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The role of the Privatisation Unit in the QAII deal

Introduction
The President’s postponed Privatisation and Taxation Seminar finally gets underway this Tuesday at Le Meridien Pegasus, on a by-invitation only basis. I am touched at the unusual number of enquiries about my travel arrangements which I hope reflect an interest in my welfare and are unrelated to the seminar. The invitation does not include a programme, which is probably still being worked on, as the government this week was cleaning up the relevant incentives legislation which it passed with much fanfare in 2003 and then misunderstood and misapplied for five years. Hopefully the sponsors of the seminar will tell us how much their failure has cost the nation and how the government plans to regularise all the improprieties since the hurriedly introduced legislation does not. I understand that the seminar will be addressed by Messrs. Winston Brassington, Geoff DaSilva and Khurshid Sattaur of the Privatisation Unit, Go-Invest and the Guyana Revenue Authority respectively, all associated with the Queens Atlantic Investment Inc (QAII) deal that has raised serious concerns about governance, accountability, the rule of law and competence.

Readers will recall that when Business Page entered the exchange on the QAII deal on June 8 it sought mainly to clarify some issues arising from statements made by President Jagdeo on the perceived tax concessions given to QAII. As early as then, this column suggested to the newly established Guyana Times that it run its own story on the concessions and called on the government to observe its own laws and disclose in the Official Gazette information on the fiscal incentives granted, as required by section 37 of the Investment Act 2004. The whole truth from those with access to the relevant information would have avoided much of the speculation among members of the public who have become cynical with the knee-jerk reactions and piecemeal, half-accurate information from the government. The consternation generated is partly responsible for the corresponding deluge of information which well-placed members of the public have volunteered, and that highlights serious credibility problems particularly for the Minister of Finance and the agencies under his control.

Without exonerating the Cabinet and very specifically the Minister of Finance for the disastrous public relations and credibility problem caused by the handling of this matter, the role of the Privatisation Unit (PU) headed by Mr. Winston Brassington has been seriously exposed by a document I received earlier this week titled Privatisation Board/Cabinet Submission dated May 3, 2007. It is clear from that document that Mr. Brassington was prepared to rush the Privatisation Board – which includes Ministers Robert Persaud and Manniram Prashad – into an agreement with QAII. Notice of the meeting to consider the application for concessions was given even before the application had been received from the company,  and within one day of an unsigned application involving hundreds of millions of dollars, the PU had not only considered but could actually recommend the concessions sought. To place that into perspective, my experience is that it takes the Unit more time to return a simple telephone call!

Schedule of planned construction
According to QA II the project should have started in 2007, but for reasons unknown there has been a delay of about one year. Making allowance for this the investment programme of QAII will run into 2013 as follows:

Without seeking to understate the group’s much hyped promised investment, the only project set for completion within a year is the printery, with the construction of a hardware warehouse and a bonded duty-free pharmaceutical warehouse scheduled for completion in two years. Contrary to what the President had said the only commitment on a textile mill is for a feasibility study to be completed within 18 months, while two full years are expected to elapse before a 3½ year construction of the antibiotics plant, to be followed five years later by the construction of the Research and Development Facility. In other words the 600 jobs will be a long time in coming, if they come at all, and so too, will the much emphasised US$30 million investment. In any case they will be very welcome, and assuming that the investors have been acting in good faith, Business Page wishes them well.

Where is the newspaper?
What is striking in reading the application by the company and the recommendations of the Privatisation Unit is the absence of any reference to the printing and publishing of the newspaper which in fact is the first real venture to materialise and which would have benefited, if not directly then indirectly, from any concessions granted to the other companies. The paper is being produced at the Sanata Complex for which QAII companies have received approval for concessions for all kinds of building materials, generators, etc.

The proposal by QAII assumes that the group will benefit indefinitely from the sweetheart arrangements it has with the government for the purchase of drugs, and speaks of being “able to order and retain buffer stocks to prevent drug shortages, which is a recurring problem with the existing system.” It does not explain, and nor does Mr. Brassington explore, the relationship between the retention of buffer stock and the vast advance payments the group receives from the government for the purchase of drugs. What if this arrangement comes to an end – does the project stand or fall on this?

