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The $18.3B which was cut from the LCDS needed to be covered by a conditional appropriation

I prefer to impute no motives to Government spokespersons or self-appointed, self-interested critics of the Budget “cuts”, including Drs. Ashni Singh, Roger Luncheon and Leslie Ramsammy, Mr. Juan Edghill and Carvil Duncan, Martin Goolsarran and Fuzzy Sattaur and Ms. Gita Raghubir and Alexei Ramotar for misrepresenting the “cuts”, including the removal of the LCDS money from the Appropriation Bill for the 2012 Budget. Shepherded by Mr. Martin Goolsarran into NCN to cry “heartless and unpatriotic”, none of them it seems, including Ms. Raghubir, an attorney-at-law, bothered to check the Budget “law”, the Fiscal Management and Accountability Act.

They would have learnt that the appropriation of expenditure of $18,394,650,000 had to be brought by way of a Conditional Appropriation Bill under section 21 of the FMAA, and not by way of an Appropriation Bill. But before I refer directly to section 21, I draw attention to both the Explanatory Memorandum to the Bill as well as the statement made by then Finance Minister Mr. Saisnarine Kowlessar in the parliamentary debate on the Bill on December 15, 2003.

The Explanatory Memorandum states that the bill “establishes the concept of conditional appropriation, whereby an agency may be appropriated sums that are conditional on the said agency achieving specified levels of revenue in accordance with an agreement entered into with the Minister.” In other words, the National Assembly authorises the expenditure but only if (or conditional upon) the money comes in.

For his part, Mr. Kowlessar in introducing the Bill said “… In addition, the Bill describes the concept of a conditional appropriation, as well as details the terms and conditions under which such appropriation may be made and accounted for.”

It is nonsensical for Dr. Singh to compare the expected LCDS sums with VAT and say that since VAT has not yet come in, maybe a Conditional Appropriation Bill will be required for VAT as well! Does he believe that in relation to him Guyanese are that stupid and cannot understand the difference between a tax (VAT) and moneys that come under an MOU with preconditions attached? Someone should have pointed out to Dr. Singh there and then that it was his Government that passed the Fiscal Management and Accountability Act because US$30 million of donor money depended on its passage. Details then did not matter. And if the PPP/C can ignore the Constitution, ignoring a mere law is no big deal.

The logic of linking the expenditure to income by way of a conditional appropriation is evident from the following example. For the year 2012, expenditure of $18.394 billion represents more than 12% of the non-LCDS budgeted Current and Capital Revenues. If that sum is spent but the money does not come in, the government’s expenditure will have exceeded its income not only by the $30.524 billion shown in the Budget but by an additional $18.394 billion, bringing the 2012 budget deficit to $48.918 billion, or close to quarter billion United States Dollars. No amount of juggling of figures or playing with the 2000 Series Bank Accounts can mask that reality.

To see how inconsistent Dr. Singh has been in relation to budget preparation for future revenue flows, one needs to look no further than the 2011 budget treatment of the Chinese vessels in which only the local expenditure of $366 million was included at the time of the budget presentation. It was not until one year later, when the resources had actually arrived in the country that Dr. Singh went to the National Assembly for supplementary appropriation of $2.588 billion. At the time, former Finance Minister Carl Greenidge drew Dr. Singh’s attention to section 21 of the Act, pointing out how it should have been treated in the first place. But so convinced was Dr. Singh that he could never be wrong, that he ignored Mr. Greenidge.

Much was made of the fact that the $18.394 billion that was removed from Budget 2012 included an unspecified amount for land titling for Amerindians. In fact, the issue of land titling for Amerindians (so far as necessary) fits neatly into the provision of the Act by allowing a “conditional appropriation” to consist of both a) an authority to spend a specified amount of money; and b) an additional authority to spend a specified amount of money, conditional (emphasis mine) upon budget agency receipts earned by that budget agency and being credited to the Consolidated Fund.

I say ‘so far as necessary’ because land titling is a constitutional requirement which since 1993 has been funded each year out of annual appropriations and need not be tied in with LCDS money. It would be a sad day indeed if our first people have to wait on foreign moneys to right the historical wrongs inflicted upon them centuries ago. But I suspect that the Singh/Luncheon formulation of including it was as bait to the international community with its soft spot for indigenous peoples across the world.

