Posts

Posted on

A review of the Low Carbon Development Strategy – Part 2

Introduction
We continue today with part two of the LCDS which President Jagdeo launched on June 8 and which is out for consultation up to the end of September, the timeline driven mainly by the need that it should be ready for the Copenhagen Conference in December of this year. That is when the world will be meeting to discuss a successor to Kyoto, the environmental treaty. The principle of the LCDS is simple enough. Rich countries, the thinking goes, have been destroying the environment at an alarming rate. And in its efforts to meet the demands of its people and not unusually the greed of illegal loggers, developing countries are unwittingly contributing to the impending crisis by the exploitation of their rainforests and eventual deforestation. Time is running out and there are few easy, inexpensive or quick solutions.
Cutting down the forests accounts for 20% of the world’s emission of greenhouse gases. The world then has an interest not only in halting but in reversing the trend of deforestation. To do so would be less expensive and faster than it would be to transform the world’s economies to make them more eco-friendly. In comes REDD – the acronym for “reduction of emissions from deforestation and degradation.” The basic outlines of REDD are clear. Rich countries will pay poor ones to keep their forests intact. In return, the rich will get credits that they can put towards their emissions-reduction targets under the proposed new climate treaty.

The promise
That on paper is simple and straightforward enough. As the Economist puts it, rainforest countries are being told “lay down your axe and you will get cash.” But it is far less simple than this or what the Government’s Frequently Asked Questions Booklet (FAQ) makes of it. In fact, that booklet along with the propaganda style of the consultations and public information programmes that are taking place to sell the LCDS do a disservice to the case, leaving serious and fundamental issues unaddressed which might not otherwise cause controversy. Which Guyanese would argue against higher and free revenue inflows, the preservation of our forests that help to protect the iconic Kaieteur Falls or, more mundanely, cheaper electricity? And who would oppose the promise of good governance, reduction of corruption, better delivery of education, health, water and housing?

If the LCDS promises holds true and the McKinsey arithmetic is more realistic than it appears, when the “money starts to flow” we will have the same level of public services, all capable of being financed not by taxes but from rich countries. The government will be able to charge a more honest rate of VAT and a reasonable rate of income tax. Our education system will offer many more QCs and Bishops’ and we will be able to afford a more functional and productive university. It must also be a huge incentive for the Guyanese public to support.

Cynicism
Yet the public has not warmed to the idea and even in areas where there are captive audiences, the average attendance to the consultation is, generously, less than 20. Despite the huge and expensive PR campaign the public is not engaging and is at best cynical. There are concerns about what the country has to give in return, the secret commitments the President has made to the world and the secrecy and apparent conflict between what he tells the world and what he says at home. The LCDS assures us that our sovereignty is not at stake, yet the President has committed the country and future governments to cede to the world the stewardship of the country’s entire forest by outsiders. That is according to the same Economist which has on more than one occasion spoken with admiration of Guyana and the President’s initiative. The consultations need to point out that no government can bind its successors and need to ask about any opt-out clauses under REDD. Would we have to pay back any money we receive as one country has been bound to under a bilateral arrangement, and are there going to be non-financial consequences as well?

The public is cynical too that President Jagdeo is already showing signs that his commitment to the environment is not guaranteed and only this week he issued a threat to continue forestry exploitation unless the rich countries put up the money to pay rainforest countries to keep their forests. The cynicism has been fed too by Mr Jagdeo’s fickle and inconsistent loyalty to strategies.

This is not the first strategy that the President has embraced. He effectively abandoned both versions of the National Development Strategy (NDS) when he realised that a debt-write off strategy was more lucrative and then jumped on the Poverty Reduction Strategy with its promise of more donor funds. Next has come the National Competitiveness Strategy that offers substantial funds from the Millennium Challenge Account sponsored and financed by the United States. Would Jagdeo’s successor – from whichever party – be as committed to the LCDS that he is now single-handedly offering? Or as some cynics see it, is the LCDS the case for a third term?

The LCDS and the NDS
Those who have pulled out their NDS to make comparisons with the LCDS are struck at the comparative absence of detail and the narrowness of the LCDS. By the standard of the NDS, the LCDS is a mini-sector strategy, and it is surprising that none of the 3,000 persons who have attended the consultations has asked about NDS 2 which covers the ten years 2001-10. How committed is the ruling party to the LCDS and does it know and agree with the ceding of control of three-quarters of the country to foreign control?

The LCDS seems extremely short on imagination and ignores any incentives to consumers in preference to investors. Why is there no incentive for solar heating or disincentives for those who contribute in no small measure to the huge fuel bill and non-friendly imports? As one colleague said to me, the owners of the Prados and Tundras that are allowed in daily under duty and tax concessions should give him a credit for driving a small vehicle. The LCDS leans to large-scale agriculture without recognising the role of the small operator or the damaging effect of illegal cross-border operators which is likely to worsen as the road to Brazil makes it easier for those operators to come, do and go as they please. With LCDS milk and honey flowing will Guyanese still have to bear one of the highest tax burdens in the world and would the President finally correct the VAT rate to what it should be?