The lease payment
Messrs. Brassington and DaSilva have told us that the country will receive $50 million dollars in rental per year, pegged to the US$ and adjusted for US inflation. Brassington’s document tells us otherwise. These are the arrangements:

i. The lease of the land and buildings for 99 years at the US $ equivalent of G$50/annum per square foot (payable in G$ at the prevailing exchange rate) subject to:

a. A rent free period of 5 years for the printing and dying section/with storage. This area is estimated to be approximately 6 acres; and

b. A 60% reduced rental for the remaining 14 acres for the first five years commencing from the date of execution of a lease agreement.”

While from year 6 the rent will be the equivalent of G$43.5 million in today’s money, during the first five years it is a mere $18 million for 871,200 square feet of land plus the building, and here I am giving Mr. Brassington the benefit of his miscalculation since he reckons it will be only $12 million. Let me say as well that I believe that the government’s financial experts are confusing indexation with the discount rate, but that is not an issue for this column even though the implication is a cost to the country.

Professional valuators value property including land by reference to recent transactions in the same or similar areas. In 2007 the government charged John Fernandes Limited $320 million for 6 acres of land in the same complex, so that on a proportional basis, 20 acres of land to QAII will be valued at over G$1 billion dollars.

To convert a capital value to an annual lease payment, professional valuators as a rule of thumb divide the capital sum by ten years, which would put the amount of the annual lease for the 20 acres at over G$100 million. In other words, the lease payment is reduced by over $80 million per year for the first five years with the building thrown in free! And in each year thereafter, the reduction is approximately G$50 million.

Expedient law-making
We will look next week at other issues concerning the Privatisation Unit whose very existence in law is doubtful and which takes advantage of its questionable legal status to engage in creative governmental accounting. For now we turn attention to the bill tabled by the Finance Minister this past Thursday designed to restore discretionary concessions being granted by the political directorate. It is a complete reversal of the 2003 repeal of a 1970 provision in the Income Tax Act which allowed the President to remit taxes where he had felt it was “just and equitable” to do so.  The 2003 repeal was explained as the elimination of the broad discretionary power to concede amounts of income tax payable and under some extremely narrowly defined conditions such as “natural disaster, disability, mental incapacity or death” and only if it was expressly provided for in a tax act. Five years later Bill # 14 of 2008 empowers the Minister of Finance to make regulations for the remission of all or part of the tax payable by any person or category of persons subject only to negative resolution of the National Assembly! In respect of discretionary waivers, we are now worse than we were 38 years ago, let alone 5!

If passed in its present form, the bill could render meaningless critical sections of the Financial Administration and Audit Act even as it fails to legitimise all those concessions given since 2003 based on a wrong interpretation and application of the Income Tax (In Aid of Industry) Act, including tax holidays granted to non-companies. It is possible that since the Minister and those under his control are the only persons with access to that information and further, since there appears to be no intention to comply with section 37 of the Investment Act 2004, there is nothing to correct.

The last hope is that the Audit Office will highlight the improprieties and one hopes the almost two year delay in the publication of the 2006 Audit Report has allowed the Office enough time to do a thorough job, including the Investment Act section 37 omissions. The bill now allows the Minister of Finance in his discretion to grant tax holidays in respect of infrastructural development for an indefinite period as opposed to existing legislation which does not include infrastructural development and limits tax holidays to ten years. It will also allow the Minister to grant tax holidays to value-added wood processing, rice millers and chicken farms, sugar refining and of course to the QA II investments like textile production, new pharmaceutical products (new to science or to Guyana?) and the processing of raw materials to produce injectables. Instead of limiting tax holidays to 30 + room tourist hotels the Minister will now be able to grant these to any tourist facilities, the definition of which he will decide for himself.

The bill
It maintains the geographical as well as the industrial-type classes of investment for which the Minister can grant tax holidays so that in practice, once the activity creates new employment in a widely defined range of economic activities that leaves out mainly financial and distribution services, it  can benefit from the Minister’s generosity. The scope of this legislation in my judgment and experience borders on the reckless, and if this is the government’s considered view then it may as well abolish Corporation Tax altogether.

Conclusion
Business Page offers no prize for guessing who will finance all this extravagance – of course it will be the salaried workers in the more legitimate and formal businesses and the consumers in the form of VAT. Coupled with the generosity of the politicians to some entities, this is a dangerous piece of legislation that shows how little the powers understand the tax system and how it works.

