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Cents were abolished by statute

I no longer believe that Mr Rajendra Rampersaud is engaging in a coherent, sensible discussion. He writes a letter (‘Ram’s analysis in relation to the exchange rate was flawed’ SN, October 27) in which he refers to “fifty Guyana cents.” I pointed out that “cents” as part of Guyana’s currency had been abolished by statute (‘Business Page statement derived from Bank of Guyana report’ SN, October 29). Obviously forgetting or not understanding my point, he then volunteered the information that the Bank of Guyana had long before 1998 withdrawn cents by way of a circular! (‘Exchange rate movements cited by Mr Ram were taken into consideration under the Real Exchange Effective Rate’ SN, November 1)

I must therefore withdraw from further engagement with Mr Rampersaud who thinks others’ “conclusions are based on superficial feelings and political spin in total disregard for fundamentals.” I am not interested in his brand of fundamentals.

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VAT no burden? What does Jagdeo know

Introduction
In his press briefing on Friday, October 22, 2010, President Jagdeo said that he does not see the Value Added Tax as a burden and therefore there is no need to revise it with a view to lowering the rate. He sought to divert calls for a reduction in the rate of VAT by spinning the consistent increases in the VAT collection as a result of widening the tax net and because of the better performance of the economy over the years. This to me demonstrates how little respect Jagdeo has for the nation and its intelligence.

At one level Jagdeo is right, that he personally does not see VAT as a burden. Indeed he would have been just as right had he said he sees no tax as a burden. And for one very simple reason. He pays no tax in Guyana. Under section 13 of the Income Tax Act, his official emoluments are exempt from income tax. And section 6 of the Property Tax specifically makes that act inapplicable to the President while section 5 of the Capital Gains Tax says that if Property Tax does not apply, then neither does Capital Gains Tax.

Presidential tax planning
Because rental income is not official emoluments it was not tax efficient for President Jagdeo to lease his Pradoville One house, since the net rental would have attracted income tax at the rate of 33⅓%. So what did the President do? Instead, he reportedly sold the property for $120M that no more than two years earlier he had valued in a division of property matter with Ms Varshnie Singh at $10 million. On that transaction alone President Jagdeo saved in Capital Gains Tax approximately $22 million! If the property had been rented over a period of time to earn the same $120 million, then assuming that the maintenance costs were borne by the tenant, he would have had to pay $40 million in taxes.

In other words, the sale by President Jagdeo of his property, the land for which he received at a subsidised value from the state, has cost the tax system between $22 million and $40 million! See why everyone wants to be a president? And on a salary of $1.5 million per month, the state forgoes income tax of close to $10M each year.

In fairness to President Jagdeo, he did not write the tax laws of which he is now the major beneficiary. That was done by Mr Forbes Burnham, whom many describe in unprintable language. Despite their socialist claims, neither of the Jagans thought of repealing this generous piece of legislation. But what Mr Jagdeo has done is made what was a temporary, ex officio benefit into a life-long benefit. Below are the benefits under the former presidents legislation he signed.

Presidential burden
For the rest of his life, President Jagdeo – and all future presidents as well – will enjoy, at the expense of the state, a free and unlimited supply of water, electricity and telephone services to his Guyana home; unspecified numbers of clerical and technical staff, gardener, maid and personal staff; fully paid medical attendance and treatment for himself and family, without limitation; full-time personal security and services of the Presidential Guard Service; unspecified number of vehicles to be provided, all expenses and costs paid by the state; two first-class return airfares provided on the same basis as that granted to serving members of the judiciary.

Most of these benefits would be considered taxable for the rest of the Guyanese. But not for the President. And if you think this is bad, consider that under this act, he will never again have to pay capital gains tax or property tax in Guyana, not ever! The one good thing is that this legislation exists in an act which any later Parliament can amend or repeal. It is worth speculating whether Mr Jagdeo could take the country to court if the Parliament were to repeal this immoral and colossally expensive act. In fact, that is itself a burden.

Clearly then the President does not have to bother personally about the impact of taxes or even VAT. While Mr Jagdeo is a consumer and would therefore suffer VAT on some purchases, unlike other ordinary Guyanese, his take-home pay and his gross pay are about the same. For the average Joe, VAT at 16% would have to be paid out of income already taxed at 33⅓%.