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On the Line: Caribbean Container Incorporated and Guyana Stockfeeds Incorporated

Introduction
Today we continue our review of the annual reports of two more of the country’s public companies – Caribbean Container Incorporated (CCI) which held its annual general meeting last Friday and the Guyana Stockfeeds Incorporated (Stockfeeds) whose annual general meeting is scheduled for tomorrow. Both these companies are on the Secondary List of the Guyana Association of Securities Companies Incorporated (GASCI), popularly referred to as the Guyana Stock Exchange.

As a result of a challenge in the High Court of Guyana by the government company National Industrial and Commercial Investment Limited (NICIL), a shareholder of the company, the company is not permitted to issue any new shares until the outcome of this matter is fully settled. The regulator, GASCI has suspended trading of the company’s shares until the matter is settled. The shares of neither company, both of which have a dominant shareholder, are actively traded on GASCI with the last trade in the shares of CCI taking place on January 9 of this year while for Stockfeeds there has been no trade since October 27, 2008.

In the case of CCI, the dominant shareholder is a non-public company which goes by the name of Demerara Holdings Inc, which has some 129 million of the 152 million of the issued shares of the company, while in the case of Stockfeeds, Chairman and CEO Robert Badal owns some 35 million while an associate of his owns 25 million of the issued shares. Except for DDL and Banks DIH, the majority interest in all our public companies are held by a single shareholder with the minority shareholders playing a passive role. This raises the issue of the prospects of the survival of our public companies as they are supposed to operate.

CCI
CCI has had a checkered history with ownership changing hands from government to Ansa McAl to Rand Whitney and now Demerara Holdings Inc, which it is believed is in turn owned by CCI’s Executive Chairman Ronald Webster, who has been with the company for decades. In an era when recycling is becoming the buzzword, it is good to see CCI making some strides to sustainability. Its non-executive directors include Dr Elisabeth Ramlal and Mr Frank DeAbreu, one of Guyana’s younger breed of entrepreneurs.

Shares transactions
Shareholders were called upon to ratify the passing of two resolutions which had already received the blessing of the majority shareholder: one dealing with the cancellation of shares and the other with the issue of bonus shares. The first is to cancel 1,500,000 ordinary shares standing in the company’s name resulting from the reacquisition of the said shares. In 1992, these shares were allotted under an Employee Share Purchase Plan and were fully paid for on behalf of the employees via a loan from a financial institution. However, at the time of winding up the said plan, none of the shares allotted were taken up by the intended employees, nor had they settled the outstanding repayments in relation to those shares.

In keeping with the requirements of the Companies Act the directors of the company have decided to cancel these shares and treat them as part of the authorised but unissued shares. According to the company, the transaction should have no effect on the company’s equity but where I have some difficulty is the statement that the Revenue Reserve Account is credited and I doubt that shareholders would have been clearer.

The second resolution is to authorise the issue of 1 bonus share for every 50 shares owned. Bonus shares are not paid for and at one time were very popular in Guyana, particularly with Banks DIH. They have fallen into disuse because they are a kind of artificial transaction with a mere book entry between equity accounts without any increase in the company’s asset value or earnings prospects. Accordingly, if there is one bonus share for every one share in issue, the price per share is halved. However, when the capital market was even less developed than now, the share price never moved, and the ‘bonus” turned out to be a real bonus. Maybe with a bonus issue of one share for every fifty held, there is not going to be much change in the market price.

Financial Summary

Source: Audited financial statements 2011

In 2011, turnover increased by 13.4% from $887 million to just over one billion dollars and earnings before depreciation (EBDA) by 3.3% from $115 million to $119 million. Gross profit at $172 million was up by 19% over 2010’s GP of $145 million. The loss before tax was reduced by 25% from $7 million to $5 million. Without any real discussion, the Chairman attributed the year’s improved performance to good sales and production efficiencies. Gross profit on sales remained constant at 30% and while finance charges fell by $7 million, administrative expenses rose by $14 million, mainly in staff costs.