Seeing REDD
A doubling of any country’s annual budget is not a small matter. The economy and the society can be transformed by simply doing nothing. That must be a huge incentive for any government. Not that that is how the government intends to spend the money. Under the strategy the government will set up new institutions in the Office of the President to drive major low-carbon programme priorities and manage and direct the use of the money coming in under REDD. It is of course hardly reassuring that the money will be placed not in some trust or the Consolidated Fund, but under the watchful eyes of the Office of the President which also currently controls the Lotto Funds in breach of the constitution. Since the President’s embrace of a low carbon economy is a new development, which fund did the money come from to pay McKinsey for its dazzling mathematics to show the worth of our forests? REDD on the other hand is premised on good governance, accountability and transparency which have been endangered by Jagdeo’s disregard for the constitution and the law.

Nor is it clear how the international community putting all this money into Guyana will view the two-tier approach of the LCDS, which provides for the forests under Amerindian control to be an opt-in arrangement. Effectively the country is committed to ceding the vast portion of the country to the international community, but not the Amerindian-controlled forests which that community would be at liberty to manage and/or exploit if it so chooses. While they have a historical and cultural interest in the forests’ preservation, if the Amerindians choose not to be part of the LCDS would they be excluded from LCDS funds or would they get the best of both worlds? And how does Jagdeo’s proposal to deal with LCDS funds fit in with Article 77 of the constitution?

The PPP/C government under President Jagdeo has allowed some Asian operators in the forest sector free rein to extract and export forest products under some of the most glaring transfer-pricing arrangements, with minimal returns to Guyana. Yet, the LCDS cannot be a legally acceptable excuse for breaking a binding agreement as the LCDS seems to assume. The same is true in mining which is probably doing as much immediate harm to the Guyana environment as forestry can do.

Image
Internationally Guyana has established quite a leadership role in forestry preservation due to the Iwokrama project, established under President Hoyte, whose foresight in all of this goes unacknowledged. With President Jagdeo’s promise to the world of what amounts to several more Iwokramas, our international image has been enhanced. But image is not enough. Clout is, and that would have come from the combined efforts of the six or eleven countries with rainforests, depending on definition. Brazil’s is infinitely larger than Guyana’s and surely it would have been to our advantage to team up at least with our neighbour and others in the hemisphere. Assuming there are funds for REDD which would be necessarily limited, criteria for entitlement will have to be established and instead of Guyana and Brazil being on the same side, they may be competing for the same funds.

The difficult questions
Nor is the REDD to be taken for granted, and while there is a recognition that rainforest countries should be rewarded for preserving their forests, the how, the how much, who receives and who pays and whether under a multilateral facility through the UN, or by way of bilateral arrangements as Guyana seems to be working towards with Norway, are still to be decided. Many European countries other than Norway have already entered into arrangements with developing countries. There is Plan Vivo under which donors channel money to Mexico, Mozambique and Uganda to protect forests and plant trees. External inspectors verify the results and issue credits which the UN has chosen not to recognise. Combining these into a ‘Kyoto 2’ will not be easy nor will an agreement be helped by reported corruption in the Office of Climate Change in Papua New Guinea.

Who pays and who benefits are also unresolved questions with one side effectively arguing in Guyana’s favour that those who have a good track record of forest management should be rewarded ahead of those who exploited and now want to re-forest. But the ‘who pays’ is even more controversial. China and India, despite their economies growing at a rapid rate and creating emissions in the process, consider themselves as developing countries and argue that they are not really ready to forgo development for the environment. Why not America? they ask, but America’s own recent climate change legislation shows that while preserving the environment is a universal issue, domestic politics dictate what can be agreed and delivered. And is Canada a special case for its vulnerability arising from the melting of the ice? To crown it all, the conference will be taking place in the year of the world’s worst economic crisis since WW 2.

For me the biggest question mark about the LCDS is its failure to consider a Plan B which hopefully is not the threat that President Jagdeo issued a couple of days ago – let’s continue cutting our forests under the prevailing lopsided arrangements with the Malaysian and Chinese operators who just could not give a damn about Guyana. One thing is for sure: the money he hopes to receive under REDD is several times more than the country currently earns from the sector.

Next week we take a break from the LCDS to cover some topical financial issues and return with a concluding part the following week.

