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Guysuco needs drastic surgery to ensure survival – part 5

Introduction
In today’s column I will begin a review of GuySuCo’s Strategic Blueprint announced by President Jagdeo on January 8, 2009, following the installation of an interim board he appointed to steer the local sugar industry out of its field of inefficiencies, tonnes of red ink, and punt-loads of government subsidies. Dubbed by President Jagdeo a “turnaround plan,” and by the plan itself as a blueprint for success, the plan and the interim board were a reaction to the low-point of production by the corporation in almost two decades, and to the danger that the corporation was staring down the barrel of insolvency. Unlike previous studies on the corporation and the industry, the strategic plan is a hidden document, accorded the utmost secrecy, not available to economists and analysts, politicians or taxpayers who, by virtue of having to pump billions of dollars to keep the corporation afloat, must be considered the corporation’s current major stakeholders.

There are several versions of the Strategic Blueprint, but the one on which this column is based is dated May 2009. The first point to note is that the architects of this multi-billion dollar blueprint acted partly on oral instructions for the terms of reference for their work. They proudly refer readers to the website of the Office of the President which sets out the mandate given to them by President Jagdeo, and also make reference to a press report quoting Minister of Agriculture Robert Persaud. They promptly complied with instructions from Minister Persaud, who directed them that it was “an appropriate time to make changes to the organisational structure of the corporation, starting at the management level.” No thought about starting at the activity level, such as separating agricultural, factory and value-added activities, since presumably that was not the instruction.

Strategic deficiencies
The product is an unfortunately limited document that did not seek first to ascertain why and how GuySuCo got there, where the politicians wanted to take it, and most importantly whether what the politicians wanted made any business sense. The government presented to the team a political, if unwritten plan. At the most acquiescent level, a professional team would have developed a business plan, which this document is clearly not. It considers only those matters on which instructions, or more accurately directives, were given. The team is a mainly public sector group, the members of which with the notable exception of Ms Geeta Singh of Clico, have very little commercial experience. Not surprisingly then, excluded from the plan is any reference to consideration of such sensible possibilities as estate closure, and more daringly, private sector participation in the corporation, by sale or joint venture. They were unprepared to confront the reality of an inevitable failure of the corporation if it retained all 8 estates, factories and 20,000 workers.

It was clear too that they could not deal with the poorly considered idea by President Jagdeo to invest hundreds of millions in the Skeldon Sugar Modernisation Project, compounded by the calamitous decision by him, against the better advice and judgment of the experts, to bring in inexperienced Chinese as the contractors.

Chinese power
The President ignored the reality that the factory was in a mess, and rejected advice that the contract be cancelled. The money outstanding could then be paid to a competent contractor to finish the job. But politically, it was easier to persist with the Chinese while blaming Booker Tate. The trouble is that that course has had serious financial costs, including thousands of tonnes of sugar lost, and a similar number of hours of senior GuySuCo time spent on increasingly difficult negotiations with the contractors. A meeting locally with a Chinese government representative and visits to China proved equally difficult, if not unproductive. It was a display of Chinese power versus Guyanese amateurism, experiences which could be useful as we negotiate an even bigger contract for the construction of the Amaila Falls hydropower project. The indications are that we are about to repeat that political adventurism, only this time on a bigger scale.

The writing had long appeared on the wall that the selection of CNTIC as the preferred contractor was heading for disaster. They could not get their team together, their project management capability was less than what the project required and as early as 2005, the project itself was already behind schedule.

The plan did not examine the fundamental problems of the industry, and similarly, glossed over in one page what it called the state of the industry, incredibly under three headings: current cash position, production history and projected 2009 production. It could not bring itself to admit that the Skeldon Project contract price had escalated, demanding a disproportionate amount of time, draining the cash resources of GuySuCo of billions, and starving the other estates of critical capital and operating expenditure. What little was left had to be spread among all the estates, good and bad alike.

The President had always signalled his unwillingness to accept these unpalatable facts and that the corporation was unlikely to show any profits for several years to come. He and the board concealed such vital information behind a mask of financial and political propaganda, saved temporarily by the weakening of the US$ against the euro, and the increase in complementary quantity that gave the corporation some breathing space until 2008.

