ChrisRam.net

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Introduction

Last week I began looking at the capital expenditure of the central government comparing it with the rate of growth over a five year period. The conclusion was that despite the government having spent over US$800 million dollars over that period and more than US$1 billion over the last seven years, this expenditure has not been reflected in matching growth in the economy. One person commenting on that conclusion considered that I was ignoring the extent of the underground economy which is estimated to range between 30% and 60%. While there is merit in that criticism it is hard to fault anyone for using official statistics but more important is whether the substantial sums spent on capital expenditure by the government are for the benefit of those who under-declare their businesses’ performance and engage in tax evasion and money laundering or for those who struggle to survive in very challenging circumstances and yet try to abide by the laws and the rules.

I concluded last week with a commitment to look this week at the significant items in the capital expenditure budget for 2008 of G$40 billion dollars. Of that amount, four ministries account for $26.6 billion or 66% (See following table). Compared with the preceding year however this was approximately 0.16% over 2007 during which the official rate of inflation was close to 15%.

Table 1 - ($million)

Source: Estimates of the Public Sector, 2008

The Ministry of Finance itself does not within its own portfolio expend the capital expenditure it allocates itself but spends this in a number of areas. A more direct breakdown of the $8.8 billion it will spend in 2008 is as follows:

1. $4 billion to the Guyana Sugar Corporation;
2. $575 million providing for institutional strengthening and purchase of equipment under the IDB funded Fiscal and Financial Management Programme;
3. $998 million for support to community roads, drainage and irrigation projects; and
4. $674 million providing for poverty alleviation and community development projects.

Of the $8,049 million to be spent by the Ministry of Public Works and Communications:

1. A total of $6.2 billion has been budgeted for roads ($5 billion) and bridges ($1.2 billion) of which a substantial portion ($1.8 billion) is for ongoing expenditure on the New Amsterdam to Moleson Creek Road and $980 million budgeted to complete the access roads to the Berbice River Bridge and the rehabilitation of 54 bridges along the Timehri-Rosignol corridor;
2. $2.2 billion to continue construction, rehabilitation and maintenance of sea defence structures;
3. $395 million for the docking of ferry vessels and dredges, acquisition of spares, and rehabilitation of stellings and navigational aids;
4. $108 million is budgeted for the construction of two new airstrips at Wakenaam and Leguan and the rehabilitation of the Baramita Airstrip.

Operators in the domestic airline sector to whom I spoke claim not to have been consulted on this extravagantly unaffordable proposal for the two airstrips. Access to many of the established airstrips is only available at prohibitively expensive charter service affordable to only a few. Not only will these new airstrips be badly under-utilised but operating and maintenance will run into millions each year. This is what I have referred to as cost-added rather than value-added expenditure from which only government ministers are likely to benefit.

Security

Mainly security expenditure in the Central Government Budget falls under the Ministry of Home Affairs which includes the Police and the Guyana Defence Force. These are the capital expenditure allocated in the 2008 Budget:

Table 2 - ($million)

Source: Estimates of the Public Sector, 2008

Included in the capital expenditure budget for the Ministry of Home Affairs is an allocation of $660 million for the Citizens Security Programme and $430 million for the Guyana Police Force.

Despite having announced that the government would be spending some $900 million on acquiring equipment including two helicopters for the Army in 2008 the allocation is considerably less which can only mean that the government was planning to have Supplementary appropriation even as the Minister of Finance was delivering the 2008 Budget!

Social Sector

Table 3 - ($Million)

Source: Estimates of the Public Sector, 2008

The Ministry of Labour, Human Services and Social Security has the largest reduction from 2007 in the capital expenditure budget of all the ministries, departments, agencies or regions while education has also dropped by about 20% which may be due to a levelling off of programmes - the allocation to UG-Turkeyen fell by $360 million while the IDB-Funded BEAMS programme fell by $220M, primarily the School Performance Component (provision for numeracy and literacy programmes).

House lots instead of housing

Although substantial sums are to be spent via the Ministry of Housing and Water the allocation for housing ($1.5 billion) is mainly $850 million to provide infrastructure in low income settlement schemes and $420 million to complete roads, drains and structures in various areas. While the government has abandoned any attempt at providing any housing for the really vulnerable who cannot get a mortgage because for example they are either too old to work or simply cannot find jobs the number of new homes has risen substantially as a result of the house lots policy of the government since 1992.

