Introduction

Recently there have been open debates between senior members of the ruling PPP. Mr. Ramkarran, the respected House Speaker, is in support of a secret ballot to determine the next Presidential Candidate of the PPP. President Jagdeo, however, does not like the idea of a secret ballot, but would prefer that the members of the Central Executive Committee of the PPP show their hands when voting for the next candidate. This is a curious position to take by the President who was elected by secret ballot.

One might ask why is the President keen to have members show their hands when voting for the future Presidential Candidate. The answer to this lies somewhere in the series of Development Watch columns I wrote on elected oligarchy. If a leader is going to control the economic space in Guyana then he must maintain control over the executive members of the PPP party, which after winning the national election is able to govern under a Burnham Constitution.

This internal party control must be fortified before the leader accedes to the national stage to enjoy Forbes Burnham’s Constitution. The internal control takes the form of generous pay packages and privileges for the family members of the leadership of the PPP. Therefore, the show-of-hands is a control mechanism intended to allow the President to select his candidate. In essence, then, this control system is at the heart of the making of the Guyanese oligarchy. The prize is to win the election in order to enjoy the luxury of non-transparency that comes with the Burnham Constitution. Once the party leader is armed with the Burnham Constitution, he can now control the economic space by showering tax payers’ monies to chosen friends and families.

Key Features of the Oligarchy

The elected oligarchy comes into being by the following chain of events. First, Democratic Centralism allows the a few individuals in the PPP to select a Presidential Candidate who is then presented to the party mass supporters and the nation as a whole (this is the reason why the President wants the method of show- of-hands over that of secret ballots. Second, given the entrenched ethnic voting patterns, the Candidate is likely to win the national election and therefore enjoy the immunities of the mildly tinkered 1980 Burnham Constitution. Third, this Candidate then surrounds himself with chosen like-minded individuals. Fourth, generous State sponsored incentives (using the monies of the people) are then offered to chosen members of the business class. This allows the elected oligarchy to control the economic space in Guyana.  Some members of the oligarchy will eventually reach the point of buying out media assets to further dominate the society and public views.

Adverse Effects

As I have noted in previous columns, the oligarchy promotes its own subservient business class. However, in the aggregate the oligarchic government crowds out private investments – hence a crucial reason for the perpetuation of a backward production structure in Guyana. Economic transformation will require effective governance and large amounts of foreign private investments (from multinationals and from the Diaspora).

Until this period, the oligarchy does not seem too keen to lose control of the existing tiny economic space. Allowing large inflows of foreign private capital will increase the economic space and make for faster economic transformation. It is this transformation that will allow for better wages and salaries for public and private workers. The citizens of a nation are as rich as what they produce.

The oligarchy also retards rapid economic progress through the group-think syndrome. Once the voting members of the Executive and Central Committees are under the control of a Benefactor-in-Chief, they will not likely raise questions when wrong policies are about to be implemented. The first example would be the Skeldon sugar factory investment when it was known to analysts by the mid-1990s that sugar agreement could come under threat because of the new WTO rules.

Second, the financing of the LCDS, enshrined in REDD schemes, is uncertain and cannot provide the level of funds for structural production transformation of the economy. In other words, the society does not do as well as it could with greater freedoms. This is shown by negative total factor productivity (TFP) growth in recent years as some studies have shown. As I mentioned, some time ago TFP measures how well a country is utilizing its resources. With negative growth, it means the country is doing a poor job in utilizing its human and other resources optimally.

Baseline Constitutional Reforms

The only way to break away from such a control mechanism exerted on the country by a few individuals is to have deep Constitutional reforms. One such reform could include abandoning the Executive Presidency. A second reform would be to ensure that a party leader never gets to select the Members of Parliament as the present list system allows.  The party list system allows the party leader – possibly under the control of a Benefactor-in-Chief – to select like-minded Parliamentarians who will not raise too many objections to misrule. However, the leader shoots himself in the feet because it is not possible to get alternative viewpoints on potential policy failures.

The bigger problem is the country is taken down sub-optimal investment paths.
Therefore, Constitutional reform must allow the situation where Members of Parliament are elected directly by the people. Parliamentarians must be made accountable to a specific geographic location rather than a leader or political benefactor. One way to facilitate this would be to have an upper and lower house of Parliament.