Selling VAT
Not being subject to the country’s wide, deep and draconian menu of taxes, the President may have honestly felt that the VAT is no burden. But let us remember that for practical purposes, he is also the country’s economist-in-chief, is a big spender and knows something about money and the nation’s finances. He played a big role in selling VAT to the nation, the architect-in-chief of a VAT system introduced under his watch four years ago. Yes, we may have adjusted and adapted to VAT and its sister, Excise Tax, but let us not forget that they only came into existence on January 1, 2007.

Having pronounced on the non-burden of VAT, the President then makes what he considers a natural progression in his line of reasoning: there is no need to revise it to lower it. But here he is being disingenuous. He and his Finance Minister have been reminded about his own sweeping, unqualified and oft-repeated commitment to VAT being “revenue-neutral.” So memory lapse is not an excuse. The nation has helped to remind him even as the people plead for relief.

But it did not need an economist to know that VAT was almost instantaneously a burden. Ram & McRae had said in its Budget Focus 2008 that “at some point the law and the tax can become excessively burdensome.” The accounting firm added that “if this point had not been reached, we certainly are very close.”

Remembering GUYEXPO
There was however no need to consider what others said or felt. Just consider what the President and his Finance Minister have said and how they have danced in delicate step on the question of VAT. The President needs no reminder of his speech at the opening of GUYEXPO 2006 during which he repeated his government’s commitment to the revenue-neutrality of VAT when he announced: “We said from the very beginning that VAT should be revenue-neutral, we are not looking to increase the collection of taxes, increase taxes or the revenue base with the introduction of this tax.”

Or that on its introduction, the government was adamant that the rate of 16% was arrived at after careful consideration and that any concession to the pleas of the trade union movement, consumer groups and civil society would undermine the Value Added Tax. Finance Minister Dr Ashni Singh insisted in his mid-year report of 2007 that the tax was revenue neutral. In fact, if we go back some months before the presentation of that report, Dr Singh, rapidly demonstrating all the schemes and skills of a politician, and disparaging the members of the opposition for suggesting that there would be a windfall, made it pellucidly clear how the government had computed “revenue neutrality.”

On page 206 of the Hansard records of the February 15, 2007 sitting of the National Assembly dealing with VAT he said, “If we turn to table VI of the Estimates, we see that the actual collections from the taxes that were abolished with the introduction of VAT, generated a total revenue of $24.3B last year, and so if the actual collections for these taxes were $24.3B for last year, and the projected collection for VAT is $24.8B, I have great difficulty in understanding where, Mde Speaker, is the windfall? These are facts of the matter.”

Well, if revenue neutrality was the goal and commitment, Jagdeo and Singh have gouged the people of this country more than fifty billion dollars.

Dancing with the facts
Dr Singh had to slither a bit when the results for full-year 2007 became public. It showed that VAT and Excise Tax had exceeded budget by $12.6 billion, or 49%. In fact for VAT alone the excess was a staggering 76% but since the two taxes were linked by the government in its revenue neutral commitment, the correct measure was the 49% excess in the combined rate.

By then of course, both the President and the Minister of Finance were aware that the rate of 16% was in fact the result of a mistake which his government had discovered very soon after VAT’s introduction. But instead of correcting the mistake, the government, under pressure to modify the rate, extended a deceptive compromise by agreeing to monitor implementation and make adjustments as necessary to bring relief.

Pity the Poor
For consumers, this was no theoretical matter. VAT is a tax on them. If the tax is not properly formulated, it is a hugely regressive system of taxation because it is imposed on expenditure. The poor do not earn enough to save; they are more affected by VAT than those who earn enough to save. Let us forget for a while that the business class has also exploited the VAT and are the biggest VAT cheats. I have in my possession a single invoice issued earlier this year by a Berbice businessman that was not only in breach of the VAT Act but cheats the revenue of close to $100,000! And that is one invoice for one businessman on one customer.

Sorry about the digression. By the time of VAT’s introduction, the government had removed the lower rate of 20% for the first band of taxable income. The wretched poor and not so poor therefore found themselves in the same tax bracket as the better off folks, paying the same rate of personal tax on income – 33⅓% – and out of the balance were then forced to pay the incorrect, immoral rate of 16% on the VAT-able items of goods and services they consume, including the meal at the corner restaurant.