The company has some $66 million in retained earnings out of which dividends could be paid and may have caused one shareholder to complain to me that as a group they have been receiving nothing by way of dividends from the company. The company also has $43 million in the bank and there must be some reason for the ultra-conservative decision not to pay any dividend. Maybe there is a belief that a bonus of one share for every fifty held will appease the shareholders.

Guyana Stockfeeds Incorporated
The company manufactures and distributes livestock feeds and related products including day-old broiler chicks to both the local and export markets. It also produces parboiled rice for the export market under its “Angel” brand. In the domestic market feed sales grew by 30% while baby chick sales grew by 5% but in the face of competition from Brazilian suppliers of parboiled rice, rice export sales declined by 16%.

Highlights are set out in the table below:

The annual report is not heavy on discussion. As a result the reader is left to scour note 4, Taxation to the financial statements, to determine why a $63 million increase in profit before tax should carry a corresponding $63 million increase in taxes with the result that the after-tax profit in 2011 is marginally less than in 2010. The explanation lies in a higher deferred taxation which in 2010 benefited from a lowering of the applicable tax rate.

The company pays a significant portion of its expenses through a related party ($852 million in 2011) and also pays the related party $30 million as a “reimbursement for costs incurred.” This was the same amount paid in 2010.

Expenditure on property, plant and equipment was $76 million and the overall decrease in cash was a substantial $240 million with the result that liquid balances declined from $304 million to $60 million. Faced with this situation the directors of the company are not recommending a dividend for the year 2011.
Minority shareholders in neither of these companies will be particularly happy.

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On the Line – Demerara Distillers Limited Annual Report 2011

Introduction
Demerara Distillers Limited, a conglomerate group comprising several local and overseas companies with manufacturing, trading, banking and trust relationships in Guyana, the region, North America and Europe as well as a joint venture in India and associated companies in Guyana and Jamaica, will be holding its annual general meeting this coming Friday, April 27. When the shareholders meet at the company’s Diamond Complex on the East Bank of Demerara, they will consider, among other routine items, an impressive if not entirely informative annual report containing the financial statements of the parent as well as its subsidiaries.

Measured by growth in turnover, it was not such a good year either for the parent (2.2% compared with 11.3% in 2010), or for the group as a whole (a more respectable 6.7% but less than 10.6% in 2010). Sales to subsidiaries represented 75% of total turnover of the company compared to 77% in the prior year.

In terms of after-tax profits, on the face of it the company and the group have done very well; the profits of the company increased by 68.7% while those of the group increased by a still substantial but smaller 35.7%.

Performance over the past nine years is illustrated by the following graph:

Source: Annual reports

No doubt encouraged by these results, the directors of the company are recommending an increase in the dividend per share from $0.45 to $0.48 – it would be good if the company could appreciate, like everyone else, that “cents” are no longer part of the currency of this country –which will cost the company some $23 million more than the $346 million paid out in 2010. Yet, for all of these, the Chairman in his report was less optimistic than usual, for reasons that only became apparent as the reader perused the financial statements and in particular their accompanying notes. Let us turn to some of those numbers.

According to the Chairman, there was an unspecified shortfall in bulk sales which carry a significantly lesser margin for which the higher value, higher margin-branded products should have more than compensated. An outsider looking in would think the company should welcome any situation whereby the higher margin products grow at a faster rate than the lower margin products. The emphasis on the sale of bulk products over branded products evident in year 2010 during which bulk sales increased by 45% while total sales increased by 10% seems quite counter-intuitive, if not illogical.

Domestic operations
While two of the four domestic operations made losses, those that were profitable produced some good results on a considerably smaller asset base. The standout failure is TOPCO, the juice company in which, despite the injection of hundreds of millions of dollars in capital expenditure, has managed to make losses in more years than it has operated profitably. One cannot help but notice too for TOPCO the almost identical language in 2010 being repeated in 2011, suggesting an inadequate level of attention in a competitive business environment. On the other hand, Distribution Services Limited, with a much smaller asset base, is reported to have enjoyed a10% growth in income and a 43% growth in after-tax profits.

Revenue from Guyana customers represents 65.4% of total group turnover compared to 62.5%, possibly reflecting the pressures faced in the international markets.

