Skip to content

“Lies, damned lies and FSC company accounts” (edited version appeared as ‘Lies and more lies’ in The Fiji Times, 6 June 2015)


Lies, damned lies and FSC company accounts
[An edited version appeared in The Fiji Times (6 June 2015) as ‘Lies and more lies’]
Professor Wadan Narsey

 A few weeks ago, I cautioned readers of The Fiji Times (‘Lies, damned lies and statistics’, 9 May 2015), about implausible statistics thrown at them by people in power.

Last week, the Executive Chairman of the Fiji Sugar Corporation (Abdul Khan) was reported by the Fiji Broadcasting Corporation (28 May 2015) as telling the annual general meeting of FSC in Lautoka that FSC has recorded “$1.8 m profit for 2012, $6.2 m for 2013 and $6.9 m for last year.’

The public would naturally have been reassured by the 2014 Annual Report which stated ‘The company’s profitability has been maintained now for 3 years thus giving the financial market confidence in the company and the industry.’

But were they to read the 2014 Annual Report (and that for 2013 and 2012 which are now on the FSC website), they would read that the profit for 2014 was $6.9m ‘after writing back a portion of the impairment loss.’

Khan and the PS Sugar (Parmesh Chand) also made other statements that should have given nightmares to taxpayers.

It is a sad indictment of the knowledgeable people in Fiji, that they show no concern: there have been no querying Letters to the Editor, or statements of concern by prominent accountants or auditors or accounting academics (who are no doubt all too busy making money to care about the public interest).

So painfully, I have taken time out of my urgent academic work, to draw the attention of the thinking and caring public, to the serious dangers of uncritically accepting press releases on FSC profitability.

Read a few more lines in the FSC accounts and you find that the trading results for the last three years are not real profits at all, but actually ‘operating losses’.

FSC’s net equity has been negative for the last four years. Its debts exceed its assets.  Most of us, if we become overwhelmed by debt, are declared bankrupt.

This should be of great concern to Fiji taxpayers (who through government own 68% of the FSC shares), and to the statutory bodies, local companies and individuals who own the rest of the shares.

Taxpayers in general should also worry about government guarantees given to the financial institutions who have lent huge amounts to FSC.

The real operating profits?

The FSC annual reports give the Trading Profit/(Loss), before extraordinary items, for the last four years as follows (rounded off to millions):

2011    ($32 million) (operating loss)

2012    ($14 million) (operating loss)

2013    ($10 million) (operating loss)

2014    ($5 million) (operating loss)

It is a pity that Abdul Khan chose not to mention the genuinely (but slight) good news that the operating losses have been reducing, but then he would have had to acknowledge that FSC has been making losses not profits.

The public (and accounting students) might be curious to know how exactly ‘Operating Losses’ magically become ‘profits’ in Fiji’s world of accounting?

The 2010 ‘Impairment Loss’

In 2010, the FSC accounts showed an ‘Impairment Loss’ of a massive $173 million.

This was the accounting profession’s sensible way of telling FSC shareholders that

* the huge loan taken from the Exim Bank of India for the ‘Mill Upgrade Program’, and other loans, had not worked as expected, and added far more to liabilities than assets;

* In 2010, Total Liabilities exceeded the Total Assets by $64 million i.e shareholders net equity was negative $64 million.

* FSC was technically insolvent, and were it not receiving ongoing government handouts, private shareholders could technically file for FSC’s ‘bankruptcy’ to protect whatever little financial interest they could retrieve.

[Note a company is technically not bankrupt until they have legally filed for bankruptcy.]

Reversal of Impairment Loss

But, since then, NZ consultants have apparently advised FSC about improvements in the mills’ performance and future earning prospects.

Sugar industry stakeholders, such as all the financial institutions who have lent money to FSC, and farmers organizations whose livelihoods depend on FSC surviving), might want to demand that FSC release these NZ consultants’ reports to see exactly what they recommended, as opposed to what the FSC Annual Reports imply, reading between the lines.

Whatever they said and recommended, FSC has for each of the last three years, ‘reversed’ a proportion of the ‘impairment losses’ (the amounts chosen by themselves, apparently) which, when added to the operating losses, resulted in the positive ‘profits’ of  $1.8m, $6.2m,  and $6.9m for the last three years, as focused upon and quoted so misleadingly by the Executive Chairman.

BUT this is an accounting result, produced merely by reversing the 2010 ‘impairment loss’ which should not have occurred in the first place.

[Note that the FSC Board pats itself on the back in the 2014 Annual Report that they could have reversed even larger amounts, but chose to be ‘conservative’.  But of course, reversing larger amounts for 2012, 2013 and 2014, would have shown even larger ‘profits’ for these years, but also meant that in future years they will have run out of ‘impairment losses’ to write back, and MUST then show ever larger losses. The FSC Board is not that stupid, eh?]

The fundamental reality is that FSC has recorded large operating losses for the last four years, even if they have been reducing in size.

The accounts show that FSC shareholders’ equity has been negative $99 million for 2012, negative $93 million for 2013, and negative $86 million for 2014. i.e. FSC has been insolvent for the last three years.