With all the cheats and cheating, VAT even with poor administration is a huge tax gatherer. And the IMF and the government tried their best and placed considerable resources in ensuring that the poor did not get away. Pity that the same effort was not placed against the VAT cheats that dominate our commercial centres and rural areas. VAT has continued to be a major revenue source and even in 2010 when we expect the economy to grow by less than 3%, VAT takings over the first half of 2009 were 9%. Despite this, the Minister expects the full year increase to be only 5%!

Table: Central Government Abstract Revenue by Head
G$ Millions

Source: National Estimates and Mid-year Report 2010

Conclusion
When the first year results of VAT became known, Ram & McRae confidently and generously said in its Focus on Budget 2008 after the size of the windfall became known that “it would now be immoral for the Government to renege on its commitment to adjust the rate of the tax to make it revenue-neutral.”

Since the year of VAT’s introduction, the economy has grown by 5.4%, 3.1% and 2.3% and for this year it is projected to grow by 2.9%. Compare that with the growth of VAT collection for the same years: 47.82%, 1.06%, 20.4% and close to 6%. But if you take what he said at GUYEXPO 2006, those things had nothing to do with revenue neutrality.

Once again President Jagdeo and Dr Singh have been caught out. I am not sure they care, however, well looked after as they are and with the peoples’ taxes available to silence critics and buy support. My own view is that VAT should be made into an election issue. I am prepared to consider casting my vote for a party that commits itself to correcting the dishonesty that has characterised VAT.

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Business Page statement derived from Bank of Guyana report

Mr Rajendra Rampersaud’s letter in Stabroek News, of October 27, 2010, ‘Ram’s analysis in relation to the exchange rate was flawed’ refers.

Citing data from the 2009 and 2010 half-year reports of the Bank of Guyana where Mr Rampersaud works, I wrote in last Sunday’s Business Page that the “exchange rate of the Guyana Dollar to its US counterpart depreciated by 0.25 per cent compared with an appreciation of 0.37 per cent at end-June 2009.” That came from their reports; it was not spun by me. And a single sentence that states that it is incorrect to measure a floating Guyana Dollar against only one other currency is hardly a harp – musical or otherwise – or self-serving – to whom or what I haven’t a clue.

I find it interesting that a country whose exchange rate management was practically dictated by the IMF for nearly twenty years is significant and unique enough to develop the concept of a “home grown, official” exchange rate. Mr Rampersaud should identify the experts in the Bank of Guyana and their reasons for deciding that the decades-old methodologies established by international financial institutions, central bankers and academics are inappropriate to Guyana. To use Mr Rampersaud’s word properly, both the IMF’s assessment and his reliance on it are a classic case of “self-serving.”

The statement in Business Page to which Mr Rampersaud refers, derives its support and basis from the June 2010 Bank of Guyana report, Table 9.2 (b) which shows that over the period December 2000 to June 2010 the Guyana Dollar depreciated against the US Dollar from $184.75 to $203.75 or 10.3%. In turn, over the period December 2001 to April 2010, the dates for which the Bank of Guyana provided figures, the US Dollar depreciated against the Canadian Dollar by 36.5%; the Euro by 33.8% and the Pound Sterling by 5.4% (Table 9.5). I can understand why Mr Rampersaud would wish to avoid such realities. What I cannot understand is why he would consider such statistics and analyses necessary in a newspaper column dealing with national accounts.

Let me put it another way. Based on the selling rates by Guyana’s leading commercial banks, at December 31, 2000, it took G$120.63 to buy one Canadian Dollar. Today it requires $191.27. That is a 58.6% change. At December 31, 2000, it took G$267.28 to buy one pound Sterling. Today, that will cost $298.57, a downswing of 11.7%. At December 31, 2000, it took G$185.65 to buy one US Dollar. Today, that requires $203.70, some 9.75% more, proving the point that the US Dollar has lost against those three major currencies. For the average Guyanese buying Canadian Dollars, official exchange rate stability is a mirage.

Finally, it may seem a small point, but as an economist with the central bank, Mr Rampersaud should know that the Bank of Guyana Act abolished cents since 1998. He should know as well that professionals and technocrats do the public a great disservice by being careless, incorrect or recklessly disregarding accuracy.