International operations
Not unlike the domestic operations, the inconsistently presented information for the overseas operations indicates that the international members of the group also had mixed fortunes. Total overseas sales fell by 1.6% despite growth in branded products of 10% reported by the Chairman.

In problem plagued Europe, turnover was down 6% and after-tax profits by 32%. In that region, a single customer generated 44.6% of total turnover from Europe compared to 50.0% in the prior year.

In DDL USA, no sales information is offered but after tax profit is reported to have grown from G$21 million in 2010 to $31.5 million in 2011. The shareholders of the parent company will recall that Demerara Rum Company of Canada was bought two years ago for $76.9 million. The company’s shareholders would certainly have liked to have had some particulars of that transaction as well as the parties behind the acquired company which handled bulk sales in Canada and must have had the confidence of the directors back home.

Interestingly enough, while the Canadian company was able to record an after-tax profit of $23.4 million in ten months, in 2010 it made only $8.9 million in 2011. It would certainly be interesting to learn how this was possible in the home of the company’s VP for International marketing, Mr Komal Samaroo. The company’s joint venture in Jamaica saw profits halved in 2011, but it was the Indian joint venture which ought to have caused the most concern among the company’s directors.

It seems certain that the existing joint venture in Demerara Distillers (Hyderabad) is heading the way of a number of other subsidiaries which the parent acquired and subsequently found unprofitable. Anyone following this column in the early nineties would remember the adventures of the first Indian operation which suddenly and without any explanation or information disappeared in 1993. Well, the directors having promised shareholders in the 2010 annual report that management would “make appropriate decisions to ensure an adequate return on [India] investments in 2011” now say, after another year of losses, that a “decision will be made in 2012 on the way forward.”

BEV Processors Inc
What does all of this mean? Except for an interesting transaction in which the company divested its BEV Processors Inc, the results of the company and the group would have been unimpressive. The profits reported include a non-recurring $288 million in dividends received prior to the sale of the investment, a reminder of a missed and costly lesson for Guyana’s taxpayers on whose behalf privatisation czar Winston Brassington sold the government’s 20% holding in GT&T without getting any of the year’s dividends, let alone accumulated profits.

The BEV transaction was particularly interesting in that the sale took place in early March 2011, but the dividend was not recorded in DDL’s books until the second half of 2011. Moreover, the 2010 annual report referred to the BEV shares sale in March 2011 without any mention of the substantial dividends the company received.

The June 2011 half year report published under the Securities Industry Act was used to help explain the revenue flow over the year. Turnover in the second half of the year represented 53% of the turnover for the entire year but produced exactly 50% of the gross profit and 60% of the profit before tax as a result of other income earned, representing 79% of the year‘s total. For the second half of 2011, finance cost was 52% and profit before and after tax 63% and 66% respectively, of the full year amounts.

But the income statements are interesting for other reasons too. Note 26 Related Parties discloses several transactions with group companies, only some of which I have been able to follow in the financial statements. Here are the major ones:

One might expect these to show up somewhere in the Income Statement; it is unclear where some of these items have been accounted for. In the interest of transparency, the company and its auditors TSD Lal & Co should be asked by some shareholder to explain these substantial transactions, before the GRA does. They should also be asked to provide information on which of the subsidiaries are audited and by whom, and which are not. It does not help shareholders and market confidence to have such uncertainties flowing from the financial statements of a public company, particularly one that is totally controlled by executive management.

Balance Sheet
Ever since this column began reviewing the company’s annual reports about two decades ago, two areas have stood out: inventories and loans. Because of the stable of products offered by the company, it is expected that inventories in the maturing process will be fairly significant while bearing in mind that inventories for accounting purposes must always be valued at the lower cost and market value, regardless of the accretion of the market value. The company had sales of $9.5 billion in 2011, the cost of which was $5.9 billion. In other words, the company has some 327 days of finished inventory on hand compared with 234 days in 2007.

Included in inventories as well is an amount of $1.165 billion of “spares, containers, goods-in-transit and miscellaneous stocks,” a category that always seemed to have been overstocked and out of balance with the finished stocks. It is good to see that that category seems to be falling significantly, both in absolute and relative terms. In 2007 the value of the inventories in that category was $1.8B or approximately 30% of total inventories.

