|Volume No. 1 Issue No. 47 - Friday August 29, 2003
|PM Statement on DOMLEC |
by Hon Pierre Charles
Dominicans are well aware that the Commonwealth of Dominica has been experiencing very serious fiscal and economic difficulties and that our present debt situation, largely inherited by this Government, is unsustainable, in the absence of serious corrective action.
Dominicans are also very well aware that a return to higher levels of economic activity requires stabilisation of the fiscal and economic situation. Government has had to put in place strong budgetary measures in order to protect our general public interest and save our country in the interests of generations to come. The measures taken were not easy.
Two of the most difficult decisions Government had to make were to adjust the taxes payable by our people, and reduce the salaries, wages and allowances of public officers. In addition to cuts in allowances, my Ministers and I accepted a 7% reduction in salary.
The public response to the budgetary measures has been positive. Our people fully understand the need for personal and national sacrifice during these very difficult times.
Of course, there are those who will seek to destroy the public interest and our beloved country for their own political ends. But thankfully, those selfish sentiments are not reflected in the general population.
We as a people are growing up; no longer misled by empty and politically motivated statements. We fully understand and appreciate that the time has come to do all that one can to save Dominica.
One of the fiscal measures taken by Government was the withdrawal of the consumption tax concession in respect of the importation of diesel fuel. Prior to my budget address, no consumption tax was paid on the importation of diesel fuel.
As you will recall, in my budget address I said:
“I hasten to add in this regard Madam Speaker, that this measure is not expected to have a net negative impact on the consumer, since the Company (meaning Domlec) appears to be in a financial position to absorb the impact of the removal of the concession on diesel imports without increasing tariffs in 2003”.
My statements on the possible effect of the withdrawal of the concession were premised on an analysis of Domlec’s financial statements. One has to assume that the information contained in the Company’s financial statements is correct.
Domlec’s statements show that on the basis of the Company’s after-tax profits, it realized a 16.8% return on equity, inclusive of finance charges of $3.5 million at the end of the 2002 financial year.
Sometime after my budget address, Domlec published a Press Release in the local print media in which it stated that it could not absorb the impact of the cessation of the consumption tax concession, and consumers would have to pay an increase in tariffs of 17%.
The media blitz mounted by Domlec began. There were appearances on the electronic media during which Domlec sought to persuade you that the die was cast and that Domlec would meet its demise if it had to absorb any part of what Domlec’s representatives described as the new taxes.
On Monday the 25th August 2003 Domlec published another statement in THE SUN intending to set out what Domlec says would be the inevitable consequences of any amendments to the Electricity Supply Act.
The clear purpose of that statement was to create fear and cause you to believe that any attempt by the Parliament of the sovereign independent State of the Commonwealth of Dominica to act in the public interest and for the protection and benefit of all consumers would lead to further hardship on the people of the Commonwealth of Dominica.
The statement published by Domlec in THE SUN is in very similar terms to a letter dated the 19th August 2003 written to me by the Chairman of Domlec. As Prime Minister and Minister of Finance and a son of the soil I believe that the true purpose of Domlec’s letter and statement was to intimidate the people of this independent and sovereign State and Government.
I am fortified in my belief that this is Domlec’s true motive because Domlec’s representatives have been communicating with the international community including the IMF, the European Investment Bank and the Caribbean Development Bank. in an effort to further undermine and intimidate us. The reason is clear; Government cannot afford for its stabilization and adjustment program to fail.
Therefore, Domlec is attempting to capitalize on our difficult national problems and have in effect threatened that it would default on the loans to it guaranteed by the previous Government thereby exposing this Government to the real risk of failure. Domlec is threatening to do at a time when we as a people are all making deep personal sacrifices.
It is disturbing to us as a Government that Domlec has chosen to engage in public disputation and attempts to discredit Government both locally and abroad, without first providing the Government with information and documents in support of its case. We have, so far, as a responsible Government should, refrained from responding in kind. However, the time has come to clarify Government’s position on the matter.
The frank position of Government is that Domlec’s conduct is unacceptable.
This media blitz and transparent strategy of intimidation is taking place within the following context: representatives of the Government of Dominica and Domlec met on two occasions to discuss their response to the withdrawal of the concession on diesel fuel oil.
The Director General of Finance chaired the first meeting. I chaired the second meeting. Because of the great public importance involved, I agreed to meet with Domlec’s Chairman and other representatives on my first day back at work after my recent angioplasty procedure in Atlanta, Georgia.
I made the Government’s position clear -- that in the absence of an agreement by Domlec and the Government, I would have to convene the Parliament. At both meetings Domlec’s position was that it cannot and will not absorb any part of the cost of the consumption tax and that in any event it has to comply with the terms of the Electricity Supply Act of 1996.