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Mid-year report and the Debt party (no pun intended)

Introduction
Almost invariably in discussing recent mid-year reports which the Minister is required to present to the National Assembly under Section 67(1) of the Fiscal Management and Accountability (FM&A) Act 2003, I have made two broad prefatory comments. The first is that it is always misdated.

The Act requires that the report be presented “within sixty days” after the end of the half-year. The second is that comparing it with the half-year report of the Bank of Guyana submitted to the Minister of Finance long before he completes his own report, is like comparing cheese with brick. In content, comprehensiveness and quality they are poles apart.

In 2007, the first full year of tenure of this Minister of Finance the mid-year report was not presented until late November. Subsequent years have seen some wide disparity, none of which however met the deadline, notwithstanding the mis-stating of the date on the reports themselves.

This year the Minister, who was cited by AFC MP attorney-at-law Khemraj Ramjattan for misleading the National Assembly in the small matter of the payment of $4 billion to GuySuCo, dates his report August 27, 2010 two days before the statutory deadline. Until I’m convinced, I shall withhold my congratulations for timely presentation.

As readers are aware the Speaker of the National Assembly Mr Ralph Ramkarran said he did not find a prima facie case against the Minister in the GuySuCo matter although he did find one against the Minister of Housing and Water, despite the Minister of Finance being at least an accessory if the accusation is in fact upheld.

However, it must also be said that the Minister does his reputation no good by the wide disparity between the dates he places on the reports and the dates on which they are tabled.

Breaks and gaps
Since it is routine for reports to be lodged with the Parliament Office between recesses, the Minister would be well advised to lodge the report as soon as it is completed, and issue a press statement to that effect. He can add that “unfortunately, the contents of the report cannot be released until I have had the opportunity to lay it in the National Assembly.” He must also not issue any instructions to the Bank of Guyana or the Bureau of Statistics to withhold their own publications until his report is tabled.

To place in some context what the report should include but does not, I can only draw attention to the concluding part of my commentary on the 2009 mid-year report published in December 2009. I noted there that the mid-year report required more than the year-to-date execution of the annual budget. It requires the report to set out the prospects for the remainder of the year. It also mandates the inclusion of a revised economic outlook for the rest of the year, a statement of the projected impact of the trends on the remainder of the year, and very importantly, a list of major fiscal risks for the second half of the year with likely policy responses that the government proposes to take to meet the expected circumstances.

It was clear then and is more egregious now that the report presented by the Minister falls very short of the requirements of the Act. The result is a report of very limited use and, for any serious reader, when compared with that of the Bank of Guyana, of no practical use.

The best and the brightest
As if to prove that one can fool some of the people all the time, some time in early July, the Parliamentary Sectoral Committee on Economic Services suggested in its fifth Periodic Report that it was likely to recommend that the National Assembly extend the deadline for the submission of the mid-year financial report by the Finance Ministry.

The report suggested that a recommendation be made to the National Assembly that the FMAA be amended to allow for the extension of the deadline for submission to October 9 to coincide with the end of the parliamentary recess. In fact, the committee noted that all the data necessary to compile the mid-year report would not be available by the end of June/early July. Well how much more misinformed can a parliamentary committee be! The deadline is the end of August, not June or July and the committee must have heard of the billion dollar software (IFMAS) in which the government has invested that allows for considerable real time data availability.

And while that ill-informed suggestion would have been music to the ears of the Minister, it is clearly not reading from the same song-sheet as the Chairperson of the Public Accounts Committee Chairperson, Ms Volda Lawrence, who in relation to the 2007 report called the delayed report scenario “gross disrespect” for the people of Guyana and said that it was time people stopped taking such behaviour sitting down.

For purposes of this column and for reasons mentioned in the first paragraph, this column relies on the report of the Bank of Guyana rather than that of the Minister, although it must be said that unlike 2009, the two reports agree on the GDP growth statistics.

Growth
The economy showed what the Bank of Guyana described as modest growth of 2.8 per cent during the first half of 2010. Significantly, the government has now revised the budgeted growth in 2010 from 4.4% to 2.9% for the full year. This would represent the lowest rate of growth in the economy since 2006. In his report, the Minister gave no reason for the significantly lower growth projections, a lacuna that pervades his entire report. And to ensure that they rhyme this year, the Bank of Guyana also projects a 2.9% growth for full year 2010 without indicating whether this is its own estimate of merely a repetition of the Minister’s.

