SN Business August 2003
Stabroek News
August 3, 2003
Co-op credit union soliciting deposits from the public
Refuses to divulge names on committee of management
Questions are mounting over the operations of a cooperative financial institution, established in March, soliciting deposits from the public but not falling under the supervision of the Bank of Guyana to ensure the safety of members’ deposits.
The National Cooperative Credit Union and Trust Limited (NCCUTL), the first national cooperative society with scope over the entire country, is registered under the Cooperative Societies Act, administered by the Ministry of Labour, Human Services and Social Security.
Minister within that ministry, Bibi Shadick, on Friday assured Stabroek Business that her ministry was capable of inspecting, auditing and regulating such an institution. However, the ministry does not investigate persons on the management committee to determine whether they are fit to be entrusted with public monies.
The Central Bank conducts such tests for financial institutions but the Financial Institutions (FIA) Act of 1995 exempts cooperative societies from its definition of a financial institution. It defines a financial institution as a bank or company other than a bank engaged in financial business but not including a cooperative society or the now defunct GAIBANK. Accepting deposits and granting loans is financial business and would normally require a banking licence and Central Bank approval.
The Cooperative Societies Act allows societies to define their areas of operations, which the NCCUTL has defined as the Republic of Guyana. The Ministry has to approve the rules of such societies’ engagement. There are over 900 such societies, many of which are now defunct.
Minister Shadick said her ministry hires qualified auditors to check on the accounts of these societies to ensure all is well in their operations and adds that her ministry is capable of regulating the operation of these societies.
The area of main concern is the issue of safeguards to protect members’ monies and members of the banking sector have reportedly also expressed concern about the society’s national thrust and its solicitation of deposits openly, offering tax-free interest rates and low-cost loans. Stabroek Business was reliably informed that persons have withdrawn their entire savings from the banking sector and have deposited these with NCCUTL.
In the case of commercial banks and other financial institutions, the Central Bank acts as the regulator to ensure their safekeeping of depositors’ monies by issuing prudential guidelines and backing this up with on-site inspection of the banks operations.
Chairman Dr Fred Sukhdeo was not willing to tell Stabroek News who the members of its committee of management are but denied that this credit union is a backdoor entry into the banking sector, using the loophole in the FIA.
Treasurer of the NCCUTL, Joshua Shafeek, had applied for a banking license through the Federal Investment Merchant Bank Limited (FIMB) but had been turned down by the Central Bank. Then the insurance business Shafeek is involved in, the Guyana Fire, Life and General Insurance Company Incorporated (GuyFlag), recently sought to attract deposits using the term certificate of deposits in newspapers’ advertisements.
However, the company was advised against this and to change the name of the product to annuity certificate of deposits, which it has done.
Then in March, NCCUTL was established with its office in the same building housing GuyFlag Insurance and FIMB and began advertising itself as a cheaper source of credit and providing a higher return on various forms of deposits. The cooperative has since received a letter from the Central Bank advising that it would need to comply with the rules of a Trust to be able to use the word Trust in its name. Sukhdeo yesterday indicated that until the society can so comply, the Trust would not be associated with the society’s public image.
However, on Saturday, Sukhdeo sought to disassociate the society from GuyFlag Insurance or FIMB and declined to say whether Safeek was a member of the management committee. He changed this position on Monday when he contacted Stabroek Business and it was put to him that Safeek was the treasurer and the society had received over $1 billion from GuyFlag through the Guyana Mutual Fund Inc, which arrears to be a related company. Sukhdeo said the society is still in its formative stages and he could not disclose the type of information requested. But he was then asked whether a society in its formative stages should solicit deposits from the public and offer itself as a source of cheaper financing. Sukhdeo says if members from the public ask for the information Stabroek Business sought it would be provided. He could not explain why it could not be given to this publication.
While he would not say who the other members of the management team were, the ministry has revealed these to be Alvin Yassin (also a director of GuyFlag Insurance), Chubilall Ramlochan, Rosalin Semple, Alex Haywood and Tina Jodhan (Secretary).
Put to him that this reluctance in providing information could affect confidence in the society, Sukhdeo on Saturday said he did not care but on Monday said the attractive rate of interests offered, the tax-free status of these services and confidence reposed in the society by the public are seeing millions being poured into the society’s coffers. He boasted that all of the deposits are insured but pressed on whom they are insured with, given that deposit insurance is not available in Guyana, Sukhdeo said he had to clear such information with his board of management.
Sukhdeo is insisting that the operations of the society are in keeping with the laws and said he would not be opposed if the government should change the legislation to allow cooperatives to fall under the purview of the Central Bank.
While Sukhdeo denies that the society is a backdoor entry into the banking arena, the rules of the association say it intends to promote the establishment of a National Cooperative Bank with the participation of other credit unions and other institutions. Sukhdeo confirms this intent and says the society is aiming to invigorate the cooperative movement, which can be an influential sector in society.
He adds that NCCUTL is aiming to pattern itself after the Hindu Credit Union in Trinidad and Tobago, the leading credit union in the region. It intends to offer similar services such as flexible deposits, soft loans and other services including international visa cards. It is seeking, according to Sukhdeo, to promote businesses. Its rules allow for the taking of deposits from members and non-members including corporate houses.
However, the society has not yet fixed the maximum liability it may incur in loans or deposits, which has to be approved by the chief cooperative officer, but it has already accepted $1B in deposits from the Guyana Mutual Fund Inc.
And Sukhdeo, who had denied that the society was in any way afliated with GuyFlag Insurance or FIMB, explained the society’s operation out of the said office at Ruimzeight Gardens, as being a sharing of office space but being an independent operation with no links. Safeek and Yassin, members of the management, are also on the GuyFlag board while Shafeek is on the FIMB board.
Anyone who wants to be a member of NCCUTL is free to join but Sukhdeo would not say how many persons are currently members or how much in deposits has so far been taken in.
The shares are worth $100 each and no one can own more than 20% of the capital base of the society. But Sukhdeo would not say what is the capital base.
Sukhdeo expressed the view that the credit unions in Guyana today operate at a box hand level with members only able to borrow against their savings but the NCCUTL intends to be “dynamic” and go beyond this. He said no loans have been granted to date but Stabroek Business has seen a report on the operations, which says that loans were issued in Regions 1,2,3,4,5,6 and 10 by NCCULT at 12% per annum.
He also said the union intends to have branches in several parts of the country but would not say where it is targeting to have such offices. On Monday he said Kwakwani is one such location because the banking services there have been shut down.
The Hindu Credit Union of Trinidad defines a credit union as a cooperative financial institution, owned and controlled by the people who use its services. These people are members and credit unions serve groups that share something in common, such as where they work, live, or go to churches, or temples. It added that credit unions are not-for-profit institutions, which exist to provide a safe, convenient place for members to save money, invest together, and to get loans at reasonable rates. Credit unions, like other financial institutions, are closely regulated and operate in a very prudent manner. The only difference between a credit union and a bank is that the latter is in business for profit.
Credit union deposits and loans are tax-free and NCCUTL has been offering interest rates on regular savings between 4-6% and on certificate of deposits between 6.8 and 8%. The advertisements claim 100% insurance of all deposits, non-taxable interest on deposits, and discount on vehicle purchase among a host of other services, including housing finance.
NCCUTL rules permit the acceptance of deposits from members and non-members but the issue of loans only to members. No loans can be in excess of one percent of the society’s unimpaired capital and surplus.
Public policy not justified on empirical analysis - IDB
- to fund institutional strengthening of Stats Bureau, ministries
The Inter-American Development Bank is funding a project to improve governance in Guyana by beefing up data collection and analysis to allow the government to make policy decisions on the basis of sound empirical analysis.
The Bank says there is no clear culture in Guyana of justifying public policy decisions on the basis of empirical analysis and the government neither appreciated nor made use of official statistics. It found that the services of the Bureau of Statistics were undervalued and led to “less than optimal” financial and technical support from the government.
However, with the government pursuing initiatives under the Poverty Reduction Strategy Paper (PRSP), crucial for further debt relief and poverty reduction, a premium is now attached to statistics to allow for the tracking of outcomes of programmes being pursued.
“The measurement of development effectiveness, through timely and reliable monitoring of key outcome indicators in the social areas, is now an explicit part of the government policy dialogue with its international development partner,” the IDB says in the profile of the new project it is to finance. The project targets social statistics and policy analysis reforms.
Guyana is to track 27 indicators, mainly in the social sectors, over the next five to ten years to measure progress under the PRSP, and these would require sound data analyses to allow for changes or modification as may be necessary.
The Bureau of Statistics, as it is, provides statistical coverage in a number of areas, such as, the national income accounts, consumer price index, trade statistics, migration statistics, ad hoc household surveys, social and demographic statistics and decennial census operations.
However, the Bureau suffers from institutional constraints, which include very few professional staff, a low maintenance budget, and outdated and sparse capital equipment.
To allow for development effectiveness, decision making at all levels in the public sector would have to be made on the basis of data driven policy analysis but this is constrained by the current civil service, ill-equipped to provide such analyses.