It must be emphasized that at the very first meeting, Domlec’s General Manager agreed with the Government’s representatives that the definition of the base price in the Electricity Supply Act of 1996 was outdated and needed to be changed.
On the 20th August 2003, I responded to the Chairman of Domlec’s letter dated the 19th August – a letter devoid of any material justification and replete with open threats and defiance.
In my reply, I informed him that Government did not accept his statement that Domlec could not afford to absorb any part of the cost of the consumption tax and confirmed Government’s view that the Electricity Act may have to be amended to protect the public interest, not only with respect to the issue at hand, but also to take account of several areas where the public interest, especially the interest of consumers, was affected.
I also requested that Domlec provide the Government information in relation to 3 subject matters. Domlec’s response was to request up to the 29th August in order to prepare “a comprehensive response” and for a further meeting to be held on 1st September 2003.
By letter dated 25th August 2003 I informed Domlec’s Chairman that Government would agree to Domlec’s request for more time on the condition that Domlec did not continue to charge the additional 17% increase while discussions between the Government and Domlec continued in accordance with the extended time requested by him. By letter dated the 27th August 2003 Domlec’s Chairman rejected my suggestion.
The importance of all that I have said in relation to the above is this: notwithstanding all of its public protestations, media blitz and attempts to influence the international community against our country, it is only late Friday 29th August 2003 that Domlec made available information which it says supports its case that it cannot afford to absorb any part of the impact of the removal of the consumption tax concession. This information is presently being reviewed by representatives of the Government
On the other hand, Government has had the opportunity, and continues, to review the Sale Agreement between the Government and CDC, the Business Plan and the Electricity Supply Act 1996. There are many disturbing facts. Owing to the constraint of time, I will highlight some for the benefit of public consumption and understanding.
1) The Government of the United Workers Party sold the shares in Domlec well below the market value recommended by the internationally recognized firm of Coppers & Lybrand.
2) In addition, the Government of the United Workers Party transferred the sum of EC$ 6,438,225.00 of grant money to Domlec in exchange for ONE SHARE at par value.
3) CDC has wholly failed to comply with the Business Plan, which formed part of the Sale Agreement for the shares owned by the Government of the Commonwealth of Dominica. Representatives of Domlec have sought to suggest that the Business Plan was conditional on proposed projects of the UWP Government. The consultants who prepared the Business Plan made it clear that “the degree of uncertainty associated with these plans has been reflected in the approach taken in forecasting electrical demand.”
4) As a direct result of the promises made by CDC in the Business Plan, the then Government agreed to a guaranteed minimum rate of return of 15% and guaranteed increases in basic tariff rates of at least 8% for the years 1998 and 1999. This was apparently intended to facilitate CDC in the execution of the Development Plan.
It is Government’s position that in view of the failure to comply with the Business Plan, certain aspects of the Electricity Supply Act and in particular the guaranteed rate of return of 15% needs to be reviewed. If Government does not do so, CDC and Domlec will continue to benefit from those provisions of the Act notwithstanding their failure to execute and implement the Business Plan.
5) An Electricity Act was passed in 1976.Under the heading FUEL SURCHARGE in the First Schedule “base price” meant $1.4066 per imperial gallon. A fuel surcharge is intended as a mechanism to protect utility providers against the full impact of fluctuations in the price of fuel particularly in the light of world oil crises dating back to the mid 1970’s.
6) The current Electricity Supply Act No 21 of 1996 came into force on the 15th January 1997. When the matter first came to the Parliament, the then Minister of Communications and Works Mr. Earl Williams said that while some of the definitions in the Act came from the 1976 Act, the definition of “base price” was new and would mean “the average price of US$1.4066 per imperial gallon in the case of diesel fuel oil and US$1.3780 in the case of blended fuel oil, each as delivered to the Company at its power stations in Dominica”.
The definition of “base price” was taken to the Committee stages of the Parliament by the then Attorney General. No member on the Government side indicated that any error existed or had occurred.
7) The significance of the definition of the “base price” is that the higher the base price or the closer it is to the current market price for fuel, the lower will be the fuel surcharge paid by consumers. On the other hand, the lower the base price or the further it is away from the current market price, the fuel surcharge payable by consumers will be higher.
8) Therefore, as the new 1996 base price was in United States Dollars, that price would have been closer to the current market price and consequently, consumers would have paid lower fuel charges. However, on the 17th December 1997 the same Mr. Earl Williams, as Minister for Communications and Works, came to the Parliament to say that “a typographical error” had occurred. As a result, the Parliament with the Government’s majority amended the base price from US$ to EC$.
9) Significantly, and consistent with the Government’s position, the General Manager of Domlec accepted that the present base price is outdated and needs to be updated.
10) It appears from information available to the Government that Domlec calculated the base price in EC$ from 1996 and not in USD as required by law prior to the amendments made in 1997. The result is that Domlec may owe consumers a significant refund. A more detailed examination is required to confirm that a refund is in fact due to consumers.