I hope that the debate on the bill in the National Assembly will be lively and that it will resonate with civil society and the trade union movement. Most of all I hope that that debate starts at the seminar or else more difficult times will lie ahead for the working and unemployed poor. And I hope too that the International Financial Institutions that have helped so much to avert economic disaster are now paying attention.

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Another try at preventing money-laundering

Introduction

The current select committee review of Bill No 18 of 2007 Anti-Money Laundering and Countering the Financing of Terrorism Bill 2007 took me back to the Hansard report of the debate on The Money Laundering (Prevention) Bill 1998 which was piloted by then Attorney General Charles Ramson when he famously announced how proud he was to be associated with a government that had “zero tolerance for corruption.”

On that occasion the government rejected pleas by the parliamentary opposition to refer the bill to a select committee and seemed to have paid little attention to the submission of the Guyana Association of Bankers (GAB) on the bill. To read Mr Ramson extolling the bill’s virtues, strengths and capacity to solve what had become a scourge that distorted every single measure of the economy was like celebrating the discovery of sliced bread. He said for example that the new law if given scope could exorcise the much wider range of illegal schemes which can be “disruptive of the conventional economic matrix.” He did not explain what constituted that matrix.

Ten years on a select committee of the National Assembly is meeting to bury that bill which has really never seen much light or action, although there is a Financial Intelligence Unit (FIU) that was set up not within the Bank of Guyana as recommended by the GAB, but essentially as a one-man operation within the Ministry of Finance and which never published a single report on its activities.

The 1998 bill became law and is still on the statute books as The Money Laundering (Prevention) Act 2000, but for the near-life of the act (an SN editorial to mark the third anniversary of its enactment described it as a “bear in hibernation”) it has been more words than action.

The list of persons who pronounced on the act at various stages included then Finance Minister Sasenarine Kowlessar who after the act’s assent announced that no decision had been made as to who would supervise the act; President Jagdeo, who one year after the act was passed said no funds had been budgeted for its implementation; then Director of Budget Dr Ashni Singh who pronounced that “money-laundering could have significant influence on currencies, market prices and financial stability”; Home Affairs Minister Gajraj who in discussing money-laundering spoke of non-working millionaires and the “Siamese twins of the narcotics scourge”; his successor Ms Gail Texeira who called on consumers to boycott drug lords’ businesses and Commissioner General Kurshid Sattaur who announced that GRA’s software would pinpoint money launderers.

But perhaps the most striking non-action was the establishment in 2001 of a special task force under Dr Roger Luncheon to oversee the implementation of the act – that too never got anywhere. Significantly, never a word from the Director of the FIU.

History favours pessimists

History is not therefore on the side of the optimists. Between then and now money laundering has earned itself – helped by the inaction of the politicians and technocrats – to become one of the most significant segments in the economy although the Bank of Guyana hardly thinks it worthy of comment in its just released report for 2007. The non-bank cambios, almost all controlled by individuals, have become lawful vehicles for the pursuit of unlawful activities. Someone needs to explain why we would not allow insurance companies and commercial banks to operate as sole traders but would do so for the non-bank cambios, with little reporting obligations and no audit requirements.

To argue that we need the cambios because of the fear of driving foreign currency transactions underground is to admit that there is something wrong with the market and the regime for foreign exchange, including the exchange rate. As currently operated the cambios have legal cover to transact transactions, a number of which involve laundering.

A more ambitious task

What is different this time? The 2000 act had the modest objective of “the prevention of money laundering and for matters connected therewith,” and had a total of twenty-nine (29) sections. The new bill is far more comprehensive and now extends to the prevention of the financing of terrorism, a consequence of the attack of September 11, 2001, that allowed US President Bush to reorganise the priorities of all regulators in a one-size-fits-all solution. The bill now extends to “politically exposed persons,” and I hope that the lawyer/politicians now reviewing the bill will cover all the bases and not leave any technical loopholes to be exploited by their political parties, particularly at elections time.

The bill, an immensely complex piece of legislation covering some one hundred and fifteen (115) sections, will require several pieces of supplementary legislation to support it and confers both powers and duties, some of which are mandatory and others discretionary. Even if only some of these were to be carried out with minimum efficiency, it would require a significant bureaucracy and budget which the government may be unwilling or unable to finance, and external financing may be required for its viability. In fact we will probably hear, as we did with its predecessor, that there is no money to operationalise it.

