The economics of Linden and electricity rates – conclusion

As this column evolved over the past month its focus moved beyond Linden and electricity to the whole of Region 10 of which Linden can be considered the capital. The column which concludes today was in response to developments in that region in which the drastic hike in electricity rates led to protests, deaths and what will soon come to be known as the Region 10 Agreement. That agreement, signed by the Chairman of Region 10, Sharma Solomon, and Prime Minister Samuel Hinds on behalf of the Government of Guyana provides for a Technical Team specifically to look at the question of electricity; an Economic Committee to address the economic conditions in the region, a Commission of Inquiry to look into the events of July 18 in which three persons were killed; the establishment of a Region 10 Land Selection Committee to look at investments and land development in Linden and Region 10; and for the transfer to the regional administration of the television dish and transmitter and the granting of a television licence to the region.

The agreement provides for the naming of the Economic Committee by Tuesday of this coming week and for it to submit its final report “within ninety days.” While the members of the Technical Committee have been named as proposed by the region and the government, this column has learnt that the designated persons are awaiting formal notification of their appointment which makes the ninety days to report even more challenging.

Unfortunately ‘normal’ in executing agreements in Guyana is often synonymous with procrastination and more like a long-distance hurdle, with President Ramotar’s Tax Review Committee only one recent example. At this stage all the details of the Commission of Inquiry have not been made public and it is unclear when the commission will be assembled to begin its work.

Time for action
This column calls on the parties to the agreement to accelerate the rate of activity.

In this concluding part which seeks to look at the prospects for economic development in the region, the unsatisfactory state of available and reliable baseline data is an immediate problem. Indeed one of the terms of reference of the Economic Committee is to “examine the employment situation of Linden in particular and Region 10 in general…” That is not only an enormous task but also an enormously important one with direct relevance for affordability, one of the matters into which the Technical Team is required to enquire. As time would have it, that task is made more challenging by the fact that the committee might not be able to call on the services of the Bureau of Statistics which is now engaged in the national ten yearly census.

Accordingly, the members of the Economics Committee will have to be resourceful in how they approach the gathering of information and explore places like GECOM, the ministries and other agencies which would have collected some economic and social data for their respective purposes.

Economic plans
One of the other terms of reference of the Economic Committee requires it to “examine all studies, all plans, all sectors and their resources in use, new resources and human resources and develop a sustainable plan for Linden and Region 10.” There have indeed been a number of plans which the committee will find most useful and which with some updating could constitute a useful starting document. But I fear that the ninety days deadline for completing the work will require economists of herculean ability. Both Dr Clive Thomas who is generally regarded as the country’s best economist and Mr Haslyn Parris who is very familiar with the economics of the region are on the Technical Team looking into the electricity issue, which has the same deadline.

But let us leave the committees to do their work and get on with our own and look at the economic and development prospects for Region 10. Despite its not so positive image of bauxite, the region is rich in other natural resources.

Giving away the store
Region 10 is one of those regions for which tax holidays are provided for under the Income Tax (In Aid of Industry) Act. To qualify, the economic activity must be new, of a developmental and risk-bearing nature and demonstrably create new employment. The power to grant tax holidays rests with the Minister of Finance who also has wide powers to enter into investment agreements which could give businesses additional and valuable wide-ranging concessions. To give an idea of the width of the discretion and the possibilities for abuse and misuse of the law, one only has to look at Bosai and Rusal, neither of which undertook new economic activity nor demonstrably created new employment. Indeed they slashed employment in an existing activity but were yet given tax holidays.

Unfortunately because of the politicisation of the tax system none of the ten administrative regions has any power to attract or direct businesses to their regions. Tax incentives and concessions provided for under the laws including tax holidays as well as the powers to enter into investment agreements, are entirely controlled by the central government. Some participation and control were clearly contemplated by Article 76 of the Constitution which anticipates Parliament making laws enabling “regional democratic councils to raise their own revenues and to dispose of them for the benefit and welfare of their areas.”