Water gets $3.7 billion for projects which include the completion of two iron removal plants at Sophia and Central Ruimveldt ($500 million); upgrade of transmission and distribution lines ($331 million); completion of a treatment plant at No. 56 Village ($90 million); design and commencement of construction of three water treatment plants at Lima, Vergenoegen and Cotton Tree ($1 billion) and $58 million to improve water supply services to communities in the hinterland regions.

In agriculture an Agricultural Export Diversification Programme for US$20.9 million will be launched and for the privilege of hosting CARIFESTA for which Guyana was the only taker we will be forking out $300 million in the first instance while in electricity $220 million has been allocated for the purchase of a diesel electrification system for Port Kaituma, to construct distribution systems for Orealla and Siparuta and install solar panels in hinterland communities.

Depressed Communities

There is little in the 2008 Budget that can give any hope to some of our most depressed communities and even the billions that are being spent annually on roads and other infrastructure cannot be enjoyed by the large number of unemployed, pensioners and single parents - overwhelmingly women - who have no jobs to go to and who struggle daily to put some food on their children’s plates. In fact the lack of any attention in the Budget to women and the unemployed and depressed communities is particularly striking.

The major beneficiaries of the capital expenditure are a handful of contractors and suppliers many of whom provide extremely shoddy goods and services including construction of roads, bridges and the Conservancy and many of whom are themselves that group of self-employed that even the Guyana Revenue Authority complain so bitterly about. In fact by their performance and conduct they have raised the question whether the shift in the policy of contracting out ought not now to be revisited. With the margins by some contractors and suppliers being as high as 50%, the country will save tens of billions from having the work done by the government.

Many will consider this too radical but with the substantial savings it would be possible to employ better staff and pay better wages, reduce the level of corruption and still provide a better quality of work than is now obtained from some of our contractors.

Conclusion

When Dr. Ashni Singh was appointed as Minister of Finance there was hope that the quality of budgeting, accounting and financial controls in the government would be improved and that the country would start receiving value for money. That hope has receded and it is now questionable whether he has the courage or the scope to change significantly the system of weak controls and largely tax-and-spend policy he has inherited, even if he was so inclined.

The way a government seeks to tax its people and how it spends the billions so derived best reflect its values, interests and policies.

It is clear that what we have had for close to two decades is a mindset that embraces IMF-style traditional growth rather than pro-poor policies, and which in practice is compromised by poor economic management and equally poor governance.

What would be very useful is for the opposition political parties or economists to come up with a new set of policies and build an alternative budget to reflect those policies.

Introduction

In detailing the government’s capital expenditure budget of $43 billion in 2008 the Budget Speech gave a troubling indication of how vast sums are expended year after year with scarce regard for basic principles of economic and financial investment decisions. Capital expenditure is distinguished from recurrent expenditure which includes the normal operating annual expenses such as wages and salaries and maintenance of roads, bridges and buildings while capital expenditure would include the cost of constructing those roads, bridges and buildings. By principle, convention and practice, capital expenditure is expenditure the benefit of which accrues to one or more future periods while recurrent or operating expenditure is consumed in and benefits one period only.

Of the budgeted expenditure of $119 billion dollars announced by the Minister of Finance in his 2008 Budget Speech, capital expenditure accounts for $40.9 billion, roughly US$205 million dollars. This compares with a budget of $37 billion in 2007 which was overspent by some $6 billion, in commenting on which the Minister indicated that this was a 21% increase in the public sector investment programme.

Individuals, companies and governments invest in capital expenditure for many reasons including enhancing their earning capacity by expanding the income potential or reducing expenditure.

Capital expenditure and growth

The table below shows the capital expenditure and growth in the economy for the past five years. During that period, the government spent close to G$160 billion or US$800M in capital expenditure while the economy has on a simple average grown by 1.54% per annum - a poor return on investment by any measure. Why with all the investment expenditure by government (and we must not ignore recurrent expenses like wages and salaries which by putting money into consumers’ hands should also stimulate economic growth) has growth been so anaemic? The explanation is not straightforward but with a rational approach by the decision-makers in selecting investments there would certainly be a better chance of higher economic growth.

