Pleas for help ignored
April 23, 2000
BUSINESS PAGE is dedicated to providing objective information an opinion on issued of interests to the business community and the public at large. The articles in Business page are prepared and contributed by CHRISTOPHER RAM. Christopher Ram is the Managing Partner of Ram & McRae, Chartered Accountants, Professional Services Firm.
Before concluding, I would like to refer to the entertainment tax which is causing much concern to cinema proprietors. The easy access to and wide ownership of television is adversely affecting the economics of the film industry. This has implications particularly in the rural areas where the cinema plays an important part in the social pattern. The entertainment tax clearly needs review in the light of the new developments affecting the industry since cinema owners appear to bear the brunt of the entire entertainment sector.
This plea comes from a presentation by the Business Page contributor at a seminar - 'Managing for Economic Recovery' - hosted jointly by Christopher L.Ram & Company (now Ram & McRae) in association with Ernst & Young on Saturday, January 8, 1994.
Six years later... Budget (2000) was the last straw for Liberty owner Samtani - 'Business up for sale' (Stabroek News April 17). Several other cinemas across the country are closing down weighed down by the 25 per cent entertainment tax and the continued infringement of copyright and other intellectual property rights.
Why as a country can we not recognise the warning signals or hear the pleas of those in danger? Why do we act, if we do at all, only when it is too late and irreversible damage has already been done? Why did successive finance ministers and presidents since 1994 ignore the calls for a review of the entertainment tax on cinemas and action on copyright legislation? Why do we talk of modernising the economy when we ignore the concept of the ownership of knowledge, the very foundation of the new economy? Why do we let businesses go to the wall even after we publicly announce that "the government will work with the private sector to support distressed companies in their efforts to restructure"? What logic can explain a statement from the Vice-Chairman of the Private Sector Commission that Budget 2000 is investor-friendly when he must be painfully aware of the plight of so many businesses across all sectors of the economy and the country? Is this the view of the Private Sector Commission and if not why has there not been any clarification?
Johnny Braff wrote in his song about two decades ago that "there are more questions than answers," but has nothing changed?
Ironically, and for the records the Tax Act which imposes the entertainment tax was amended in 1997 to waive the tax on Caribbean and non-resident Guyanese artistes performing in Guyana. How much more insensitive and irrational can policy makers become ignoring their threatened own in favour of those whose money-making visits to Guyana have practically no fixed costs and who face none of the challenges and risks which locals suffer. The Government has a duty to act in this matter and hopefully the management of Liberty Cinema can be persuaded to change its mind in a package which responds to the concerns of all cinema owners.
Businesses in distress
It is just about six months ago that this Page carried a two part article on Businesses in Distress which got its title from an organisation formed around that time to draw attention to the difficulties faced by so many of our small and medium-sized businesses in particular. Unfortunately that organisation appears to have had no progress and the initiative may have been abandoned, which is a real pity. Certainly it could not be that its objectives were achieved as recent newspaper articles and official notices suggest that more businesses are going to the wall and involuntary severance is becoming more widespread.
In Ram & McRae's review on the 2000 Budget the firm offered some suggestions which, if implemented on a case by case basis, lead to the recovery of a number of businesses. Business failures are of course a feature of the market economy. Yet the circumstances which necessitate assistance and intervention cannot be much more appropriate than those currently prevailing. Government constantly makes its own case for debt relief and routinely ploughs millions of dollars into public sector companies, but appears unwilling to put measures in place to help the "engine of growth." Just this month the Blair Government in Britain announced an aid package to the coal mining industry. We must show no less courage and imagination in addressing the difficulties facing our own private sector.
There is no doubt that too many businesses in Guyana - large and small - are badly run and that tax minimisation rather than growth and development dominates their thinking. Insider trading, less than honest conduct of the relationship with creditors and sheer incompetence developed in a hitherto politically protected business climate demand that some of these businesses, at best, fold. On the other hand there are those who have been the victims of interest and exchange rate measures, poor judgement and management of lending by commercial banks, punitive tax rules on property and depreciation and unfair competition and political upheavals. Some little effort and appropriate policy measures could put them on the road to recovery benefiting the entire economy in a very short period of time.