Contrarily, the government has been improperly giving away tax revenues which the law requires them to impose and then turns around and tells the regions it has no more money to spend on them. Similarly the Constitution at Article 77 A requires the Parliament to make laws providing “for the formulation and implementation of objective criteria … for the allocating of resources to, and the garnering of resources by local democratic organs,” again emphasising the right of regions to raise revenues.

The importance of good governance
Still on the governance issue the constitution sets out as a fundamental right the participation of persons through various kinds of organisations in the management and decision-making processes of the state. And then there is article 78 A which requires the Parliament to establish a Local Government Commission which together with the other provisions will ensure better governance and democracy at the regional level.

Unfortunately all the regions of the country have had to contend with years of shocking failure by their representatives in the National Assembly to bring the necessary laws to ensure that the constitutional provisions are effected. Our parliamentarians must be the only people not to recognise how fundamental these are to the development of Region 10, as indeed to the rest of Guyana.

I have always believed that good governance is a necessary prerequisite for social and economic development, and that good economics always turns out to be good politics. Maybe the Region 10 Chairman should meet with his counterparts to persuade them to press their parties to do what the constitution has provided in the interest of the people of the regions. If they do not wish to play ball in their own interest, then region 10 will once again have to show the way.

Regional Development Strategy
Assuming these governance issues are addressed, the question for the Economic Committee is how to achieve their objectives in 90 days, a challenge which even Jules Verne would find daunting. Fortunately there is a document called the Regional Development Strategy for Region 10 which was prepared not too long ago with input from LEAP (referred to in an earlier part of this column), the government, the EU and the UNDP.

And as I mention the LEAP, I should update readers with a conversation I had with a high-ranking government official who suggested to me that the reason for the runaround I had to get a copy of the LEAP Completion report is that that report never got beyond the draft stage. While I consider my source just short of impeccable, I am astounded that the European Union would have spent €12.5 million without a completion report on the project!

On the other hand, the Regional Development Strategy is a document which could form the basis of the work of the Economic Committee. That report identified as the vision for the economy five engines of growth: agriculture, forestry and wood value- added manufacturing and other skill-based industries absorbing the increased technical output of our schools and technical institutions, tourism and transportation.

The strategy recognises that bauxite mining will continue in Linden and at Aroaima. It asserts that a study to determine the feasibility of constructing an aluminum smelter in Linden has confirmed its viability while kaolin and laterite are developed within the bauxite industry to complement the traditional metal, chemical and refractory grade bauxite.

The strategy also includes a vision for environmental stewardship, the social sectors and governance and institutional capacity, but did not appear to have addressed the constitutional issues. Paragraph 2.4 of the strategy identifies “Region 10 [as] crucial to the development of Guyana. Its geo-strategical position as a gateway to Brazil, its central location in the heart of the country bordering six other regions, its span over the three major rivers, and its weight in the national economy (particularly bauxite mining) make it an outstanding region compared to others.”

But the document goes further claiming with justification that the elaboration of a Region 10 Development Strategy as a pilot project in Guyana and a harbinger for similar strategies in other regions gains critical importance in the national context. While some of the methods the leadership of Region 10 has pursued have not won universal approval, the community itself has demonstrated to the rest of the country that central government habits die hard and sometimes have to be pushed out of the way to make room for development.

The next ninety days and how the government responds to the reports of the Technical Team looking into electricity and the Economic Committee with a broader mandate, will signal the direction in which the country will go. Favourable and it could be a model for success. Failure to act will cause failure all around. The government remains key but not exclusive.

The economics of Linden and electricity rates – part 3

As with the first, the second installment of this column last week attracted a full length response from the Prime Minister Samuel Hinds which as far as I could understand pleaded with me “to help soothe anxiety about removing a historical subsidy.” I have no objection to doing so if Mr Hinds would share with me a copy of the Bosai Power Purchase Agreement and detailed information on the generation and distribution of electricity in Region 10.