In this arrangement, in my opinion, there is no need to jettison the system of proportional representation.  The Prime Minister could be elected via proportional representation while the Parliamentarians are elected on the same ballot but for a specific geographic location. There are other arrangements that have to be implemented to prevent oligarchies from emerging after free and fair elections. The crucial point is Guyana’s democracy is deeply flawed and it does not serve well the developmental needs of the country.

By Tarron Khemraj

Introduction

In past columns in this series on elected oligarchy, I argued that the primary channel through which the Jagdeo elected oligarchy retards progress is through the stifling of independent private investors and the pursuit of sub-optimal government investment projects. This column develops this thesis further by providing data to show that the government’s investments have a negative effect on private investments at the macro level.

The case of Mr. Robert Badal presents a clear example. Here the PPP government intends to utilize taxpayers’ monies and subsidize a foreign brand so as to bring competition against the Pegasus, which is owned by a local investor, Mr. Badal. It is not that I am against competition, but should the State – which is presently in the hands of elected oligarchs – use the monies of the people to engineer the destruction of domestic investors which it dislikes? Regardless of the political views of investors, they create jobs that ordinary Guyanese need. If the Marriott wishes to invest on its own, then that is wonderful for Georgetown and Guyana. I am sure there are better uses for the subsidy.   On the other hand, the President has been busy favouring some investors who are friends. Some examples include former Buddy’s, Queens Atlantic Investment Inc and the road contract to access the proposed Amaila hydro project. The critical question which remains is whether this has benefitted the country in the aggregate. There is no way to assess the overall job creation of the oligarchic economic strategy as Guyana does not compile unemployment data on a regular basis as do Jamaica, Trinidad and Tobago, Barbados and The Bahamas. Therefore, I will use published data to show that in the net the public investments of the PPP government since 1992 have been detrimental to private investments, which many would agree are essential for economic progress.

Sub-Optimal Investment Projects

When the Jagdeo oligarchy is not crowding out private businesses, it is busy making economic decisions that could hardly be seen as optimal in terms of long-term economic transformation. As these columns have repeated, economic transformation must commence with production transformation. The masses are as rich as what they produce. An ACCA accountant lives a better life than an accounts clerk with only CXC because the ACCA was able to upgrade his/her skills. The same principle applies to the economy as a whole. If the country continues to concentrate on primary products, then it will stay poor.

At times these decisions appear devoid of logic. Take for instance the road project and the Amaila hydro electricity project. A contract was awarded to build the road but it was reported by the Stabroek News on August 10 that the IDB is yet to determine the feasibility of the project. Earlier the President noted that the Chinese government is willing to fund the hydro project. These reports raise all types of questions and suspicions. For example, is the Chinese government willing to part finance a project without a feasibility study? If that is the case, what is the quid pro quo? What is the back up plan for the road that would be built should there be no financing for the hydro? Is US$15 million enough to build new roads through swamps and virgin forests? Is this entire episode an election year gimmick?

Of course, perhaps the best example of a sub-optimal investment would be the Skeldon investment which dives Guyana deeper into sugar production rather than moving mainly into ethanol or low calorie sweeteners. These columns have argued many times why renewable energy is better than sugar. The use of bagasse for energy would materialize in any case whether the factory produces sugar or ethanol.

The Crowding Out of Private Investments

I have provided micro level examples of a trend to crowd out some private investors who are not on the “right” side of the political divide. I will present some data in support of a suggestive macro level negative effect of the government’s public investments. Before doing so let me present the popular economics textbook story of the crowding out thesis. The thesis goes like this: the government first borrows heavily to finance its investments. When it does so it causes interest rates to increase and therefore makes it hard for private investors to finance their investments. There is a quantity effect also as the government competes for the scarce stock of investment funds (or national savings) to finance its spending, private investors find it more difficult to obtain funds.

While I will not discount the quantity effect in Guyana given the tendency for the banks to demand large quantities of excess liquid assets (short-term Treasury bills), my argument is more a political economy argument. The Jagdeo government has decided to create its own private sector using state largesse. This private sector was termed the Newly Emerging Private Sector (NEPS) by the President himself. In other words, we have a situation where an oligarchic government crowds out private investors that could also be creating jobs. The crowding out, therefore, results from a quest to control the economic space, which eventually results in the total domination of the political space. The quest of domination of course has its own financial rewards as those who obtained favoured treatment must either shut up politically or pay up to finance election campaigns, build homes for the oligarchic leaders, provide fancy cars, and other things. It is therefore a classic oligarchy where we have the interaction of the political and economic sphere in the pursuit of total domination.