The debt/equity ratio is a healthy 0.87:1 but the share of income before interest and taxes which goes to interest is around 25% and lenders to the company consistently receive a bigger share of the company’s earnings than its shareholders. In 2011 interest paid was $618 million ($371 million after tax assuming the lender is subject to a 40% tax rate) compared with dividends paid of $346 million with lenders investing less than half of shareholders’ equity.

Human resources
DDL has always prided itself as a good corporate citizen and is a major donor to the community through sports and education. In fact, two years ago the company established the DDL Foundation to “make a difference in the lives of deserving young people.” Internally too, the company has supported its employees with training, including the degree programmes at the University of Guyana. As the Chairman said, however, employee retention is a problem, a fact borne out by the turnover at management level in the company.

Of the nine members of the management team identified in the 2006 annual report, only two are still with the company, one of whom has moved up to the main board. Indeed, even at the board level there have been changes – some unavoidable – with only four of the nine directors in 2006 still on the company’s board of directors. Of the eight current directors, four are accountants including three serving in a non-independent executive capacity. The remaining one is a recent addition to the Board and serves as the Chairman of the Audit Committee.

Conclusion
This column has for years commented on the quality of the information provided in the Annual Report including an indication of those subsidiaries which have been audited and by whom. It is also not in keeping with modern trends to have only a Chairman’s report and not a CEO’s report, or a Management Discussion and Analysis which does not depend on the existence of the CEO.

Despite the improved earnings and earnings per share, the company’s share price is trading lower now ($10.7) than it did at the end of the half year ($11.0).

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The GT&T share sale (Conclusion) and the New Building Society

Introduction
In today’s Business Page I conclude the discussion started last week on the announcement by Dr Roger Luncheon that the government has sold the country’s 20% shareholding in the telecommunication company Guyana Telephone and Telegraph Company Limited (GT&T) to an unknown Chinese entity. The announcement came a few days after the 2012 Budget Speech which contained no mention of the sale negotiated by NICIL of which the Finance Minister is the Chairman.

Well we now know that the Chinese company is Datang, less known for its connection with the Chinese Liberation Army than for its development, production and sale of electronic information systems and equipment. Incredibly the company appears to have not had a formal meeting with the 80% shareholder, Atlantic Tele-Network of the USA and it will certainly be interesting to learn how the usually sceptical US Government will view a partnership of their company with the Chinese who do not have a good record as a respecter of intellectual property or confidentiality of information.

Under the Companies Act 1991, the ownership of the shares in the company will pass to Datang on the delivery to them of the transfer form and the share certificate. At that point, except that the government is the government, it would cease to have any interest in GT&T. Interestingly, at that point, the Government of Guyana’s rights under the 1991 agreement with ATN in relation to any share-ownership right shall cease. Datang will no doubt soon present itself to the GT&T management with the share certificate and transfer form in their hand for what will no doubt be a very useful exchange.

Last week we were told that the government is selling its interest for US$30 million of which US$25 million is to be paid immediately and the balance paid later. Meanwhile in a couple of weeks Datang will participate in an AGM at which dividends will be on the agenda. Unfortunately Mr Winston Brassington seems to have negotiated an agreement under which dividends that ought to come to the government will go to Datang! How eerily does history have a way of repeating itself! A not too dissimilar situation arose when the PNC administration sold Guyana Telecommunications Corporation with a bundle of cash in the bank. I wonder what those who then accused the PNC of being either careless or stupid would think of the Privatisation Board and the Cabinet for giving away US$2 million.

But that is not the only give-away. At US$30 million, the price for the shares is a significant markdown on what the shares are worth. GT&T is not a public company and its shares are not traded anywhere for their value to be determined. There are then two options. The first is to take all relevant factors into account, project the income of the company into the future and discount these into present day value. The alternative is to take a price earnings ratio (a vital tool used by investors) of the shares in a similar entity and, making adjustment for specific factors, apply a P/E ratio to the earnings of the company. Using that method I have arrived at a price of approximately US$40 million.