Like the President, the interim board seemed equally unwilling to accept the fact that the corporation would not survive if it retained Uitvlugt, Wales and LBI, and if it did not reduce its workforce by several thousands. Like the President, the politically-minded interim board could not understand that good-paying jobs do not come from bailouts, but rather from new and dynamic businesses. Robert Litan, who directs research at the US Kauffman Foundation which specialises in promoting innovation in America reports that between 1980 and 2005, virtually all net new jobs created in the US were created by firms that were 5 years old or less. GAWU might lose some members, and the ineptitude of many of the politicians would be exposed, but I am not sure that would be such a bad thing. Sugar workers are hard-working and resourceful and will not sit idly by. They will go out there and find better jobs, jobs which are less demanding and offer greater security.

An industry, not a company
The other fundamental flaw of the plan is its total concentration on the corporation – again because that is what the team was told to do – rather than addressing the problems of the industry. GuySuCo is not an island, but is at the centre of an industry. Its success depends on the success of the industry, and if the industry does not have a future, neither does GuySuCo. Because it was told to come up with a plan in the “shortest possible time,” the team never did any analysis of the industry, including the private cane farmers, or of the dwindling labour and talent pool from which it would be required to draw exceptionally committed employees if the plan is to half-succeed.

The Skeldon project anticipates the participation of private operators, yet no attention is paid to this group with which the corporation would have to compete for labour. Unlike the corporation which can count on state subsidies and which the Minister of Agriculture says is too big to fail, these private operators will make hard decisions on economic and financial grounds. GuySuCo has guaranteed hundreds of millions of dollars of bank loans to those operators. The private operators will be concerned about having to share the costs of the inefficiencies of the Skeldon Factory, the uncertainty of the market and the unpredictability of the weather.

Irrationalities
Absent too is any indication that the turnaround team did any work on a market analysis so necessary in the light of the new trading arrangements in the once highly subsidised and profitable EU markets, and the developments within this region. One of the first rules in business planning is that you start with the market and build around that. Instead this plan starts with an obsessive commitment to production of 400,000 tonnes annually from 2013, with 110,000 tonnes from Skeldon. One has to wonder too, whether the team knows that the corporation is almost always too optimistic in its projections and production. In its secret deal with the government, the corporation is disposing of choice land currently under cultivation at Diamond, accounting for 18,000 tonnes of sugar annually,which it claims will be made up by ‘recommended’ strategic measures at Blairmont. It must be a sign of extreme desperation that a professionally prepared plan would sell land under cultivation just when it seeks to expand production and then incur additional heavy capital expenditure of G$3 billion on which it admits that returns will not be very large in the early years. The only thing that I can think of as more ridiculous than the sale is the purchase of the land by the government, which will now have to convert agricultural land to housing development.

But it is easy for the plan to engage in such irrationalities. Its authors do not state what they consider a reasonable return on capital or acceptable measure of profitability and success. Most of the corporation’s land is held on peppercorn lease rental from the government – $1,000 per acre per year – and it would add to the absurdities for the corporation to pretend to sell land it does not own and for the government to buy its own land. The plan is premised on continued subsidies of all sorts, most of which are not, however, disclosed. The industry’s contribution to GDP is now about 7% and it is the major beneficiary of government subsidies, of which the land sale is just another example.

False economies, accounting
The plan is also based on some false economies such as the imposition of a fixed average cost for cultivation of $490,000 per hectare. If this is an arbitrary determination by the accountants who predominate in decision-making in the corporation, then the impact will be felt in production and productivity, negating the gains so excitedly touted to the Economic Services Committee of the National Assembly.

I will close by noting two points about costs and their behaviour which the plan does not address. It does not appear that sufficient or any attention was paid to the question of costing and management accounting. It is wrong for the corporation to make decisions only on the basis of the field cost per tonne. To return a profit requires the entity to sell at a price that covers total cost. On that basis, cost per pound was approximately US forty cents in 2008, and not much less in 2009.

The second is that in any project analysis, if the marginal cost exceeds the marginal revenue, each additional unit produced increases the entity’s losses. It does not appear that this point was considered in the plan. I should add that it does not matter whether the sugar produced is then used for value-added, such as the Packaging Plant. For what that means is that that plant will be using over-priced raw material. Better to buy from third parties and do the packaging – assuming that it would make sense to do so.

Next week, I will wrap up this series and move on to deal with other fast-moving developments taking place.