Mr Hinds in his letter also cited ultra-conservative, anti-labour Margaret Thatcher’s handling of the coal industry in the seventies as a model against which to compare our 21st century Linden. As if to establish the firmness of his belief, his government then appoints two Bosai directors, Messrs Winston Brassington and Norman McLean, to investigate the Bosai-supplied electricity in Region 10, the genesis of the current unrest in that region.

Mr Hinds also reacted to my reference to the LEAP Completion Report and even sought to advise how I should “proceed to critique it.” After two weeks and despite assurances by the Minister of Finance that the report would be provided to me, I am yet to receive a copy.

In last week’s column I reproduced a map of Guyana showing the administrative regions of the country. Region 10 is not a particularly large region and has been described as the only landlocked region in the country. But that understates its importance. Not only is it the country’s sole bauxite region but in terms of natural resources it also is a significant forestry region which LEAP had projected would witness increased annual production of about 5% per annum from 2004 onwards. The incomplete draft Completion Report spoke confidently of the number of activities taking place in the agriculture sector, allowing farmers to target specific high yield crops for the Guyanese and export market. It referred to a draft agriculture strategy having been tabled for discussion by LEAP and the Regional Agricultural Team, which when finalised, would guide regional agricultural development in the medium to long term.

Historically the fortunes of the region have been closely linked with that of the bauxite industry. But employment reduction at Linmine and Bermine and their successors has been significant over the years. Given that the sector now employs less than 10% of the 12,000 persons employed by the industry at its peak, the largely forgotten National Development Strategy (NDS), and Poverty Reduction Strategy (PRS) both articulated the need for significant expansion and diversification of economic activities. Not surprisingly then, the draft LEAP Completion Report identified a rapid transition to a diversified economic base as of particular importance in Region 10.

Importance of Linden
Linden’s location is strategic. It has the potential to become the hub for goods from northern Brazil and a key point in the Lethem to Georgetown corridor. But its importance within Guyana has been underlined during the current impasse in which road contacts and movement of goods and people between Regions 7, 8 and 9 and Regions 4, 5 and 6 have been brought to a virtual standstill.

Ocean-going vessels navigate their way to Linden with practically no problem, while the region also has various kinds of clay to spawn a major industry. With no threat from rising sea levels and a largely concentrated population many of whom are skilled artisans, the region has the capacity to provide its current population of approximately 45,000 with a standard of living that compares favourably with the rest of Guyana.

Transformational leap
LEAP was supposed to have provided that springboard with €12.5M provided by the European Union. The project had the kind of structure so loved by those overpaid international consultants who often have a first call on project funds. Overall responsibility for the project rested with the National Authorising Officer of the Ministry of Finance, while executive responsibility lay with the Project Steering Committee. This committee was responsible for approving the annual work programme and receiving regular technical and financial reports.

The government was expected to play the major role in supporting the transition from a bauxite town to a diversified community with the key five agencies being GO-Invest, National Industrial and Commercial Investment Limited (NICIL), the Forestry Commission, the Ministry of Agriculture and the Linden Economic Advancement Programme (LEAP).

The core component of the LEAP was the Business Development Services (BDS) oriented to providing “hand-holding” assistance to new businesses and SMEs as well as to help entrepreneurs to modernise and improve management skills. Whereas in the short to medium term BDS was expected to become a one-stop-shop in Linden to streamline queries and business solutions for existing and new entrepreneurs, the ultimate purpose was to turn it into an example of a driving force for business and economic development of Region 10.

Government stalled
The results of the LEAP are disputed. Ms Kathy Whalen, LEAP International Programme Manager was confident that LEAP achieved most of its set indicators and that new jobs were created and investors were attracted to the community. Many disagreed then, and now question those glowing reports against the background of the current state of the community. The absence of the Completion Report makes any assessment of LEAP a step in the dark while there is almost a blanket of silence over the successor Linden Economic Advancement Fund which the government brought their friends in to manage.