So we – or rather Drs Luncheon and Singh and other ministers along with Brassington have given away some US$12 million of the taxpayers’ money. They did the same when they waived some G$400 million of interest and preference dividend in the Berbice Bridge Company Inc so that the private sector entities could receive theirs.

The question why these gentlemen would have acted so recklessly and secretively probably has to do with the diversion of public funds from the Consolidated Fund to the illegally operating NICIL, all the directors on the Board of which are Cabinet members. That is unheard of anywhere in any self-respecting country, but is easily explainable as the creation of an illegal fund from which Cabinet can do as it pleases: pay over price for goods and services, divert, build white elephants, etc – all in complete violation of Articles 216 and 217 of the constitution. And to add some veneer of legality and acceptability to the saga, Dr Singh the Finance Minister, had the decision passed through the Privatisation Board of which Dr Singh is the Chairman!

These bright gentlemen have decided to bypass the constitution and do through the backdoor what they are not allowed to do through the front door.

On the Line: 2011 Annual Report of New Building Society
The editor reminded me that it is that time of the year when annual reports for companies and entities with a December 31 year end become available. Starting today with the 2011 Annual Report of the New Building Society (NBS) Business Page will review those reports well aware that other national economic issues will not wait. The page will try to offer a balance between the two.

The annual general meeting (AGM) of the NBS is slated for Saturday April 28 and will be held in the Society’s new head office in North Road, to which the Society moved a few weeks ago. It is to the credit of the institution that the move appears to have gone off quite smoothly, at least so far as the customers were concerned.

Readers will recall that the Society was brought under the Financial Institutions Act in August 2010 and the results for 2011 would have been the first full year since the new status. Surprisingly, however, there was only a passing reference to the impact of this is in the Chairman’s report: “It is also to be noted that notwithstanding the Society is currently governed under the New Building Society’s Act, Chapter 36:21, the Supervision by the Bank of Guyana, must be seen as a positive sign.” I am sure members would have liked to know the full impact, if any, the FIA has had on the Society in the absence of which the directors should have indicated whether they intend to take the full four years to come into full compliance with the provisions of the Financial Institutions Act.

Highlights

Source: 2011 audited financial statements

As the table above shows interest income from mortgages and other assets fell by 5% but interest paid on deposits declined by a dramatic 26% with the result that the net interest income increased by $229 million. Loss on exchange has again raised its ugly head after the directors resiled from a members’ decision to repatriate the moneys held in the UK and as a consequence the Society lost some $26 million following a $7 million loss in 2010.

Dr Nanda Gopaul, who has signalled his intent not to continue as Chairman of the Society following his appointment as a minister of the government, in his report announced a “record profit of $772M being made, an increase of 34% over the previous year.” According to Dr Gopaul this “was achieved despite reducing our mortgage rates for lower, middle and higher income mortgagors at the beginning of the year from 4.75%, 6.95% and 7.95% to 4.25%, 6.25% and 7.45% respectively.” That was only half the truth since the reduction in interest income was only $123 million. The real reason is obvious from the graph below that shows that while the returns on loans have declined from 7.3% in 2009 to 6.7% in 2011, the average interest paid to depositors declined dramatically from 4% to 2.7%!

It would have been helpful if either the Chairman or the CEO gave an explanation for the significant reduction in the Society’s deposit rates rather than have members speculate on whether the Society is carried away by the misnomer “profits” rather than surplus, or is seeking to discourage persons putting money into the Society which it is then unable to on-lend.

Returns on Loans, investments and deposits

Source: 2008 to 2011 audited financial statements

Assets and their returns

Source: 2010 and 2011 audited financial statements

The Society has increased its loan limit to $15 million subject to ministerial approval, which it says the Society is working towards making a reality, so that its financial resources can be more beneficially utilised to the advantage of members and customers.

In 2011, there was a net increase in the number of mortgage accounts of 276 while the Society disbursed mortgage advances for the year totalling $4.2B, another record, which was 43% higher than the previous year. At year end, the mortgage portfolio was 52% of Assets or 61% of Total Investors’ balances.

