PUC 2015 Order exposes… GTT spent US$30M for cable in Suriname and transferred ownership to offshore company it created, then became subsidiary’s prime customer for bandwidth

Feb 23, 2020 News

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Pull quote: “The Commission in monitoring the operations of Utility Companies under our purview has long held the view that GT&T appears to inflate the cost of its capital acquisitions. This will increase the asset base of the Company resulting in higher profits to which it is not entitled.”

By Kiana Wilburg

The Guyana Telephone and Telegraph (GTT), despite its positioning as a local company, is 80% owned by US-based Atlantic Tele-Networks Inc.

(NASDAQ:ATNI) with Michael T. Prior as its current Chairman and Chief Executive Officer.Under a 1990 agreement with the Government of Guyana, GTT is licensed to provide international voice and data to the Guyanese market – but in recent years, the company has expanded its portfolio to offer unregulated services outside of its license, to the benefit of its shareholders.
One such service is internet, for which GTT, as part of a consortium, invested US$30M in 2010 to construct a submarine fiber optic cable system, the Suriname-Guyana Submarine Cable System (SG-SCS). This system has landing points in Trinidad, Guyana and Suriname.
The SG-SCS became a point of note in the Public Utilities Commission (PUC)’s Order No.1 2015 (which is available on the PUC website for public scrutiny), when GTT requested a review of its rates for services provided under the 1990 Agreement – and for which, the PUC is the regulator.
The 2015 Order stated: “A few years ago GTT spent US$30 million to establish an underwater cable from Suriname (SG-SCS). We had requested particulars of this transaction and were told that it had no business plan for that enterprise!!!
“GTT also told us that the cable will not form part of the asset base in any tariff filing, that it does not plan to operate the cable system as any type of common carriage, and as such the cable system is not subject to the Commission’s approval or authority pursuant to Section 28 of the PUC Act.”
Based on GTT’s ability to land the SG-SCS without need for approval or presentation of business plan to its regulator (the PUC), observers want to know under which provisions and/or permissions was this investment done.
Further to its Order, the PUC said it subsequently learnt GTT created an offshore company in the British Virgin Islands (a well known tax haven), to sell bandwidth to service providers, and then transferred its ownership of the SG-SCS to this newly formed company.
The PUC later found, however, that GTT was that company’s only purchaser of bandwidth in 2011, noting that, despite the maneuvering, this was in actuality an investment by GTT.
The PUC also observed that this investment served GTT since bandwidth is an essential component in the lucrative internet business in which GTT is prominently involved.
The PUC stated: “We are not aware that GTT has been earning any interest on the funds expended in the creation and functioning of the subsidiary.
“A utility company may have little incentive to minimise its own expenses while remitting funds to an overseas enterprise, be it parent or lateral subsidiary, which may result in significant increased profit to that entity with no regulatory limit on its permissible earnings. There must be dealings with affiliates at arm’s length.”
In raising this point, the PUC, as GTT’s regulator under the 1990 Agreement, was keen to note that it does not have the practicability to regulate transactions with affiliates that may involve the examination of their books and records, and which can be very critical in tracing the bona fides of an affiliated transaction.
It also noted that since the subsidiary does not come under its jurisdiction/purview, it is therefore impossible for the PUC to review/examine the books, account papers or records kept by them (the subsidiary).
Significantly, the 2015 Order states, “The Commission in monitoring the operations of Utility Companies under our purview has long held the view that GT&T appears to inflate the cost of its capital acquisitions.
“This will increase the asset base of the Company resulting in higher profits to which it is not entitled. If this is so then the depreciation figures stated in the financial statement would be overstated.”
The 2015 Order continues, “We are also concerned about the valuation of the Company’s assets and its reluctance to respond to our requests for the acquisition costs of assets for specific periods.
“We also have a difficulty reconciling the company’s test year data and investigations must be conducted seeking explanations on the computation of property, plant and equipment, and working capital.”
These points become noteworthy when one considers GTT’s continual complaint that it is “overtaxed” at a rate of 45% –even though it fails to provide detailed accounting to its regulator (the PUC) through mechanisms such as conflating revenues for regulated and unregulated services which shroud a true assessment of the company’s actual rate of returns on investments under its licence; using an offshore company to hide investments; and bypassing the PUC for permissions to operate by claiming that services are outside of the ambit of its regulation.
In view of the doubts relating to the true value of GTT’s asset base, and the accompanying issues in relation to determining its real, effective tax rate, the PUC, in its 2015 Order, said it may consider having an investigation carried out in this regard.
This would indeed be helpful, prior to liberalization and the settlement of GTT’s outstanding US$44 million tax claim to the Guyana Revenue Authority (GRA), to ensure that the Guyanese treasury is not further deprived of revenues, apart from the already considerable tax concessions GTT enjoys under the 1990 Purchase Agreement, and the additional benefits post-liberalization it is seeking in its negotiations with the government.

 

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