The government appears not to have acted on some of the suggestions made in the draft Completion Report including the need for an institutional arrangement for investment promotion and micro-credit activity. The draft recommended a jointly public-private financed and operated entity with the Government of Guyana continuing to make a credit line available.

The government dilly-dallied and as a result, arguably the richest region in the country was left to become a depressed community where residents are unable to meet the economic cost of basic necessities. Sadly, it took the events of July 18 to cause the government to establish two teams to look at electricity specifically and the wider economic state of the region. While those teams will have their work cut out, there are several options they would no doubt consider. Here are my brief comments on some matters they may wish to consider.

1. Historically low tariffs have militated against any attempt not only at conservation but common sense. It appears that most consumers use electricity rather than gas for cooking and many of them keep on lights 24/7. At least one government representative agreed with a suggestion I made to him that the government buy a bulk supply of gas stoves which it can distribute to residents of the community, at a modest cost. This would have an immediate and significant impact on consumption and therefore the subsidy. Similarly the government can distribute energy-savings bulbs with the same effect.

2. The entire arrangement whereby the government supplies duty-free fuel to Bosai Services and pays the company to generate and supply electricity to the region has to be carefully scrutinized. The members of the team include GPL Chairman Mr Winston Brassington and its CEO Mr Bharrat Dindyal. GPL is of course a high cost supplier of electricity and by their presence on the team may also benefit from the kind of professional examination of electricity costs which will take place. No doubt too, there will be a thorough examination of the Power Purchase Agreement and the allocation of costs between various groups of users/consumers.

3. The team should also consider a more sustainable, lower cost alternative strategy for the medium term (3-5 years). Energy is critical to economic development and I understand from a document which was provided to me, that a regional energy plan, including the use of the region’s natural resources is being considered. This must be accelerated.

4. The region must not be forced into the national grid. This is as much an economic as a political matter. If the region can provide electricity at a lower cost, then it must be free to do so.

Economic issues and democracy
The potential of the region, like the rest of the country, has been stymied by lack of local democracy. For all the talk about budgets, the regions are at the mercy or fancy of the Minister of Finance while the Minister of Local Government appoints the Regional Executive Officers. The regions have no control over taxes and are required to deal with all kinds of garbage including plastic containers for which the central government collects more than one billion dollars annually. If ever there was one set of revenues that should be shared among the regions, the Environmental Tax is that one.

And it is not that revenue-raising is any new concept. As Article 76 of the Constitution states, “Parliament may provide for regional democratic councils to raise their own revenues and to dispose of them for the benefit and welfare of their areas.”

If this was in place, the region could raise revenues by way of tolls, charging for certain services, etc.

And while that would be at the regional level, the regions themselves will have a fair share of national revenues if the slothful parliament would do as Article 77A of the Constitution requires and make “law [to] provide for the formulation and implementation of objective criteria for the purpose of the allocation of resources to, and the garnering of resources by local democratic organs.”

Finally on this score, is the abomination of annual postponement of local government elections which some claim is unconstitutional. In depriving the people of their democratic, constitutional rights, the Parliament is proving to be the most undemocratic body in Guyana.

Next week I will conclude with some recommendations on the economic revival of Linden.

The economics of Linden and electricity rates – part 2

It is now more than three weeks since what was intended as a five-day protest against the electricity hikes in the region took a dramatic turn for the worse on the very first day with the deaths of three protesters. By contrast, the talks between the government and the regional administrators to address the region’s problems have moved at a pedestrian pace, despite the political social and economic implications for Region 10 and other regions and sectors which have come to rely on the Linden passage, and of the danger of a deteriorating situation the longer the standoff continues.