To obtain a macro effect, I use Bank of Guyana data to calculate the annual percentage of GDP accounted for by private investments and government investments. I use annual data from 1993 to 2009. I obtained a simple correlation of -19%. The scatter plot (Figure 1) below shows a case where as government investments increase private investments decline. This is shown by the negatively sloping trend line. The old saying goes that correlation does not imply causation. However, I have proposed the causative channel of an elected oligarchy crowding out the private sector in the pursuit of political and economic domination. The scatter plot is certainly consistent with my argument.

Figure 1. The crowding out of the private sector

Conclusion

What matters at the end of the day is for government investments and spending to crowd in (increase) private investments rather than crowd out (decrease) private investments. The net effect matters for long-term production transformation and jobs creation. Indeed, some of the members of the NEPS have benefitted from the Jagdeo consolidation of power. However, others have suffered, some were frustrated, and some investors lost money. What matters is the end result or the net effect of the power consolidation.

I am still optimistic that the State can become a developmental one rather than a semi-predatory one. We have to study the roles played by the developmental states of Taiwan, South Korea, Japan, Mauritius and other places and shun the methods of the predatory and semi-predatory ones. In the Guyana context, at least three important tasks will have to be accomplished to reverse its current semi-predatory instincts: (i) Constitutional reform; (ii) the formation of a meritocratic public service; and (iii) the Freedom of Information Act. These themes will be picked up in the next column.

Start-up logging company, Vaitarna Holding Private Incorporated (VHPI) has not yet set up a promised wood processing plant here but company director Chethan Narayan has assured that such a facility is on the cards and the company is doing the groundwork.

“We are still working on it,” Narayan told Stabroek News when contacted last week. VHPI is a subsidiary of the India-based Coffee Day Group. Coffee Day, through its Dark Forest subsidiary, in 2010 acquired the State Forest Exploratory Permit (SFEP) for 391,853 hectares of forest originally awarded in 2007 to US-based Simon and Shock International Logging Inc (SSILI), after buying out SSILI.

After the acquisition, the company registered in Guyana as SSILI. Subsequently, Dark Forest acquired the 345,961 hectares concession which was originally awarded to Caribbean Resources Limited (CRL). The government accepted an offer of $600 million for the Timber Sales Agreement (TSA). The company was registered as VHPI and has been harvesting and exporting logs from this concession.

The total area held by Coffee Day is 737,814 hectares of forest.

The company has committed to set up a processing plant here with V G Siddhartha, owner of the Coffee Day group, saying in May that a processing centre for logs will be set up here but the main facility will be in India.

Narayan told Stabroek News that they are doing the groundwork for the setting up of the plant but could not give a time frame as to when the processing centre will be set up. “We are working on the commercial (aspect),” he said adding that they have to look at the cost, type of production, capacity, market and so on.  “We are working on it,” he assured.

He disclosed that the Guyana Forestry Commission (GFC) had asked about a month back for a practical plan for setting up a sawmill and this was submitted. In addition, their five-year operational plan includes the setting up of a sawmill, the director said. In the meantime, the company continues to harvest logs from its CRL concession and he noted that it is a new venture. Narayan said that the company has 15 pieces of equipment on the ground and logs are exported and some sold locally.

He noted that in terms of setting up a plant, the company has to look at every aspect. He point out that Vaitarna’s concessions make it the second largest in Guyana and “our setup should be big.”

Meantime, the company has completed all the prerequisites to convert its SFEP for the SSILI concession to a TSA which would allow it to harvest logs and is now awaiting approval from the GFC. “We can get (the) TSA at any moment,” Narayan said adding that they have done all the studies to a high standard.

Siddhartha has said that the company has exported logs from Guyana to India and China. The export of unprocessed logs has long been a concern of activists who argue that Guyana could earn more from processing logs here and exporting the products. Former forestry minister and now Minister of Natural Resources and the Environment, Robert Persaud had said last year that there would be no large scale export of logs by Vaitarna. (Gaulbert Sutherland)

The Chinese electronics giant, Haier, has not yet begun assembling laptops here as a result of several factors including the re-organisation of the company’s structure in China.

