The GT&T dividends issue - nothing much to shout about
by Joe Tyndall
March 20, 2001
THE Government of Guyana should not allow itself to be too carried away by the US$2.6 million in dividends received from the Guyana Telephone and Telegraph Company (GT&T) since June 2000.
Compared to the huge non-dividend flows to ATN (the parent company) since 1991, the dividends paid to the Government is nothing much to shout about.
Make no mistake about it. The payment of the dividends (the first such payments in GT&T's ten years of highly profitable operations) has been well timed.
GT&T's audiotext binge will come to an abrupt end after January 1, 2002, the date when the company will be forced to reduce its settlement rate for telephone communications with the U.S.A. GT&T has been signalling for years now that the consequential loss of audiotext revenues will require a steep compensatory increase in the rates for its domestic services, for it to maintain a 15% rate of return.
GT&T could hardly be unmindful of the fierce public opposition that the proposed increases are likely to generate. It is also concerned about Government's decision to end its monopoly. In these circumstances, any gesture that may serve to weaken public opposition to the rate increases, or to temper the Government's resolve with respect to the ending of its monopoly, is no doubt viewed as a good investment.
ATN never had any real interest in receiving dividends from GT&T, since it had other means of extracting cash from the public utility and it exploited these means with ruthless efficiency.
The three major sources of non-dividend flows from GT&T to ATN are the six per cent advisory fees, loans from ATN to GT&T and GT&T's audiotext operations.
THE SIX PERCENT ADVISORY FEE Under an Advisory Services Agreement signed in 1991, GT&T paid ATN an annual fee for management services of six per cent of its gross revenues. From 1991 to 1997, the fees totalled US$38 million from gross revenues of US$762 million. What is particularly troubling about this arrangement is that, in addition to the six per cent fee, GT&T is required to pay for all the costs involved in the provision of the services.
The fee is payable even if no services are provided. It is an extraordinarily generous give-away to ATN
A similar arrangement between ATN and VITELCO, its Virgin Islands telephone subsidiary, was prohibited by the Virgin Islands Public Service Commission. In the USA, such schemes have been prohibited since the 1930s. Why ATN has been allowed to exploit GT&T and its ratepayers in such naked fashion all these years is beyond comprehension.
GT&T and ATN have contended that the Purchase Agreement gives GT&T the right to the six per cent fee. This claim is absolutely false.
The advisory services do not come cheaply. For his services as a consultant, Mr Ron Sanders was paid a sum of G$26,370,162 (US$182,000) in 1995, G$31,467,143 (US$217,000) in 1996 and G$13,000,000 (US$90,000) in 1997 (for services up to June). When asked by the Commission to describe the nature of the services provided by Mr Sanders, all that GT&T's General Manager, Mr Statia, could say was that Mr Sanders was a "consultant as regards PUC issues".
From December 4, 1995, Mr Sanders (now Sir Ronald Sanders) was the High Commissioner for Antigua and Barbuda in the United Kingdom.
An aspect of the advisory services agreement that has so far not received the attention of the Commission is the procurement of equipment and supplies by ATN for GT&T. In the absence of regulatory supervision, the opportunities for ATN to benefit from excessive transfer pricing are enormous. Regulatory commissions usually subject such inter-company transactions to the closest scrutiny.
On January 28, 1991, ATN also signed a loan agreement with GT&T providing for inter-company loans between GT&T, on the one hand, and ATN and its other subsidiaries on the other. Quite astonishingly, the first transactions under the agreement were up-stream loans from GT&T to ATN as well as to one of its subsidiaries, Puerto Rico Telcom, that was, at the time, on the brink of bankruptcy. (Such up-stream loans have been proscribed in U.S. regulation since the passage of the Holding Company Act in 1935).
The loans plunged GT&T into a cash flow crisis and drove the utility to borrow from the local banks at an interest rate of over 30%. These transfers resulted in an intensification of Guyana's foreign exchange problems at the time and to the rising interest rates of the commercial banks. The loans to ATN were unsecured with no interest stated.
In its 1991 Decision, the PUC ordered GT&T to recall the loans. Immediately after repaying the loans, ATN began to make loans to GT&T at an interest rate of 32%. ATN sought to justify the rate by claiming that it corresponded to the prime lending rate of commercial banks, as published by the Bank of Guyana.