The IDB is to grant a US$5 million facility to allow for such analyses by providing institutional support for the strengthening of the Bureau, as well as, ministries directly linked to the programmes of the PRSP.
This US$5 million facility would improve the collection and dissemination of social statistics; strengthen the Bureau of Statistics in data analysis for social policy; and finance the modernisation and upgrade of the curriculum for the Bachelors degree in Economics and Masters Degree in Public Administration at the University of Guyana (UG). Those programmes are now to include quantitative policy analysis courses with special focus on poverty and social issues.
The Bureau of Statistics is only in charge of collecting a part of the entire range of official social and economic statistics in Guyana. The ministries with the substantive portfolios produce official statistics on agriculture, education, health, labour, transportation and those derived from vital registration. As it is, the Ministry of Education conducts an annual school census and the Ministry of Health collects routine surveillance information on maternal and child health. However, the IDB notes that there is no formal coordinating mechanism in place to ensure that these statistics are coherent and adhere to internationally accepted standards and classifications.
The PRSP itself calls for the institutional strengthening of the Bureau and the creation of a culture of statistics in Guyana by improving the capacity within the line ministries to collect, manage and analyse data so as to monitor, evaluate and make adjustments to programmes as necessary.
The objective of the new IDB project is to increase the capacity of Guyana to generate social data and to make sound policy decisions. The IDB sees its involvement in this project as an effort to improve governance in allowing for decisions to be based on empirical analyses. It also sees the project as providing support for social programmes by strengthening the required agencies’ ability to monitor and evaluate targets, which will allow for their adjustment/modification as necessary. This would lead to poverty reduction and social development in the Bank’s view.
The IDB project would see a strategic plan being developed and implemented to modernise the Bureau; train and develop its staff; and acquire hard and software for its work programme. It would also see the Bureau putting out a publication of survey reports and sector reviews, and the Bank would also (co) finance data collection through surveys of living conditions or labour force in collaboration with other donor initiatives.
“The overall strengthening of the Bureau should bring about an increase in its operational capacity and contribute simultaneously to a substantial advancement of its profile in the country, allowing it to take full responsibility of its role as coordinator of the national statistical system,” the IDB says in the project profile.
This component would also strengthen data collection in the Ministries of Education, Health, Agriculture, Labour, Human Services and Social Security.
The second component of the project would finance a beefing up of the technical capabilities of the staff of the Bureau and line ministries charged with PRSP implementation.
In-house and formal training would be provided on data manipulation, quantitative analysis for programme monitoring and evaluation.
The third component of the IDB project would see the curriculum at UG upgraded and would allow for the creation of a data bank with modern computer facilities to provide students with household survey data sets from Guyana and the region for their research or dissertation. As it stands, neither the undergraduate nor the graduate courses provide for training in quantitative data and policy analysis using the HIES or MICS data sets nor is there a data bank.
The Bureau and the Office of the President would be the executing agencies for the project. The project analysis mission is due next month and the project would be taken to the IDB board in October. Implemen-tation is expected to commence this year.
The Bank is already assisting the Bureau in executing the national consensus via a technical cooperation programme. The Bureau, in the early 1990s, also benefited from a UNDP institutional rebuilding project, which financed consultants; saw some staff development as well as the 1992 Household Income and Expenditure Survey (HIES). The IDB then funded the 1999 HIES, and UNICEF, the 2000 Multiple Indicator Cluster Survey. But there were no accompanying staff and institutional development components to these programmes.
The World Bank last year provided US$500,000 through the PRSP credit to finance equipment and staff training and development in the Bureau. Also US$1.7M from that project would support the executing agency of the PRSP to implement an innovative community based monitoring & evaluation programme to assess local implementation and the impact of related PRSP activities.
Not enough jobs being created
- Thomas
Professor Clive Thomas feels that enough jobs are not being created within the economy to meet the requirements of the labour force.
He also says that as a result of privatisation, reorganisation and downsizing of businesses, many jobs are lost and new ones are not be created as rapidly to fill the gaps.
However, he feels the official unemployment rate would remain low because of a low national labour force participation rate. This rate reflects the ratio of the labour force to the population above 15 years.
In the 1992/3 Household Income and Expenditure Survey (HIES)/Living Standards Measurement Survey (LSMS), the labour force participation rate was 60% but this fell to 57% in 1999. This, Professor Thomas argues, is very low.
The participation rate for men and women differed sharply with the rate for men being 81% in 1992/3 and falling to 76% in 1999. For women, the participation rate was constant at 39% in both years.
The 1999 HIES/LSMS found the unemployment rate to be 9% or 23 960 persons as against 12% or 32 586 persons in 1992/3. The total labour force was given as 263 807 in 1999 against 278 078 in 1992/3. This unemployment rate is low because the labour participation rate is low.
Thomas said many persons dropped out of the labour force because of labour fatigue or and lost confidence in finding a job. Once a person did not look for a job in the past two weeks, they were counted out of the labour force.
The total population above 15 years in 1999 was 462 615 as against 467 173 in 1992/3.
Persons outside the labour force for the period were 198 808 and 189 095 respectively.
The unemployment rate could change for 2002 depending on the net effect of migration and downsizing on the workforce.
In 1993, the size of the total public sector was 56 132 and this moved to 35 903 in 1999.
Employment in the public sector fell by 3.5 per cent in 2002, following a 2.9 per cent reduction in 2001.
Vast improvements in Go-Invest services
DaSilva seen as a credit - survey
Companies using the services of the Guyana Office for Investment (Go-Invest) have found these to be much improved since Geoffrey DaSilva took over the helm in 2001. This is according to the results of the 2002 Client Satisfaction Survey, commissioned by the Guyana Economic Opportunities (GEO) project on behalf of Go-Invest.
That survey targeted 100 businesses using the services of Go-Invest but the response rate was 44%, with 97% of the respondents rating Go-Invest’s services as “satisfactory or better”.
All of the 44 companies said they would use the agency’s service again, despite some firms having expressed frustrations or criticisms over various aspects of its work.
Executing agency of the survey, Chemonics Inter-national in association with Management Systems International Inc, said this willingness to continue to seek Go-Invest services is indicative of growing satisfaction. On a five-point scale, with one being excellent and five being poor, Go-Invest received a rating of 2.16% for its quality of service, compared with the first survey in 1999 of 3.4%. This is a 1.24 percentage point improvement.
The agency received better scores for the quality of its export assistance than for its investment assistance. The average score for export assistance was 2.12, that is, between average and satisfactory compared with 2.24 for investment assistance, also in the same category.
However, the analysis by the executing agencies said this difference could be attributed to the responses for export assistance being less than those for investment assistance, as well as few respondents being unable to identify which type of assistance they had received.
Go-Invest’s staff was found to be highly professional in the 2002 survey. All of the respondents felt that the export promotion staff ranked satisfactorily or higher in professionalism while 97% gave a ranking of satisfactory or above for investment promotion staffers. These scores were higher than the 2001 survey scores.
As in the 2001 survey, in 2002 respondents felt the agency provided slightly more timely assistance in investment and export promotion. For export assistance, all 44 companies felt that they had timely and effective assistance. Seventy per cent of the respondents felt that the assistance for investment was timely. It should be noted that lengthy processes such as concessions and land award fall under the investment regime. Nevertheless, these scores compare well with 1999 when only 12% felt the services were timely.
But the most often repeated comment by the clients surveyed was the need to make Go-Invest a one-stop agency, without the dependence on other government agencies/ministries, in the business related processes, especially in areas relating to duty free and discretionary concessions as well as land awards.
Many firms felt that DaSilva, well regarded, was faced with too much work to be effective. They recommend that more staff be hired and for DaSilva to delegate more of his responsibilities to his senior staff.
They also thought more frequent updates were needed for businesses waiting on decisions on their requests for land and other concessions.
Two other recommendations were for the agency’s staff to visit all business locations to understand how these were run and the constraints/advantages faced, as well as for the agency to seek out businesses and not to wait until it was approached. There was also the view that there is need for more public awareness on the agency’s services.
Of the 44 companies responding, three were foreign firms. The firms were of various sizes ranging from one to over 1000 staff and with earnings of less than G$250 000 to over $5M.
Requests for assistance came from the manufacturing, agriculture/fishing and the handicraft sectors. Most requests were about concessions, land and factory space awards.
The most common requests were in relation to the acquisition of duty free concessions, discretionary concessions, land/factory space, information on legal requirements and information on key contact agencies.
The need for the agency to promote the use of its website and to use it as a dynamic tool to attract businesses and keep them informed was also noted by clients in the survey.
GT&T’s net income up 34%
The Guyana Telephone & Telegraph Company Lim-ited (GT&T) at the end of June raked in US$37.2M in revenues, a 16.8% increase over the same period last year but its net income moved up by 34% to reach US$15M compared with US$11.2M.
According to the third quarter report by its parent company, Atlantic TeleNetwork, GT&T raked in US$19.3M at the end of June in international long distance revenue compared with US$17.7M for the corresponding period in 2002.
Local exchange service revenues also climbed from US$12.6M to reach US$16.2M. This is a 28% increase. Other revenues not described, moved up from US$1.4M to US$1.6M.