“It’s all in place, it’s just a matter of when to do it,” said Brian James, the Chinese firm’s local partner, when contacted by Stabroek News last week. He said that the firm has not yet begun assembling laptops or other electronic appliances. At the unveiling of the company’s assembly line at Industrial Site, Ruimveldt, in June, James had said that Haier was working to have operations from its new base up and running within two months.

Quizzed about the delay, he said that the “temporary halt” is as a result of supplying the second and third tranches of laptops for the One Laptop Per Family (OLPF) programme as well as re-organisation within the Haier structure in China. James said that the finalization of plans and the models to be assembled is being done. However, he could not give a timeline as to when the assembling will begin because no decision has yet been made on this aspect.

Company officials had said that the assembly line will be capable of producing 200,000 laptops and monitors and 150,000 television sets a year. The replica OLPF project assembly line was engineered to be eco-friendly with minimal power consumption, according to officials.

It was said too that the assembly line would be mostly man powered and 70 technicians would be responsible for the putting together of all products. The assembly building would also house the components and the finished products ready for sale. Different stations were designed to ensure quality products including burn stations that will test all electrical components for faults and assess durability, according to the company.

James had said that the US$2 million investment in the plant is not just about computers as the company will focus on assembling other appliances. He had said the venture could mean substantial savings on products for consumers. Haier is targeting the Caribbean market as well as the country’s neighbours and the existing business agreement between Guyana and Brazil will aid the entity.

James had told Stabroek News in February that in addition to the plant, the company plans to establish an industrial park within five years in an investment pegged at US$10 million.

Last year, Haier won a US$7.56 million contract for the supply of 27,000 netbooks for the OLPF project. (Gaulbert Sutherland)

Introduction

If NICIL – the National Industrial & Commercial Investments Limited – was a play, it would be one that challenges Othello and King Lear for the dubious distinction of saddest tragedy ever written.  And this is how the dramatis personae would be introduced:

Chairman of the Board: Dr Ashni Singh has the distinction of reporting to himself; credit for the undermining of the last vestiges of confidence in public accounting; lead authority on the use and mostly abuse of the Consolidated Fund and its offspring the Contingencies Fund; and credit for the largest financial sector failure under his watch;

Director:  Dr Roger Luncheon, who thinks running a government and country is an opportunity to display verbosity and jest; who has merrily led the country’s National Insurance Scheme to the brink of the cliff and then casually denies reality; and who cannot distinguish a government company from a private company;

Executive director: Winston Brassington, who has been the architect or centre of almost every concoction or government initiative in the past fifteen years – the Queens Atlantic Investment Inc and its illegal tax holidays (later accepting the assignment to teach a private sector icon about the country’s tax laws); railroading the most costly financial package in setting up the Berbice River Bridge Company Inc and inducing and bribing investors with generous tax incentives; and the longest transitioning from the public sector to the private sector in Guyana’s history;

Auditor General: the benign Deodat Sharma, who moves from the stream of auditing (or not auditing) government transactions to the ocean of auditing where statutes on taxation and governance rule; where familiarity with deferred taxation and ever-changing IFRSs challenge the most seasoned accountants; who audits some of the country’s largest (government) companies in accordance with the Companies Act 1991 which does not recognise him as qualified to do such audits;
Regulators: such as the Registrar of Companies who was frightened off from demanding annual returns from the company for close to twenty years; the Commissioner General of the Guyana Revenue Authority who has not been able, for more than twenty years to collect a penny of Corporation Tax from Dr Luncheon’s “private company” despite several billion dollars of profit before taxation; or Property Tax despite the company owning at various times some of the most valuable state assets; or Capital Gains Tax despite the company acquiring premium assets at nil value and disposing of them at market value (except in the case of some friendly sales); and the national accounting regulator who has sat on two complaints for the equivalent of one year, unable or unwilling, maybe because the financial interest of its members, to pronounce on alleged egregious breaches of ethical and accounting rules and the Companies Act.

Making hay of delay

Apparently the Institute, applying a logic best understood by them only, decided to treat with the two complaints sequentially. From follow-up enquiries on these complaints, there appears some equivocation or evasion on whether or not this approach was reversed following stalling tactics employed by counsel retained by Ms Gitanjali Singh to deal with the complaint against her on the fundamental question of conflict of interest. After all, more than Ms Singh’s conduct is at stake here and it was no surprise that she resorted to Senior Counsel.