Posted on

A review of the Low Carbon Development Strategy – Part 1

Introduction
To all Guyanese, from Cabinet to Canal # 1, the announcement that the people of Guyana are willing to act in placing our rainforests under “globally-verified forest and other land use governance standards and transparent, accountable deployment of forest payments” must have come as a great surprise, if not a shock. Under what the government calls a Low Carbon Development Strategy (LCDS), the economy will take a new direction in which national development and combating climate change are complementary and not competing objectives. The strategy is premised on Guyana receiving huge annual sums from the international community for preserving its forests, sums in excess of what we now pay in taxes and also in the amounts of debt relief we have received in recent years. If the principle is accepted, not here in Guyana but in Copenhagen in December of this year when the United Nations convenes a conference to decide a replacement for the international treaty on the environment called the Kyoto Protocol, and if the strategy is properly implemented by Guyana, the LCDS can have a transformative effect on the country. It would be like the country discovering oil or gold from a non-exhaustible source, to last in perpetuity – economic nirvana. These are major ifs that have hardly been mentioned in all the exchanges witnessed so far in the public debate in Guyana.

Business Page will review the LCDS and engage in a reasoned assessment of the strategy, its perceived benefits, its practicability, weaknesses and chances of success. I will start by setting out and reproducing extensively from the Office of the President’s LCDS Draft for Consultation and its accompanying glossy Frequently Asked Questions, also described as a ‘Draft for Consultation.’ This will be followed by a discussion of the advantages and benefits to Guyana of the strategy, a critique of it and conclude with this columnist’s own views and recommendations. The series will try to avoid the unquestioning, simplistic and naïve attitude of those who are captivated by romantic notions about our forests or taken in by the consultations and commitments by President Jagdeo. Equally, it will avoid the dismissive reaction of those who decide that the messenger (President Jagdeo) could not in any circumstances deliver a good message. We will consider too whether and what the Plan B is or ought to be if Copenhagen does not accept or undertake to finance the fundamental assumptions and effect of the LCDS.

Background
Guyana is fortunate that it is one of the world’s last remaining rainforests with almost 80% of our territory still in its pristine state. This pleasant situation is the result of a combination of factors including the nature of our forests that does not allow for the extensive felling of trees, the preservation of the forests by our First People, mostly strong forest management by the regulator going back to fifty years and more, and the objection to the practices by some operators that generated the collective abhorrence of Guyanese of the exploitative practices of some of the recent entrants into the forestry sector.

According to the consultation document, Guyana’s pristine forests are its most valuable asset – the majority of its 15 million hectare (58,000 square miles) rainforest being suitable for timber extraction and post-harvest agriculture and estimated to contain significant mineral deposits below its surface. International Consultants, McKinsey & Company, appointed under a contract of which no Guyanese knew until recently, estimates the value of this forest – known as Economic Value to the Nation or EVN – to be the equivalent of an annual payment of US$580 million. According to the Office of the President, generating this EVN, while economically rational for Guyana, would have significant negative consequences for the world. The deforestation that would accompany this development path would reduce the critical environmental services that Guyana’s forests provide to the world – such as bio-diversity, water regulation and carbon sequestration. The draft states that conservative valuations of the Economic Value to the World (EVW) provided by Guyana’s forests suggest that, left standing, they contribute US$40 billion to the global economy each year.

Essentially the LCDS is arguing that since the world benefits by US$40 billion dollars per year from the conservation of our forests, and since to Guyana the annual worth of the forest in economic terms is US$580 million, then the world must pay us that sum. Unfortunately the basis on which the Office of the President has come up with these numbers is only summarised in the consultation draft. A more serious review of those numbers requires those studies being made available to those with the necessary skills to analyse such technical analysis, modelling techniques and econometrics.

Self-interest
But economics is only one of the reasons why Guyana should be willing to play its part in the preservation of its rainforest. Self-interest is another. We are dangerously vulnerable to and conscious of deteriorating and irreversible weather patterns placing us among the high-risk countries threatened by climate change. Much of the population and economic activity in Guyana exist at or below sea-level, and according to the draft, in-land flooding represents a significant and growing risk to investors. Major floods in 2005 were reported to have caused damage equivalent to 60 per cent of GDP.

One of the obvious consequences of climate change which only a handful of eccentrics are still prepared to dispute, is that sea levels will rise and more than likely at a faster rate than had been originally predicted. For example, researchers applying the possible scenarios outlined by the Intergovernmental Panel on Climate Change (IPCC) found that in 2100 sea levels would be 0.5-1.4m above 1990 levels, much greater than the 9-88cm forecast made by the IPCC itself in its Third Assessment Report, published in 2001. That would be devastating to coastlanders who would have to abandon everything and move scores of miles inland (or out).

The discussion draft notes the increasing global recognition that protecting forests is essential to the fight against climate change – forestry causes about 17% of global greenhouse gas emissions. Adding that the movement from recognising the need for action to actual action continues to be too slow, the discussion draft promotes the LCDS as seeking to provide insights on how to stimulate the creation of a low-deforestation, low-carbon, climate-resilient economy.