On the other hand, international long distance expenses fell from US$5M at the end of June 2002 to reach US$3.776M. Telephone operating expenses, however, increased from US$13.2M to US$14.9M as did general and administrative expenses, which moved from US$2.2M to US$3.3M. The total telephone operating expenses moved from US$20.6M in mid 2002 to US$22M.
Meanwhile, the company increased its fixed access lines from 86,245 at the end of last year to 88,138 at the end of June, an increase of 1,893 lines.
Cellular subscribers moved from 79 915 in December 2002 to 104 852 at the end of June. This is an increase of 24,937 or 31%.
ATN on Tuesday announced 43% higher earnings for the second quarter of this year as compared with the second quarter of last year. Earnings were US$0.62 per share for the quarter ending June 30th, compared with US$0.43 per share at the end of June 2002.
The earnings for the second quarter were also 10% higher than the first quarter.
Commercial court, alternative dispute resolution mechanism by year-end
The Inter-American Development Bank (IDB) is working on detailed designs for a specialized commercial court and an alternative dispute resolution mechanism for Guyana to allow for an efficient, transparent and fair resolution of commercial disputes and the execution of contracts.
An IDB mission was in Guyana last month reviewing, with the government and private sector officials, its proposal for the establishment of the court and the alternative dispute resolution mechanism.
The Bank’s resident representative in Guyana, Sergio Olea-Varas, says he expects the project to be approved before the end of the year. “We need to complete the design and expect approval of the project before the end of this year,” Olea-Varas said last week.
The Bank was hoping to complete the design last month to be able to prepare a plan of action for submission to its President, Enrique Iglesias for approval. However, preparation of the project is a bit off-track.
The IDB is providing non-reimbursable technical cooperation support of US$500 000 for the project, which the government has to match with US$50 000. Because of the difficulty with implementing legal reforms in another programme, the Bank is placing great attention on the design of the institutional framework and an effective execution agency. The Chief Justice, Carl Singh, the bank said, is a leading advocate for the establishment of the court and the alternative mechanism and his office is seen as the ideal executing agency for the project.
The funding would establish and operationalise the commercial court, as well as, the commercial alternative dispute resolution mechanism.
The commercial court, under the project, is to be provided with strict case management practices and systems, as well as well-qualified and motivated judges.
The court is expected to be an effective mechanism to improve judicial decision-making and enforcement for commercial activities, including financial transactions in Guyana.
The project would also allow for the recruitment of a staff of qualified arbitrators and mediators to handle matters, which come under the alternative dispute resolution mechanism. This mechanism would provide parties in commercial transactions with an “effective and expeditious alternative” to the court system to resolve disputes, the IDB project profile says.
The IDB’s strategy is aimed at strengthening the enabling environment for the private sector to do business in Guyana. The IDB has found that the current enabling environment is plagued by weak enforcement of property rights and contracts, which increases legal and other risks to the private sector.
“This discourages most types of commercial activity, but in particular longer-term investments and financial transactions, as financial intermediaries cannot effectively secure collateral for credits.
In addition, poor official property rights enforcement encourages informal business activity and discourages foreign investment,” the IDB says.
John Snow, US Secretary to the Treasury, in an address last week to the IDB Board argued that for capital to play its full role, it is necessary to have an investment climate that protects the rule of law, promotes respect for contracts, and encourages clear and transparent agreements.
“Capital is a coward” and only goes to places where it feels adequately protected, Snow told the Bank, as he underscored the role of political leaders and institutions such as the IDB in creating appropriate conditions for economic growth through structural reforms.
Judges selected to preside over the commercial court in Guyana would be trained in commercial laws. Support staff would be trained in/made aware of case management and court procedures for the bar and representatives of the private sector.
The project would finance a medium-term advisor to assist the judiciary to manage the establishment and initial operating stages of the court. Commercial law information, texts and materials, including Internet access to online legal information database, such as Quick law, as well as a management information system (basic computer hardware and software) would also be financed.
For the alternative dispute resolution mechanism, the project would provide technical assistance to address the legal framework and operational regulations. The assistance would also target the institutional structure and connection to the court and the registry, legal status and structure as well as the establishment of a sustainable financing mechanism.
There would be training for a roster of mediators and arbitrators and for the administrator of the alternative dispute resolution mechanism.
Additionally, the IDB project would aid in the development and implementation of a public awareness and outreach programme to increase knowledge of and receptivity to the mechanism by the commercial sector.
The local banking system has been clamouring for years for a commercial court to be established, especially Chief Executive Officer of the Guyana Bank for Trade and Industry, Radha Krishna Sharma.
Judicial system “ineffective, overwhelmed”
- IDB
The Inter-American Development Bank says the weak enforcement of property rights and contracts which the private sector confronts is more likely the result of an “ineffective and overwhelmed” judicial system than inappropriate laws governing commercial activities and contract enforcement.
“Decisions are too often neither prompt nor transparent and often appear to be based on questionable jurisprudence,” the IDB says in its technical cooperation profile for the establishment of a commercial court and an alternative dispute resolution mechanism in Guyana.
To improve the enabling environment for the private sector, the Bank is funding the establishment of a commercial court and an alternative dispute resolution mechanism, both of which should materialize before the end of this year. The Bank has expressed the view that the inefficacy of the judicial system has led to weak enforcement of property rights and contracts, which in turn increases the legal, and other risks the private sector faces.
“This discourages most types of commercial activity, but in particular longer-term investments and financial transactions, as financial intermediaries cannot effectively secure collateral for credits. In addition, poor official property rights enforcement encourages informal business activity and discourages foreign investment,” the IDB argues.
The current backlog of civil cases at the end of 2002 exceeded 11 000, which is more than double the number of civil cases disposed of annually. The Bank points out that at least a third of the cases filed in 2002 were related to claims involving financial institutions.
In cases where decisions are rendered, the bank says enforcement can be “slow and cumbersome” and the accompanying reasons for decisions are often not published for months or years after a decision, preventing an appeal.
“This judicial environment increases substantially the risk of financial transactions, particularly with respect to property, fixed or moveable, as effective guarantees. Without an effective threat of judicial enforcement, there are limited costs to nonpayment of creditors and the consequent development of a weak payment culture. This weak legal enforcement of financial contracts is viewed as perhaps the greatest obstacle to more rapid financial market development (in Guyana),” the bank states.
The IDB posits that there are multiple causes for this poor performance with judges insufficiently trained in all aspects of law, particularly commercial law, and the lack of legal information and resources at their disposal which tends to facilitate delaying tactics by debtors such as requests for injunctions or stays of execution, inappropriate decisions and slow enforcement of decisions.
Additionally, the Bank says there is an insufficient number of judges and court administrative capacity to handle the backlog of cases and volume of new claims. The ability of the system to respond to demand is also insufficient as a result of outdated court administration systems and procures which includes the lack of automation in the registry, manual court reporting and handwritten decisions.
Low remuneration levels for court officials, including judges, are also seen as contributing factors to the problem which the private sector confronts and the low wages make it difficult to attract highly skilled human resources. This ends up having a deleterious effect on moral, the Bank notes.
“The establishment of a specialized commercial court, with strict case management practices and systems and well qualified and motivated judges, should provide an effective mechanism to improve judicial decision making and enforcement for commercial activities, including financial transactions,” the bank says, noting as well the benefits of an out of court settlement mechanism.
The technical cooperation project being prepared by the Bank would provide in the case of the Commercial Court, technical assistance to design the legal framework and jurisdiction for the Court to operate, its case management rules and a sustainable financing plan and mechanism.
The IDB had in 1999 funded another technical cooperation through the Multilateral Investment Fund to strengthen the legal framework and administrative procedures in Guyana as it related to transactions in movable and immovable property rights.
However, implementation of that project has been disappointing because of insufficient attention and resources devoted to it by the executing agency, the Ministry of Legal Affairs.
“The institutional strengthening component, including the safeguarding and computerisation of deeds documentation, which represents about 80% of the project’s cost (of US$1.3M) has not advanced beyond its preliminary stages, while the revision of legislation for securing financial transactions, has been prepared, but not yet presented to parliament” the IDB points out in the profile of the commercial court project.
The MIF project was to review the legal framework for secured transactions in movable and immovable property and develop a plan of action for reform. Laws were to be analysed including the Deeds Registry Act, the Bill of Sale Act and laws of evidence. That component was to also streamline procedures for creating security interests in movable and immovable property, revising existing notification procedures for perfecting a security interest in such property (including notification in daily newspapers); modifying procedures for enforcement of movable security interest and carrying out seminars with stakeholders and potential customers to explain the nature of the reforms.
The second component was to support activities to strengthen and improve the services provided by the Registry offices in Georgetown and New Amsterdam. This would include streamlining administrative procedures for the transfer of interests in movable and immovable property, creating and perfecting security interests; implementing training and staff evaluation programmes; conducting seminars with stakeholders and potential customers, increasing salaries of deeds registry staff, modernizing and computerising property recording among other issues. The final component provided for an initial baseline survey of Deeds Registry users, followed by an end of project survey to evaluate progress on both a quantitative and qualitative basis.