The South Pacific Stock Exchange quite correctly delisted FSC in 2011, and stopped trading its shares.

This was to ensure members of the public were protected from trading in shares whose values were ‘very unclear’, and certainly not the large positive amounts quoted in previous years.

So it is astonishing that the 2014 Annual Report states (page 2) that ‘The Corporation’s shares are listed and traded on the South Pacific Stock Exchange Limited’.

This is simply not correct, even though it can have a major impact on innocent readers.

While this might be a genuine mistake resulting from ‘cut and paste’ from previous annual reports, note that this statement was not there in the annual reports for 2011, 2012 and 2013.

So who therefore authorized this statement to magically appear in the 2014 Annual Report and did no director pick up this absolutely important error? Or was it deliberate?

Note that directors of companies are usually liable if their annual reports have false or misleading statements.

There is more bad news.

How much money does FSC owe?

FSC’s 2014 balance sheet shows that it owns assets (including its mills and other equipment, stocks of sugar and cash) worth $227 million. But its total liabilities (what it owes to its creditors and lenders) are $374 million.

FSC owes $55 million to its ordinary business creditors, who we assume will get paid over time. But it also owes more than $300 million to a number of lenders. These include:

  • Government of Fiji $173 million
  • Exim Bank of India (Government guaranteed) $  73 million
  • Reserve Bank of Fiji (Government guaranteed) $  30 million
  • Sugar Cane Growers Fund (Government guaranteed) $    4 million
  • Fiji Development Bank $  14 million
  • Fiji National Provident Fund (Government guaranteed) $  10 million

How will a company that cannot make a trading profit ever pay back these debts?

Board Accountability and Transparency

Every Annual Report of FSC states “The Board supports a strong disclosure regime acknowledging transparency as a key element of an effective corporate governance system. This includes timely and accurate information to be disclosed on matters such as the Corporation’s financial and operating results’.

Yet the FSC Board refused to release the Annual Reports and the annual accounts to its shareholders for three years, including the taxpayers of Fiji, and other private investors.  Hardly ‘timely’ was it?

The Executive Chairman claimed that they withheld the financial statements for the past three years because of ‘commercially sensitive information … and to protect the shareholders from compromising their position’.    What gobbledegook.

Accounting professionals know that shareholders are best protected by being given full information about the financial viability of the company, annually or even more frequently in troubled companies, so they can decide whether to buy more shares or sell, and at what price.

The taxpayers also need to know, since Government, on their behalf, continues to give massive guarantees for loans to FSC by ANZ and the other financial institutions mentioned above.

The public could ask were the Fiji Development Bank, Fiji National Provident Fund, and the Reserve Bank of Fiji, officially informed that FSC was insolvent before they granted the loans?  And if they did know, why did they, given that they are not welfare organizations?

The PS Sugar is also supposed to have piously said  that the AGM “has demonstrated the accountability of the board and management because the annual report is something that opens up the affairs of the company”.  True enough.

But why delayed for three years?

And why would the PS Sugar, a civil servant, allege that the accounts were not revealed and the AGM not held for three years “to ensure that proper consolidations happened.”

Is this more gobbledegook from a civil servant who right from the 2006 coup, has been periodically fronting up to the media cameras, and with his deadpan, smooth and slick manner, justifying the unjustifiable (and being suitably rewarded).

Has Fiji’s Institute of Directors or the usually vociferous and grandiose Fiji Institute of Accountants, raised publicly this failure of good corporate governance, that the FSC directors have not been fulfilling their fiduciary duties by refusing to release the annual reports and accounts to the shareholders?

Have the FSC directors for the last three years met the legal requirements of the Companies Act under which they have operated since 2006?

Why an Executive Chairman?

FSC suffers another governance weakness in that the Board Chairman (Abdul Khan) is also the “Executive Chairman”, i.e. CEO as well drawing a full salary and being the overall ‘manager’ of FSC.

It is generally accepted (and the trend is strengthening internationally), especially for public companies, that good governance requires a totally independent board to monitor the performance of the management, and report independently to all the shareholders, large and small.

Under an Executive Chairman, the Board cannot be fully at arms length from the management.

The FSC Executive Chairman is technically reporting on his own management, which includes massive losses for the last four years, failing to present annual reports for three years, and even failing to hold Annual General Meetings for three years, all the while  praising himself by telling the media that shareholders were happy.

How slack of the private shareholders that none of them told the media how happy they were with FSC management.

It is a pity that no sugar industry stakeholder has asked how an ordinary board member eight years ago, was suddenly  made the CEO of a complex sugar milling company with several mills, and facing such massive problems of declining efficiency and collapsing markets.

Were there any advertisements for this position to which the best applicants from the world over could have applied, including some former citizens who have had good track records in this position?

What were this current CEO’s qualifications for this position, apart from some business deals he may have been interested in relate to co-generation, and apart from his slick public relations ability to give out rosy pronouncements on FSC’s performance, year after year?

Who indeed appointed him?

And, having appointed him as CEO, why did the Bainimarama Government not appoint an independent chairman of the Board to independently monitor the company and the CEO?

