Archive for September 1st, 2009

How to leverage Water Authority’s assets

How to leverage Water Authority’s assets

| 01/09/2009 | 26 Comments

The Cayman Islanders are already some $600 million in debt and $780 million when the $180 million cost of still unfunded pensions are added.

Now that the UK is enforcing the current limit on debt and the government is faced with a shortage of funds to pay its employees’ salaries and pensions, it really has little choice but to divest non-strategic assets, so as to prevent a potential credit rating down-grade that would raise its future cost of borrowing.

While government control should probably be retained over key profitable assets, such as the Port Authority, Civil Aviation and even the unprofitable ones, such as Cayman Airways, there are still some valuable assets, such as the Stock Exchange and the Water Authority that could easily be leveragedto raise substantial capital.

The assets of the Water Authority (WA) are the most valuable and the easiest to leverage to obtain best value, thanks to the ideal benchmark comparison provided by the Consolidated Water Company (CWCO). The CI government is not involved in any other utility companies, so why is it in the business of making and selling water?

Fresh water is increasingly becoming a precious commodity and companies dealing in water have seen strong investment demand, particularly those operating in a tax free environment, such as CWCO, which currently commands a high Price/Earning ratio (PE) of 32.19 with the stock trading at about $18.00 and a market capitalization of $260.1 million.

In brief and rounded figures, CWCO has $122.2 million in total assets ($116.5 million Net Tangible Assets), $8.08 million in income and a PE of 32.19, these figures being excerpted from a key data screenshot made on August 3rd. The Water Authority, on the other hand had $46.3 million in assets and $3.7 million in surplus/net income, as reported on pages 306 and 309 of the 2008-2009 Budget.

If the Water Authority’s assets were bundled up into a public company trading on the Nasdaq through an Initial Public Offering (IPO) – the same route employed by CWCO to become public – and using the same parameters that currently apply to CWCO, we would get the following valuation:

-Based on assets:

CWCO: $260.1 mil/$122.2 mil = 2.13
=> WA: $46.3 mil x 2.13 = $98.6 mil

-Based on net earnings:

CWCO: $260.1 mil/$8.08 mil = 32.19 PE
=> WA: $3.7 mil x 32.19 PE = $119.1 mil

So, if these Water Authority Assets were trading on Nasdaq now, they would likely be worth between $98.6 and $119.1 million, or an average of approximately $109 million of Market Capitalization. However, CWCO stock has been trading much higher during the stock market bubble – in fact twice as high, but there is no certainty that this will happen again soon…

CWCO: a resounding success

Admittedly, CWCO is well managed, has expertise producing fresh water efficiently and has been aggressively marketing its services outside the Cayman Islands, where growth is naturally limited. CWCO share price has risen from $5.00 in 2002 to over $36.00 in 2007 and now stands at $18.00 – not counting a 2 for 1 stock split that occurred in July 2005. This means that a shareholder spending $5000 to buy 1000 shares in 2002 would have had 2000 x $36.00 = $72,000.00 at the peak in 2007 and still a respectable $36,000.00 nest egg at today’s date – a 720% increase in 7 years!…

No wonder the stock of CWCO is in such demand and fetches such a high PE.

This is why it would make good financial sense for the CI government to IPO say 48% of the stock to retain control of the new public water company as the majority shareholder, thereby raising about $52.3 million cash – less about 10% in underwriting expenses. By keeping 52% of the stock worth some $56.7 million, the government will take advantage of future price increases, whichcould be substantial, judging by CWCO stock history.

So, the IPO of 48% of WA’s assets would bring in cash more than their $46.3 million book value, while the government would still have nearly $57 million in remaining controlling equity in the new public company: this is clearly a case of having eaten your cake but still having it for an encore…

Of course, if the stock market continues to improve, then even more money can be raised from this operation. However, an IPO will take at least 6 months to set up, so the decision to proceed should be made without delay. The extra cost of operating a listed public company – audit expenses at CWCO were $326,000.00 for 2008 – is nothing compared to the ability to raise additional funds for expansion through issuing new shares.