However, the Bank profile sees the office of the Chief Justice as the most suitable executing agency for the commercial court and alternative dispute resolution mechanism project.
In Guyana, USAID is the donor most involved in judicial reform in recent years. It has a Governance and Rule of Law programme schedule for completion in 2003 and is supporting initiative to improve the tracking and reporting of cases, the drafting of revised civil procedures and through the Carter Centre, is promoting the alternative dispute resolution to address the backlog of cases and weak judicial administration. That programme seeks to build support for the alternative mechanism and possibly implement a pilot project to test for its effectiveness and generate a positive demonstration effect.
Stock exchange gets going
Demtoco share price jumps 35%
Guyana’s first stock exchange was opened for business on June 30, 2003. Trade is being facilitated through three brokers, with a fourth one recently registered by the exchange. The shares of 12 public companies, registered with the Guyana Securities Council as reporting issuers, are being traded on the exchange. Below, we provide a summary of the transactions for the first month.
By Johann Earle
The stock exchange has seen 155 650 shares traded over the last five weeks valued at $1.8 billion.
The stocks of seven of the reporting issuers have changed hands and of those seven, trading was centred around the ‘big names’ with the tobacco company, Demtoco, a late entrant on the market and the shares of two breweries (DDL & Banks DIH) receiving the most interest.
At its official opening for business last month, the market saw no trades. However, 7.344 million shares for a number of the reporting issuers were offered at prices ranging from $7.50 to $28.00.
At the second weekly session, exchange picked up with 68,500 shares traded, mostly shares of Banks DIH Limited and Guyana Bank of Trade and Industry (GBTI). There was a single bid for 1,000 National Bank of Industry and Commerce (NBIC) shares.
However, this improved on the third trading session (third week) with bids coming in for 2000 NBIC shares, and 2000 Demerara Distillers Limited (DDL) shares were traded at $7.5 each. The volume of shares offered for sale in this session hit 3.353 million with the prices ranging from $7.5 to $30.00.
The most activity was recorded for the fourth and fifth trading sessions when a new company’s shares were offered - those of Demerara Tobacco Company Limited (Demtoco).
At the fourth session, bids were made for 11,000 GBTI shares at $28.00 each, 2000 Citizens Bank shares at $13.00 each, 29,000 Demtoco shares at $30.00 each and 500 of Demerara Bank Limited shares at $1.2 each.
In this session, 2,000 NBIC shares were traded at $15 each, 3,500 GBTI shares went for $28.00 each, 18,700 Banks DIH shares were traded at $7.5 and 9,600 DDL shares traded at $7.00 each.
The last (fifth) session saw trades being executed with 11,750 Banks DIH shares at $7.50 and 2,250 of the same company’s shares at $7.40. The price for Demtoco shares soared to $42.1, the highest price recorded for any share to date and demand rose to 29 000.
When Demtoco shares began trading, it was at $31.1 and the new price reflects a 35% increase. A total of 7,400 of those shares were traded. A total of 19 950 of DDL shares were sold at various prices: $7.50 (12,000 shares), $7.40 (5833 shares) and $7.00 (2117 shares).
Additionally, this session saw 500 Demerara Bank shares sold at $1.20 each.
Clarence Perry, Market Official for the exchange said the price increase for Demtoco shares was as a result of demand surpassing supply.
And an official from one of the licenced stockbrokers, Trust Company Guyana Limited told Stabroek Business that the shares of Demtoco were always in demand but because there was no stock exchange, this demand was not filtered down to investors.
Perry said stock prices are affected by bids (demand) and offers (supply) and highlights the need for the public to be more aware of the investment opportunities available with the advent of the stock exchange. The exchange plans to embark on a public education campaign.
He also told Stabroek Business that the activity seen so far is indicative of Guyana being an emerging economy, and is what is expected of stock exchanges in small, developing countries.
According to Perry, all the shares traded on the stock exchange are ‘secondary shares’, meaning that they have been in existence before the exchange came into being. The exchange is not a medium through which new shares can be issued.
“Hopefully we would see some primary shares being issued which would make the (stock) market more attractive to investors [as the market allows for higher priced securities to be issued],” the GASCI official said.
He noted that the exchange makes the raising of financing more attractive, whether they are shares, corporate or government bonds.
The stock exchange is expecting that the private shares transactions made between buyers and sellers without an intermediary (broker) would find themselves at the exchange as the market would offer better prices.
As of the end of July, none of the 12 reporting issuers had yet applied for official listing with the exchange, Perry said. He said when a company is so listed, it sends a signal to the market of that company’s maturity.
A listed company will be able to raise capital with more ease than unlisted companies, will be more attractive to investors, and will be able to be cross-listed on regional exchanges.
The association’s web site, www.gasci.com, is now under construction but has available on it the trade journals and market publications. As the website develops, it is expected that activity on the exchange will increase, GASCI said.
Thirty-eight companies fall in receivership in last two years
In the last 21 months, 38 companies have suffered the ignominy of being in receivership as they come to grips with extant economic realities. Of these, two which are not mentioned in the given list, that is, Hotel Tower and Guyana Furniture Manufacturing Company Limited - managed to restructure deals with the bank and have come out of receivership.
Stabroek Business highlights information available in the High Court Registry on these businesses in the list provided below which also indicates the respective company’s name and the date when it went into receivership.
Arjune Persaud and Sons Limited (November 2001);
Allens Enterprises Limited (November 2001); ABC Investments Limited (May 2001);
Analan Incorporated (November 2002);
Arjune Persaud and Sons Limited (January 2002); Agri Tec (Guyana) Limited (April 2003);
Caribbean Rice Industry (Guyana) Incorporated (October 2001); CK Newbridge (Guyana) Limited (March 2002); Candel Limited (November 2002); Caribbean Molasses Company Incorporated (February 2003); Dhanaswar Industries Limited (September 2001); ElJay Associates (October 2001); Guyana Furniture Manufacturing (October 2001); Guyana Mortgage Finance Company Limited (December 2001); Guyana Housing and Development Company Limited (December 2001); Genesis Enterprises Limited (January 2002); Guyana Investment and Development Company Limited (January 2002); IDI Engineering Incorporated (December 2000); Kayman Sankar and Company Ltd (2002);
Kayman Sankar Investments Limited (2002); Letter ‘T’ Estates Limited (2002); Livestock Investment Company Limited (2002);
Linden Power Company Limited (August 2002); Mazaruni Granite Limited (May 2003);
Nagasar Sawh Limited (October 2001);
O.O. Carter Limited (January 2002);
Pereira Agricultural Company Limited (October 2001);
Printing Craft Services (October 2002);
Roraima Mining Company Limited (October 2001);
Rayitan Bros. Incorporated (May 2002);
Satros Investment Limited (October 2001);
Supreme Seafoods Guyana Incorporated (January 2002);
Samson Manufacturing Company Limited (June 2002);
Super Horizon Enterprises Limited (August 2002);
Vinelli Industries Limited (October 2001);
Wal Ming (April 2002);
Willems Timber and Trading Company Limited (October 2001);
Wilzon Enterprises Incorporated (January 2002);
Interior Transport Services Limited is the third company which has come out of receivership.
Editorial
Cambior takes over
Cambior today assumes management of the bauxite operations at the Linden Mining Enterprises (LINMINE) as a second step towards the proposed 70/30 joint venture with the government. The company had earlier assumed the stripping and mining arrangements for LINMINE.
The government this week paid in excess of $1 billion in severance to the 1250 workers of LINMINE plus a couple million dollars in associated costs (NIS, PAYE, pension etc) to facilitate the transition.
Omai Gold Mines Limited, Cambior’s subsidiary in Guyana, has over the last two days been rehiring selected LINMINE staff. However, it is estimated that only about 250 would be rehired. This would leave some 800 workers without a job but with severance pay in their pockets. This is an issue of concern because if this lump sum is not invested prudently by those severed, it will only be a matter of time before the public hears from these workers.
The government is reportedly banking on a call centre, Amatuk Global out of Barbados - with whom it has signed a memorandum of understanding - to get started at the old Guyana Stores building in Linden. It expects that this call centre will pick up about 150 workers in its initial phase and later hire as many as 500 persons.
Additionally, the government plans to push ahead with certain public infrastructural projects to create jobs within the already depressed mining community. The Takatu Bridge and the road to Lethem are seen as potential job creating outlets. However, with the long gestation period associated with public projects, it will be wishful thinking to hope that these projects will materialize shortly.
The government will need to come up with a socio-economic plan that will be bought by the Linden community. The labour fall-out will be the issue of immediate concern for this administration. This newspaper has been assured that the government is very sensitive to the situation in Linden and would be making an announcement shortly on its plans to deal with the labour fall-out. We keenly await this announcement.
But while all eyes will be focused on the labour situation in the upcoming weeks, sight should not be lost of the potential effect of the management takeover.
LINMINE has been an ailing enterprise for a number of years. But with effect from June 30th, 2003, all government transfers have ceased and LINMINE is no longer a cost to the treasury.
Cambior now takes the risks and the main challenge it faces is to bring LINMINE into a cash neutral position and to make the operations self-sustainable before the end of December, the deadline for the joint-venture agreement.