Epiphany
Even by his own admission President Jagdeo is a new convert to climate change and global warming and it was only as recently as December 2008 that he seems to have recognised the importance of these issues to Guyana. He has moved fast since then. In February 2009, he and the Prime Minister of Norway, Jens Stoltenberg, announced a partnership agreement designed to support a low-carbon strategy that includes employment and investment-creation opportunities in Guyana and sustained efforts to avoid deforestation and forest degradation. The consultation draft refers to a joint statement by the Guyana President and the Norwegian Prime Minister, but that statement has not been released to the public and I could not find it in the website reference in the consultation draft. There hardly seems any compelling reason for that statement not being available on the LCDS website and made available to the public-sector dominated LCDS Steering Committee.

In fact, given the implications for the country of the adoption of the strategy, it would be useful for the several documents referred to in the consultation draft to be made available to the nation. That will contribute enormously to an informed public and meaningful discussion. As we shall see many of the actions to be taken under the strategy would require substantial concessions and valuable incentives which will have to come either from the money received under the international arrangement or from taxation.

The four phases of the LCDS
The proposed LCDS will be introduced in four phases beginning in 2009 and continuing indefinitely. The following are the four phases and the intended Payments to Guyana.

Phase 1 (2009) – No sum indicated but the document refers to interim payments to launch the LCDS and funding for Monitoring, Reporting and Verification (MRV).

Phase 2 (2010 – 2012) – US$60M to US$350M for capacity building, human capital development and the investment required to build a low carbon economy.

Phase 3 (2012 – 2020) – US$350M to US$580M annually for essentially the same purposes in Phase 2 and for payments to avoid deforestation and climate change adaptation.

Phase 4 (2020 and onwards) – Greater than US$580M providing incentives at or above the Economic Value to Guyana.

What the strategy will do
The strategy comes perhaps midway in the National Competitiveness Strategy, promoted by the government as the centrepiece of its medium-term strategy and praised by the private sector for its inclusivity.

The NCS prioritises the modernisation of the four sectors on which our economy has relied for centuries – sugar, rice, forestry, and mining – and identifies five additional sectors with the greatest opportunities for new growth and diversification: nontraditional agriculture, aquaculture, manufacturing, business process outsourcing/information technology, and tourism.

The LCDS has more than just subtle differences with the NCS but these the private sector has so far ignored, at least publicly. Under the LCDS Guyana will:

Invest in strategic low-carbon economic infrastructure, such as a hydro plant at Amaila Falls; improved access to unused, non-forested land; and improved fibre optic bandwidth to facilitate the development of low-carbon business activities.

Nurture investment in high-potential low-carbon sectors, such as fruits and vegetables, aquaculture, and sustainable forestry and wood processing.

Invest in other low-carbon business development opportunities such as business process outsourcing and ecotourism.

Expand access to services and new economic opportunity for indigenous peoples through improved social services (including health and education), low-carbon energy sources, clean water and employment which does not threaten the forest.

Improve services to the broader Guyana citizenry, including improving and expanding job prospects, promoting private sector entrepreneurship, and improving social services with a particular focus on health and education.

Undertakings
To win support for the LCDS, the government is prepared to offer a number of undertakings to enhance operational efficiency, transparency and accountability for the execution of the LCDS. The principal new organisational units and systems include an Office of Climate Change (to coordinate all climate-related activities for the nation), a Low Carbon Strategy Project Management Office (to drive major low-carbon programme priorities), and a Guyana Low-Carbon Finance Authority (to manage forest payments and related investment flows into the country and promote investment efficiency to the benefit of Guyana’s economy). The first two of these will operate within the Office of the President.

And as mentioned in paragraph one, the government says it is prepared to subject the rainforests to globally-verified forest and other land use governance standards and transparent, accountable deployment of forest payments.

Posted on

Report of the Auditor General 2007: Different year, same mess

No change
The report of the Auditor General on the Public Accounts of the country for 2007 has been tabled in the National Assembly and is now officially available to the taxpaying public and commendably on the Audit Office’s website. The story is no different from that of last year, from that of the year before, or from that of the year before that: late by ten months beyond the statutory deadline; a story of reckless abuse of the public funds; condemnation and threats from the opposition; and the nine-day outrage by the public followed by whatever revelation inevitably comes to light. Let us go back to the report for 2000 which was reviewed in Business Page of May 19, 2002 in the form of an imaginary letter to Mr Stanley Ming, then a member of the Public Accounts Committee which is mandated to review and report on the report. In part, this is what the ‘letter’ said:

“A significant number of bank accounts currently in use, including the Guyana High Commission London Account, as well as non-operational accounts were allowed to be overdrawn by large amounts in contravention of Section 22 of the Financial Administration & Audit Act (FAA). Continues.