Minor players whose names or faces are supposed to lend credibility to NICIL: These include former Chairman and Minister of Finance Mr Saisnarine Kowlessar who would hardly have suspected how the company would come to define and represent some of the very values he represents; Mr Geoff DaSilva, Head of Go-invest, Ms Sonya Roopnauth, Budget Director and Ms Marcia Nadir-Sharma, NICIL’s Company Secretary, ever ready to sign corporate documents and defend the most offensive of corporate practices.

Ms Nadir-Sharma we recall was on television in September 2012 on the NCN’s outstandingly ironic debate on corruption, vociferously denying that NICIL had been in violation of the Companies Act and then rushing just over one year later to sign off on the statutorily mandated directors’ report for nine years – 2002 to 2010 inclusive – bearing no date but only the month:  November 2012. Consequently, what NICIL and its directors could not and did not do in years could suddenly be done in just two months, a demonstration of political expediency trumping the law and governance. It is probably more than idle speculation that NICIL might have been taking advantage of the craven slothfulness of the Institute of Chartered Accountants which has delayed any consideration of a number of issues on the financial statements of the company and the conflicts of interest between the company and the Audit Office.

The plot

More important to the players however is the plot to take an entity established by the PNC government of Desmond Hoyte to oversee the privatisation process and make it in an instrument of circumventing the Constitution and other laws of Guyana. More specifically, it ensures the ignoring of Article 216 of the Constitution that requires all government revenue to be placed in the Consolidated Fund and bypass Article 217 which requires parliamentary approval for all public expenditure. The plot is devilish in its simplicity: vest state assets in the company which it then sells and uses as its own money to do as it pleases, whether to develop Pradoville 2, divert sewerage or mismanage road contracts or build a hotel.

Sitting in the pit of the  theatre of the absurd are the politicians, including the main opposition party APNU, demonstrating a failure to understand or appreciate the deviousness with which their concerns over NICIL and other financial issues have been circumvented, and announcing in late 2012 that the government had become “more accountable”; the professional class more concerned about their economic well-being or about being victimised for their courage rather than standing up and speaking out for the financial well-being and fiscal rectitude of the country; and the public bewildered and bemused that the kind of maladministration for which NICIL has become a poster child continues to this day.

Financial summaries

Against this background Business Page commences a review of the financial statements and directors’ reports of NICIL for the years 2002 to 2010, the last year for which annual reports have been tabled in the National Assembly by Dr Ashni Singh. To carry out this function Dr Singh seamlessly changed hats from being the Chairman of NICIL to that of Minister of Finance. Here is a summary of the financial statements of the company – not the consolidated accounts of the group – for the ten years 2001 to 2010 as disclosed by the audited financial statements.

Statement of financial position
   2001    2004    2007    2010    
G$ M    G$ M    G$ M    G$ M    
Non-Current Assets                        4     3,206     3,578     3,553
Current Assets                                                                            0     3,567     3,834     4,840
Total Assets                     4     6,773    7,412    8,393     

Capital & Reserves                                                                       (52)    5,214     5,300     4,924
Non-Current Liabilities                                                                  -             2        133        289
Current Liabilities                56     1,557     1,979     3,180
Total Equity & Liabilities                                                     4     6,773     7,412     8,393   

Statement of the Comprehensive Income
2001 to 2010    
G$ M
Revenue                                 13,081  
Profit Before Taxation                                   8,599
Taxation                                                                                                                               (473) 
Profit After Taxation                                                                                                      8,126 

Statement of Cash Flows
    2001 to 2010    
                                     G$ M    
Investing Activities  
Acquisition of Investments                         (4,401)
Acquisition of Property, plant& equipment                                                          (2,321)
Disposal of Investments                             2,065
Proceeds from Disposal of Property, plant & equipment             990
Movement in Investments                                                                                                  222
Reclassification of fixed assets                         29  
Net Cash flows from Investing Activities                                                   (3,415)   

Financing Activities
Prior period adjustment                                                                                                            (56)
Restatement to reflect unrecorded assets                                                                      3,381
Dividends Paid                                                                                                                          (7,577)
Grant Received                                 2
Revaluation Reserve                                                                                                                 1,044   
Net Cash flows from Financing Activities                                                         (3,205)    

However, before addressing and analysing these I will use next week’s column to conclude the twenty year review of the banking sector in Guyana which I started last month. I do apologise for the untidiness of not completing that review before beginning the examination of NICIL’s financials, but my own efforts at data collection and research were less efficient than I had anticipated.