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The economics of the Amaila project do not add up

Last Thursday, Dr Roger Luncheon, Head of the Presidential Secretariat was asked for further details about the award of the multi-billion contract to Synergy Holdings for the construction of a road to the Amaila Falls. Dr Luncheon who placed the contract “within the provisions of the Procurement Act,” said that the persons who were raising doubts about Synergy and its ability to implement the project, were by extension raising doubts about the procurement process, and accused them of being part of a sinister agenda. It was also said that the award was based on the fact that Synergy had submitted the lowest tender.

The facts show that it is Dr Luncheon who is being sinister – and less than forthcoming – in attempting to mislead the public, which is asked to pay more than G$3 billion to build a road by a company that has zero experience in such a project. Dr Luncheon must know that National Industrial and Commercial Investments Limited (NICIL) is a state-owned private company that does not fall under the Procurement Act; that Synergy did not meet any of the pre-qualification criteria for the contract and its tender should therefore have failed at the first hurdle; and that the project’s Request for Proposal states unambiguously that there was no obligation to accept the lowest proposal. Yet, Synergy is now foisted on the nation as the only road to shining light, compliments of NICIL, chaired by Finance Minister Dr Ashni Singh, with a supporting cast of other ministers and political appointees of the President.

As a private company, NICIL is a vehicle of convenience to award the road-building contract as a precursor to giving a preferred company an even more lucrative contract – the construction of a hydropower plant valued at hundreds of millions of US dollars. Dr Luncheon’s government pretends to be blissfully unaware that the economics of the Amaila project do not add up, and may end up like the decision to spend more than US$200 million on the Skeldon Sugar Modernisation Plant, financed by loans on which GuySuCo has defaulted, requiring a government bailout.

Moreover, Dr Luncheon did not tell the nation about the source of this initial US$15 million. The 2010 Budget anticipated a G$6 billion from the Norwegians under the MOU. That money has not arrived, and indeed many key conditions of the MOU for its receipt are yet to be met by Guyana. Ironically, the four million square metres of tree-clearing operation required under the Synergy contract is likely to cost some US$14 million of penalty under the very MOU, reducing by approximately 48% the G$6 billion budgeted to be received from Norway this year.

The budget already has a $28.6 billion deficit which will increase as more money is put into GuySuCo to keep it afloat, and political spending accelerates in preparation for the 2011 elections. Of course, it is the hapless Guyanese taxpayer who is saddled ultimately with the related implications of, and responsibilities for, deficits brought about by government’s caprice.

Taking a different tack, there is also the possibility that this project is being financed from the NICIL fund created out of moneys diverted from privatisation proceeds and huge sums from various public entities. By these unlawful and unconstitutional means Parliament and the Consolidated Fund are bypassed in favour of NICIL, a company which for several years has not been filing its annual tax returns, or having its accounts prepared and audited in accordance with the law.

All in all, the choice of NICIL to do this piece of midwifery is not surprising. It has been at the centre of many highly questionable transactions involving this government, including: 1) the RUSAL bauxite give-away; 2) spending for the phantom hotel; 3) the NIS investment in the Berbice Bridge Company; and 4) facilitating, most egregiously, the Ramroop’s Queens Atlantic Investment Inc deal which included unlawful tax concessions.

This Synergy deal continues a pattern, and the parliamentary opposition and the people of Guyana should demand an enquiry into this outrage, potentially the largest single financial transaction ever undertaken in Guyana. This must be stopped.

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On the Line: 2009 Annual Reports of the Guyana Bank for Trade and Industry and the New Building Society

Introduction
Business Page today interrupts its series on the state-owned Guyana Sugar Corporation to present an overview of the annual reports and accounts of two of the country’s financial institutions which will soon be holding their annual members’ general meetings at which the presentation of the annual reports is a major agenda item. One of these is the commercial bank, the Guyana Bank of Trade and Industry which is a licensed financial institution regulated by the Bank of Guyana under the Financial Institutions Act. The other is the New Building Society Limited, which carries on a financial business but which the Bank of Guyana claims does not fall within the act and which, despite several commitments by the Bank of Guyana and the government, remains unregulated. As a result, the bank is subject to the Single Borrowers Limit and other “strong financial regulations,” as described by no less than the Minster of Finance himself, while the NBS is not.

This is not the only note of contrast. One has to look no further than the Chairman’s reports by Mr Robin Stoby SC and Dr Nanda Gopaul of the two institutions respectively to see how they reflect the backgrounds, styles and personalities of the individuals. Both of them had good reason to be satisfied about the results of their entities. But while Mr Stoby was professional and measured, even enthusiastic at times, Dr Gopaul showed how difficult it is for him to adjust his political style to dealing with the commercial world.