“The Consolidated Fund is overdrawn by tens of billions while the sum total of all bank accounts (including the overdrawn balance on the Consolidated Fund but excluding the balances on the bank accounts special projects) reflects a positive balance. Continues.

“The State continues to provide funding annually to several public entities even though they do not comply with their statutory duty to submit audited financial statements. Continues.

“The Contingencies Fund continues to be abused despite repeated negative comments on this practice. Continues.

“Proceeds from the Guyana Lotteries are not being paid over to the Consolidated Fund but are kept in a ‘special bank account’ held at the Central Bank and used to meet public expenditure without parliamentary approval… despite the public commitment given by the President and de facto Minister of Finance that this would be corrected.”

Some change
Some things have changed. The report has been cut down in size – the 2000 report contained 2,120 paragraphs; now it is 557 paragraphs. Government expenditure has jumped from $47 billion in 2000 to $101 billion, or more than double. Reports of corruption no longer make news. There has been a Financial Management and Accountability Act that demands more not less accountability, and an Audit Act that sets greater obligations and higher standards on the Audit Office. Have things got better? I do not think so. Back then, we had a professionally qualified accountant heading the office, now we do not. The independence of the office is now more compromised than it was with Mr Deodat Sharma, Auditor General (ag) reporting that he was summoned for instructions by President Jagdeo, clearly in breach of the constitutional provision that the Audit Office should “not [be] subject to the control or direction of any person or authority.” Egregiously, the wife of the Finance Minister is now in a position to give professional guidance to the Auditor General (ag) by virtue of her position as his qualified assistant.

The administration’s response
Predictably and once again, the Minister of Finance Dr Ashni Singh has criticised the report for not reflecting the comments and responses of the various budget agencies and accounting officers. He cannot be serious. The report is in fact full of such comments, even when they make little sense or are misleading. For example on page 5, the Ministry of Finance’s response to the absence of end of year outcomes required under section 68 of the Fiscal Management and Accountability Act 2003 is that the information was not forthcoming from the ministries, agencies and departments. That obligation falls on the Minister of Finance who has more than an adequate set of sanctions to ensure that he gets the information he needs.

But I suspect that the reason is more political. One of the major variances is the revenue collected from the new VAT and Excise Tax introduced in 2007. A single agency over which the Ministry of Finance exercises controls administers those taxes. More than one of them knows that the reason for the massive surplus is that the VAT rate had been incorrectly calculated, but that despite the early detection of the error, the government persisted in what some may consider a fraud on the nation. This information was around and an independent Audit Office should have done its own assessment and put the findings to the ministry.

Indifference
A constant refrain in the responses is that the Head of the Budget Agency had indicated that this matter was being addressed by the Ministry of Finance; that these were presently engaging the attention of the Ministry of Finance; that the Head of the Budget Agency had indicated that this issue was being addressed by the Minister of Finance; and that the Head of Budget Agency had explained that the administration had since written the Finance Secretary to have this matter rectified and was awaiting a response (they are all in the same building). The state of the audits for entities coming under the Office of the President and for which reports have not been laid in the National Assembly deteriorated, while the excuse by the budget agency that “every effort is being made” to do so was met with a further comment from the Auditor General (ag) calling for “special effort” – at best an apparent form of indifference by the Audit Office. But can society be so indifferent about the failure by the administration to properly account for public funds? Since the Minister would also have been aware that a substantial part of the report is of prior year matters which have not been resolved, his response to the report can only be seen as a political rather than technocratic reaction, confident that all will soon be forgotten.

New GPC again
For all the apparent sound and fury generated by the report, all it does is identify some of the better known examples of gross financial irregularities and improprieties that feed the public’s appetite for scandal. Advances of hundreds of millions of dollars to the New GPC, friends of the President, continue to be made for the company to buy drugs for the Guyana Public Hospital Corporation in breach of the tender procedures. One of GPC’s senior officials sits on the board of the hospital, which also does not maintain proper accounting records so that both the non-receipt of items and their issue cannot be determined. What successive reports have failed to do is cause any change in behaviour by a government whose financial management is repeatedly endorsed by the electorate. Perhaps the President was right when he described segments of the public as financially illiterate.

By now the public is well aware of the breach of the constitution regarding the Lotto funds and one wonders why the report only mentions the amount over a ten-year period rather than the period covered by the audit. The report also does not state that the Lotto money is being spent by a person who has no authority under the law to spend any money. There is no great virtue in repeating the statement that the Lotto funds are not being put into the Consolidated Fund as required by the constitution. It is not that it is being held safely in trust or investments – the money is being spent by President Jagdeo as he pleases.

Tardiness and illegality
Where are the sugar unions in the face of the continuing failure to provide satisfactory evidence of $1.451 billion as deposits held for investments on behalf of the Sugar Industry Labour Welfare Fund, the Sugar Industry Rehabilitation Fund and the Sugar Industry Price Stabilisation Fund, two of which have not been audited for twenty-eight years and the other for eleven years? One of the ironies is that GINA, which is being used to defend the government’s record of financial management is itself in breach of the audit requirement.