The change to a performance driven public company would be excellent for the spirit of the WA employees, as their good work could now be rewarded with stock options, as is the case at CWCO, which may explain why Mr F. McTaggart left WA to join CWCO long ago, where he earned over $500,000.00 in total compensation for 2008 as its CEO. In addition, he has also accumulated some 116,257 shares of stock worth over $2.2 million at $19.00 per share!

CWCO reported 2008 consolidated bulk water sales of 1.05 billion gallons worth some $9 million to WA in the Cayman Islands and $19 million for 3 billion gallons in the Bahamas with a corresponding net income of $3.2 million without breaking it down by location. If the margins were similar in both markets, this implies that CWCO earned around $1 million selling water to WA that it actually makes in WA’s own plants. However, it’s clear from the above figures that CWCO is charging WA some 36.5% more for its bulk water – $0.0086 per gallon instead of $0.0063 in the Bahamas – so CWCO’s profit on bulk sales to WA in the Cayman Islands may well be closer to the $1.5 million mark, depending on the respective plant efficiency, since there is only about 2 cents per kWh (~10%) difference for large commercial consumers…

Driven by a new entrepreneurial spirit, the new company should endeavour over time, based on the existing management contracts with CWCO to operate its own plants, which would add at least 30% to its current bottom line and would have a very beneficial effect on its stock price. In addition, the new public water company would be free to contract outside the island for additional business, as CWCO has done so successfully.

Changing focus and regulations

Under beefed up management, the new public company should become more customer friendly: huge bills that outrage customers so much that they file lawsuits and a CI$21.00 minimum cost to read a meter, compared to $5.00 for the same job done by CUC, should become things of the past, as consumers yearn to be treated in a fair and equitable manner.

Then, a special government Authority that supervise all the utility companies should be created along the lines of the ICTA, where the utility companies would fund its operation in order to set rules and investigate complaints, as customers well know that it’s impossible to expect a fair shake when the potentially guilty party is also the judge and jury…

While CWCO does not break down the value of its assets by country of operation, it appears that the total depreciated value of its plants and distribution system in the Cayman Islands can be estimated at about $30 million…

Interestingly, some 30% of assets at CWCO are now in cash to the tune of $41 million, including about $13 million worth of secured bonds on which CWCO pays 5.95% interests – even though it now has the right to repay the entire amount from cash on hand with only a small penalty. One cannot help but comparing this $41 million stash to the $46.3 million assets value of WA and speculating whether CWCO is trying to buy out WA’s assets cheaply.

Willour government be tempted to grab some much needed cash quickly and liquidate WA’s assets for around book value, or will it have the fortitude to implement this proposal to best leverage these assets while raising even more cash in about 6 months and keeping a majority stake worth around $57 million in the new public company??…

Note: Since this analysis was written on 3rd August 2009, CWCO has reported a large increase in profits and its stock price has briefly reached $19.96 before settling back… 

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Fiscal rehab

Fiscal rehab

| 01/09/2009 | 2 Comments

Our elected leaders should go down in history as the government that saved us from taxation not the one that turned it loose. Recessions are the result of overindulgence.

When our excesses finally become so extreme that we can’t sustain the weight of too much speculation, debt and enthusiastic growth, the house of cards comes tumbling down, shrinking us down to size, making us re-examine our ideas and values, forcing us to pay off credit cards and loans. A recession drags us kicking and screaming where we don’t want to go. Fiscal rehab is painful, we lose weight, get the shakes, and eventually, after saying goodbye to the perks and luxuries we get leaner and smarter.

Recessions hurt and we resist with all of our might, but eventually businesses are forced to scale back their projects and plans, laying off the great people that they have hired, training and groomed for the future. Property holders sell homes and investments, often for less than they paid, and pensions disappear. People begin living on their saving, anxiously taking jobs that were beneath them before. Without doubt the medicine is very painful. Like chemotherapy we drink poison to kill the cancer of economic excess and sometimes the poison nearly kills us as the pendulum swings too far. Cuttingmuscle, fat and bone. This is the price that we pay for not having the magic of brilliant fiscal foresight.