Cambior is currently negotiating with the International Finance Corporation (IFC) for the US$20M in debt financing required for the joint venture investment in the bauxite operations. US$10M would be brought in as equity.
However, once the transition in management is smooth, the social transition is not disruptive and Cambior can improve the production levels of calcined bauxite, the risks associated with the financing arrangement would be mitigated and the joint venture agreement can be effected.
Both the government and Cambior are optimistic about the fortunes of LINMINE. The feasibility study by Cambior had come up with promising results. Already, Cambior has experienced efficiency savings in the stripping and mining operations and in the recovery from the plant via careful planning of the kilns.
While the government will be required to pay Cambior a minimal management fee for partial reimbursement of direct cost, Cambior itself has invested considerable resources into the project in terms of machinery and other resources.
Cambior will be in charge of marketing the calcined bauxite using its marketing links. Once the cost of production can come down this should not pose a problem to the operations. Brazil is on its way out of the calcined bauxite market, leaving China as the lead player.
The future of LINMINE could be promising. At least, it does not look so bleak now.
However, the socio-economic situation in Linden is cause for concern and has to be addressed urgently. There is need for more industries to be set up in that community and the creation of a tax free zone a few years ago in that region has not helped so far.
The government will need to come up with an innovative plan to attract industries into Linden specifically and the rest of the country as a whole.
Corporate bonds the way to go!
- Far cheaper than bank loans!
Corporate bonds and equity financing are cheaper alternatives to bank financing but apart from a handful of Guyanese businesses, the local private sector seems most unwilling to pursue these options.
The reasons for this reluctance may well have to do with the level of disclosures necessary to allow for the raising of public debt, as well as, the relinquishing of control of a family-owned business if equity is offered. If this is the case, cheaper financing for the private sector will remain elusive with the disclosure requirements of the Securities Industries Act (SIA), unless these companies have sound credit histories to negotiate lower interest rates with commercial banks.
Private companies unable to negotiate cheaper credit, and running scared of full disclosure requirements, as well as the need to upgrade their accounting and reporting policies, may very well find themselves at the door of cash flow difficulties. This could potentially lead to all kinds of troubles with foreclosure a distinct possibility.
In essence, the local private sector, operating in a stagnating economy, face varied options in finding creative solutions for their financial needs. The options are not only bank financing but include corporate bond debt or equity financing vs 100% retention of a business, which could go nowhere or even fail.
“If someone is to offer a company bond today, they would be able to offer an interest rate well in excess of treasury bill rates or ordinary savings account rates and still make this offer at a substantial discount to the cost of a loan via the commercial banks,” says Patrick van Beek, acting chief executive of the local private stock exchange as he argues in favour of corporate debt.
The current, one-year, treasury bill rate is about four and a half per cent, whereas prime lending rate at commercial banks (which would only potentially apply to very good customers) averages 16.33%. Customers of solid track records have been able to access cheaper refinancing terms of up to 12% interest per annum from commercial banks.
But a local business can float a corporate bond at treasury bill rate plus 10%, a total of 14% interest and still find this cheaper than the current bank loan rates. Commercial bank rates average 17.25% - 26%, depending on the level of security offered to the banks. As noted above, a good client, with an excellent track record, can negotiate a lower interest rate.
As van Beek explains, debt is priced off the savings rate and not the lending rate, hence, companies can float debt at rates far cheaper than existing commercial bank rates.
In the example above, offering 14% on a bond debt would allow companies to save between 5-12% in interest cost and would provide investors with an additional 10% interest against Treasury bills rates. Ordinary savers could get an additional 8% or more than the saving rates offered by banks.
Corporate bond
Debt and equity financing are the two main classes of capital. Debt financing is a loan, which can be raised in two ways - via the bank or via a corporate bond. A bank loan is usually secured and has a fixed repayment schedule of interest plus capital.
However, as van Beek explains, a corporate bond is also a fixed interest security issued by a company, but interest payment is stretched over a specified period while principal is repaid at the end of the period of the debt.
Having to just make interest payments on a debt is a big advantage for companies seeking capital for investment or capitalisation and could have been a saviour for a number of companies in distress and in receivership currently.
But another advantage of corporate bond over bank loans, van Beek elucidates, is it can be secured on all sorts of assets, including the future cash flows of a company.
As in the case of a bank debt, the most secured type of corporate debt is called a debenture. A debenture is a loan contracted against one or more specified asset(s) of a company against which a creditor can move in on.
Other types of popular corporate debt options include subordinated debt, unsecured debt, convertible loan stock and securitisation.
Subordinated debt ranks behind all other creditors but ahead of shareholders, including preference shareholders. That is, if a company makes a subordinated bond issue and then falls into difficulties, bond-holders would not be able to leverage on the assets of the company until all other creditors have had their take. But bondholders’ claims fall due before shareholders can have a piece of the company.
“Shares are more risky than bonds because in the event of a company winding up, shareholders are entitled to the residual after all other creditors are satisfied and that is typically zero,” van Beek notes. However, he adds that while investments in shares are the more risky, they also provide the potential for the greatest returns in the form of dividends and capital appreciation. That is, if a company’s earnings increase, the share should attract increased dividends and the share price would be expected to follow suit.
In the case of a subordinated bond, van Beek says this form of debt is usually a good way to have bank security released by refinancing the bank debt. That is, a subordinated bond issue can be offered to clear off a bank debt and on the release of the collateral held by the bank, this bond could then be refinanced with a secured issue. One risk to the subordinated bond-holder here is that the company offering the subordinated loan stock could go bankrupt during the transaction.
Unsecured corporate debt is as the name suggests, an unsecured debt, which ranks alongside all other unsecured creditors. Again, such creditors rank ahead of shareholders and any asset left over after creditors are paid off is fair game in the case of an unsecured bond issue.
Another option to companies is a convertible loan stock, which is a regular debt providing the holder with a predetermined option to convert the debt to equity/shares at a given time.
“This is an attractive investment to people who are not prepared to risk investing in ordinary shares in the short term, but would like some exposure to the potential growth in the share price in the longer term.” van Beek notes.
Securitisation is one of the more popular forms of corporate debt in the United States and has been made popular by credit card companies and mortgage companies to secure the repayment of debt on the basis of future cash flows. That is, if a creditor is not liquid and is confident of the repayment of an existing debt, a new debt can be created on the basis of that repayment and sold to the public to allow for liquidity creation within the company.
The interest which corporate bond debt attracts could be either fixed or variable with the latter linked to inflation or tied to Treasury bill rates to lower the risk for the buyer and make the debt more attractive.
Raising equity
This requires the dilution of control in private companies and the dilution of stock in public companies.
This option would be preferred by those who are unopposed to giving up a part of the shareholding in a private firm in return for fresh, low cost capital. However, this would require sharing the profits in dividend payouts and if the company fares well, the sharing of a larger pie.
The advantages of equity financing are that no assets of the firm are tied up with creditors and hence the potential of going into receivership is reduced. Additionally, there is no obligation to pay dividends.
The negative aspect of equity financing is that if the company’s earnings should fall, its share prices would fall and it would be exposed potentially to a takeover. Also, issuing shares dilutes ownership and dividends to initial owners of a company.
Where to raise corporate debt
The stock exchange is not the medium for raising capital. It is a medium for trade in existing issues. That is, the stock exchange is a secondary market trading in existing stocks and shares and is not a primary market for the issuance of new stock.
To be able to raise capital from the public, under the SIA, a company has to register with the Guyana Securities Council (GSC) as a reporting issuer. The SIA and the Companies Act of 1991 permit the floating of bonds by companies but require that certain guidelines be followed.
In the case of a private company wanting to make a private placement, once this does not affect the lives of more than 50 persons, there is no need to register with the Council or write a prospectus.
However, all public offers require a prospectus, for which, a receipt must be issued by the Council. There would then be the need for an advertisement identifying the security to be distributed, a person from whom the prospectus may be obtained and a person through whom orders would be executed. Part VI of the SIA details
the requirements for raising financing via a
public offer as well as the exemptions.
A company may wish to employ the services of an underwriter. Van Beek says that the benefits of underwriting a public offer include the issuer not facing the full risk of raising the capital required, as the underwriter of the prospectus would face the risk as he is obliged to take up the slack in financing requirements.
As to the benefits of having a stock exchange when raising capital, van Beek says the exchange makes a public 9issue much more attractive. He explains that if the issue is oversubscribed, the exchange is the medium through which persons can offer to buy shares of the company. Because of this increased marketability of the company’s shares, he says, the cost of the firm raising capital is reduced, as it can issue higher priced securities.
The exchange, he also says, provides a stamp of approval if the issuer is officially listed and its officers are willing to work with any issuer interested in listing a new issue.
Having one’s shares officially listed on the exchange means among other things that the company is a reporting issuer with the Council, has an adequate trading record under management of known character and integrity; was trading for no less than three years (unless so exempted); there is sufficient public interest in the business of the issuer and its securities; that the minimum percentage of securities of the company in public hands is 20% with a minimum of 100 shareholders; that the issuer’s market value or shareholders’ funds is not less than 500M dollars with no less than 100 000 shares held by 50 shareholders and that the securities for which admission to the official list is sought is freely transferable.