The report also highlights a transaction involving Region 6 that smells of illegality including differences in vehicle chassis number and full up-front payment when the contract calls for progress payments. If the Customs officers could be referred to the DPP why not those involved in this purchase? And why has the Guyana Elections Commission not taken action against the “firm” that took 268 cartons of Polaroid film valued at $30.485 million which it has failed to recover from the “firm”?

Value for money
Once again the report announces that a Value-for-Money Unit (VFM) is being set up and after four years we can expect a VFM report. That we had to get assistance from Canada to achieve this is bad enough, but the choice of entity makes the idea into a mockery. I visited the Palms briefly not too long ago, and it was shocking to see the conditions under which the residents are housed and the staff have to work. The laundry, kitchen, sleeping and dining facilities are all in a state of disrepair, strangled for cash and other resources. What the Palms requires is not a Value-for-Money audit, but a money-for-value audit, refurbishment, additional staffing, new equipment for the kitchen and laundry, etc.

Conclusion
The recurrence of the egregious weaknesses and exorbitant losses resulting from poor financial administration and a weakened Audit Office suggests either an unwillingness to deal with the problem or a ‘we-like-it-so’ attitude by the government. Even the superficial enhancements in the Audit Office have to be financed with grants and loans, and in 2007 a second grant was obtained from the IDB to implement certain aspects of the office’s three-year Strategic Plan. Unable to do some of the most basic audit functions, to discharge the office’s obligations under various legislation and to complete the audits of the state entities in a timely manner, the Audit Office is now about to establish a Forensic Audit and Quality Assurance section.

How that will solve the problems that have persisted for more than ten years is anyone’s guess. Meanwhile the Auditor General tells us he cannot be sure about the accounts presented to him for audit by the Ministry of Finance.

Posted on

Guyana hosts regional accounting conference

Introduction
Guyanese accountants are this weekend hosting their counterparts from the region in the annual conference of the Institute of Chartered Accountants of the Caribbean (ICAC). This is the region’s umbrella body bringing together accountants of the English-speaking Caribbean. According to the ICAC website its membership is currently made up of seven members and four affiliates. The members are the national institutes of the territories of the region each of which operates under domestic statute.

The conference comes at another of those times when circumstances force the profession and/or the state to confront issues affecting the public interest. Sometimes the profession is affected indirectly rather than directly. One such example was in 1862 when the UK Parliament quickly reversed the 1856 Companies Act which had all but abandoned the mandatory accounting and auditing requirements of the 1844 Companies Act, encouraging a form of laissez-faire accountability. But the most dramatic and direct example of reform within recent memory was the Enron debacle which was quickly followed by a series of corporate failures forcing the US to pass the Sarbanes-Oxley Act in 2002. Failure was not restricted to the companies involved, but affected one of the pillars of the auditing profession – the prestigious Arthur Andersen which gave up its licences after being found guilty of criminal charges relating to the firm’s handling of the audit of Enron. The firm won something of a Pyrrhic victory when the Supreme Court of the United States overturned the verdict, but by then the firm’s demise had been sealed.

Blurring profit and professionalism
Only a few years preceding the Enron failure, Arthur Levitt, Chairman of the Securities and Exchange Commission of the US had said of the profession: “The audit profession has a long and distinguished history of guarding the integrity of our companies’ financial statements. They must live up to their history… I fear that the audit process, long rooted in independence and professionalism, may be diminished in the name of these increasingly lucrative and commercial opportunities.”

In other words accounting and auditing had become a business and the profession was in danger of individual accountants and firms putting profit and personal interest before the profession. The challenge for the society and the profession is how to balance the pursuit for profits with the objectives of the profession to set and maintain the highest standards of professionalism, to attain the highest levels of performance and generally to ensure that the public is convinced that the hallmark of the profession – independence and integrity – remains intact.

A market economy requires that there be credibility in information and information systems that are fed to shareholders and the public. And that persons who are certified by the accounting bodies to offer professional accounting and auditing services possess the highest standards of technical competence, experience and expertise and performance. Such issues must be ever present in the minds of those with responsibility for the proper functioning of our society.

Top of the chain
The region’s laws give to the accounting profession major and valuable roles to perform in the proper functioning of the economies of the countries. In Guyana these include the Companies Act, which assigns to the accounting profession the power to set and oversee the application of accounting standards and invests it with the sole authority to carry out the audits of locally incorporated or external companies registered to carry on business in Guyana. The Corporation Tax Act requires all companies to support their tax returns with financial statements audited by members of the Institute of Chartered Accountants of Guyana. The Securities Industry Act and the Financial Institutions Act all assign or delegate to the profession specific roles with regard to compliance with internal controls.