Every person and every business is affected. Now our government is going into fiscal rehab and it doesn’t like it any more than the rest of us. Unlike the private sector it has the awesome power of taxation. It is now proposingto use its power of taxation to perpetuate its current expenses structure instead of seeing this as an opportunity to implement a top down quest for lean efficiency.

Competitive businesses can’t afford a top-heavy bureaucratic structure and neither can a small community with a population of barely 60,000 people. Cayman is not much bigger than a large North American town, yet it has the government structure of a small nation. We have the government that we have because we had so much money to spend for so long. Our government structure took many years to build and it really is something to be proud of. A trip through the 800 pages of our annual budget is a mind-numbing journey of an elegant structure of intricate plans and expectations. After so much work it seems a shame to not use it, but now we need a government that we can afford. Our current tax base generates nearly CI$500,000,000 PA. That’s roughly US $30,000 for every 3 people in Cayman, assuming that they haven’t been sent home because of rollover or a loss of employment. Cayman needs more people and it needs more economy if its wants a bigger government, not more taxes.

Government needs to cut away fat and even muscle in order to deal with its new reality; projects, plans and great people with wonderful ideas for the future need to be let go. Government needs to concentrate on preserving the core elements of it responsibilities: expanding the economy by removing restrictions, protecting its citizens and managing its revenue stream with the least overhead expense. Projects and plans that don’t produce results now need to be put on the shelf for the future or maybe never. It needs to consolidate its hierarchical structure down to a flatter structure of core competencies and productive responsibilities. Magically, every reduction leads to more efficiencies and its business becomes simpler to manage and progressively more cost efficient.

Government needs to keep people who do the essential revenue and protection work, and eliminate managers, managers of managers and mini-departments. They need to consolidate tasks and responsibilities; simplify communication by eliminating reporting layers, internal memos, meetings and committees. It should give the most competent people the ability to consolidate multiple departments and operations into smaller more efficient structures, and then ask them to do over it again. Instead of trying to justify jobs and positions, employees should be trying to eliminate their job and move into the private sector. Every person in government is either part of a reduction solution or they are part of the expansion problem. Practice this continuously and within a year or two our government will be half its current size and still efficiently providing us with essential services. Experienced, ex-government employees with a resume of aggressive cost cutting will easily find profitable employment privately.


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Cops in dock

Cops in dock

| 01/09/2009 | 13 Comments

(CNS): Police say that two serving police officers, Rabe Welcome and Adrian Clarke, are due to appear before the court today (1 September), having been charged with wounding following an incident that occurred at a George Town gas station on 17 June in which a man armed with a machete was placed under arrest by an off-duty officer. Welcome also faces an additional charge of common assault. Both are currently on suspension.

An investigation led by Inspector Charles Best commenced following the incident which saw one man arrested in the early hours on suspicion of threatening violence and possession of an offensive weapon, the RCIPS said in a release. The man, who had reportedly been armed with the machete, sustained a number of injuries during the incident, including a laceration to his face and a broken arm, for which he received medical treatment. The man has been released without charge. A third off-duty officer who was involved in the incident has been eliminated from the enquiry and has returned to work.

The 911 Emergency Communications Centre received a call at approximately 1:00am from a member of the public reporting that an altercation was taking place at the Red Bay Esso on Shamrock Road and that one man was armed with a machete. Uniformed officers from George Town responded to the location and found that the man had been placed under arrest by an off-duty officer.

The RCIPS takes incidents of this nature extremely seriously and although police officers do find themselves in situations where the use of force is necessary they are required to justify that use of force, showing that it was proportionate and legal, and that there was, at the time, an absolute necessity.

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Tax forum driven to new venue by hurricane

Tax forum driven to new venue by hurricane

| 01/09/2009 | 0 Comments

(CNS):  The OECD forum which is meant to be examining the world’s “stormy finances” has been moved to Mexico City from Baja California, because of a real storm. Hurricane Jimena has forced the major international conference on tax transparency from Los Cabos owing to the major threat posed by the category four Pacific hurricane. "The meeting of the OECD’s Global Forum on Transparency and Exchange of Information due to take place September 1-2 has been moved to Mexico City," the finance ministry said in a statement.