Part 1 of this column which appeared two Sundays ago had as its central theme the arrangements for the supply of electricity in Region 10 and that the increases in tariff scheduled for July 1 of a minimum of 300% for consumption in excess of 75 kWh per month were hardly consistent with the progressive realignment of rates announced by the Minister of Finance only a couple of months earlier. The column was met by a response from Prime Minister Samuel Hinds who has ministerial responsibility for energy and who is also a Region 10 representative of the government in the National Assembly.

Instead of offering some pointers to addressing the economic and social conditions facing the community in one of the country’s richest regions, Mr Hinds resorted to the usual everyday currency of ad hominem pettiness and political banality to the level at which he as Prime Minister finds it necessary to point out that the percentage increases were not in a circular about the new electricity tariffs! But it is not necessary to respond to an explanation as to why the regional supply of electricity is exempted from regulation by the Public Utilities Commission.

What I found unbelievable was his justification for the supplier – Bosai – making a profit partly out of the national subsidy, a profit he linked to the company’s cash flows. The two are as related as apples are to mangoes! Surely a more logical link would be royalties and taxes paid to gross revenues – or even to the cash flows of the region’s two international bauxite operations. It is troubling that Mr Hinds can be so insensitive to the relevance or impact of the rate of the tariff increases, in many cases exceeding 300%.

It is an indictment for his government to ignore its duty to enforce the law including the Bauxite (Production Levy) Act, and that the Finance Minister would be willing to consider waiving royalty for any non-renewable resource, particularly for a company that is hugely profitable. Any country serious about managing its resources within a framework of an acceptable climate for foreign investors would pursue a fairly negotiated Double Taxation Treaty with that country. Separate, secret negotiations with strict confidentiality clauses may be useful between private companies but have no place in a transparent democratic environment in which one of the parties is the state.

From dream to LEAP
Linden, once the dream community of Guyana, now has an unemployment rate that ranks with the worst pockets in the country, with some saying – implausibly – that it is 70% while a leading government spokesperson conceded that it was somewhere around 25%. How it got here through a series of failed policies and market circumstances is beyond the scope of this particular column, but suffice it to acknowledge that within a short few years Linden came to be singled out by the European Union and the government for special treatment.

Under the Linden Economic Advancement Programme (LEAP), the EU provided €12.5M over a nine year period which ended on December 31 2010. Yet – incredibly – neither the Office of the European Union nor the Ministry of Finance was willing to provide me with a copy of the Completion Report on that project. Acting on the unlikely suggestion that I seek out an unofficial copy, I was provided with a draft, incomplete report with many key data missing.

According to that draft, the objective of the project was the creation/strengthening of viable and competitive enterprises and the generation of new long-term jobs contributing to improving the living conditions of the community in Linden and Region 10 and to reduction of social tensions. But the same draft identified as the purpose of the project was “the development of the local market for business advisory services and financial services in order to attract new national and foreign investment and increase employment opportunities.”

And if that was not enough of a mouthful, here is how the draft defined the key results of the project as:

● improved local capacity for economic planning, project design and implementation within the private and public sectors;

● improve business and finance sector;

● viable and competitive companies created;

● direct permanent jobs created by enterprises benefiting from loans and support services;

● laid off miners or unemployed youth receive training in employable skills;

● public officials trained in economic and regional development planning, project preparation, management and proposal writing;

● basic infrastructure upgrade.

A harsh assessment based on existing conditions in the region would suggest that the project was a huge failure. That would be unfair; the funds provided were clearly inadequate for the project’s ambitious objectives. My efforts to source relevant information from the Bureau of Statistics were even less successful and I was directed to the last census a decade ago. While that is surely disappointing, what is worse is the reluctance of key parties to make the Completion Report available since that robs the national conversation of useful information about the extent of the problem and strategies to deal with the economic malaise which the region shares with so many depressed communities in the country.

Failure of governance
Linden is a failure of governance, the laws and the constitution. This is what Article 77 A of the Constitution states: 77A. Parliament shall by law provide for the formulation and implementation of objective criteria for the purpose of the allocation of resources to, and the garnering of resources by local democratic organs. Nearly twelve years after that Article was inserted in the constitution, the inept National Assembly is yet to pass any such law.