Under the principles of corporate governance the accounting profession in the role of internal auditors is regarded as one of the pillars of sound corporate governance, and in many jurisdictions the Audit Committee is one of the standing committees of the board with defined powers, rights, obligations and reporting responsibilities.

Increasingly too, accountants because of their facility with figures have risen up the corporate ladder and many of the region’s CEOs are either accountants or are MBAs majoring in finance or accounting. By law they sit at the top of the accounting pyramid. In practice they can be both the players and scorers adding to the challenge of meaningful regulation. Those are immense privileges that are sadly not always matched by commensurate responsibilities.

Making accountants more accountable
Enron and its ‘side-kicks,’ Tyco International, Adelphia, Peregrine Systems and WorldCom may have been perceived by the regional profession as a US problem, and it seems that the region saw itself as a witness to a fascinating spectacle, but no more. Now, faced with Stanford and Clico is the profession in the region right to ignore the possibility that these major disasters which continue to have ripple-down effects on households are as much governance and regulatory failures as they are accounting failures? Hopefully the accountants meeting at the Conference Centre would find time to address this critical issue.

The US tried its best in the face of resistance from the profession to make the profession more accountable, and following the Sarbanes-Oxley Act, self-regulated peer reviews at accounting firms were replaced by independent inspections conducted by the Public Company Accounting and Oversight Board. But that applies only to the US.

Here in the Caribbean, characterised by the smallness of our economies and countries and the nature and size of business units, it is no surprise that the accounting profession is dominated by sole practitioners or partnerships of no more than a handful of persons. There is limited scope for second reviews, peer reviews and quality control or in-house capability to deal with complex technical or ethical issues. And with only four major accounting firms in the world – down from eight a couple of decades ago – real choice even for the big companies is seriously limited for purchasers of audit services. Yet self-regulation is regarded as sacrosanct.

All national legislation provides for a self-regulated profession in which the accountants make or adopt their own technical, professional and ethical rules and oversee and discipline – or fail to discipline – individual members and firms where their conduct has brought the accounting profession into disrepute. It is perhaps no surprise then that one of the objectives of the ICAC is the preservation of the self-regulatory nature of the profession. The profession forgets at its peril that in many cases the failures surface soon after the auditors for those companies have given them a clean bill of health.

Education
It would seem that the Caribbean Institute has abandoned one of its founding objectives, and that is the creation of a standard regional accounting examination, administered initially by one of the international accounting bodies. At the time that decision was taken there was considerably greater disparity in corporate and tax legislation and relevant textbooks were unavailable. Such restrictions have been reduced.

There has been much by way of reform if not harmonization in corporate law and our countries, with the exception of The Bahamas are all signatories to what is popularly referred to as the Caricom Double Taxation Treaty. There is now an excellent text by Dr Claude Denbow on taxation in the Commonwealth, and the region’s law schools have a considerable amount of material on corporate law.

As new legislation is enacted in the region to give effect to the Revised Treaty of Chaguaramas, as the profession is held to be part of the fight against money-laundering, and as our professionals if not our artisans move freely around the Caribbean, the dream of a Caribbean professional accounting qualification that begins with a degree programme from our regional universities should be revived.

The region’s lawyers and doctors have done it. There seems no reason for accountants to hold on to the coat-tails of international accounting bodies principally from the UK to shape our accounting education in the second decade of the 21st century.

Ethics and insurance
Accountants have a duty not only to act ethically, but also competently. Shareholders, investors, tax authorities and other users of the financial statements rely heavily on the yearly financial statements of a company, as they can use this information to make informed decisions about investment and taxation – two issues of major public importance.

The journals of the major accounting bodies reflect an alarming increase in the number of complaints lodged against accountants and auditors. That must be a fraction of the actual incidence of this phenomenon. The public is largely unaware of the finer points of professional ethics, and accountants are loathe to report on their colleagues since they may be as equally culpable. And even if a complaint is lodged, the rules for addressing it are too often unclear and allow for such complaint to be heard only by accountants.

The danger is that self-investigation can become self-protection.
Finally our accountants ought to place on their agenda another problem facing the public in the region, and that is that the bulk of the professional accounting practitioners have no professional indemnity insurance. The regional or national bodies do not require it and the insurance industry is hesitant to offer it. So the client who receives sub-standard advice or shoddy work from his accountant is often left with practically no recourse but to end the relationship. That is no remedy.

Hopefully even as the Caribbean accountants enjoy Guyana’s hospitality and grapple with arcane concepts of IFRSs, the financial crisis and modernising corporate legislation, they will reflect on their overriding duty to the public and the need to restore public confidence in the profession.