The Organisation for Economic Co-operation and Development (OECD) confirmed the move on its website. "On the basis of latest information indicating that Hurricane Jimena is now likely to make landfall on the southern part of the peninsula of Baja California on Wednesday, Mexico’s national authorities are advising to take all possible precautions and have issued a hurricane warning for the area," it said.

Representatives from almost 100 governments are due to attend the OECD conference including a Cayman delegation which will be chaired by Mexican Finance Minister Agustin Carstens and attended by OECD Secretary General Angel Gurria. The meeting which starts today has tax evasion and the implementation of the internationally agreed tax standards on transparency high the agenda.

“The meeting will coincide with the publication of the Global Forum’s annual report, Tax Cooperation 2009: Towards a Level Playing Field – 2009 Assessment by the Global Forum on Transparency and Exchange of Information,” the OECD said.

The organization stated that it would be seeking to implement “a robust peer review mechanism.” Proposals that are expected to be discussed include monitoring the implementation of the agreed tax standards; expanding the jurisdictions participating in the Global Forum, including developing countries and speeding up the process of negotiating Tax Information Exchange Agreements and Tax Treaties, including developing multilateral instruments.
 The OECD said it expected a new mandate for the Global Forum, focussed on ensuring effective implementation of the standards by all jurisdictions that are part of the global financial system through monitoring and peer reviews would result from the meeting.

“It is expected that agreement will be reached on new governance structures and membership rules and on a new status for the Global Forum which may become a self-standing programme, under the OECD umbrella, with its own resources,” the OECD stated.



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MLA accused of ‘wicked lies’

MLA accused of ‘wicked lies’

| 01/09/2009 | 1 Comment

(CNS):  Prosecuting Attorney Andrew Radcliffe, QC went to great lengths on Monday afternoon to explain the charges against former Member of the Legislative Assembly Lyndon Martin to the jury and exactly what they had to be sure of before finding him guilty. He suggested that the case hung on the existence or non-existence of a red file which Martin had claimed contained incriminating evidence against a senior police officer. Accusing Martin of “wicked lies”, Radcliffe suggested that, had he been believed, Martin could have ruined the career of RCIPS Deputy Commissioner Anthony Ennis and with it unjustly brought down newspaper publisher Desmond Seales.

The long awaited trial opened in Grand Court five on Monday to a jury of seven women, who heard the prosecution suggest that the former politician had falsely accused a very senior police officer, Anthony Ennis, of leaking highly sensitive information regarding Royal Cayman Islands Police operations and of discrediting the Police Commissioner to the Cayman Net News editor in chief.

Radcliffe told the jury that they had to be satisfied that Martin had made these allegations knowing that they were not true and that he deliberately intended to pervert the course of justice with his “terrible baseless and wicked lies” that could have brought down both Ennis and Seales. He also warned them to put aside any knowledge they may have relating to the case concerning the dramatic unlawful arrest of high court judge Alex Henderson, the charges against Deputy Police Commissioner Rudolph Dixon and the removal of the former commissioner.  All of these connect to Operation Tempura, the costly investigation into corruption in the RCIPS.  

Outlining the accusations that Martin had made against Ennis, Radcliffe said they were all made up and when the police had pressed Martin for evidence he was not able to produce it, not because it was just difficult to get but because it never existed. Yet Martin continued to “up the stakes” with his lies.

Radcliffe said the lies and a red file formed a key part of the prosecution’s case against the defendant and that once the prosecution had demonstrated that this file did not exist, the jury may believe that Martin had maliciously fabricated the allegations against Ennis and Seales.

The red file which Martin had told other senior members of the RCIPS existed and contained emails sent by Ennis to Seales (evidence of the leak) was important, Radcliff told the jury, because Martin had claimed its existence on many occasions to both local police officers and the Special Police Investigation Team from the UK, but it was never forthcoming. “How could he produce it?” Radcliffe asked the jury rhetorically, “The accusations were false.”

The prosecuting attorney suggested that if the file did not exist it could be perceived by the jury as evidence that Martin made the accusations knowing they were not true. Radcliffe only speculated at motive and said the target may not have been Ennis but Seales, Martin’s boss, with Ennis inadvertently drawn into Martin’s lies.