But the governing party has simply made matters worse. The principal local democratic organ to which Article 77 A refers is of course the Regional Administration whose executive operations are headed by a Regional Executive Officer appointed by and accountable to a central government minister and whose funds are provided by another central government minister, the Minister of Finance.

It would be instructive to learn whether either of these ministers has had any extended conversation with the Chairman of Region 10 since the November 28 elections, let alone July 18.

Region 10 is an interesting region. It is not among the larger regions by size or population. The last census showed that it had a population of 42,000 persons or 5.5% of the total population and with a size of 19,387 km2, accounts for some 9% of the country’s 214,999 km2. Those statistics do not however reflect the region’s economic significance.

Administrative map of Guyana

Region 10 is the bauxite capital of Guyana with RUSAL living up to its international corporate reputation in exploiting the bauxite reserves at Aroaima while Bosai controls the Linden operations. Both entities have slashed the number of persons employed in bauxite, to about one-tenth of the numbers in the peak days. So while there is justification in the statement that Linden is no longer a company town, it still provides both companies with a pool of employees eager and willing to work even as they bear the cost of the illness-related externalities. For the three years 2009 to 2011, bauxite exports (tonnes) were: 1,406,908 in 2009, 1,135,817 in 2010 and 1,816,548 in 2011, bringing in export revenues of US$79.5M in 2009, US$114.2M in 2010 and US$133.3M in 2011.

Next week I will continue examining the region’s economic resources as I make the point that it contributes far more to the national treasury than it draws out.

Remarks at Service for Linden Martyrs

As the community and country mark the burial ceremony of three of our fellow citizens, let us remember and share the personal grief of those who are left to mourn the deaths of Shemroy Bouyea, Alan Lewis and Ron Sommerset. To their loved ones I extend sincere condolences. We remember too those who were injured on that fateful day – July 18, 2012 – as they protested for better living conditions – the right of every citizen of this country. We pray for their full and speedy recovery.

I speak today as a Guyanese of Indian descent to remind my Indian sisters and brothers of the grief and suffering they and others in Guyana still remember and commemorate at the killing in 1948 of five Indo-Guyanese protesting their working and social conditions. Where is the progress I ask, in this richly endowed country, that sixty-four years later, three African Guyanese are killed protesting high unemployment, economic stagnation and prohibitive increases in the cost of electricity?

Whether as Africans, Indians, Amerindians, Chinese, Portuguese or mixed race, what must matter to us is not the ethnicity – but the identity – of those who gave the orders and who pulled the trigger. We debase ourselves by our silence if we do not condemn unequivocally the killing of Shemroy Bouyea, Alan Lewis and Ron Sommerset not as African Guyanese or Indian Guyanese, as Amerindian Guyanese, or as Guyanese of Chinese descent – but as Guyanese. Let us ensure that whoever the perpetrators are, that they are brought to justice.

Particularly to my fellow Indians, I say Guyana has no place to go if the words “we” and “our” are seen through ethnic lens. Our country and communities are too diverse and interdependent, the national fabric too interwoven, families now too mixed, for any form of ethnic purity. We must all feel and share a national sense of disappointment, poverty and insecurity that any one community, any one region or any one village is deprived, impoverished and without hope.

Today marks Emancipation Day, the declaration of freedom from that abomination called slavery, a day that defined us as a people and a nation. Let us see today as another defining day in which we finally begin to do as our Constitution requires us to do and that is to “Forge a system of governance that promotes concerted efforts and broad-based participation in national decision-making in order to develop a viable economy and a harmonious community based on democratic values, social justice, fundamental human rights, and the rule of law.”

When tomorrow comes – and by the grace of God it will – let us resolve to respond to the anguished cries of the Linden community for justice to prevail for our brothers who lost their lives, for those who were injured and who bear the scars of that day, for those who day in and day out struggle to make ends meet, to send their children to school, to pay the light bills and to stand up for fair and equal treatment guaranteed by our national sacred document called the Constitution.

