry. Excessive taxation is imposed on labour while investors enjoy all forms of concessions. There is an obsession with GDP while ignoring people issues like employment and poverty.

The country has so far taken the ostrich’s view of the economic crisis. It is time that we take our heads from the sand if we are to successfully negotiate with the challenges of 2009.

The PNCR statement is a litany of hearsay and wishful thinking

Before I comment on or seek to correct the more egregious errors in the PNCR’s statement published as a letter in the SN of December 19, 2008 (‘Parties in opposition tend to encounter difficulties which can lead to the exit of important members, but they do recover’), it is worth noting that its level of vitriol and malice hardly contributes to enhancing public discourse or the creation of an informed polity.

Equally, it is a measure of how the PNCR has changed over the years in dealing with criticisms. When in 1996 along with other members of civil society I wrote a letter critical of a decision by Mr Desmond Hoyte to speak at a certain function, his response was a private letter to me stating that he “did not accept our concerns as being valid” and promising to follow up with a more complete response. And so he did two weeks later. Mr Corbin, too, demonstrated similar civility towards views expressed by me both publicly and in a letter to him advising him not to follow through with a boycott of the 2004 budget debate since it would rob the party and the country of constructive criticisms of the budget. In a response of April 7, 2004, he stated, “You need not apologise for your persistence. The party welcomes and encourages healthy debate as it is the only way to ventilate all relevant issues.” Apparently those who now issue statements on behalf of the party do not share those sentiments.

Let us now turn to the statement:

1. On taking to the streets: I am not sure by what strange logic or giant leap the statement could interpret my call for “holding the government accountable” as the option of taking “to the streets again.” I sincerely hope that a party which has been around for fifty-three years, twenty-eight of them in government, can be more constructive, creative and resourceful in its strategizing than to think its role is “the street” or nothing. And let me say that I hope the party still considers street activities not only as legal and legitimate but as one of the most effective instruments of political advocacy.

2. On the attitude of people of my “class” to PNC supporters: The statement suggests that people of my “class” refer to the supporters of the PNC as thugs and hooligans. I challenge the architects of the statement to show any evidence where I have ever described, even remotely or indirectly, the supporters of the PNCR or anyone else as hooligans and thugs. In fact one of my most emotional memories of a public encounter with a crowd of persons was during the disturbances on the East Coast Demerara in 2001 when at around 2.30 am a large group advanced on the car I was driving with a number of Indian staff members of our firm. I came out of the car with headlights on, approached the crowd, which was Afro-Guyanese, stating “Good Night friends, my name is Christopher Ram” and heard a voice say “that is a good man. Let us escort them out.”

On this question of class − whose class interests were served when the PNC boasted of its reversal of the policy of making the small man the real man and supported trickle-down economics and the downsizing of jobs in the public sector?

3. The statement refers to what it claims people of the class the party ascribes to me told Mr Corbin on his election as leader of the PNC. What I told Mr Corbin is on record; it is contained in a letter of February 3, 2003, congratulating him on his election as leader of the party and expressing the hope that he would “demonstrate in full measure qualities of wisdom, courage, understanding, sensitivity and personal sacrifice which few possess.”

4. On my party membership: The statement describes me as a “former active member of the WPA.” I have never been a member, let alone an active one, of the WPA. For some time I supported the WPA for its Rodneyite philosophy and principles which I believe are as relevant today as they were when Dr Rodney was around. And I have also acted supportively to other parties, including the PPP/C mainly when in opposition and the PNC. Over the past twelve years I have actively participated in around ten public activities of the PNCR, all in my capacity as an accountant and member of civil society. In fact in the run-up to the 2006 elections when the PNCR invited professional groups to send representatives to meet with it, I unhesitatingly volunteered to represent the accounting profession. Senior members of the party must be aware that I was consulted and sat in on working sessions of two of the main groups charged with the preparation of the party’s 2006 elections manifesto. I suggest to the architects of the statement that they enquire of the reasons for the manifesto being issued just a few days before the elections. Their findings would be instructive.

5. On where I was while the PNC led support for the people during the 2005 and 2006 floods: The statement asks where I was when the PNCR and its Leader led the way in the disastrous floods of 2005 and 2006. The answer is simple − I was actively engaged with civil society in helping to mobilize resources and in the distribution of hampers at the Civil Defence Commission on Thomas Road. When we consider the role and response of organisations like the Red Cross whose mandate is that kind of work and others like Alicea Foundation and the Guyana Citizens Initiative which was established in response to the 2005 disaster, it seems distasteful for any one individual or organization to claim credit. In fact Mr Corbin was doing just what President Jagdeo did – claim credit for what any citizen should do, let alone a political leader.

Apparently unaware of the several articles and letters I wrote on the flood and the failure of the government to account for the huge sums received, the statement asked, “Who was it that exposed the gross mismanagement, discrimination and corruption within the government flood relief programme?” Again I would refer the writers to the exchange of letters and my columns during and immediately after the flood and more recently to a three-part article on the Audit Office in which I reminded the Audit Office that their promised report on the flood accounting has not been issued three years after the disaster. Can I suggest that they ask Mr Corbin to press for the publication of the report? And are they aware that it was a letter dealing with the flood that prompted President Jagdeo to bring a law suit against me?