Guyana Power and Light (GPL)
Cutting system losses is a vital factor in balancing the books
- Company lost 401 business customers since 2000
- a review of the Annual Report for the year ended 31st December 2002
by Raymond Gaskin
Introduction
The annual report of the Guyana Power and Light (GPL), which includes details of the performance of the company, and the Balance Sheet, has now become available for review and it is necessary to examine the report in depth in order to determine how well the management has done.
It is unfortunate that there is no legal requirement for the financial statements of this important institution to be published in the national newspapers as many others are required by law to do, and it would be a good thing indeed if GPL were required to do so.
GPL is not only one of the largest companies in Guyana in terms of sales volume, size of assets and number of employees, with 126 421 customers at the end of December 2002. But it is also a major utility with an important impact on the economy, a virtually unregulated monopoly notwithstanding the PUC and it is also the institution that most Guyanese love to hate.
It is also now a wholly state-owned company with a handpicked board and senior management answerable only to the Minister responsible for the electricity sector, Sam Hinds. Therefore, the more light that can be shed on the company, the better for all.
The recent history of GPL, particularly since October 1, 1999 when the CDC/ESBI consortium took over management confirms that the secretiveness that pervaded in the deal which gave CDC/ESBI 50% ownership of GPL on a pay-later plan and a sweetheart management contract costing over $700M per annum was ill advised and this lack of transparency eventually exploded in the faces of CDC/ESBI and the Government. It is hoped that the government may have learnt a lesson or two because the culture of secrecy is still firmly entrenched at the GPL. The annual report for 2002 is especially useful since it provides valuable information on the three fiscal years of the company 2000, 2001 and 2002 and forms a reasonable basis for a report card.
Financial Performance
Sales, Expenses and Profitability
It must be stated from the outset that although we are reviewing the reports of the board chairman and CEO ended 31 May 2002 and of the auditors Ram & McRae dated April 29th 2003, there are other financial documents emanating from GPL for the fiscal period ended December 31, 2002 which show quite different results.
Our focus remains on the statement audited by Ram & McRae. The first thing that strikes the reader of the report of the auditors is that it is not a “clean” report bereft of adverse comment from the auditors.
In the body of the report itself the auditors felt it necessary to draw attention to important matters affecting their audit opinion.
In its audit report for the year ended 31 December 2000, Ram & McRae had pointed out that in their opinion, the treatment of deferred taxation and unrealized foreign exchange differences was not in conformity with International Accounting Standards. In a note to the statements, the auditors further advised that the treatment of the matters stated above did not comply with standards required under the Companies Act 1991, because “unrealized translation gains and losses are taken directly to non distributable reserves as per the company’s licenses”. ( pg 12).
A year later, in the audited report for the year ended 31 December 2001, the auditors stated they were “unable to substantiate receivables as shown in the financial statements”. They further repeated the statement made earlier that the treatment of unrealized foreign exchange differences did not conform with International Accounting Standards and the Companies Act 19912 (note 2A).
In the auditors’ report for the fiscal year ended 31 December 2002, Ram & McRae reported that GPL separated the balances held on its billing system between amounts due to GPL and GEC, as a result of which GPL “determined that the receivables as stated on its financial statements was overstated by $413 017 million”. The company subsequently adjusted retained earnings. Ram & McRae reported further “there were no other satisfactory audit procedures that we could have adopted to determine whether this treatment is correct”.
Once again for the third year running, the auditors reported that the company’s treatment of unrealized foreign exchange differences was not in compliance with UK and International Financial Reporting Standards.
It is mind boggling that the GPL has stubbornly refused to comply with these standards although repeatedly the auditors have highlighted this failure.
The failure to properly separate the billings between GPL and GEC after more than three years of management is inexcusable particularly since the separation was done in a manner not amenable to audit and verification.
For a company to carry over $413M in receivables it does not own is a poor reflection on the priority it places on accuracy of recording assets.
It is hoped that in future, GPL would be able to obtain a clean auditor report with the exit of the CDC/ESBI management team. (but this may be wishful thinking since the principal preparer of these statements, formerly of CDC/ESBI, is still with the company.)
SALES
The amount of the apparent discrepancy, totaling $413M in receivables has been all deducted from previous years’ sales rather than adjusting the balances between GPL/GEC in the balance sheet and restating these.
One would have thought that the sales figure of $10.5 billion shown in the audited statements for 2001 were properly arrived at and under normal circumstances should have nothing to do with sorting out old GEC accounts since 1999. The turnover for 2001 would have nothing to do with GEC at all, generally speaking, but obviously management felt otherwise.
In any event, turnover adjusted for 2001 at $10.1B shows a decline from 2000 turnover of $10.2B. Accepting the adjusted sales for 2001, then sales in 2002 increased by approximately 20.4%.
Gross generation in gigawatt hours was as follows:
Actual billed sales in gigawatt hours were as follows:
The data on gross generation and actual billed sales more than any other information tell the real story of the GPL for the years 2000-2002.
Arising out of the information on gross generation and actual billed sales, it turns out that the total commercial and technical losses in the system were as follows:
We observe a gross generation growth of 6.3% in 2000, 5.5% in 2001 and a marginal increase of 1.5% in 2002. System losses have increased consistently annually and stood at 44% at the end of 2002, instead of the projected 24% as per license and management contract.
The increasing system losses over the years from 40%-44% wiped out the growth in billings for the same period because, although production increased overall from 477 GWH to 513 GWH - ie 7.5%, billings increased by a minuscule .3% of 1%.
The data reveal that the average price of electricity sales per kilowatt hour moved upwards as follows:
Included in the sales above are subsidies from the government of Guyana in 2000 of $2.2 billion, and in 2001 $1.1B. No subsidies were paid in 2002.
Consumers therefore paid directly “out of their pockets” $8 billion in electricity bills in 2000, $9.1 billion 2000 and $12.2 billion in 2002 an increase well in excess of 50% over a three year period and had to cough up indirectly further payments of taxpayers money by the government, a further $3.3 billion over the said period.
All the while, the entity operated more inefficiently than in preceding years, wasting the energy produced and ended up only selling 0.3% more of its 2000 production in 2002. In 2002, 56% of all production was wasted and lost.
The crux of the problem at GPL remains the extraordinarily high system losses (unmatched anywhere else in the prevailing literature) which negatively impacts on rates, encourages customers off the grid, forces others to bypass the billing system, and deprives the company of revenues to rectify the problem and better serve its customers.
From 2000 onwards, this problem was not tackled and the necessary investments were not made. The tariff continues to rise with the predictability of the morning sun and exacerbates an already unacceptable situation.
Profitability
There has been much talk especially by CDC/ESBI about the impact of fuel prices on tariffs. The financial records establish that in 2000 fuel costs were 47.8% of sales, in 2001 47.7% of sales and in 2002, the year of the sharpest increases after the withdrawal of state subsidies, these declined to 43.7%.
As a percentage of sales, the overall burden of fuel costs declined by 4% while average rates increased by 20%. The fact of the matter is that with an annual fuel bill of $5.332B and a system loss of 44% over $2 billion is wasted criminally in producing energy that is not billed and this assumes a projected system loss of 24% as per license. This has been the overarching and transcending crisis at the GPL for a long time even prior to 1999 but the data reveal that it worsened considerably during this period when the international managers were supposed to fix it for a fee of G$700M per annum.
The problem with fuel costs is not the unit price but the cost of wasted fuel.
Operating expenses
There are four key items in the listing of these expenses that require our attention:
Employment costs have increased by 40% over the period and this represents the highest increase in any sector in Guyana over this period, attesting probably to the militancy and bullying of the two main unions of GPL - NAACIE and GPSU and also the fear of ESBI Management of a work stoppage coupled with their lack of experience in dealing with such unions in Guyana.
Whatever the reason or combination of reasons, it is a very sharp increase for a 0.03% increase in billings and general stagnation compounded by greater inefficiency throughout.
The number of employees declined over this period from 1166 to 1080, still a huge workforce for a relatively small entity, with a peak demand of only 82.8 MW.
Directors’ fees appear to be out of control, particularly for the overseas directors. These expenses are neatly laid out in the notes.
In 2002 the chairman, aMr. Hedayat, collected G$4.5M in fees and a further $11.1 million in expenses. His expenses alone were $9.6M in 2001.
Ronald Alli, the present chairman received a mere $1.3 million as compared to $951 000 in 2001.
In 2002, Winston Brassington, a key architect of the privatisation deal declined fees but did pull down $1.3 million in 2000 and $382 000 in 2001.
It appears as if this practice of high fees is continuing but we will have to await the 2003 report to know definitively.
Management fees paid to CDC/ESBI have been properly exposed over the period and did total as follows
The differences in the operating statements are explained by the fact that in 2001 - $206M was capitalized and for the year 2000 - $64M was capitalized. No explanation is offered for this.
It is clear however that the managers were able to increase their fees substantially over the period 2000-2002 by $118M or 18% for what we now know to be a failed performance and at a time when GPL claimed not to have funds to purchase adequate stocks of meters to replace defective ones.