11) Additionally, representatives of the Government have expressed serious concerns about the manner in which Domlec has accelerated the depreciation of certain of its assets with the result that consumers are burdened with increased tariffs with Domlec enjoying the corresponding benefits of deferred tax liability of some EC$ 13.6 Million.
12) Another matter of concern is the manner in which the rates of return are calculated under the Electricity Supply Act of 1996. The representatives of the Government are concerned that the method of calculating rates of return for purposes of tariff adjustments could produce results that are not in the consumers’ interests.
13) A related matter of great concern is the escalating administrative and operating costs of Domlec. Domlec’s administrative cost has increased by approximately 300% since 1996. All of its other operating costs have also increased. Without measures to control the Company’s operating expenses, there is no incentive for it to operate efficiently since it is guaranteed a rate of return always at the expense of the consumer.
14) If there is mismanagement or a failure to properly manage Domlec, the responsibility for that failure must lie at the feet of CDC who was given the benefit of a management services agreement by the previous administration. CDC has a responsibility to manage the cost of Domlec in a manner that benefits the consumers.
If it does not do so in a responsible manner, the Government of the Commonwealth of Dominica has the right to intervene. In this regard, the Government is also considering the effect on consumers and the financial state of Domlec of the EC$ 16 Million recently written off by Domlec in the financial year of 2001. The information available to the Government indicates that the cause of write-off may be the negligence of CDC managers.
15) The representatives of the Government have also identified the need to examine the procurement policy at Domlec. A proper framework needs to be put in place to ensure that no transfer pricing takes place between CDC-related companies to the detriment of the consumers.
In conclusion, a number of persons motivated no doubt by the prospects of cheap political gain have sought to suggest that Government is hostile to foreign investors. That allegation is completely false.
The facts of the present case suggest that it is the Government who is the victim of hostility and prejudice. Domlec is a monopoly with a captive market and guaranteed rate of return.
In addition, Domlec has enjoyed a host of fiscal concessions and benefits such as exemptions from duties on all plant and equipment and the benefit of grant money in the sum of EC$ 6,438,225.00. Its financial statements show that it is getting a fair rate of return on its equity, presently in excess of 15%. No other business in Dominica enjoys the kinds of privileges and opportunity to make profits which Domlec has enjoyed and continues to enjoy.
As the majority shareholder of Domlec, CDC has enjoyed the benefit of not only the concessionary price for the shares bought by it but a host of other concessions and benefits granted to it by the Government under the Sale Agreement.
In exchange, Domlec failed to keep any of the promises made by it in the Business Plan. It has failed to implement the Development Plan. It has failed to invest the USD 16.2 Million promised by it.
It has also failed to put in place the necessary investment and cost reducing measures to ensure that Tariffs are reduced by approximately 25% in real terms between 1996 and 2006 as promised in the Business Plan.
On the contrary, Tariffs appear to be increasing on an annual basis. Moreover any investments recently made by Domlec have been financed by loans contracted by Government and on-lent to the Company, so that Government remains the primary borrower and has the first obligation to repay if Domlec defaults on its loan repayments.
Also, Government has the added responsibility of ensuring that public utility monopolies act in the interest of the consumers and the public interest. Maximum profits and the interests of shareholders cannot be the paramount motivating factors.
If that were so, monopolies particularly unregulated monopolies would never act in the interests of consumers and the public interest. Consequently, a Government has a duty to ensure that an even playing field is created and that the interests of all consumers are protected.
In all of the circumstances, Government feels justified in seeking a review of and amendments to the Electricity Supply Act in order to protect the public interest.
However, Government intends to do so in a manner which is fair and reasonable. Accordingly, I have instructed representatives of Government who are meeting with Domlec that they must continue the present discussions with Domlec but that they have until the 12th September 2003 to arrive at a resolution of the present matter with Domlec.
It is the Government’s position that if the matter is not resolved by discussion, we will have no alternative but to consider and implement all options and measures which are necessary to protect the interest of all consumers and the public interest while at the same time doing everything that Government can do that is conducive to permitting then
Company to provide a viable supply of electricity to the consumer. The next meeting between Domlec and the Government is scheduled to be held tomorrow morning, Tuesday 2nd September 2003.
Once again, Government has been burdened with the unenviable and difficult task of remedying so much of what we inherited as a Government. I cannot change history, but what I can assure you is that whatever needs to be done to protect our country, Government will take on board the task and do it in a manner, which is in the best interest of all Dominicans.
Regardless of political criticism, Government will continue to do what is right in the interest of the people of this country. This Government cannot be guided by political shortsightedness or cheap political gain. If others want to continue on their path of “deceit, deception and decay” that is a matter for them.