6. On the broader question of giving credit where credit is due: Just like its counterpart, the PPP/C takes all the credit for free and fair elections, the PNCR wants to take all the credit for statements and actions opposing the excesses of the government – for example, for the Disciplined Forces Commission Report and the exposé of extra-judicial killings. Should the PNCR not at least acknowledge the role of the GHRA? On another example − the court’s decision on the issue of broadcast licences: had the leadership of the PNCR been more willing to go to the courts, rather than claiming that the courts cannot be relied on, that decision may have come much earlier. Perhaps it is that same unwillingness by the top lawyers in the PNCR that led to the lapse of time before any action could be taken on behalf of the hundreds of poor and middle-class, mainly Afro-Guyanese out of their savings in Globe Trust after attorney-at-law Stephen Fraser, economist Professor Clive Thomas and I won a landmark case against the Bank of Guyana for its poor supervision of Globe Trust. In my view this is more than another gap in the knowledge of the architects of the statement but one of the many opportunities the PNCR under Mr Robert Corbin has missed to serve its constituents.

7. On VAT: Of all the absurdities in the statement, the one that takes the cake was the assertion that it was the PNCR and its Leader, Mr Robert Corbin, who pushed the VAT issue to the top of the national agenda. What about Mr CN Sharma, Red Thread and other groups which wrote letters and took to the streets in peaceful demonstrations on the VAT? The party seems to have gone into collective amnesia. Ram & McRae published a Handbook on the VAT and did a consultancy for the PSC on the matter while I appeared before the Special Committee on VAT, wrote several articles on the VAT which were widely quoted by the party and publicly challenged the government on the incorrect rate at which it maintains the VAT. Let me remind the authors that the PNC asked me to present the Technical Paper to the PNC Symposium on VAT at the Hotel Tower in November 2006 and it was that paper which formed the basis of a resolution from the floor mandating the PNC to take certain action. I should add that the party delayed advancing the matter while I was being unsuccessfully persuaded to alter one of my recommendations.

The authors of the statement have done a disservice to the person they sought to defend and to the party. If he was so effective on two of the most significant issues to have confronted the country prior to the 2006 elections – the flood and the announcement of the introduction of VAT – why did the party perform so poorly at the elections? The authors did not address any of the several factual assertions I made in my letter but rather incorrectly considered it an attack on Mr Corbin. The party’s statement is a litany of hearsay, wishful thinking and the imaginations of a creative mind. I therefore find it hard to believe that the statement was approved by Mr Corbin or any of the more informed leaders of the party.

Concerned as I am about our country, I sympathise with the political opposition in their efforts to have the President and his government act strictly in accordance with the constitution; raise the standard of governance and accountability; get meaningful representation on public boards and bodies; reduce corruption; ensure that state resources are not abused for partisan purposes; and above all else, ensure that the interests of the poor are not ignored while the disparity in income and wealth between the haves and have-nots widens.

Looking back

Today’s Business Page looks back not over the past year but to some fifteen years ago when on January 8, 1994, Ram & McRae (then Christopher L. Ram & Company) jointly with Ernst & Young Caribbean hosted a seminar ‘Managing for economic recovery.’ Among the persons who made presentations were then Senior Finance Minister Asgar Ally, the regional and international partners of Ernst & Young and Robert McRae and myself from Ram & McRae. With tax reform again being discussed at the national level I thought it appropriate to republish extracts from my presentation at that seminar on the topic ‘Tax reform: a vehicle for economic recovery.’ Some time over the next month or so Business Page will review developments since then and offer suggestions on steps which may seem necessary at this stage.

Role of taxation
Taxation is a major tool of economic management. Properly used it can play a significant role in fixing prices, allocating resources and alleviating social problems by redistribution of income. In the distant days of cheap oil and cheap money, however, serious mis-allocations and distortions were allowed to develop because of poor fiscal and monetary management.

Reality confronted the world and tax reform throughout most of the decade of the ’80s and early ’90s has been a popular cry in many countries of the world transcending continents, economic and political systems and different levels of economic development. In the metropolitan countries most notably the USA and the United Kingdom, the political directorate used tax reform as a way to marshal support for supply side economics, an experiment which emphasised policy measures to affect aggregate supply or potential output.

Across the other side of the world, the Asian tigers had as the objective of their reform increasing the revenues of their nontraditional sectors, a more effective income redistribution, removal of tax-induced incentives for waste and inefficiency and reduction in the transaction cost of transferring resources from the private and public sectors.

In the case of most of the developing countries the thrust for reform has largely been dictated by international lending agencies often in the role of a doctor administering to a sick patient. Unfortunately many of the prescriptions have largely followed wholesale copying of the changes in the metropolitan countries.