Posted on

On the line: Demerara Tobacco Company Limited Annual Report 2008

Introduction
The Annual General Meeting of the Demerara Tobacco Company Limited, the tobacco trading company was held on March 31, 2009 making it the first company with a calendar yearend to have presented its 2008 annual report to its shareholders. In fact its financial statements were signed off by the auditors within five weeks of the end of calendar year 2008, which is commendable, but with effectively one supplier and one customer the accounting workload is hardly demanding. The company saw sales increasing by 6.6% over 2007 and after tax profit increasing by 6.3%, an almost linear relationship. However, the rate of growth of sales has fallen over the past couple of years, when the increase in 2007 sales over 2006 was a more robust 16%.

Demtoco is a subsidiary of the British American Tobacco, plc of the United Kingdom, and its ultimate parent company is British American Tobacco plc, also a UK company. Several years ago the company closed down its manufacturing operations in Guyana and its products are distributed almost exclusively through Edward B. Beharry and Company Limited. The company’s operations are managed by a small team of a dozen persons headed by Chandradat Chintamani, an accountant by training.

Financial Highlights
20090621_table1

Despite its ever present concerns about smuggling, the company manages to produce gross returns on sales of 57% which is high by any standard, and its after-tax return on sales is an enviable 19%. The company enjoys a monopolistic position with none of the controls usually associated with monopolies, and it can and does increase prices at will. Because the company has very little in the way of assets and investments in this country its earnings per share of $39.67 represent 139% of its average net asset per share, or expressed another way, for every dollar of net asset the company has, it earns $1.39! And of the net assets of $510 million, a net amount of $136 million is lent to related parties! Compare that with a DDL, for example, where the earnings per share compared with average net asset per share for 2008 was 8.9% and for the Guyana Bank for Trade and Industry it was 21.0%.

New laws, old practices
Unlike earlier years the company no longer discloses its volume sales or changes in the level of volumes, which is probably due to the sensitivity of the tobacco industry to the serious health effects of the use of tobacco. Indeed just one week ago the indefatigable consumer rights advocate, Ms Eileen Cox, in her column drew attention to a public consultation on “Specification for the labelling of retail packages of tobacco products” hosted by the Guyana National Bureau of Standards (GNBS). According to Ms Cox a decision was expected on the new and improved Guyana standards for the packaging and labelling of tobacco products in Guyana.

Guyana is a signatory to the World Health Organisation Framework Convention on Tobacco Control, but as the Minister of Health admitted in 2005, while smoking has been an issue in Guyana “for years nothing has really been done about it.” The company’s stated marketing strategy is to meet the “preferences of adults.” It would have been good to believe that nicotine abuse is a juvenile problem.

Here are some statistics to prove otherwise.
• Tobacco use not only reduces life expectancy but also the quality of life
• The death rate is 2-3 times higher than among non-smokers
• It is estimated that it will cause 10 million deaths per year worldwide by 2020 (WHO website)
• 1.2 million deaths in Europe (The European Heart Network)
• 1.2 million deaths from smoking in Europe (The European Heart Network, 2000)
• 400,000 deaths annually in the US (Mayo Clinic)

What is worse is that as tobacco companies in the developed countries are faced with more stringent regulations at home, they focus their attention on the poorer developing countries, particularly in Africa. Strikingly noticeable is that many of those engaged in the production or distribution of alcohol and cigarettes – elsewhere as in Guyana – would not think of themselves using those products but see no inconsistency or irony in promoting their use by others. And while the industry faces restrictions on advertising the company still expended some $113 million on advertising in 2008.

To compensate for the restriction on advertising the company routinely carries out sales promotions for both retailers and consumers. The company’s marketing campaign is more subtle, and for it the Kick the Habit is in relation to energy conservation and the promotion of a low carbon economy, the newest bandwagon in town.

Returns
During the year the company paid three interim dividends totalling $22.27 per share and a special dividend of $15.00 per share. A final dividend of $15.85 dollars per share was approved by the shareholders at their March AGM bringing the total dividend per share to $53.12. The emphasis of a special dividend suggests, however, that this will not be a recurring feature. As usual the group gets more from the Guyana company than just its share of dividends, healthy (no pun intended) though these are and worth $873 million or 55% more than in 2007.

Management services, royalties and technical and advisory services have increased from $615 million to just over $700 million, an increase of 14%, more than double the increase in sales.

Share price
After an increase in the share price in the first half of 2008 the price actually reflected a small drop, but has been steady since August 2008. Despite this persons who see in the company’s performance only dollars and not the severe health risks would consider that they have done very well indeed.

20090621_table2

Source: The Guyana Association of Securities Companies and Intermediaries Inc., weekly trading reports

The government too would have been pleased with the amount of taxes collected with duty and excise taxes paid increasing from $1,608 million to $1,716 million or 6%, and corporation and property taxes of $960 million. The person who said that sin does not pay could clearly not have been referring to cigarettes and alcohol.