The bad debts expense still poses a bit of a problem. In the 2002 audited statement this is shown at $734m. In the GPL interim income statement of 28/01/03 signed by John Lynn, the bad debt expense is shown at $1.139B and the ensuing losses at $500M. This formed the basis for the first set of increases for 2003, which were challenged in court. The audited report eventually declared a loss of $150M as compared to $500M. This is a huge difference.
In the unaudited financial statements dated December 31, 2002 signed by Hedayat and West Griffin, the net income for the period is shown as $8.8M profit.
These discrepancies in documents, all signed by the management and board of GPL, would require a forensic team to sort out and are beyond the scope of this review. Suffice it to say, that they all emanated from the same accounting department and they must know the reasons.
From a consumer point of view, if these figures form the basis of interim increases in rates, at least they should stand up to audit scrutiny.
The conclusion is inescapable that the GPL has been badly managed and it is this mismanagement that has heavily burdened the consumers and produced significant commercial, technical and financial losses.
However, once the system losses are aggressively tackled and radically reduced, then profitability at the GPL would be somewhere in the order of $1.5B and this ought to be sufficient for expansion, payment of dividends and arresting, even reducing tariffs.
Balance Sheet
The company shows a strong asset position, well in excess of $12 billion and when adjusted for rate setting purposes can severely impact rates. This means that rates will inexorably increase since the tariffs are essentially rate base tariffs i.e. asset based. This continues to be a major deficiency in the tariff setting mechanism On the liabilities side the company is awash in debt of all types.
Trade creditors at $1.2B represents a 70% increase in one year, simply put GPL has not been paying its suppliers on time.
The company has borrowed heavily, especially in 2001, a loan of US$7.3M secured by debenture.
The total amount owing in leases and loans exceed G$2 billion. The 24 month moratorium in payment of principal and interest on the US$7.3M loan means that from September 2003, payments were due and payable but it is not clear what additional revenues and profitability such a massive loan was intended to produce to service this debt. It appears as if all of ESBI’s calculations went off track and the present management now has the problem of meeting the payments. Here again a special forensic audit of the spending of the US$7.3M might be useful. The cash position at year end of G$391M is extremely weak for a company with monthly expenses of about G$900M. This crisis in liquidity was provoked by the failure of CDC/ESBI to make the payment for the shares when they came due on October 1, 2002.
Customer Base
As the GPL continues its shortsighted policy of jacking up rates, unconscionably and unfairly, of abusing their monopoly position, customers are finding ways to avoid them and breach the monopoly. Since 2000 they have lost 27 industrial clients, 21 alone in 2002. This is partly responsible for the virtual zero growth in demand.
Secondly, GPL has lost 375 commercial customers since 2000, 259 of whom departed in 2002 alone.
There were only 3637 new residential customers in 2002 against 5046 in 2001 and 4000 in 2000. This is a fraction of the new housing constructed over the years and means simply that many new housing areas are not served.
Conclusion
GPL under CDC/ESBI has been “bad news” from the beginning in October 1999 and continued to be right up to their departure.
The audited data prove this conclusively. An earlier departure date would have saved all of us much grief.
Important lessons ought to be drawn from this disastrous project including
* the deal was structured badly and turned out to be a “sweetheart” deal
* the management failed and the board failed its obligations to oversee management
* the Guyanese directors were asleep on the board
* the subject minister was asleep when he was supposed to enforce his statutory functions and quite happily awoke as the disaster unfolded
* the PUC was asleep at the regulatory wheel
* they all woke up too late.
The auditors have done the consumers a great service by disclosing pertinent information and ought to be commended. The report is expensively produced in glossy form with three residential meters placed unimaginatively and prominently on the cover, dominating GPL’s silly slogan of “powering the future”. Whose future?
Political consensus crucial for economic resurgence - Thomas
Economist, Professor Clive Thomas, is adamant that there is no way the local economy can turn around unless there is national, broad-based consensus at the political level to allow Guyana to return to the pre-1997 growth path.
Tourism offers potential.
“There is no way we can have sustained economic growth in Guyana without such a national broad-based consensus,” Thomas said in a recent interview with Stabroek Business.
The local economy, which saw annual real Gross Domestic Product (GDP) or growth rates averaging 7% between 1991 and 1997, is stagnating. Growth in the last five years has averaged 0.3% in spite of significant boosts to public spending induced by debt relief.
For the first half of this year, growth is reported as being miniscule or flat.
Thomas argued that there is urgent need for a sense of political direction, and said a consensus opinion would allow the country to develop and will tip the balance, from Guyanese fighting against each other to pulling together.
He stressed that the ruling party and the People’s National Congress have to continue to work to fulfill the expectations of the communiqué, signed between President Bharrat Jagdeo and Opposition Leader Robert Corbin some weeks ago, to create that environment to foster economic growth.
“I do not know to what extent the public is encouraged that we are at a point of solution or that we are not just at another stalemate, biding time. I do not sense any deep enthusiasm over the process and I hope I am wrong,” Thomas said.
He insisted most of the problems needed to be ironed out before the next elections because if they remain, there could be another eruption.
He found it not insignificant that the spurt in economic growth in Guyana took place after the 1992 elections and since President, Cheddi Jagan died, the country slipped into economic and political crisis.
“Since then the country has lacked the quality of leadership to keep the momentum going,” Thomas said. He recognized much of the investment for this growth had taken place under the PNC administration.
But the Professor of Economics feels certain external forces will push the hands of the players in Guyana to work for political consensus as the Free Trade Areas of Americas becomes effective in 2005, the Caricom Single Market and Economy nears and the COTONOU agreement is renegotiated for an economic partnership with Europe.
“All of this would alter the economic and political space and force our hands to make decisions and find solutions before then,” Thomas opined.
The Economy
The first point he makes about the economy is the lack of statistical data for one to make informed comments, an issue, which he said, is of fundamental concern. Most of the data sets are produced too late and are not available for three months periods, especially those on the national income accounts. These data sets, Thomas said, are geared to respond to the needs of the international financial institutions (IFIs) and leave significant gaps open to domestic researchers.
But making use of official data and those emanating from the IFIs, Thomas said the economy has been in a recession since 1998, averaging 0.3% growth and recorded “virtually zero” growth in per capita GDP.
Per capita GDP was US$425 in 1991 but reached US$777 in 1998. But in the last five years, per capita GDP has only increased by US$20 to reach US$797.
This, Thomas said, is significant because the two poverty surveys of 1992/3 and 1999 indicated that growth in per capita income was more than likely to be a significant contributor to the reduction in the poverty rate. Poverty had declined from 42% in 1992 to 35% in 1999.
“The state of the economy today is governed by slow rates of growth and persisting poverty,” Thomas said. There is no indication, he added, that the poverty rate of 1999 could be dented, given the slow movement in per capita income in the last five years. But if one is to add the current situation to the pre-1992 situation of a decade and a half of immiserising growth, Thomas said Guyana is in economic crisis.
There are several reasons for this, in Thomas’ view, chief among them being the government’s failure to attract substantial foreign investment and the social/political conflict plaguing Guyana.
Thomas said the growth rates recorded do not substantiate any claim of substantial investment in the economy and if such investments were being made, the resources must be mismanaged for these not to show up in the data collected.
He also pointed out that while Guyana has benefited from substantial foreign capital inflow, including debt relief, grants and loans, these have had little impact on the economy because of the inefficiencies in the public sector and an over centralisation of authority.
“I would imagine it is a matter of high priority for the international financing institutions, how to make aid effective in Guyana,” Thomas said.
Two issues about the public sector, which Thomas highlighted, were the weak institutional capacity of the line ministries and centralisation of authority in the Cabinet. The former led to project execution units being set up with finite lives and offering higher salaries to implement foreign funded projects.
However, the economist pointed out that no one would hasten their own unemployment and this in itself led to delays in project execution and other inefficiencies in project implementation. He argues that no public sector modernisation will go anywhere if this issue is not addressed.
Thomas also highlighted the overt central, political control over decision making in the administration over economic programmes. He notes for example, that details as to which public servant must travel and who should get a scholarship are issues for Cabinet approval.
“This is ridiculous. Obviously the government’s priority is not right,” Thomas asserted.
One area, which will increasingly attract attention in Guyana, he said, is the issue of economic governance. He alluded to the IMF report on the shadow economy, which, he said, more than suggested substantial levels of corruption in the economy. He also referred to studies by the World Bank and IMF, which have pointed to weaknesses in the management of aid disbursed to Guyana.
“The feeling one gets is that people do not have confidence in the quality and capacity of persons in charge of the management of the economy,” Thomas said.
He also spoke of the ambiguous signals from the government to the private sector alluding to the debacle of the investment law, which was drafted with private sector input only to be amputated and laid in the national assembly. He also alluded to a series of unkept budget promises and spectacular reversals in some issues such as the Beal deal, hire purchase legislation and also failure of projects such as the Charity Wharf and the Moco Moco hydro project.
These, he said, do not create a feeling that all is well in economic management.