He had no qualms about castigating members of the NBS as an “uninformed little group of mischief makers and pseudo intellectuals”; or about praising Housing Minister Irfaan Alli who now risks sanction by the Privileges Committee of the National Assembly for misleading the National Assembly; or making claims about the economy that are at best questionable. While Dr Gopaul claims that the Guyana currency has appreciated during the year, the GBTI Annual Report – and you would expect the bank to know – reported that the Guyana dollar market exchange rate was $202.75 compared with $201.75 during 2008. He also said that the fiscal deficit was at its lowest in 10 years. Perhaps he has been wrongly advised by his Finance Committee comprising former Commissioner of Police Mr Floyd McDonald and trade unionist Mr Kenneth Joseph.

It also goes beyond the two chairmen. The directors of GBTI are all experienced, private sector persons, while those of the NBS with one exception are all connected, directly or indirectly with the ruling party. This necessarily flows through to the quality of governance which has been a major and continuing issue at the NBS, particularly in relation to proxy voting, pensions for directors, and a modern code of corporate governance.

GBTI
The annual report of the GBTI which will be holding its meeting on Monday, April 19, 2010 shows the bank continuing a remarkable run in which since 2006, net income before taxes has increased by 25.8% in 2009, 14.8% in 2008 and 23.9% in 2007, making for a cumulative increase since 2006 of 78.8%. Because of the tax effect, after-tax profits have increased cumulatively over the same period by 95.9%.

The Beharry family holds a 61% controlling interest with the remainder of the shares spread among hundreds of members, but the actual number and any other significant concentrations are not disclosed in the annual report.

Earnings per share for the year were 24.8% in 2009, marginally up from the 23.5% in 2008. With the company’s shares trading at $140, the P/E ratio, a popular investment measure, has improved slightly, to 5.6, making the security one of the most attractive in the domestic market. One area of significance is the increase in the effective rate of taxation which for 2009 is 29.7%, compared with an effective rate of 16.0% in 2008. The corporation tax charge for the year is 26.2%, compared with 13.6% in 2008. Readers are aware that the nominal rate of corporation tax on banks, commercial and telecommunication companies is 45%. As a result of the higher effective rate of tax, the Return on Average Assets and Average Equity have both declined, albeit marginally.

The interest earned on the average of net loan balances declined from 13.4% to 13.1% while the average interest paid on deposits was 2.2%, compared with 2.6% in 2008. This apparently low interest rate is in some significant measure due to the high level of non-interest bearing demand deposits which averaged more than $10 billion during the year. The bank continues to earn significant amounts from foreign exchange transactions with Exchange Trading Gains increasing from $664M or 18.4% of total income in 2008 to $733 million or 19.1% in 2009. As this column noted last year, the gains on foreign exchange alone cover the total staff costs of $612.6 million, which is a decrease from the previous year.

The continuing good run allows Chairman Robin Stoby to announce for yet another year, “the highest dividend payout in absolute terms in the bank’s long history.” At $7.5 per share, total dividends in 2009 will represent 30.3% of the year’s distributable profits, compared with 25.5% in 2008 and 25.1% in 2007. By comparison, the dividend payout ratio of Republic Bank Guyana Limited for 2009 was 41.2%.

Highlights

The bank’s deposits increased in line with the growth in deposits of the financial sector, thus allowing it to retain a 21% market share of deposits. Its market share of loans however declined from 22% to 20.3%. The bank’s financial condition remains very strong and shareholders’ funds have increased from $4.7 billion to $5.7 billion.

Mainly due to what is described as capital work-in-progress of $4.1 billion, the value of property, plant and equipment has increased from $3.8 billion to $5.6 billion. In addition to the new head office, the bank is also building a new branch at Diamond on the East Bank of Demerara. At the sod-turning in 2008 the bank had announced the cost of the new head office building at $2.6 billion. Unless there are some other capital developments that have not been announced, it seems that there has been a significant cost overrun on the head office. The financial statements also reveal that the bank had actually exceeded the Single Borrower Limit by its investment in Government of Trinidad and Tobago Sovereign Bonds, although it fails to disclose the amount of the excess.

As they receive the report of the continued successful performance of the bank, shareholders are likely to overlook these matters, as well as the sudden departure of the bank’s CEO in October 2009. The meeting should be quite a quiet affair.