The Society continues to record its satisfaction in its investment in the Berbice Bridge Company Inc, which earned the Society a healthy return during the year and some 32% cumulatively. The Berbice Bridge commuters’ pain is the NBS’s members gain. While the financial logic of the decision to make the investment cannot be faulted, the amendment to the Act permitting the investment and the financial structure of the bridge transaction by the Jagdeo-Brassington team is one costly venture for the country’s taxpayers who have had to finance substantial tax concessions benefiting the bridge investors.

Statutory breach

Source: 2009 to 2011 audited financial statements

Two years ago, Business Page highlighted the breach of the proviso to section 7 (d) of the New Building Society Act. Despite this, the situation has deteriorated and the shortfall in mortgage assets has increased by 58%.

Next week, I will review the annual report of Demerara Distillers Limited, whose annual general meeting will be held on April 27, 2012.

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The GT&T share sale

Introduction
Even before the debate on the 2012 Budget begins, it is overtaken by an event not outside the control of the government, but well within it, an event that has been in the pipeline for years. Drs Jagdeo and Ashni Singh and their loyal servant Mr Winston Brassington had been speaking about, offering and negotiating to sell the government’s 20% shareholding in the telecommunication company Guyana Telephone and Telegraph Company Limited (GT&T) for at least three years. Yet the Finance Minister could not find a place in his 87 page speech to alert the plebians that an investment that brought in around US$2 million per year was in the final stages of disposal.

Guyanese must thank Cabinet Secretary Dr Roger Luncheon for the timeliness of the announcement at a press conference just one day after the decision by Cabinet to sell the pearl of the cacique crown for US$30M ($6B) to a “Chinese company” whose name, incredibly, Dr Luncheon could not remember. Guyanese would find it difficult to accept that Dr Luncheon, who also sits on the Board of NICIL under the chairmanship of Dr Ashni Singh and which is legally the owner of the shares, does not know the identity of the buyer!

NICIL
For close to two decades NICIL has acted like it does not know that it is subject to an Act called the Companies Act with which it ought to, but does not comply. As a result, NICIL has practically zero experience in complying with the law and may need to be reminded that the certificate representing the 20% shareholding in GT&T is in fact held by NICIL which must also sign the transfer form to pass ownership to the Chinese company.

The CEO of NICIL is Mr Winston Brassington who has been at the centre of all the major sales/disposals of state assets and who has impressed the Guyanese public with his ability to carve up transactions in which the Guyanese taxpayers are often the biggest losers. Except that in the case of the Berbice Bridge Company, Mr Brassington’s iconic show of private-public sector partnership, the big losers are both taxpayers and commuters. The taxpayers suffer as a result of the excessively generous concessions which have been given to the investors in the Bridge Company, and the commuters, as a result of some of the most exorbitant rates for a river crossing anywhere in the world. Just by way of reminder, NICIL recently waived hundreds of millions of dollars of interest (payable to NICIL) so that the private investors could be paid theirs!

Apparently intending to impress the media, Dr Luncheon whose performance as Chairman of the National Insurance Scheme has been exceptional for all the wrong reasons, volunteered to the media that the Chinese company had “conducted its due diligence and decided to purchase the shares.” What the public needs to know is not what the Chinese did but what the government did in arriving at a fair price for the 4,125 shares which it has owned for more than twenty years. Under a 1991 agreement between the Hoyte administration and ATN of the US Virgin Islands, the government received a 20% stake in the new company that took over the assets and liabilities of the Guyana Telecommunications Corporation in a process that itself raised eyebrows. To put the latest transaction into perspective, what the people need to know is how NICIL/Cabinet arrived at the sale price, not how the buyer arrived at the purchase price.

The changing profile of the international investor
The experience in many countries is that the Chinese – and one assumes that this is neither a phantom nor a pseudonym – are more likely to sell, rather than buy, a pig in a poke. They will have looked after their interest and we ought to have looked after ours. The question is, did we?

Unless Guyana is becoming the playground for Chinese investors, the nationality of the investor is surely intriguing, since we now have a picture of one set of Chinese investing in GT&T and another investing in the competing LTE GoG network. There must be something that the Chinese know about Guyana that the ordinary Guyanese does not, but hopefully it is not too late to learn. It is well known that the Government of China invests abroad, ostensibly through private individuals and companies. With their unimaginable reserves, a managed exchange rate and a colonizing mentality, China has been throwing its power around the Third World including Guyana.