The National Income Accounts was last year rebased to 2006 and until some pattern has emerged it is difficult to assess any one of those indicators.

It would have been useful for the Minister to comment on the impact of the rebased national accounts on the growth statistics particularly in the light of the attention and issues raised by Professor Clive Thomas in his recent columns under captions such as ‘Magnification or manipulation’ and ‘Statistical illusion or real changes’ in the Sunday Stabroek of October 3 and 10, 2010 respectively.

The growth in the economy was attributed to improved performances in the agriculture and services sectors. The livestock and bauxite industries experienced a decline in output while a stable performance was registered in the manufacturing sector.

Bitter sugar
For the first half of the year sugar output was 81,864 tonnes, 1.8 per cent lower than the level at end June 2009 – the year of the turnaround plan – and represented 29.0 per cent of the 280,000 tonnes targeted for 2010. The Bank of Guyana explained that the adverse outturn was due to unfavourable weather conditions in the first quarter of the year which affected cane transport, replanting and irrigation of planted canes.

From an original 2010 target of 280,000 tonnes, the Minister of Finance has announced a revised target of 260,000 tonnes, which would confuse the GAWU members who are being told that their target is 264,000 tonnes. This is not the only confusion in the industry. While the Minister of Finance announces that “works continue on the turnaround plan which would see the realisation of increased acreage under cultivation and improvements in the cane to sugar ratio, the President is expressing fears about the future of the industry due to the failures of “a few individuals.”

Rice output was 168,267 tonnes, 4.6 per cent more than the corresponding 2009 level and represented 49.0 per cent of the 343,373 tonnes target for 2010. The improved performance has to be seen however against the significant amount of “government assistance,” a euphemism for subsidy to the sub-sector, to cushion the effects of the dry weather spell.

Bauxite, another industry that receives wide and valuable government support, saw a decline in its performance which helped to produce in the mining sector a 4.1 per cent decline in growth in real terms. The Bank of Guyana explains that the outcome reflected the decrease in bauxite and diamond output, due to the fall in demand and the “decline in motivated workers.” One cannot but help notice the contrasting attitude of the government to rice/sugar and bauxite, although the government would stoutly challenge any suggestion that ethnicity and politics play a part.

Gold and dollars
Gold again remains an outstanding contributor to the economy and but for its performance the real economy would more than likely have experienced negative growth. Yet, the government continues to hem and haw and dilly-dally on recognising that gold-mining is a key sector that warrants serious attention.

Total gold declarations increased by 8.1 per cent to 142,212 ounces and were 46.0 per cent of the 311,816 ounces targeted for the year. Gold remains by far the largest single export earner with export receipts amounting to US$146.7 million, 22.4 per cent or US$26.8 million more than the June 2009 level. The average export price per ounce increased by 26.3 per cent to US$1061.2 per ounce while export volume declined by 3.2 per cent to 138,242 ounces.

After a much-hyped improvement in the exchange rate of the Guyana Dollar to its US counterpart, the Guyana dollar, vis-à-vis the US dollar, depreciated by 0.25 per cent compared with an appreciation of 0.37 per cent at end-June 2009. According to the Bank of Guyana, the relative stability of the currency is supported by an adequate flow of foreign exchange to the market. It did not add however that the US Dollar itself has been depreciating against some major countries, so the comparison of the Guyana Dollar to the US Dollar is not an accurate measure.

A seemingly unrelated issue is the attraction to keep money in Guyana rather than converting and exporting it to another currency. Interest paid to holders of bank deposits decreased by 17.0 per cent in 2010, showing increases in domestic expenditure. This means that while depositors’ funds in the banking system are increasing their returns are decreasing. That cannot be good news either for the exchange rate or depositors, though it must be added that the extent of the decrease is quite surprising.