The bill optimistically assumes that a politically appointed director supported by an attorney-at-law and an accountant with personnel trained in financial investigation or other employees (s. 9) will be able to administer this legislation that would include both domestic and cross-border transactions. The same structure and person could not enforce the 2000 act, and never prepared a report or analysis to indicate the favourable features and its weaknesses, so it must therefore be wishful thinking to believe that a similarly structured FIU could administer a more complex piece of legislation.

Look out

I believe it would be helpful if various options across similar jurisdictions with similar legislation were explored. Data suggest that while FIUs appear to be the most common form in the Caribbean, these are not uniformly staffed and that there is no single, uniform structure. As drafted, there is no parliamentary oversight and the minister is not required to table the annual report of the FIU in the National Assembly.  In Barbados the FIU comes under the Anti-Money Laundering Authority that has wide professional membership including the Commissioner of Police, the Comptroller of Customs, the Commissioner of Inland Revenue, the Supervisor of Insurance, the Registrar of Corporate Affairs and Intellectual Property and representatives of the Governor of the Central Bank and the Solicitor General.

Look at

Despite some serious lapses that have eroded public confidence, the bill presupposes adequate regulatory mechanisms, the existence of a capacity and independence within the police force and Office of Director of Public Prosecutions to investigate and prosecute suspected wrongdoers, and a court that is attuned to the many forms of money-laundering. Will the court under the new law allow a major public company to refuse to divulge to its regulator the identity of the individuals behind major blocks of trustee-held shares?

Ministerial authority for the legislation is split between the Ministers for Legal Affairs and Finance. Yet the Ministry of Legal Affairs has taken a secondary role at the select committee level, and one wonders whether this will be another example of one thinking the other will act and both ending up doing nothing. The other main legislation where there is such joint responsibility is the Companies Act 1991, which has not been very successfully implemented and which cries out for amendments. It must be over one year ago that I made detailed representation to the Minister of Finance on some necessary amendments to the Companies Act but all I have heard is that the recommendations are engaging the attention of the Ministry of Legal Affairs.

Having had the opportunity to appear before the select committee I was struck by the exuberance of some of the members about the expected effectiveness of the bill which is largely an imported piece of legislation. Its origin is the international Financial Action Task Force set up by western governments, but even that body recognises in the Glossary to its 40 Recommendations and 9 Special Recommendations that “countries have diverse legal and financial systems and so all cannot take identical measures to achieve the common objective.” There is little evidence, however, that this bill has been sufficiently localized, and it does not identify the necessary consequential amendments to a number of other statutes, including the Bank of Guyana Act. Unless this is done, we can expect some lawyers having a real field day as they draw attention not only to the conflicts with other laws but also with the constitution which is the supreme law.

Gail’s barons

Apart from the laundering associated with the drug barons, the fuel smugglers and those who are called businesspersons, money-laundering is also related to tax evasion for which we already have many laws and other arrangements which are seldom invoked. We clearly need to develop capacity in the Guyana Revenue Authority to deal with rampant tax evasion, the proceeds of which must themselves be laundered, and I can only wonder why better use is not made of the Property Tax Act and the exchange of information provisions under the Double Taxation Treaties with Canada, the UK and Caricom states and the Income Tax (Exchange of Information) USA Order.

There is in fact a raft of other legislation that can help to ferret out money-laundering, with the Integrity Commission Act coming to mind, but what about the Companies Act itself, section 496, which allows for the Minister of Finance “on his own motion” and for the protection of the public to appoint inspectors to look into the affairs of a company. Certainly one prominent company comes to mind, but is there the will?

Conclusion

The real test of this bill is in the detailed provisions as well as the subsidiary legislation to follow. These should ensure a balance between dealing with money laundering and the financing of terrorism and the pursuit of legitimate business. But in the final analysis it will be in how serious the government is in stamping out money-laundering or whether this bill will be simply as ineffective as its predecessor.

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Statement on the rate of the Value-Added Tax

Following my presentation at the launch of Ram & McRae’s Value-Added Tax (VAT) Handbook on November 16, 2006, I have largely stayed out of the public debate on the Value Added Tax.

Part of the reason is that early in 2007, after the launch of VAT, a very senior political functionary had confided in me that the Government had discovered a significant error in the computation of the rate of the VAT resulting in the rate being higher than it should be. I was told of course that if I sought to divulge that information it would be denied.