Radcliffe recounted for the jury the alleged chronology of events relating to Martin’s accusations against Ennis and Seales and up to the arrival of SPIT and the instigation of Operation Tempura. The QC cited leaks that Martin claimed Ennis had made, including RCIPS concerns over Justice Sanderson allegedly having so many guns in his room (“The cleaners got scared"), the issue of the auditor general’s report on the Turtle Farm financing being turned over to the police, drug operations, family disputes causing conflicts of interest for senior police officer Adrian Seales, the need to expedite an ivestigation regarding Dr Frank McField, a former UDP Minister, and the removal of firearms for RCIPS officers, all of which, he said, came from an email inadvertently sent from the RCIPS press office and not a leak by Ennis.

He also said that a major part of Martin’s allegations against Ennis related to the former commissioner’s purchase of the helicopter and that Ennis had regularly contacted Seales to undermine its purchase. Radcliffe revealed that Martin alleged Ennis was telling Seales the purchase was merely to enable the commissioner to increase his own flying time and that the helicopter was not needed.  However, in his statement Radcliffe conceded that this evidence against Martin may fall into another category as the jury would hear allegations from witnesses that Seales had encouraged the belief that Ennis was the source for these stories.

Radcliffe will continue with his opening statement on Tuesday when the first witness will be called in a trial that is expected to last two weeks and hear from more than a dozen witnesses, including former police commissioner Stuart Kernohan; Chief Superintendent John Jones, who has just returned to work after being suspended for 18 months in relation to Operation Tempura; John Evans, a former reporter at Net News; Richard Coy a former member of SPIT; as well as Desmond Seales and Deputy Commissioner Anthony Ennis.

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Lost opportunity for EU funds

Lost opportunity for EU funds

| 01/09/2009 | 36 Comments

(CNS): At an economic forum on Cayman Brac Friday, Leader of Government Business McKeevaBush claimed that there had been an opportunity for more funding following Hurricane Paloma last year that had been missed. He said that the European Union had written to the previous LoGB, Kurt Tibbetts, suggesting he make a request. “But Mr Tibbetts did not make that request and therefore we lost that opportunity for funding,” Bush stated. He said that the minister with responsibility for District Administration, Juliana O’Connor-Connolly, had put in a budget request for $3.9 million for the district.

“And we are going to put more money in with the meager funds we have because we recognize the situation here on Cayman Brac,” he told a crowd of around 200 Brackers at the civic centre.

The high cost of living on Cayman Brac was highlighted by bar-ownerEddlee Martin, who noted that there was a long list of duty free items on Cayman Brac. “Government in my opinion is doing their part. The question is, is it passed on to the consumer?” Martin asked to a smattering of applause from the crowd. Going through some price comparisons, he said a 32oz bottle mayonnaise was $2.59 on Grand Cayman, while the same item on Cayman Brac was $7.99. For a 24oz bottle of Hunts Ketchup, the price difference was $1.09 to $3.29. He said a 56oz tub of the same brand of ice cream selling for $3.99 in Grand Cayman was $8.29 on the Brac, and a watermelon that was $4.99 on Grand Cayman went for $8 to $24 on the Brac.

“There’s something not right here,” Martin said, and making clear his skepticism that Thompson Shipping was to blame, he thought the shipping costs were being used as an excuse. He pointed out that nearly everything that he had listed was duty free. “So where in the world is this high cost coming from and how can our merchants justify this?” he asked. “I don’t think they really can.” Martin said free enterprise works where there is competition but it does not work where there is a monopoly or where there is collusion, and he noted that some of the stores on Cayman Brac belonged to the richest men in these islands.

The high prices were causing government to support a high percentage of people though social services, Martin said, adding that some of those people getting money think that’s a good thing.

Lynne Walton also addressed the cost of living, saying that there would be no inward investment on the Brac if people had no money and there would not be investment from outside because it was too expensive to operate a business. She asked Bush if he would you consider a formal approach to cost control on Cayman Brac with regards to fuel, electricity and shipping prices.