Other issues
The NIS also gets a mention by the Bank of Guyana but not the Minister under whose portfolio it falls. The National Insurance Scheme’s (NIS) receipts grew by 12.3 per cent to G$5,328 million as contributions rose by 9.7 per cent to G$4,633 million, and receipts from debtors grew by 91.3 per cent to G$437 million. While the decline in investment income by 10.8 per cent to G$259 million gets a mention, nothing has been said of the increased benefit payments and the status of the 2008 financial statements and annual report. These are languishing on the desk of the Minister of Finance and not being tabled in the National Assembly as the law requires, an indirect casualty of the Clico debacle.

And the debt spree continues as both domestic and external borrowings continue into the stratosphere. The stock of domestic and external public debt increased by 13.2 per cent (to G$94,760 million), and 12.1 per cent (to US$966 million), respectively from end-June 2009 level. The former is attributed to an increase in the issuance of treasury bills to sterilize excess liquidity, while the latter is due to disbursements from the IDB and bilateral credit delivered under the PetroCaribe Initiative. Both domestic and external debt services were higher on account of higher principal and interest payments.

External debt service increased by a substantial 80.4 per cent to US$12 million from its end-June 2009 level, made up of principal and interest payments amounting to US$6.4 million and US$5.8 million respectively.

The cost of carrying GuySuCo and other public sector entities while the government itself engages in some seriously costly and wasteful expenditure, is borne out by the overall cash deficit of Non-Financial Public Enterprises (NFPEs), including the Guyana Power & Light (GPL) and the NIS. This increased to G$5,026 million at end-June 2010 compared with a deficit of G$721 million in June 2009.

The result of these is that current operating cash balances of the NFPEs moved from a surplus of G$2,298 million to a deficit of G$2,097 million at end-June 2010. This decline was mainly due to a 26.7 per cent increase in expenditure which more than offset a 14.0 per cent growth in revenue.

That perhaps, even more than over-taxing the people of this country, is the story of the financial management of the public sector of Guyana in the first half of 2010.

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GT&T share sale line runs cold

Introduction
The deadline for submission of tenders for the purchase of the government’s 20 per cent stake in the Guyana Telephone and Telegraph (GT&T) company is fast approaching. Indications are that with the exception of workers’ groups, there is remarkably little interest in an investment that has produced for the government huge returns in dividends, fees, taxes and other income. At one and the same time, government’s shareholding in GT&T has been by far the most successful investment ever undertaken by the government and also the most criticised, controversial and in some quarters, most condemned.

Contrast this with bauxite, which is largely a net beneficiary from the state with all the concessions and remissions it receives, and Barama in forestry and Omai in gold, which never reached the threshold for the payment of corporate taxes, all of which have received far less attention and scrutiny. Indeed, but for the harm done to the industry by interventionist politicians, sugar, also the recipient of billions of dollars of state funds, might itself have attracted little public attention. In terms of public attention, scrutiny by the fiscal and industry regulators, presence in the courts and the object of political exchanges, GT&T is in a class of its own.

No huge interest
It might have been expected then that the decision by President Jagdeo that his government had decided to dispose of its shares in GT&T would have attracted huge interest. And that NICIL, which serves the government in so many and diverse ways, would have been more active in the exercise. Despite reservations in many quarters, President Jagdeo seemed determined to divest the shares, “[hoping] that the money that we can realize from this sale can go back to developing the ICT sector; that we can get more people access [to the internet]… we are trying to get more computers [and]… bring down the cost of bandwidth.”

Why has there been so little interest and how will Jagdeo now find money to deliver on his promises? Experience has taught us that Jagdeo’s financial management must not be under-estimated; that he has the ability to make money turn up from unknown and/or undisclosed sources, of which the unconstitutional lottery funds are only one of the better-known examples. It is therefore unclear what effect any delay on the sale of the shares will have on Jagdeo’s plan or how he will magically pull money from one of those hats to buy the computers and meet the other uses of the sale proceeds. Indeed a number of computers have been acquired and made ready for distribution, although the exact source of those funds has not been disclosed. If they were not included in the 2010 Budget, then it has to be assumed that it is not from the Consolidated Fund.

The reason for the lack of interest seems to have been driven by several factors, but for the present, the following are considered critical: 1. changes in technology and the marketplace; 2. the government’s direct participation in the sector; 3. the announced intention to liberalise the sector; and 4. a price for the shares.