Capital Expenditure for past five years and budget 2008:

Source: Budget Speeches

The drivers of government capital expenditure may be obvious in certain cases such as the expenditure on sea-defences or to mitigate the consequences of natural disaster. In other cases the decision may be made entirely on social considerations such as whether an area should have a supply of electricity or water. These still, however, leave a considerable amount of capital expenditure which do not fall in such categories and should therefore be subject to more careful analysis. And even with respect to social expenditure not generally considered susceptible to the economist’s or accountant’s return on investment criteria, and using electricity to a hinterland community as an example, the issue is not whether the community should have electricity but what is best of a range of options to provide that service. The decision-maker would have to consider whether it is better to build a generating plant and transmission and distribution system requiring on-going fuel, maintenance and technical support which would be difficult to deliver to those communities or to encourage the use of solar power by fiscal initiatives and financial support to householders to enable them to make their own arrangements?

A dollar is a dollar

Of recent investments, only the Berbice Bridge and to a lesser extent the Guysuco Skeldon Modernisation Project were subject to any independent analysis. We all recall the process that preceded the final decision on the Berbice Bridge, the studies and analyses that were conducted and the debate generated for and against the investment. It may be argued that this was because that is largely privately funded which is not entirely correct since the government had to invest heavily in related infrastructure necessary to support the Bridge investment.

Now if such a process was necessary for the Bridge how come it does not apply to fully publicly-funded expenditure or the decision, literally out of the blue, to spend over one hundred million dollars mainly to build two airstrips on the islands of Essequibo and Wakenaam? A dollar is a dollar and public investment in the final analysis comes from the people of the country. Taxpayers’ money is no less important than shareholders’ money and therefore warrants the same level of care in how it is spent.

I do not recall any Minister of Finance of the PPP-C Finance Ministers, including the incumbent ever giving an indication of any criteria for investment decisions undertaken let alone any rigorous analysis of specific investment. Indeed so often the nation is treated to expenditure decisions being taken literally on the road. This is dangerously improper from a governance perspective and irresponsible and unprofessional from a capital investment decision perspective. Under the Constitution only Parliament has the authority to approve expenditure and a responsible Finance Minister would surely want to justify any request he takes to Parliament for money for capital expenditure. Just think of the crisis we would be in if after the unbudgeted expenditure of substantial sums by the executive, the Parliament voted against any request for supplementary funds.

Cost-added rather than value-added expenditure

The decision to host the World Cup brought with it a commitment to provide hotel rooms which in one particular case were partly financed by a loan to the investor, the payback of which is now being financed by using the very rooms which may not have been chosen had we not made an irrational decision in the first place. The 2008 Budget includes $300 million for CARIFESTA-related expenditure, a decision that was largely made without any regard for cost implications. Given the tendency and history of overspending there is no guarantee that we will not repeat our questionable experience of instead of having value-added expenditure having cost-added expenditure.

The other side of VAT

VAT has been more than a fortuitous break for the government in 2007, not only allowing it to spend far more than Parliament had approved in the 2007 Budget but to absorb significant declines in the performance of public enterprises. From a surplus of $3.4 billion in 2006, those enterprises declined to a deficit of $415 million, mainly from Guysuco which had a decline of $2.7 billion and GPL, $802 million. Interestingly while both corporations had the same chairman, he was removed from the corporation which performed relatively better and from all appearances for reasons unrelated to financial performance.

In fact those very corporations received substantial capital injections in 2007 during which $3 billion dollars was put into GPL for improvement in the unserved and underserved areas while Guysuco received $863 million for its Skeldon Power Plant and $2.9 billion to accelerate completion of the factory, preparations of land to facilitate mechanical harvesting and infrastructure to support and promote private cane farming.

A new Justice Improvement Programme involving US$10.2 million began with the setting up of a Justice Sector Reform Steering Committee and the setting up of a Secretariat. But what about the truly fundamental changes that require not large sums but decisions such as the setting up of the Law Reform Commission to update the laws last done in 1973 or the introduction of new Rules of Court which have been in circulation for years now. New Rules were introduced for the Commercial Court with considerable success, and revised Rules for the other courts have been in circulation for several years. These new Rules embody what is called Case Management and introduce court-driven processes replacing the current system which in practice is largely directed by the lawyers, their time-wasting practices and endless demands for adjournments. As this column has pointed out before Guyana is the only CARICOM country not to have adopted the new Rules.

Next week we look at some of the other capital expenditure in 2007 and those proposed for 2008.