The New Building Society
After a break of two years when the directors took the annual meeting to Berbice, the annual general meeting of the NBS will return to the Pegasus Hotel next Saturday at 1.30 pm. The directors will report a profit of $588 million, describing it as an increase of 97% following a write-off in 2008 of a $200 million exchange loss on its sterling investment. According to the audited Statement of Income the profit for the preceding year was $487 million, so that the increase in profit for the current year is 9.6%.

Highlights

As is evident, the increase in net income before exchange difference was 9.63% but after taking account of an exchange gain in 2009 compared with an exchange loss in 2008, the change in net income is 97.2%. Just for the benefit of the financially minded, the accounting treatment of the gain is not in accordance with the rules of accounting.

Total assets of the NBS increased by 6.6% compared with 9.3% of the GBTI while its investors’ balances – largely equivalent to depositors’ balances – increased by 5.8%, compared with GBTI 11.9%. Despite this, and due to its tax exempt status, no reserve requirement and more discretionary provisioning rules, the NBS pays higher rates of interest on deposits and yet charges lower rates on its loans.

There is no doubt that the investments in the Berbice Bridge Company Inc are attractive, even for a tax-exempt entity. The issue has been concentration. Having acquired $1,520,000 of such investments from CLICO in 2009, the total of $1,870,000 represents 34.9% of the reserves at the end of the year. As a prudential rule, the Financial Institutions Act limits any single investment by financial institutions to 25% of their capital base.

The Society’s pension fund recorded unfunded obligations of $21.8M compared to a surplus of $21.5M, a significant turnaround of over 200%. No mention is made of the cause of this decline. Accounting rules have allowed a significant larger obligation to be presented in the financial statements.

The last time the NBS had a meeting at the Pegasus, there was quite a furore. It is unlikely that history will repeat itself.

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Guysuco needs drastic surgery to ensure survival – part 4

Introduction
In part 3 last week dealing with GuySuCo’s 2008 annual report, I opined that Ms Geeta Singh-Knight’s role in the collapse of Clico the insurance giant, and the loss to Guyana of close to G$7 billion made her unfit to be a director of the state-owned entity. Co-incidentally, the editorial pages in two of that day’s newspapers carried a report of President Jagdeo’s defence of Ms Singh-Knight, excusing her conduct as Clico’s CEO, and effectively the keeper of the company’s finance, as an “error of judgment.” Those pages also carried a letter by Mr Keith Burrowes, a director of GuySuCo, responding to criticisms about the qualifications and suitability of the directors.

These are relevant to this series on GuySuCo because directors set the benchmark for competence, integrity, professionalism, and independence, key elements for corporate governance and success in any organisation. Directors, as persons charged with turning around GuySuCo, need the wisdom of Solomon, the strength of Sampson, the courage of Shadrach, and the integrity of Mandela.

Impeccable integrity
Let us see how the directors measure up, starting with Mr Burrowes who I have known for many years in a professional, client-auditor relationship. I admire his exemplary capacity for hard work, dedication and commitment to country. I believe his integrity is impeccable, but wonder how he reconciles his personal integrity with serving as Chairman of the board of the Guyana Chronicle. He can be neither unaware of, nor insensitive to, the lack of journalistic professionalism of the Chronicle which is never reluctant to engage in or promote personal attacks on the government’s perceived opponents, or of the paper’s lack of fairness and balance, and of its sometimes undisguised propaganda. If I can fault Mr Burrowes, it is not only for his lack of courage in ensuring to all Guyanese access to our nationally owned and financed newspaper, but for his failure to recognise that by lending his credibility to what is essentially a political job, he undermines the other commendable work he does and service he offers.

Notwithstanding his lack of any experience or expertise in agriculture or sugar, I believe that in a team of complementary skills, Mr Burrowes can make a valuable contribution to GuySuCo. But only if he recognises his limitations in relation to the massive challenge facing the industry and the corporation, and can demonstrate the courage to stand up for what he knows is right, even as a minority of one. As I will discuss later in this series, I believe that that reservation is not without good reason.