Let us hope for a speedy and satisfactory resolution of the concerns of Lindeners – Justice, Fairness, and Economic Reconstruction, including the basic needs of all human beings. As we strive on this Emancipation Day to honour the heroes of our glorious revolutions, let us determine that henceforth we will create heroes, not martyrs. Let us shed our prejudices, not blood. Let us build Linden, Wismar, the coastal villages and the hinterland communities, not monuments to insensitivity and extravagance. And let the government, our leaders and us the people do so for a Guyana of seven, not one or two ethnic or influential voting groups.

Let us today resolve to honour Shemroy Bouyea, Alan Lewis and Ron Sommerset by doing all we can to bring about the community and country they no doubt wanted for themselves and for us all to live in. We, and I mean all Guyanese, owe them nothing less.

The economics of Linden and electricity rates – part 1

Region Ten is not a burden on, but rather a contributor to the state

In the 2012 Budget Speech, Dr Ashni Singh, Minister of Finance said: “Currently, in Linden, electricity costs between $5 and $15 per kWh, while on the GPL [Guyana Power and Light] grid customers pay an average of $64 perkWh. The total cost of this electricity subsidy was $2.9 billion last year, the equivalent of 10 per cent of GPL’s total revenues. Starting from 2012, reforms will be initiated to the tariff subsidy with the aim of giving effect to a progressive alignment of the subsidised rates with the national rates that are applicable on the GPL grid.”[Emphasis added].

There are a couple of small things wrong with that statement. Linking the subsidy to the total recorded revenue of GPL is tenuous at best, and misleading under any circumstances. Linden is not on the GPL grid; it is provided with electricity produced by Bosai Mineral Services for sale to Bosai Minerals Group and to the community through Linden Electricity Company and the Electricity Cooperative Society. Third, a random survey of the electricity bills for the most recent period of five GPL consumers, all staff of Ram & McRae, showed an average of $55 per kWh, high but 14% lower than the charge stated by the Minister.

Nothing progressive
But what is patently misleading is that part of the Minister’s statement that speaks of a progressive alignment starting from 2012. Here are the increases which customers were being asked to pay before the tragic deaths which led to the rates being put on hold.

Source: Linden Electricity Company Inc circular

Anyone consuming 75 kWh or more of electricity will face an increase in their bill of at least 300%. In my group of five, the average consumption is 157 kWh. The increase applicable to them would be over 600% making it hard to find any word but deception to describe the Minister’s clever use of words.

This government which has a good sense of history has had twenty years to address the subsidised tariffs in Linden. Assuming a $5 per kWh in 1992, it would have required a semi-annual increase of roughly 6% to bring the tariff up to the same level as GPL. With fatal consequences, the government has attempted to do in one year what it did not do in 20 years.

Profiting from the subsidy
But the Minister is not the only person producing misleading information. Bosai Minerals Services Inc released recently a document described as an “Audited Operation report” showing that the company made a profit of US$233,000 in 2010. The public records however show that the company made a profit (before tax) of G$76,342,000, the US Dollar equivalent of $380,000. Since the company’s business is the operation of a power plant to provide electricity to its (group) bauxite operations and the community, it must explain this difference and whether it is permitted under the agreement with the Government of Guyana to make a profit from the subsidy.

There are other concerns about the electricity operations. The information the electricity company has provided on fuel costs needs explanation. Invoices for diesel imported by its parent company (Bosai Minerals) from the State Oil Company of Suriname show a lower cost of fuel than that reflected in the company’s income statement. Since its financial statements do not suggest that the company buys diesel from the parent company, the question is why does it not pay the same price from the same supplier as its parent.