But ATN was, and is, not a commercial bank or a lending institution under the Banking Act. The loans were essentially foreign loans, since they were repayable in U.S. dollars and were thus insulated from the effects of exchange devaluation.
Moreover, a condition of the loans, as set out in the agreement, is that "the governing law and jurisdiction shall be that of the U.S. Virgin Islands". The interest on the loans should, therefore, be related to the cost of borrowing by ATN on the foreign capital market.
It is a well-established principle in rate of return regulation that the interest paid by a public utility on loans from its parent company should not exceed the allowed rate of return on capital invested in the utility, or the cost of the funds to the parent company, if the loans were made from borrowed funds. All this assumes that the utility was unable to negotiate loans at a lower cost.
The 1992 loans earned ATN a non-dividend flow of at least 15% of the loan principal. As of the end of December 1999, loans outstanding were in excess of US$20 million, not an insignificant source of income from GT&T.
A particularly perverse policy of ATN was to convert the advisory fees payable into loans to GT&T. Since the fees have no justification, GT&T was being penalised twice in being required to pay interest on its own cash resources.
GT&T'S AUDIOTEXT OPERATIONS
The most important source of non-dividend income from GT&T to ATN is the audiotext service. But the audiotext flows to ATN are concealed by the deliberately obscured relationship between GT&T and the service providers (SPs) and by the impenetrable relationship between the SPs and ATN.
This is an incredible relationship for a regulated utility. I will first deal with the relationship issue and then with the disposition of the "so-called" audiotext revenues.
Despite appearances, GT&T's audiotext business is essentially an ATN operation. Four of the seven contracts with audiotext providers concluded by November 1993 were signed on behalf of GT&T by Mr Cornelius Prior Jr, in his capacity as Secretary of the Board of GT&T.
The other three agreements were signed by Mr James Kean, as Assistant Secretary. To prepare the way for GT&T's entry into the audiotext business, GT&T became a founding member of International Telemedia Associates Inc. (ITA), a company incorporated in Atlanta, Georgia, U.S.A., on May 6, 1991. ITA's operations focused on the exploitation of the new opportunities in the provision of international audiotext services, primarily pornographic entertainment.
The management of GT&T played no part in all of these arrangements. There is no evidence in the minutes of meetings of the GT&T Board from January 1991 to the end of 1994 that the arrangements were submitted for the approval of the Board.
It would be recalled that GT&T's audiotext business began as a clandestine operation of which neither the Government of Guyana nor its two representatives on GT&T's Board had any knowledge. If the business was conceived for the benefit of GT&T, why was the Government of Guyana, the twenty percent shareholder, kept in the dark?
Mr Prior's claim that GT&T entered into the audiotext business because of its low profitability makes no sense, in the light of the robust performance of GT&T in 1991 and 1992. When it acquired control of GT&T, ATN was experiencing severe cash flow problems. The flow of dividends from VITELCO was severely restricted by the Virgin Islands PSC to restore the financial viability of the utility after what was described as "a "massive withdrawal of cash from the utility" by ATN.
ATN's lenders had also imposed strict limitations on VITELCO's dividends, in order to protect their financial stake in the telephone company. Income from other subsidiaries of ATN was negligible and declining, and its Puerto Rico Telecom subsidiary was teetering on the verge of bankruptcy.
Moreover, when the Purchase Agreement was concluded on June 18, 1990, ATN was unable to find the money to pay for its 80% share of GT&T. In these desperate circumstances, it seems reasonable to assume that ATN viewed its acquisition of GT&T mainly as a source of much needed finance to shore up its vulnerable financial position.
This conclusion is supported by the fact that shortly after acquiring GT&T, ATN began to extract loans from GT&T, amounting to three months of operating revenues, in utter disregard of the fact that the withdrawal of the funds plunged GT&T into a cash flow crisis. The Virgin Islands PSC had discovered around the middle of 1991 that ATN was exploiting VITELCO in the same way.
ATN had apparently planned to use GT&T as a vehicle for exploiting the opportunities in the international audiotext trade, an option that was not available at the time to VITELCO, its flagship investment, because of the strict conditions of U.S. law and the vigilance of the Virgin Islands PSC.
Further support for the assumption that the business was an ATN operation comes from the fact that the officials of GT&T, in giving evidence under oath before the Commission, displayed sparse knowledge of the service providers. They were unable to provide the names of the top officials or the addresses and telephone numbers of the companies.