The answer to the question who should bear the short-term cost of the assistance and recovery should be those who stand to benefit and this would suggest therefore that all stakeholders should give up something today for something more tomorrow. There is no single solution which will address all the ills or bring all the distressed companies back to good health. Specific elements in the measures will require greater emphasis in some of the companies than in others. No doctor will treat a patient without an examination and it is the same with a sick company. Yet the interested parties with legislative support can construct the features of a general framework if necessary.
There is no order of precedence since all are involved and the success of the efforts will help the economy in which all have to operate. With more persons coming on to the job market for the first time and firm closures adding to the unemployment numbers the workers and their representatives have a vital stake and role. Restructuring does not mean that all jobs are protected or that the rules of engagement are unaffected. In fact restructuring means precisely the opposite. The organisational structure, job descriptions and the numbers on the establishment will change. Some job losses are almost inevitable and the economics of the firm may require pay cuts. These are non-negotiable and can be painful. The changes must therefore be made in a transparent manner under rules that are fair, agreed by all sides and scrupulously applied. It is not only equitable but also makes good sense that future job opportunities be offered to those who are laid off in preference to new employees.
Suppliers of credit
The position of the supplier of credit either in the form of goods and services or finance has to be considered against the backdrop of their legal standing. A secured creditor who has a debenture or mortgage securing his debt is of course in a better position than an unsecured creditor. However cashing in security can be very time consuming, costly and may not produce the cash flows to liquidate the entire debt given that a forced sale hardly realises the full market value of the asset. There are as well the preferential creditors who have to be paid in preference even to the secured creditors. Both classes of creditors have some interest in the continued existence of the business though the secured creditor has more options including putting the assets of the business on the chopping block.
Some debt write off is almost invariably expected on the assumption that all must contribute in the interest of all. At its fairest all creditors should agree to a write off of an equal percentage of their debt. In return there should be clearly defined arrangements for the settlement of the balance of the debt and specific agreement on the terms and condition of new credit.
On the issue of government's contribution, the tax rules are clear: any write off will be tax deductible and the state effectively bears a 33 1/3/ 35/45 per cent share of the write off depending on the tax status of the creditor. Of course this does not remove the possibility of a remission of some of the taxes otherwise payable.
Banks operate under the Financial Institutions Act (FIA) which sets out strict rules of provisioning against doubtful debts. By the time a business reaches an extreme state of distress the bank will almost certainly have fully provided against the debt and would no longer be accruing for interest thereon under the FIA. Of course this does not mean that it does not continue to charge interest on the debt under its agreement with the borrower. These are not contradictory positions and merely reflect the legal position with its debtor and the prudence principle in accounting.
Having provided against the indebtedness it means that all amounts received from the debtor whether on interest or principal will be in the nature of income to be taxed at the rate of 45 per cent (or 2 per cent of turnover if the bank is in a loss-making tax position) as Bad Debts Recovered. It is in this area that the Government and the bank can co-operate to assist the debtor. The Government can invoke or pass legislation to waive or significantly reduce the tax on the amount recovered in return for the bank agreeing to a restructure and a write-off of all or some of the interest.
Just as Guyana has had to submit itself to certain conditionalities to benefit from debt-write off, so too must borrowers agree to supervision by creditors in exchange for relief. They must agree to correct any deficiencies in previous security and limitations on their freedom of action for a specified period of time. Drawings and salaries to the owners/managers must have prior approval and as must all major or related parties transactions. They have to understand that it will not be business as usual. In extreme circumstances, the owners may have to agree to new management in return for assistance.
The modest return to growth in the economy in 1999 masks its extremely fragile structure. If firms continue to fail there will be both economic as well as social problems making ultimate recovery more difficult and distant. It is often far better to keep an existing business going than to start a new one. The revenue losses as a result of business closures, the psychological scars of failure and the almost certain migration of the owners are too great a price to pay for the failure to help those businesses in distress. Yes, some have to go but there are many others which can benefit from a compact involving all stakeholders in an effort to make a fresh and honest start. The privatisation process showed little consideration or regard for shareholder and economic democracy. If Guyanese private sector businesses are allowed to fail at the first opportunity, the consequences for the economy can be disastrous and we may soon find that the entire economy is owned and controlled by non-Guyanese.