A second concern has to do with the agreement signed with the government for the supply of electricity, a regulated service which would otherwise come under the Public Utilities Commission. The government has excluded Bosai from any regulatory obligation hence its freedom to charge rates that should have been fixed on a cost recovery basis. It seems incontrovertible that that would be the more appropriate basis since the supply serves the group and in some cases its service is specific to the group. For example, any plant capacity for the operation of the dust collector cannot be shared with the community charge while on the remaining plant, the pricing policy should be based on the marginal cost of providing electricity to the community.

A third concern I have touches on the government’s paranoia that if it applies the country’s laws to Bosai, the company will pull out. Perhaps that is the message – or threat – the company communicates to the government in private. We should not fall for that. Bosai and China are here not to develop Guyana but to guarantee access to raw materials. They need Guyana as much as Guyana needs foreign investment. Our failure to recognise that allows investors and Bosai in particular to exploit the country. Let us look at Bosai’s Income Statement for the years 2008-2010.

Source: Audited financial statements

Under the agreement with the government the company was exempted from the payment of property tax and royalty for the five years to December 8, 2009. The notes to the 2010 financial statements state that the company has sought a five year extension, but went on to state that no royalty was payable on sales during the period December 9, 2009 to December 31, 2010 and that no property tax provision to December 31, 2010 had been made.

Order 8 of 2005 indicates that the company is subject to royalty at the rate of 1.5% but to a zero rate for the first five years. I searched the Laws of Guyana but could only find statutory authority for a 3% rate and first saw a reference to 1.5% in a 1997 Mining Policy and Fiscal Regime by Prime Minister Samuel Hinds. Mr Hinds’ paper did not even mention the Bauxite (Production Levy) Act 1974 which was introduced to ensure that the country gets a fair share of the revenues from its natural non-renewable resources.

Mrs Da Silva and Mr Hinds
The Hansard of the debate on the Production Levy Act in the National Assembly of September 25, 1974 records then leading member of the United Force as saying: “These big multi-national corporations seem to think that because they are huge multi-million concerns, that because they are big and we are small and we need the revenue from our bauxite so badly for the economy of our country, that they should have the upper hand and be allowed to dictate [to us]. That time has passed.” If you can hear me, Mrs Da Silva, that time has returned.

Those whom her party now supports in the National Assembly are prepared to waive royalties and to ignore the Bauxite (Production Levy) Act for a hugely profitable company which was on target to recover its original investment in less than five years. Prime Minister Sam Hinds, failing to appreciate the difference between royalties and corporation tax, has ensured that under Order 8 of 1995, the company will pay only the greater of royalty and corporation tax. In other words, if the corporation tax payable exceeds the amount payable as royalty, no royalty will be payable.

Let us put that into context. In the three years 2008 to 2010, the bauxite companies exported some 4,659,317 tonnes of bauxite with an exchange value of US$325.2 M. For this, the country received no royalties.

And if 2010 was a good year, 2011 was a great one. Bauxite production shot up in 2011 by 68%, from 1,082,512 tonnes to 1,818,399 tonnes. If there was no technical or economic case for a royalty waiver in 2005, there can be no financial case for an extension of that waiver in 2011.

And there is one other point which may have escaped the Government of Guyana. Without a Double Taxation Treaty between Guyana and China the income earned in Guyana would under normal tax rules, be subject to tax in China. In other words, income we do not tax is effectively contributing to the Treasury of China. If only we are courageous enough to negotiate a fair deal with Bosai, and apply Guyana’s tax laws including the anti-transfer pricing provisions as necessary, the country will be better off.

And let us end today’s column on this note. Guyana is a 30% shareholder in Bosai. So that when Bosai paid one billion dollars in dividends in 2010, Guyana received $440 million of that in revenues, $300 million in dividends paid to NICIL and $140 million paid to the Guyana Revenue Authority as withholding tax. And that is on top of the $708 million received from corporate taxation! If only we did not waive all those other taxes!

Clearly Region Ten is not a burden on, but rather a contributor to the state.

Next week I will identify some specific solutions to the tariff question.