Although it is unreasonable to expect government to finance development expenditures while controlling the deficit and reducing inflation, there is little sympathy for administrations which increase taxes. In any case it is certainly not possible to finance development outlays of the public sector by depending entirely on regressive taxes, particularly since there is concentration of income and wealth in the hands of a small proportion of the population. It is unfortunately true that this situation is usually exacerbated in the process of economic development.

Tax ratio
It is usual in considering tax reform to examine the level of taxation in the country and to compare this with other countries. Table 1 [not reproduced] shows that of a random selection of fourteen countries, Guyana ranks number three among the highest taxed countries, well ahead of places like Singapore, Barbados, Trinidad & Tobago, USA, UK and Korea. The ratio for Guyana is almost certain to be unreliable for at least three reasons not all of which move in the same direction:

  1. The development of a culture in which tax evasion became a normal part of everyday life; this was particularly acute among the self employed persons in respect of their compliance with the income tax laws and the business community both in relation to income taxes and custom duties.
  2. Guyana is rated among the hyper-generous countries in the world: A vast array of tax concessions have been granted to a host of interest groups who have therefore benefited to the tune of unquantifiable millions. If the taxes otherwise due were not forgiven then the Tax/GDP ratio would have been even higher.
  3. Estimates of the unreported, unofficial economy suggest that that sector may be as large as the reported economy.

The issue of tax reform
Tax reform in any country cannot be carried out successfully without a clear recognition of the problems facing the country, an understanding of the direction in which it wishes to go and the policies to be pursued in getting there. Taxation is merely an instrument of economic policy and development and the beneficial consequence of taxation requires a clear and cohesive policy.

The discussion of tax reform is concerned as much with the structure of taxes both direct and indirect as it is about the level of taxation. As we have said before, where the figures are unreliable the measurement of the level is in any case meaningless. Tax reform must not be seen only as a revenue matter but as part of the control of the national budget. This therefore raises the issue of expenditure control about which I will just say that the structure of central government expenditure is such that most of the expenditure is at least fixed and cannot be reduced.

Taxation will always be the main source of revenue to most developed countries where the increasing expectations of a long suffering people demand increased not less revenues. However, the introduction of any additional taxes including those resulting from changes in rates or allowances only serve to penalise further those groups, most notably the employed persons and law abiding importers and manufacturers, who comply with the law. A case clearly exists for reform both for improvements in the tax structure and additional revenues. Such reforms should ensure that additional revenues are raised with very little adverse effect.

Tax reform includes winners and losers. The losers are often likely to be those with the greatest resources to resist and defeat reforms. Accordingly popular support, consultation and communication are vital to the reform process.

In seeking change, it must be recognised that the existing tax system is the product of decades of social, political and economic legislation and behaviour. Whilst it may be ideal in a tax reform package to go back to the drawing board and reconstruct all the laws and practices this is impossible to achieve for several reasons:

  • the existing tax system significantly influences current business patterns, relative prices, property values and legitimate vested interest;
  • the will hardly exists among politicians whose planning horizon extends only to the next elections;
  • the technical and other resources are seldom ever available; and
  • the opposition from vested interests and even tax administrators.

There is no such concept as an ideal model tax system which is applicable to all countries at a particular time or for any one country all the time. Tax reform is more a process of adapting to changing social, political and economic demands and priorities rather than a swift movement towards a desired goal.

Experience elsewhere suggests that efficient reform is best achievable by a series of incremental methods rather than by any comprehensive one time reform.

Tax evasion
Tax evasion affects both the Customs and the Inland Revenue Department and although the instances at the Customs Department seem to draw more media attention, the situation among certain groups of income tax payer is perhaps not much better. Although Table 1 [not reproduced] suggests that Guyanese are an overtaxed nation a comparison of the taxes paid by the self employed persons and those paid by employed persons suggests that there must be massive tax evasion by the self employed group. It seems strange that this group which includes professionals, farmers, restaurant and night club operators, traders and unincorporated businesses pays income tax equivalent to 0.44% of the total tax revenue of the country.

Laws exist for dealing with tax evasion but the resources available to the revenue authority are clearly inadequate to deal with the apparent scale of this practice. It is not a matter of laws or penalties for these are already extremely severe. The administrative capability to deal with this crisis must be enhanced by better staffing, training and salaries.

I believe that the bringing together of the two revenue departments under a single umbrella would lead to much more significant revenue collection through co-ordination.

The economy’s structure of financial institutions and procedures will need to be reshaped to aid in tax enforcement. Faceless transactions must be prohibited; an independent and skilled accounting profession must be fostered; specialised law tribunals must be set up to handle tax cases and corruption by public officers must be dealt with firmly.

The system has so far not adapted well to the abolition of the tax exit certificate, the untraceable movement of foreign exchange through the cambio system, and the increasing incidence of short term contractors, consultants and temporary workers.

While some of these recommendations will be unpalatable to many, the danger to society as a whole cannot be dismissed. Concentration of wealth among a small percentage of the society may on the surface appear to be attractive to those benefiting. At some point however, the inequity will result in social backlash from which no one can escape unscathed.