Recent events and statements by public officials, letters in the press, and the increasing evidence of the effect on poor people of the ever-increasing spiraling rise in prices while the Government seeks to gain political mileage from their “initiatives to help the poor”, cause me to regret that I had not addressed this matter earlier.

I had decided that I would await Budget 2008 to see how the collections of VAT and Excise Tax compared with the amounts budgeted in 2007, since the Government had also publicly committed to a revenue-neutral regime of VAT and Excise taxes. The increase was a staggering 76% over budget for VAT and a more modest 20.9% for Excise Tax, an overall increase of 47.8%. Shortly after the Budget was presented I wrote my source reminding him of the conversation about the rate and offered the view that while part of the increase was attributable to the 4.7% growth in the economy and a 14% increase in imports over Budget, “a significant portion of the excess was attributable to the VAT rate initially being set too high”.

In my letter I recommended a reduction in the rate to 12%. My letter was acknowledged promptly but to date its contents have not been addressed with me.

The public is also aware that I openly posed two questions to the Minister of Finance on the issue (see Stabroek News June 19, 2008) as I was concerned about statements coming out of his Ministry and the Office of the President which could not accurately reflect their knowledge and which served to mislead the nation. In fact my information about the incorrect computation of the VAT rate was confirmed only recently by another senior political functionary and I would find it hard to believe that the Minister of Finance was not equally informed.

I hope the Government will now act honourably by correcting its mistake and reduce the rate at which VAT has been wrongly imposed for more than eighteen months.

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A close-up look at the QA II deal

Introduction
When the Ministry of Finance belatedly broke its silence last month on the concessions given by the government to Queens Atlantic Investment Inc (QA II) it asked Guyanese to ignore such considerations as transparency and the rule of law and sought to shift the debate to the “ultimate question that needs to be asked… whether these investments are a positive development for Guyana.” The two statements issued by the ministry within one day of each other contained what were some very categorical representations: that the package involved investments of US$30 million; that the investments by the group would create 600 jobs in Georgetown; and that a Memorandum of Understanding (MOU) was executed between Go-Invest and QAII in March 2008. The facts are different. They show how a serious erosion of the tax base by the extension of generous concessions unlawfully given to a favoured few contribute to the creation of an uneven playing field that instead of encouraging investment has the direct opposite effect. Such action entrenches and enriches a few and effectively creates a monopolistic situation at the expense of potential competitors and the economy in areas as diverse as construction, mining and forestry, with the ever loss-making Barama, exploiter extraordinaire of the country’s forest resources being the shining example.

For all the suggestions of bigness, QA II up to a couple of years ago had a share capital of fifty-thousand Guyana dollars (US$250) and the government should be interested in where the US$30 million dollars for the investments will come from. Even with generous and free financing by the state, the group has had to borrow hundreds of millions from the banking system, even as the parent’s books showed a negative net asset position.

Pattern of favours
The original investment in GPC was $460 million for a 60% stake in the company by Queens Atlantic Investment Inc. An additional 30% was acquired for G$200 million. It would have been reasonable and financially prudent for the additional shares to have been sold at a premium since they allowed QAII to consolidate its control.  In fact the Privatisation Unit sold the group the additional shares at what appears to be a discount of at least $30 million.

By way of an article earlier this week in the Stabroek News we learn that QA II’s main operating subsidiary, New GPC Inc, has benefited from special exemption from the tender process contrary to law, but as Minister Ramsammy says, with more innocence than information, in accordance with a cabinet decision – as though cabinet were paramount to the law. The New GPC has been handpicked for “major contracts” to procure medical supplies on behalf of the Ministry of Health and the Georgetown Public Hospital Corporation whose Medical Superintendent Dr Madan Rambaran is on the Board of GPC – another conflict of interest that is now so much part of public life in Guyana.

Free money
But the concessions go further: at December 31, 2006 the company had been advanced close to half a billion dollars by the Ministry of Health and the GHPC “to procure medical supplies on their behalf.” A government that taxes its citizens till they scream and that perpetually fails to refund overpaid taxes in a timely manner finances a supplier of products that can no doubt be procured directly and perhaps even at lower overall cost. The advance of $160M by the Ministry of Health and $314M by the GHPC alone accounted for well over 40% of the 2006 purchases by the company! Then the company turns around and invests $140M of that money in the Berbice Bridge Company of which $50M is in the form of a loan stock earning a tax-free interest of 11% and bonds of $10 million earning 9% interest.