Attempts by the Commission to locate Beylen Telecom Inc., the largest service provider met with no success. Moreover, there is a very unusual relationship between Beylen Telecommunications, the largest service provider, and GT&T and a mysterious relationship between ATN and the provider. There is evidence that ATN and Beylen have worked in close collaboration.
Indeed, they have made joint representations to the Federal Trade Commission in its Pay-Per-Call (audiotext) review.
The individual who signed the agreement with GT&T was a Mr Peter Knobel, the President of Beylen. Mr Knobel was also president of another audiotext company, Gemini Tele-Com Ltd, which had a contract with GT&T. Mr Knobel had the very unusual authority of issuing instructions to GT&T to make payments to various beneficiaries who were unknown to the management of the telephone company and these instructions were followed without question.
The faxed instructions did not show the address and telephone number of the company and were often unsigned. The Telephone Protection Act of 1991 requires that the date, time, logo and facsimile telephone number should be printed on each page of a faxed message. Without an authenticating signature the validity of the document could be open to challenge.
This is not the way to run a regulated utility, or any business for that matter. Mr Knobel operated in Omaha, Nebraska and St Croix, U.S Virgin Islands. He travelled by private jet on business in the U.S.A. and, presumably, in commuting between Omaha and St Croix, with the expenses paid by GT&T.
Reportedly, the payments were deducted from moneys due to Mr Knobel (or Beylen). Even so, the arrangement is highly unusual, at least for a regulated utility. (The PUC transcript does not indicate whether Mr Knobel travelled on the private jet operated by ATN. In 1991, GT&T was charged with expenses connected with the operation of ATN's jet, including the ferrying of the then General Manager of GT&T on week-end trips to his home in the St Croix).
Mr Knobel also served as a consultant to GT&T. The records show that a payment of US$655,000 went to Peter and Patricia Knobel for services provided. The top management officials of GT&T were unable to describe the nature of the services provided by the Knobels.
In the context of these arrangements, it is difficult to determine the share of the audiotext revenues flowing directly or indirectly to ATN or to persons associated with the company.
What is absolutely amazing is that GT&T does not earn any revenues from the provision of audiotext services. This is certainly the position in the U.S. market.
No one in the United States who dials GT&T's audiotext service is required to pay any charge over and above what is normally paid to the U.S. telephone company for calls to Guyana. No individual or organisation in the United States ever collects any charges, on behalf of GT&T, from persons who dial GT&T's audiotext service.
No U.S. telephone company (not AT&T nor Sprint nor MCI) transfers any money to GT&T as audiotext revenues. The evidence suggests that the position is the same in all other markets.
How then can GT&T claim and record audiotext revenues?
The naked truth appears to be that GT&T has been designating a significant part of the revenues from its normal (non-audiotext) business as audiotext revenues from which it meets the expenses, fees and other payments related to the audiotext operation. The revenues in question represent payments to GT&T from overseas telephone companies for terminating calls transmitted to Guyana.
The services are performed pursuant to accounting rate agreements, which have no connection whatever with GT&T's audiotext business.
That GT&T does not derive any revenues from audiotext customers is confirmed in testimony before the Commission by Ms Sonita Jagan, as Deputy General Manager for Finance. It is also confirmed, in painstaking detail, in a sworn affidavit submitted by ATN to a U.S. regulatory Commission.
The testimony of Ms Jagan and ATN's affidavit provide solid evidence to justify the allegation that GT&T's revenues from its legitimate telephone business are being misappropriated for the purposes of an activity that is clearly illegal. (GT&T's audiotext service is not covered by its licence and is, therefore, an offence under section 5 of the Telecommunications Act).
Ordinary telephone revenues that have been characterised as audiotext revenues from 1992 up to the end of 1999 totalled US$410.6 million. If the argument as to the allocation of the revenues is sustained, a huge tax liability will attach to the portion of this sum that has flowed out of GT&T to audiotext providers and other beneficiaries - more than 80% or US$328.0 million.
This is not a matter for tendentious arguments but for a fair process of legal adjudication, to which GT&T could hardly object.
The authorities concerned must decide whether GT&T's licence and the Telecommunications Act are just pieces of tissue to be fouled and tossed aside.