Special skills
In defending Ms Singh-Knight, President Jagdeo says she brings special skills to GuySuCo, and excuses as errors of judgment, her role in Clico. This simplistic assessment invites speculation on the possibility of other reasons, since no rational person would describe as mere judgmental mischance sustained actions by a chartered accountant and business executive, causing losses to the NIS, policy-holders and pension schemes, of close to seven billion dollars. Forget for a moment that the President showed such antipathy towards the directors of Globe Trust who, in response to an order by the regulator for an increase in the capital base of the fledgling financial institution, put up their houses as security for a book entry loan. By contrast, Ms Singh-Knight ignored letters from the Commissioner of Insurance (COI) about her company’s non-compliance with the Insurance Act, and could consider herself doubly fortunate that the COI acted with such excessive – and as it turned out – costly restraint and tolerance. Forget too that Mr Steve Backer – and this is no defence of him – had to leave the company in an adversarial legal controversy over benefits to which he claimed he was entitled. By contrast, Ms Singh-Knight is back in the position and control of key company records of potentially legal interest and significance, even though a Judicial Manager has been appointed. Forget too, that the President was prepared to travel the Caribbean to beg for fungible sums of billion of dollars to correct Ms Singh-Knight’s “misjudgments.” By contrast, the depositors of Globe Trust received empty promises, but no money.

The list, the list
President Jagdeo seems to be unaware of the role and duties of a director under the Companies Act, and of the penalties under the Insurance Act. The duty of care, diligence and skill developed and established by the common law has evolved into a statutory form. It is reasonable to expect that Ms Singh-Knight would, in executing her duties as a director and officer of Clico, apply those skills which the President bestowed on her. The general principle is that what is expected of a corporate director in matters of conduct and judgment depends on the particular qualifications as well as the size and structure of the corporation, the composition of the board of directors, and the distribution of duties among the directors and officers, among other things. In relation to the Guyana company, Ms Singh-Knight was more than a director and an officer of Clico. Her powers seemed more akin to that of a corporation sole, or the President/ Chairman/ CEO /CFO wrapped into one.

The Companies Act 1991 substantially upgraded the common law requirement for diligence, raising the bar to that of a reasonably prudent person. Shipping out all that money to a dubious related party hardly qualifies as an exercise of diligence, particularly when the regulator writes to you on more than one occasion, putting you on notice. But apart from the reckless disregard for the Insurance Act and of the principles of prudential investing demonstrated by the company under her stewardship, questions have been raised about the payments made out of the $1.5 billion the company received from the sale to the New Building Society (which co-incidentally is chaired by GuySuCo Chairman Dr Nanda Gopaul) of its investments in the Berbice Bridge Company Limited of which she is the President’s hand-picked Chairperson. More than any presidential endorsement, the publication of the list of persons who were the recipients of the pre-collapse payout by Ms Singh-Knight would answer many of the nagging suspicions that linger about the real reasons why the President is resisting an investigation into Clico’s demise, as well as allay concerns about the “special skills” she brings to the board of GuySuCo. Failure to provide such a statement can be interpreted that transparency is not an ingredient or yardstick for governance in GuySuCo.

Political choices
Another of the directors who are part of the turnaround leadership is Mr Donald Ramotar, General Secretary of the PPP/C and the longest serving post-1992 director, although his exact qualification, role, or representational interest for a board position, and as a survivor after the recent housecleaning, is far from clear. Then there is Dr Rajendra Singh, who is reported to be associated with the ruling party from afar, but whose worth to the corporation is considered so valuable that he is flown in to attend meetings of the board. In 2008 the corporation paid to Dr Singh fees of $70,000 and expenses of $2,020,000. That was smaller only to the $13,335,000 in expenses paid in the same year for Mr Errol Hanoman, CEO and $3,387,000 in expenses for Chairman Ronald Alli.

The only director with any field operations experience is Mr Jangbahadur Raghurai, who at 74, has been brought out of retirement to help work on the turnaround plan and to join the board. He is the only one of scores of former managers, many younger than he, who are available and might have responded to a recall to help revive and restore an industry and company they served for the better parts of their lives. That would have been at least as cost-effective as the expenditure on new recruits for whom the first five years with the corporation – if they stay that long – is an investment.

Chairman of the board is Dr Nanda Gopaul of the Office of the President, a top political public servant, whose regard for good corporate governance at the New Building Society has been an issue for some members whom he told, “We have Region 6,” in reference to the election of the directors. His appointment as Chairman will ensure that the President for the time being, is represented in the boardroom, and that his wishes can be directly conveyed to the directors.