For all its boasts about being the “Caribbean’s leading pharmaceutical manufacturer” the company’s production labour accounts for under 3% of turnover. At $47 million production labour barely exceeds depreciation – hardly evidence of any key focus on job creation. The company’s financial statements also show incredibly that it exports all its manufactured products and that it benefits from another general tax concession that is in violation of the country’s international obligations as pointed out in the Business Page of January 13, 2008.

The Fabulous Five
The above is a summary of various agreements signed by Dr Ashni Singh, Minister of Finance and Dr Ramroop of the QA II companies. These agreements make disturbing reading for the appearance of carelessness and lack of expertise on the part of the Privatisation Board, Go-Invest and the Ministry of Finance. These are some of the worst agreements I have ever seen in multi-million US dollar documents. There is no preamble linking “Supplementary Investment Agreements” to the so-called Memorandum of Understanding which the Ministry of Finance claims was signed in March 2008, or to any principal agreement. The agreements contain several blanks, and manuscript changes are not even initialled, a most elementary requirement that raises questions as to the dates of the making or modification of the documents. What is worse is that all the agreements preceded the much touted MOU, in one case by several months. Again any professionally done, arms’ length transaction would begin with a Memorandum of Understanding to be followed by supplementary agreements as certain details are worked out and pre-conditions are met.

Lots of toilets…
The claims by the government and the company in their public pronouncements of 600 jobs being created by the investments appear a gross exaggeration. In fact according to these documents the number is just half of that when the projects come fully on stream. A careful examination of the items approved for tax exemptions “for one year beginning from the date of signing the Agreement” reveals a surprising number of similarities between the items approved for Healthcare Life Sciences Inc and Health International Inc. Examples are one complete switchboard system; 500 x 5/8˝ steel rods; 1000 x 0.5 mild steel rods etc, 50 length 0.75˝ armor flex insulation; and one 500 KVA generator each. There is a carte blanche agreement for tax concessions on the contents of thirty-one pallets for Global Printing, and one must sympathise with the customs officer who has to determine whether they constitute “One complete printing press.”  The list of items for Healthcare includes only a few real big ticket items (500 KVA generator, one mini-van and two double cab pick-up and four forklifts) which along with the cables, breakers and switches hardly appear to amount to the US$9 million claimed to be invested by this company.

Some of the items approved for concessions appear to be more appropriate for domestic use while others are inflated. One of the entities (Global Textile) has approval for forty-six toilet sets, “12 ctns Briggs China lavatories” and “12 ctns white rf toilet express” while Healthcare Life Sciences has approval for another twenty toilet sets and twenty wash basins. This quantity of toilets seems surprising and yet there is nothing to suggest that any of these is for the newspaper company.

Kudos to the press
The story of QA II and its investments showed the Guyana media at its investigative and persistent best, helped no doubt by President Jagdeo’s own uninformed outburst. It has allowed us to see, admittedly in one instance only, of how state business is transacted behind closed doors by a few who consider laws a matter of (in)convenience and raises the troubling question of what else might be taking place with this and other favoured investors that the government does not wish us to know about. It exposes the serious and costly deficiencies on the part of the Georgetown Hospital and the Ministries of Health and Finance, the Cabinet, Go-Invest, the Privatisation Board and the GRA. It provides ample evidence of how this government is generous to their friends at the expense of the people. It is a failure of people and systems that allows the careless granting of concessions without a proper analysis of proposals submitted while the apparent absence of adequate follow-up mechanisms amounts to a gross dereliction of responsibility for which no one will be held accountable.

Still more questions
The revelation of these agreements does not mean that all questions have been answered. The famous MOU of March 2008 is still a state secret, and it is still not clear what pharmaceutical products the US$9 million dollar Healthcare Life Sciences Inc will manufacture that GPC cannot do or which of the two medical companies has been granted tax holidays. Or quite what kind of export Processing Zone one of the new companies, Health International Inc, will establish and how different that will be from the kind that has been called for by the private sector for many years but ignored by the government. Despite the continuing publicity, the government has not tabled the agreements in the National Assembly, fuelling fears that there may be even more to hide or that the government believes that accountability and transparency are a matter of form and not substance.