Technology
Not only has the newcomer Digicel demonstrated its marketing capabilities but together with a limited opening up of the market, it (Digicel) has proved a worthy competitor and has challenged GT&T aggressively for market share. This means that GT&T is no longer a giant which prick it as you might, you could not harm or hurt. The advent of Digicel changed that. Compounding the challenge is new technology that allows subscribers to make international calls at a fraction of the cost charged by the company. It is a safe assumption that the medium of choice for a large share of international telephone calls is Skype, a US-based service that is used directly or indirectly by thousands of persons in Guyana.

The result is that the company’s international long-distance revenue has declined from $10.1 billion in 2007 to $7.9 billion in 2009, a drop of more than 20% in two years. Partly in response to this challenge, the company entered into a joint venture with Telesur of Suriname to link Suriname and Guyana through a state-of-the-art 1,200 kilometre (700 mile) submarine fibre optic cable connected to a worldwide network of similar cables through a landing station in Trinidad. The new cable offers 3,000 to 4,000 times more bandwidth than is currently available through the Americas II cable and satellite link.

Any new investor in GT&T is effectively taking a chance that the financial rewards from the new cable and from new products and services it will be offering will stem the decline from one of the company’s most profitable sources.

Government competition
Over the past two years the government has invested hundreds of millions of dollars to land a new fibre optic cable, ostensibly exclusively dedicated to e-governance. By December last year, the government had already advanced about $400 million to a contractor for the installation of fibre optic cables and terminal equipment. Not many people have been convinced by President Jagdeo’s explanation that the cable would be “dedicated purely to e-governance” and the linking of institutions like schools, hospitals and police stations.

Interestingly while the 2010 mid-year report refers to the GT&T cable, there was no comment on the government’s, and it would be wrong to assume that we have heard the last of the government’s re-investment in the sector or its impact on GT&T. One challenge to the government in trying to sell this as a commercial service is the absence of any redundancy in case of failure. That, however, can easily be met by the government compelling GT&T and any other private supplier to provide the government with back-up service.

It has to be remembered too that President Jagdeo has not been entirely unequivocal or unambiguous about the intent of the government with regard to this cable. For example, in comments made to the media in May 2009 on the cable, he spoke of the need to bring down the cost of bandwidth without saying that this was in relation to the government as a user of bandwidth.

The present intention and future use of this cable have unforeseen ramifications for GT&T and therefore both its majority and minority shareholding.

Liberalisation
This term has been widely used but hardly defined or explained in relation to the telecommunication sector generally, or GT&T in particular. Many thought it might have simply been the removal of GT&T’s monopoly in relation to certain defined services as was the case with cellular services. The word around is that draft legislation making some sweeping changes is now being circulated and provides for at least two persons with close party connections being granted status as Internet Service Providers. Another significant possibility is that the facilities now owned by GT&T may have to be shared with other service providers. How this encourages innovation and rewards investments is anyone’s guess but until the draft is circulated for wider discussion, it would be difficult to assess its potential impact on GT&T.
For now, it is safe to speculate that if the new provisions adversely affect the existing rights of GT&T, then unless there is agreement on compensation, the matter will end up in the courts.

A reasonable price for the shares
The current shareholding in the company is that GT&T has 16,500 shares and the government has the remaining 4,125. The net assets of the company at December 31, 2009 amounted to approximately $24 billion so that on an asset basis each share is worth about $1.2 million. On an earnings basis using a (technical) price/earnings ratio of 8:1, the share price per share would be about $1.3 million.

But the notes to the financial statements indicate that there are what are called contingent liabilities arising from rulings by the Public Utilities Commission and the Guyana Revenue Authority amounting to several billions of dollars. A potential buyer of the shares would need to look carefully at the financial statements of the company and do an assessment of the likelihood of all or any of those contingent liabilities materialising.

Such an exercise is fraught with some real challenges.

Conclusion
No one buys a cat in a bag. This is not a share sale by the company requiring a Prospectus or an Offering Memorandum with all the warranties, assurances and projections by the company and its directors. Like any ordinary holder of shares in a company, the government could make no representations about the future of the company.

The absence of takers for the government’s shares should therefore not surprise anyone, and least of all the government. It would be strange for it to expect any interest when as the seller, the legislator, the regulator and fellow shareholder it has created such uncertainty and confusion about the company. An investment in the shares of any business is a calculated evaluation about the future. As it is in the case of GT&T.