On the other hand, the CEO’s relationship with the sole shareholders has never been an easy one, and he is generally regarded as more closely associated with Booker Tate than with the corporation. It is understood that his contract will expire within a year, with another succession issue to deal with. Except for the CEO, the board is a political board, likely to bow to the wishes of those who appointed them, rather than bring their own expertise, and exercise their own judgment, in managing the affairs of the corporation. In passing, one recalls the agreement between Hoyte and Jagdeo that the opposition should have a seat on the board. That held for a while, but through default and lack of interest by the PNCR, that agreement is now ignored, to the detriment of all.

Unprecedented threat
Confronting the gravest threat unprecented in its centuries of existence; the failure of sugar in several regional countries and across the world; the global downturn and uncertain recovery; and radical shifts in demand, industrial capacity, and market prices, all required the turnaround team to address the industry and the corporation’s future honestly and boldly.

It required the application of some of the most sophisticated approaches and strategic tools in management science, economics, marketing, human resource management, and managerial accounting. The last thing it needed were elementary spreadsheets and assumptions more appropriate to business planning for an individual enterprise, prepared in a matter of a few months, and acting largely on political directives.

My view is that, not only have the directors accepted a basket to fetch water, but individually and collectively they lack the necessary ingredients to stem the decline of the industry and cash drain of the corporation, let alone return them to success. All the persons referred to above were deeply involved in the Blueprint for Success, the so-called turnaround plan. Sugar is grown in the fields, processed in the factory, sold in the marketplace and accounted for in the office. As we shall see over the next couple of articles, that schematic appears to have had insufficient attention in the document that contains several conceptual flaws, some naive assumptions, and elementary mistakes.

According to the plan, the workers have lots of obligations for the success of the industry, but and instead of corresponding rights, they are expected to accept a decreased share of the corporation’s revenue. In ‘Appendix 1, Impediments for Success,’ the “union and workers” are required to co-operate with management to stop the decline in attendance and incidence of strikes. The “union” is required to convince members to adjust to rewards for production, while the “unions” must support cost rationalisation. Is it a mistake that in two cases only the singular union is identified, while in the other it is more than one? And if it is not, which is the one union that has been singled out to carry such responsibility?

It would be merely a personal matter if the plan simply reflected the professional competence of those involved in its preparation. It would be unfortunate if it was done with such haste as to ignore the real problems, causes and structural weaknesses of the industry and the corporation. But that the plan is being used by the Jagdeo administration as the basis to plough into the corporation further billions of dollars of subsidies which the rest of the economy can ill afford, makes it a disaster of national proportions.

To be continued

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Guysuco needs drastic surgery to ensure survival – part 3

Introduction
In the two preceding parts of this series on the state-owned sugar entity, my focus was on the 2008 financial statements which are contained in the annual report tabled in the National Assembly in late 2009. Those accounts told a story of a company in serious trouble and in danger of terminal decline, whether measured by profitability (it had a pre-tax loss of $6.2 billion); liquidity (by its own admission it experienced cash flow difficulties requiring working capital for the fourth consecutive year from the UK based ING Bank and a lifeline of $3.2 billion from a consortium of local commercial banks); or solvency (it was practically insolvent and requires Government support to keep it afloat). In the course of the earlier parts, I touched on some of the disclosures and omissions in the annual report, the principal use of which is to tell the story behind the numbers, offer some explanations, sometimes excuses, and indicate how the directors intend to take the road to recovery.

As a state-owned entity, the corporation has filing and reporting obligations under both the Companies Act, as well as the Public Corporations Act (PCA) which requires that the accounts and report be tabled in the National Assembly within nine months of the end of the accounting year. Allowing for a few weeks delay, the reporting obligations of the corporation are met, which is more than can be said for the majority of publicly owned enterprises and budget agencies.

But the combined effect of these two acts creates for the corporation a recipe for confusion, if not disaster. Following the wave of privatisation and the new post-1992 dispensation, many of the provisions of the PCA, including the establishment of a Public Interest Committee consisting of workers, women, youth, students and consumers, have fallen into disuse. The directors’ powers and duties under the Companies Act are effectively overridden by the PCA which gives to the Minister immense powers over the corporation, and for good measure, also to the President. With such conflicting reporting obligations and so many bosses, it should surprise no one that the corporation seems incapable of dealing with the myriad of problems that cause it such massive losses and public embarrassment, as we witnessed this week over procurement in the corporation.

The annual report
For now, let us turn to the annual report. The then Chairman Mr. Ronald Alli in his report restates the mantra that sugar makes a significant contribution to the country’s GDP and is our largest foreign exchanger earner. The data do not support these bold assertions.