But the exposure has shown how important it is for the Privatisation Board and Go-Invest to be restructured and to include persons of competence and independence both at the directorial and executive levels. It is farcical to have the Minister of Finance not only sitting but chairing the Privatisation Board which makes recommendations to Cabinet which then instructs him to act on those recommendations.

Conclusion
The concessions and real monetary benefits the Ramroop Group has enjoyed make it practically impossible for any competitor – in any of the group’s activities – to operate successfully, a fact that should not be overlooked by those who are taken in by claims of those who seek further concessions. Let us understand that in creating effective monopolies we encourage high profit-seeking and prices, and stifle competition – the consumers’ best friend. This is not an anti-business or anti-investment position. The call for transparency and compliance with the law by those in power cannot be more urgent, even as we welcome new investments.

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Facing the threat of rising oil and food prices

Introduction
Oil seems to have a talismanic role in the world’s psyche. More than gold its price causes predictions of apocalyptic proportions, paralysis in the modern world and fears of wheels grinding to a halt. Those of us of an earlier generation will recall how the four-fold rise in the oil price in the seventies sent shockwaves across the world and caused a tectonic shift in global resources as more money poured into the oil-producing economies than they could handle. The dramatic increases in oil prices in 1973-74, 1978-80 and 1989-90 were all followed by worldwide recession. Yet with unerring regularity and often defying the predictions of doom, the economies would return to the historical pattern of periods of unprecedented growth, low interest and inflation, consumer confidence and spending.

In the decade of the eighties, the economies of Asia grew (real GNP) astronomically ranging from 120% growth in the Republic of Korea, Taiwan 90%, Hong Kong 65% and Singapore 80%. Even the Asian crisis went almost as soon as it had arrived, leading the region and the world’s economic managers to take the credit for having fixed the system – once and for all. The more hubristic were even prepared to say that inflation had been bottled up, the economic cycle of periods of recovery and prosperity characterised by relatively rapid growth followed by contraction and recession or the more extreme form ‘depression,’ had been neutralised and the central bankers and the IMF were in complete control.

Storm clouds
Even Bush could not mismanage the US economy given the magical powers of Alan Greenspan of the Federal Reserve Bank, while Gordon Brown, the ambitious Chancellor of the Exchequer was credited with all the economic achievements of Tony Blair. The only threats that the revered gurus could see was the bin Laden-inspired terrorism, and more mundanely, the impact of washing drug money in the pure financial stream overseen by the ever more confident central bankers. But then suddenly storm clouds began to gather on the horizon and the respected Economist publication, ‘The World in 2006’ cautioned that the global growth rate of close to 5% for two consecutive years was too good to be true and that things could not remain so rosy for ever.

Real oil prices had already begun to climb, a housing boom or rather bubble financed by sub-prime loans, extravagant consumer spending with the gas-guzzling Hummer and SUVs being the vehicles of choice and negative personal and national savings rates were facilitated and masked by cheap money. History is replete with examples that such a party could not last, that the night would come to an end and the hangover would be long and painful. That unfortunately has now happened, and almost quarterly we see leading institutions like the IMF and the European central banks revising their economic outlook, shaving a few decimal points with each revision. The decline started with the sub-prime mortgage crisis in the US, which now affects the global financial system with fears that the system can collapse and that Bear Stearns in the US and Northern Rock in the UK were only the early casualties.

A matter of opinion
How the crisis will play out, however, is a matter of dispute, and there are conflicting projections by influential players in the system. The influential Bank for International Settlements – the central banks’ central bank – considers that the world economy is probably facing a deeper and more prolonged slowdown than many assume, and that even though the worst of the credit crisis may be over that did not indicate an all-clear for the world economy.

Barclays Capital and the Royal Bank of Scotland seem to have a more pessimistic view of the state of the world’s major economies, and in mid-June the latter advised its clients to brace for a full-fledged crash in global stock and credit markets over the next three months as inflation paralyses the major central banks.

The UK right of centre newspaper the Daily Telegraph quotes the bank as warning that the S&P 500 index of Wall Street equities is likely to fall by more than 300 points to around 1050 by September as “all the chickens come home to roost” from the excesses of the global boom, with the contagion spreading across Europe and emerging markets.