“You also have the feeling that things just take too long to get done in Guyana,” Thomas said. He said the budget appears to be an exercise in public relations rather than economic planning as it comes out too late to have any real impact and often final releases for ministries and regions are made in October/ November and instructions are passed for these to be spent hurriedly. This does not augur well for efficiency in management, Thomas noted.
Additionally, Thomas pointed to the Poverty Reduction Strategy Paper has not lived up to expectations because of difficulties in achieving targets set as a result of the September 11 attack on the US, the global recession and on the local scene, political conflict, violence and crime as well as some failure in policy designs.
The potential for growth
For Thomas, Guyana holds out much potential in the informal services and micro-enterprise sector.
“The sectors that hold out the best promise for rapid expansion of employment is tourism and entertainment but there would be need for considerable improvement in the political climate. Creative tourism is the best option at this point in time to absorb the excess labour and to advance the skills and capacity of the country, linked to other types of services such as data processing and others in the Information Technology sector,” Thomas said.
There is also the need to embark on a national programme targeting the micro-sector to promote growth and jobs, Thomas said. This sector has already been a strong employment creator.
The road to Brazil, he said, is also important and can facilitate the tourism drive to allow for the teaching of English, culture and arts in Guyana for non-English speaking persons.
While the natural resources can be harnessed to get value out of them, this sector cannot be relied upon for sustainable, long-term growth.
Thomas said there is need to shift to knowledge intensive industries and to train the labour force for such jobs.
There is also a strong need to develop the non-traditional agriculture sector. He noted that much is said about the US$250M expansion plan for sugar but there are no announcements about spending for fishing or other non-traditional sectors.
He said fish farming could be a large industry in Guyana but a major constraint would be services attached to delivery such as credit, transportation and barriers to foreign markets.
This will also require systematic efforts on the part of the government to provide access to Europe, North America and other markets. Some players in the fishing sector have already received certification from Europe to allow for fish exports to that market.
Thomas also felt that equivalent strength should be put behind the marketing of non-traditional foods as is put behind sugar. He said also that it would be a major effort to get by the technical barriers to trade such as the sanitary and psytosanitary requirements.
Guyana, the economist said, has to start gearing itself for niche markets such as Europe and other places, which will offer higher prices for organic produce. He noted that in five years, if farm produce does not carry codes telling where and how they are grown, they would not find themselves in supermarkets in Europe. This is the type of marketing challenges Guyana should be gearing itself to face, he noted.
He also said Caricom should be targeted, as it imports US$3B in food products each year.
“We should see ourselves indirectly linked to the opportunities of those markets,” Thomas said.
But is Guyana producing the kind of skills required to take the country where it ought to be? Thomas said there is no manpower planning and there is need to plan the skill requirements.
Is Linux the software solution for you?
- Cheaper than Microsoft windows
By Johann Earle
As the world dances to the tune of the seemingly ubiquitous Microsoft Windows, Linux is slowly striking a chord among internet servers and businesses, gaining corporate respectability even in Guyana.
Linux is an operating system, developed by Linus Torvalds in 1991 as an open-source software. That is, the software can be customized and tailored for one’s own use. It is available at no cost from the internet and has been tested by a number of business firms locally.
This article takes a look at Linux and the whole question of `open source software’ and examines some of the issues, which businesses should consider when making the decision to invest in Linux as an Information Technology (IT) solution.
Linux as an operating system
The Sustainable Development Networking Programme (SDNP) is one of the first international projects in Guyana to use Linux as the operating system for its Internet services.
SNDP, a UNDP funded project, has as part of its mandate the promotion of the use of open source software in Guyana.
Vidyaratha Kissoon, Coordinator at SDNP, is promoting the use of Linux as a cheaper and more viable alternative to Microsoft Windows for the private sector. The private sector he says, is the driving force in the use of IT in Guyana.
The selection of business system solutions, Kissoon asserts, depends on careful cost/benefit analyses of investments in hardware and software. He points out that most of the businesses in Guyana tend to use basic financial and inventory management systems.
Most of the software available for use by businesses locally, Kissoon also notes, has to be purchased with a licence and while in Guyana, there is a certain amount of latitude to copy and distribute software (piracy), the cost of the licence increases the cost of the investment by businesses.
Linux, according to Kissoon, is an adaptable software, which is free and would decrease the cost of doing business in Guyana.
Open-Source Software
Software programmes are written as source code and then compiled (transferred) into machine-readable binary codes. The machine-readable codes are then sold with licences restricting their use and distribution. Upgrades of such software have to be done by the developer.
On the other hand, open-source software is one which can be freely distributed with the source codes to all parties and groups without discrimination.
The open-source software is adaptable to other materials such as instruction manuals and engineering designs, Kissoon explains.
Users, he notes, are allowed to customise the software and tailor it for their own use.
The most widely known open-source software, Kissoon says, is the Linux operating system, which is accompanied with the Open Office set of word processing programmes, spreadsheet and presentation materials. The Netscape and Explorer Browsers are Linux compatible. While the operating system itself for Linux is free, the distribution cost for some of the accompanying programmes are not. However, the cost is minuscule against the cost of the comparable software.
One system administrator who uses Linux and spoke with Stabroek Business, describes the software with transfer restrictions as an automobile with the hood welded shut, meaning one cannot make any changes whatsoever.
SDNP’s two servers are using open source software for email, browsing, word processing, spreadsheet and presentation.
Kissoon makes the point that a computer system could facilitate both Linux and alternative software such as Microsoft simultaneously. He explains for example, that a business could invest in a mail server and a file server both running Linux, while each user could use a PC running Microsoft Windows system. He recognizes that a small business would be more willing to implement one software package.
However, in making a decision about investing in open-source software versus restricted software a number of questions ought to be considered, Kissoon notes. These include whether there is adequate expertise to manage an open-source system; how significant would limited support be for the implementation and maintenance of such software given that many small businesses would not recruit IT staff but would use their services on contract; and does the usability/functionality of an open source solution reconcile with end-user needs?
Ronan McDermott from a company, which provides Linux services in Guyana, says a prominent manufacturer uses the Linux software running the Red Hat version and Communigate Pro mail server. This was acquired a few years ago but has never required a maintenance visit from him.
“It’s still up and running and, quite frankly, has never required a visit from us in all that time,” McDermott asserted.
The University of Guyana has conducted several Linux workshops for its students and there is an ongoing discussion with the Computer Science lecturers to integrate the Linux operating system and some applications into the curriculum, Kissoon says.
Other IT professionals in Guyana are also conducting their own training in Linux to become familiar with the systems and to position themselves to offer support services, Kissoon says.
He adds that larger IT providers like IBM and Oracle are providing solutions, based on Linux, since they have found that Linux is more reliable and stable for larger systems.
Kissoon says the use of open-source software in Guyana will largely be in managing mail servers, file servers and in providing firewall sources. There are other Linux applications available.
In addition, new Linux software is being developed for browser-based applications for accounting, inventory management and human resource management.
According to Kissoon, the challenge for most businesses is to understand that the licence costs for software could be reduced in considering an open-source solution for parts of their computer network and even end-user systems.
At least one entity has considered using Open Office instead of the more expensive Microsoft Office for its staff who uses the minimum features of word processing software, Kissoon says.
Linux in use
Girendra Persaud, Systems Administrator for Telsnet, an Internet Service Provider (ISP) located on Hadfield Street, tells Stabroek Business that his ISP is one of the fastest dial-up Internet services in Guyana, offering up to 6.1 kilobytes per second.
He attributes the speed of his ISP servers to the Linux operating system, Red Hat version 9.0, which he describes as “stable and reliable”.
He adds that one of the ISP servers was in continuous use for 262 days without being turned off and experienced no difficulties. He notes too that while one may pay up to US$375 for a Microsoft Windows server programme, Linux is free of cost, inclusive of the operating system and support tools.
He estimates that with this ‘open source’ software, his company will save US$10,000 per year in maintenance and support for the system.
Persaud also makes the point that unlike Windows, Linux is not susceptible to virus attacks, illegal operations and shutdowns. He notes that 85% of viruses are aimed at the Microsoft Windows operating systems.
Persaud says a version of the Linux operating system is available for home use and is just as user friendly as Windows.
Installation of the Linux software is easy, he assures and notes too that it has generic drivers to support audio, video, modem and other applications.
The reason why Linux is not as popular as Microsoft Windows, Persaud points out, is because of a lack of marketing.
“They (Linux developers and distributors) don’t want to spend a lot of money on marketing. Marketing is done subtly through the persons who use the systems,” Computer Consultant Leroy Carter says, alluding to why the programme is not very popular.
Carter, speaks well of the Internet capabilities of Linux and notes that ISPs benefit more from the use of this operating system.
One of the systems administrators at Guyana Net located on Irving Street says Linux has been in use by that ISP for about two years and the system has greatly benefited the company.
“You can bring up your server and leave it on. You don’t have to reboot,” he says.
He indicates that Linux is a lot more stable than the comparable Microsoft Windows software. Linux is used on Guyana Net’s email and web servers also.
Providers of Linux and other Open Source software in Guyana are MCDIS, run by McDermott (info@mcdis.com) and SDNP (information@sdnp.org.g) Tel 227-6198). SDNP could also provide demonstrations.