Measured in terms of constant prices, in 2008 sugar contributed 5.9% of GDP, placing it seventh in ranking, while in terms of export earnings it earned the country considerably less than the earnings from gold. In 2009, contribution to GDP was unchanged, but in terms of export earnings, sugar earned less than half of that of gold. With respect to taxes, sugar makes a negative contribution, receiving from the treasury a host of subsidies, exemptions and concessions. Of course, production and prices of sugar and other commodities can change the equation from year to year but the underlying trend is not encouraging and indeed, if you can believe it, in the GDP league, sugar is not too far ahead of Other Crops, which does not include rice.

The table below, taken from the 2010 Budget Speech, shows the value of exports in millions of Guyana Dollars for the five years 2005 – 2009.

It may be excusable if the statements in the annual report were made by persons with less access to information. It is perhaps merely regrettable that these statements about the greatness of sugar are made without any attempt at fact checking. But what is not excusable and is more than regrettable is that such uninformed thinking is often advanced as justification for billion dollar investments and subsidies which the working poor and the unemployed can ill afford.

The annual report devotes scarce space to describing the efficacy of the movement of inventory among estates, the procurement of goods, and the concerted efforts made by the “hard pressed staff” of the procurement department. Yet months after the publication of that report the corporation is now reporting systemic misconduct and losses in the department. Since no one in the corporation will reconcile these clear conflicts, the public will remain confused.

Corporate governance
Here again reality confounds theory, the walk differing from the talk. The directors assert that the corporation is committed to high standards of corporate governance. Yet, neither its annual report nor its website states the names of persons heading and constituting the various governance committees. My efforts at finding out left me with the distinct impression that the corporation does not understand what corporate governance means. The office of the Corporate Secretary advised me that for the information, I should call the Chief Executive. The response from his office was that I should call the Chairman Dr. Gopaul. That was that.

I later understood that the Audit Committee is headed by Ms. Geeta Singh-Knight, the CEO of the insurance giant Clico which collapsed spectacularly in 2009. The government has resisted calls for an investigation into this collapse amidst evidence that the law – the first ingredient of corporate governance – has been breached, and suggestions that there may have been collusion between the company and some key political and other persons in the society. The resistance to such calls appears to have as its objective, the protection of those persons, and to conceal as much and as long as possible, regardless of the cost and consequences. The public’s confidence in Ms. Singh-Knight has been totally lost as a result of her direct involvement in all the major decisions of Clico up to and even after its collapse. In any other situation such a person would not be considered a fit and proper person for appointment as a director. With this government, the rules are more tolerant.

There is too a Remuneration Committee that would have approved the huge salaries and millions of dollars of expenses paid for some directors and senior staff. Yet there is no coherent wages and salaries policy in the corporation, even as industrial relations stumble from one crisis to another. The other committees established by the board are the Central Tenders Committee and a Lands Committee with responsibility for land disposals. My understanding is that this committee was side-lined in the controversial Diamond land deal in which two ministers stand accused of improper conduct in the National Assembly.

Interestingly the directors stated as their primary function the generation of “sustainable wealth for the shareholder as the key stakeholder in the business.” This rather controversial assessment is hardly likely to find agreement among the workers who have to perform the back-breaking tasks under some of the worst modern day conditions, and among taxpayers who increasingly are keeping the corporation from going under. But the directors, including one leading presidential hopeful, challenges this primary function by categorically re-stating a policy not to declare or pay dividends. It is not often that in a single annual report that one finds such contradictions. In the case of Guysuco these are on the same page. No wages policy, no return on capital threshold, and a make-no-sense dividend policy. Perhaps the directors charged with the turnaround of the company will tell the stakeholders what is the real policy of the corporation.

Political loyalty over professional competence
The disaster which has befallen the corporation is the fatal triumph of politics over business, of expediency over planning, of political loyalty over professional competence. For any turnaround there needs to be a transformation in how the corporation is run. The stages of good practice are at the basic level, statutory compliance with laws and regulations, followed by good corporate governance and later, by corporate social responsibility (CSR). As a state-subsidised entity that touches on the environment, food and finance, and that directly employs thousands across the coast, the stakeholders extend beyond the shareholders. This would normally demand the formulation and application of CSR. How the corporation moves from its pre-level 1 stage to stage three is anyone’s guess. The Public Corporations Act permits performance contracts involving the corporation. Those who are now asking for billions more in subsidies should be asked to sign such a contract before any money or further concessions are granted.

To be continued