The LoGB claimed that some of the things he heard regarding the cost of living on the Brac amazed him. “There are laws for price gouging, and if that is going on then Brac business people need to look at themselves and how they are conducting their business.” However, he said that was “a whole other apparatus and we don’t want to have to get into that.” One merchant at the meeting, Bernard Tibbetts, defended his own prices and offered to show anyone how he priced his goods.

Elvis McKeever, who owns a construction company, said if government would support a national lottery and casino, he could get a 5-star hotel built on the Brac. “Gambling is going on on all three Cayman Islands. Church people going to kick against that but when I went to church everyone carried fan. Now everyone want a/c,” he said to illustrate the rising expectations of Brackers.

Peter Bradshaw, an electrician, said his pet peeve was the bureaucracy within the Planning Department, which stymied development and hurt the poorer people. “You’re absolutely right. We need to roll up the red tape and we need to roll out red carpet,” the LoGB said, noting that all planning processes were under review.

Offering his ideas for government savings, BernardTibbetts suggested that some government departments could be eliminated – the Complaints Commissioner’s Office for example.

“The FOI is going to be much worse than the complaints commissioner,” Bush said. Tibbetts returned, “Maybe we can eliminate both.”

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CICSA backs expat jobs

CICSA backs expat jobs

| 01/09/2009 | 51 Comments

(CNS): The vice president of the Cayman Islands Civil Service Association says that he and the rest of the membership are behind all public sector workers whether they are local or foreign. Christen Suckoo told CNS that the goal of the organisation is to protect the salaries, benefits and jobs of every single civil servant. He said, however, that the association was well aware that there are forces in the community that would like to see the service downsized and, given that pressure, the CICSA had to offer sensible ways of addressing that.

“Our position is in defence of every civil servant, regardless of where they come from,” Suckoo said. “However, we would be naive to deny that there are forces out there that want to see a reduction, and if we have to think about that, the realistic options are early retirement and contract renewals.”

Following reports that Suckoo had suggested removing expat public servants as a means of cutting government expenditure during a meeting hosted by Leader of Government Business McKeeva Bush to address the dire financial circumstances facing the country, the CICSA VP said that was simply not the case.

He explained that he would not advocate just removing foreign workers, not least because many of them have essential skills that the service depends on. But he said that if the service was forced to downsize, which he said had to be a long term project over a decade or more, those wanting to take early retirement and contract renewals should bethe first areas of consideration. He explained that those wishing to retire would have to be eased out over a long period to protect the impact on the pension fund, and every contract had to be considered on a case by case basis because of potential negative impact of not renewing contracted civil servants who could be essential to the needs of government.

“I apologise to any ex-pat in the service who thought I was suggesting that we should just cut contracts. That was not the message I wanted to convey and I could have articulated my point much better,” Suckoo said, adding that he was hoping to take a realistic assessment of how it was possible to downsize without causing harm to workers or the service itself.

He said the pressure to downsize was one that was based on a misconception of an over bloated and lazy civil service, which he said was just not true, and if cuts to jobs were coming people would have to think hard aboutwhat sort of services they are prepared to sacrifice.

“The idea that there are hundreds of overpaid and under utilized people in the public sector is totally misplaced,” Suckoo warned. “While there are some individuals earning large salaries, many, many more are not. I would also suggest that in comparison to the private sector most civil servants are paid considerably less for equivalent positions. More importantly, the public has to ask itself does it really believe we have an overabundance of teachers, police officers and garbage collectors that we can afford to just cut. ”

Suckoo said that, while there was room for efficiencies, he did not see how civil service jobs could be significantly reduced and still maintain the level of service the to which the public had become accustomed.  He also noted that the service had submitted a considerable number of ideas regarding revenue raising measures, which were discussed with the leader of government business following the meeting last Thursday at the Ritz, and further meetings were planned this week.

“One thing we have to remember is that any significant job losses in the civil service will have a direct negative impact on the local economy. “We have to understand that we are dealing with the largest body of employees in the country and if lot of them are to lose their jobs at the same time this will have a tremendous impact on local businesses.”

Suckoo noted that these were difficult times and the public sector was an obvious target, but it could not be the only target. While the civil service wanted to help all it could, everyone had to come together and think through the implications carefully.

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