They seem willing to get involved in sugar, bauxite, hydro-electricity, airport expansion, Guyana Power and Light, ferries and bauxite, many of which have benefited the Chinese disproportionately.

Led by Mr Jagdeo, there has been a fundamental shift in the profile of investors in Guyana. The implications for Guyana in the medium term can be fundamental, although this is not to suggest that the GT&T share sale is part of some bigger picture.

The strange silence of the Minister of Finance
GT&T is regulated under the Public Utilities Act, and one wonders whether the government had notified the PUC of the proposed sale of its holding in the company and whether, in view of the nature of the company, the identity of the buyer ought to have been similarly communicated.

Unfortunately, there are too many persons of influence and power who think that the law is an ass, and need not be observed or obeyed. Hence, it may be wrong to assume that the buyer has taken advice that as a substantial shareholder under the Companies Act 1991 (10%) it must give written notice to the company within fourteen days of becoming a shareholder.

Given this scenario it is not beyond the realm of possibility that in doing its “due diligence,” the Chinese may not have met with GT&T and might have relied on assurances from the same Mr Winston Brassington, the second-in-command negotiator-in-chief for the government.

What is more disturbing is that the share sale agreement was concluded on Wednesday April 4, less than one week after the Minister of Finance presented the 2012 National Budget to the National Assembly. By then, the discussions with the Chinese – in which the Minister would have played a major part – must have already arrived at the framework of an agreement including the price to be paid to the government.

But the Minister of Finance chose to remain silent on this major development and the budget he presented did not include any income from the sale of these shares.

NICIL again
The frightening possibility is that this money will be put into NICIL’s hands, later to be paid into the Consolidated Fund only if and when the Board of NICIL – which is chaired by the Minister of Finance and which includes Cabinet ministers and as said above, Dr Luncheon – decides to pay a dividend. The law does allow for the payment of interim dividends by all companies, but if NICIL’s directors choose not to pay any dividends, there is little recourse available short of court action.

Meanwhile, NICIL will be free to spend the $5 billion dollars it receives from the Chinese as it pleases, including on the Marriot Hotel which NICIL is bent on financing whatever the perceived risks associated with the industry and the project. It is clear that NICIL has now abandoned any pretence of being the Privatisation Unit of the Ministry of Finance which ensured that proceeds of privatisation transactions went direct to the Consolidated Fund.

By interposing NICIL in the mix, that direct relationship no longer exists, and Dr Singh as Minister of Finance must wait until Dr Singh as Chairman of NICIL’s board of directors decides to pay a dividend before he could bring any money into the public coffers. That just does not sound kosher.

There is some hope from a precedent from a couple of years ago when dividends payable by GT&T to NICIL went into the Consolidated Fund, bypassing NICIL. Parliamentarians, the public, the University of Guyana and the country’s pensioners await with interest the course of the Budget deliberation and whether the Minister of Finance will follow that course and amend the revenue numbers in the Estimates to include the $5 billion.

If he does not, we know then that the fears that the Minister administers at least two budgets – one for the Consolidated Fund and the other for NICIL – are in fact justified.

The agreement
Now back to the agreement. It was always incongruous for the government to be a player (shareholder) in a sector as well as the regulator (PUC), a principle that applies as much to telephones as it does to the media, or any other business.

On that basis, the sale is welcome, although there are disturbing signs that the previous administration has been paving the way, at taxpayers’ expense, for its associates to enter the sector and enjoy major benefits.

In the disposal of shares, a sensible negotiator would contract a price that is cum div or ex div, meaning whether or not outstanding dividends go to the buyer or the seller. GT&T would be concluding its 2011 financial statements in time for April 30 filing deadline. It will probably have its AGM shortly thereafter at which the question of dividends for 2011 will be considered. Since the government-Chinese agreement is made in 2012 the government as the seller could have done one of two things about the 2011 dividends: agree for the buyer to receive the dividend but paying for this in the purchase price, or selling the shares while retaining the right to the dividend.

Dr Luncheon did not mention whether this was considered, nor, unfortunately, did any of the media ask him the question.

We will look at this in the concluding part next week.