Global inflation has jumped from 3.2% to 5% over the last year. Tim Bond, chief equity strategist of Barclays Capital, believes that the “emerging world is now on the cusp of a serious crisis; that inflation is out of control in Asia,” and that the need to slam on the brakes will cause “a deep global recession over the next three years as policy-makers try to get inflation back in the box.”

One of the less discussed implications of globalisation is that it spreads both its virtues and its vices, and whether it is a matter of inflation, interest rates or a credit crunch, the dangers will move across borders. Of course it also means that every economy becomes its brothers’ keeper with a real and direct stake, and as is evident with the EU countries complaints of loss of independence is not infrequent. Now with oil and food costs soaring, inflation has returned with a vengeance; economic managers, investment managers are nervous; the genie of inflation has re-appeared; and the dangers of inflation are now so great that those managers would readily sacrifice growth to control inflation. But even that is a major challenge and many are now saying that what has in fact changed is that the long-term growth trend is under threat. And again oil is a major factor, with active wars less so with stability gradually returning to Iraq so that even presidential hopeful Barack Obama is now shifting his position on the drawdown of US troops.

The jury is out
So far it is hard to say which of the two scenarios predicted by BIS and RBS is correct. It is true that the wage-price spiral has been avoided but jobs are disappearing whether in the closure of 600 Starbucks coffee houses or among major car manufacturers, and during this week the stock market actually reacted positively as one of America’s major car manufacturers reported only an 18% decline in sales – it was expected to be higher! Let it not be forgotten that America is still by miles the world’s largest economy and it is the spending habits of the American consumer that have driven the meteoric rise of China and India. The reverse may not be entirely proportional because demand in the numerically significant China and India has increased, but not even America’s worst critic would wish for the collapse of the US economy.

The double edge of the twin
It is one of the ironies that these two economies are partly responsible for the sustained oil and food price increases. While past oil shocks have been caused by supply constraints, the current increases have a significant element of being demand-driven as China’s industries and their growing middle class along with their Indian counterparts find that they can afford cars that are still dependent on oil. The search for alternative energy sources which accompanied pervious oil shocks waned as things returned to relative normalcy with the significant exception of electricity companies which started to move away from oil. The current one will have some similar effect as car manufacturers accelerate their efforts to produce hybrid cars. The airline industry has cut back its flights with immediate effects on the region’s tourism industry that is so pivotal to its survival. And as tourism falls, so too will remittances from the rich countries as migrants struggle to stave off the foreclosure of their homes. Just getting over the next five years without a major catastrophe will be a major achievement.

But while oil has stolen the limelight, food is an equally grave and direct concern, and for the first time in decades countries are suddenly talking of food security. Heads of governments of the region and the world are holding conferences to address the dramatic increases in the price of basic food items, some of which it has to be said are related to the search for alternative energy sources with corn being the most popular cited example. In fact at the World Food Summit (WFS) some NGOs called for a moratorium on ethanol production arguing this would cut wheat prices by 20%.

With oil there may be several alternatives that would be both technically feasible and economically attractive, but food is a different story. The escape of hundreds of millions in the developing world from hunger and poverty means that there are far many more mouths to feed with a growing demand for meat, which itself demands more feed. Like oil, agriculture is not susceptible to dramatic short-term fixes, but that does not mean that more cannot be done, and as we witnessed recently the placing of an export ban on one type of rice by India had an immediate adverse effect on the international price. Countries and their politicians are particularly vulnerable to fears of hunger among their populace and countries are reluctant to co-ordinate national strategies for the global good. For example, while Japan has agreed to release its government-controlled stockpile, Egypt has extended its ban on the rice trade for another year. To compound all of this, the interest of the private operator/producer/exporter and that of the government seldom converge and short of government control regional and international agreements are hard to make and even harder to enforce.

The problem with agriculture is also structural – in both the developed and developing world there is a reducing appetite for participation in the sector with weather and price fluctuations making it like a night at the casino. Added to the challenges of global warming, the reduction of water supplies, declining investment funds, reduced land for agriculture and a long-term trend of falling prices for agricultural produce, we see an industry that can only grow if there is a significant increase in agricultural productivity.

Alas, giving seeds to the populace may appear politically attractive, but it is no more than a very limited short term measure with some impact at the level of the poor household.

Note: I have delayed the column on taxation as I have been promised some additional information.