More dangers ahead

Taxpayers are warned that the 2014 Annual Report states that they were looking at converting the Fiji Government’s loans of $174 million to FSC, into ‘equity’.

Having lent $174 million of their hard-earned money to FSC at 5% interest, taxpayers are legally entitled to some $9 million in interest payments per year, while dreaming of the future repayment of the $174 million principal (no harm in dreaming, even in cloud cuckoo land).

Khan and Co. are planning that the Bainimarama Government (on taxpayers’ behalf)  will convert the $174 million loan, for an equivalent amount of ‘equity’. In other words, the Government will give up its $174 million loan and instead invest $174 million to take more shares in a bankrupt company.

Usually, loans are ‘first charges’ on the assets of a company if it is wound up.

The shareholders get their share of whatever is left, which in the case of FSC right now would be a large majority share of ‘a Big Fat Zero’.

Here is a commercial test: imagine what ANZ would say to Abdul Khan and Parmesh Chand (apart from ‘ha ha ha ha’) if they suggested  that ANZ should convert its loans to FSC into ‘equity’.

Taxpayers be warned: the National Bank of Fiji was considered a massive disaster costing taxpayers $220 million. But the FSC may lose taxpayers not just the $174 million of government loan, but perhaps even more than $300 million if ANZ, Exim Bank of India, FDB, Reserve Bank of Fiji and FNPF call upon the Government guarantees of their loans.

There are so many sad PhDs which can be written on the FSC and the magical illusions of creative accounting and auditing, probably from universities abroad.

Just do not expect any investigative PhD’s from USP or FNU, whose academics remain silent while national financial crises in their fields of expertise develop under their noses.

Neither should the public expect any investigative or critical journalism from the programs run by our two television, such as 4 The Record, or Close Up, despite the ample evidence in front of them that ‘all is not well in Denmark’: these journalists have now become propaganda hacks, and are a shadow of what they were ten years ago.

Postscript 1: the military and the sugar industry

Today, there is no shortage of statements from the Bainimarama Government about how much they value the sugar industry and the welfare of the 200 thousand people who apparently depend on it.

But they conveniently forget that in 2009, Bainimarama contemptuously threw away 300 million dollars of EU aid for the sugar industry, by refusing to hold elections that they had promised, stating that they were not going to discard their ‘vision for Fiji’ just because ‘a few carrots were being dangled’ by the EU.

That $300 million could have gone a long way towards enabling the industry and cane farmers to diversify.

Of course, today the Bainimarama Government, without blinking an eyelid, is lovey dovey with the same EU which is now throwing fewer carrots at the Fiji sugar industry, while removing the biggest carrot of all, the guaranteed sugar prices and quota for the EU market, likely to be the last nail in the sugar industry coffin, as currently constituted.

Remember also the many military officers who, with massive increases in their salaries and perks,  energetically charged into battle as Permanent Secretaries or Ministers for the sugar industry or administrative officers here and there. Of course, you could not blame them, they were merely following orders, as the military demands of them. Theirs is not to question why….

For eight years, the media has conveyed their articulate jargon about the revolution these military men were going to unleash in the sugar industry with the renewal of land leases, new cane planting, new sugar industry research institutes, new harvesting methods etc.

Today the same military officers are now talking about a new ‘development plan’ and a new ‘strategic plan’ for the industry, as do many con men in other public enterprises where action never matches the rhetoric.

These military sugar industry experts have apparently suddenly discovered that most of the cane farmers are now too old, and have no real interest in farming because their children are earning good money in towns or overseas, while the high input costs, and paying for outside labor, and cane transport by trucks, makes the cane farm totally unprofitable for two thirds of the smallest cane farmers.

The sugar industry nightmare continues, while the Bainimarama Government’s spin doctors continue to pain a rosy picture, all with the assistance of the technocrats of UN organizations, IMF, World Bank, and donors, who are slowly beginning to once more enjoy the ‘good old days’ that prevailed in Fiji, before Bainimarama, rocked the boat in 2006, with the ready assistance of China and Malaysia.

Postscript 2    What data to reveal to shareholders, what to discuss and what not

For any student who wishes to do a PhD on FSC, one astonishing thing they need to keep in mind is the FSC Board Chairman’s choice of statistics to present, what not to, what to discuss and what not to.

Ignore the all the glossy photos of the Board Members and the senior management (FSC has managers coming out of every nook and cranny while sugar output is half of what it was ten years ago).

The 2014 Annual Report, for instance, has on page 15, a table of the names of all the ships that took away Fiji’s sugar and molasses, how much, their arrival date and their departure date.

What do the shareholders care about this trivial information?

But on page 17, there is a 10 year statistical summary that for some indicators gives the 2014, but for others, stops at 2013.  Why so? A mistake by this massive company?

There is no series on the average price for sugar, although you can calculate it from other data.

The data on POCS (i.e. Pure Obtainable Cane Sugar) is given in whole numbers, which hides real trends.

There is no discussion of one key indicator of the performance of mills which is ‘average crushing rate for all mills’ which was about 900 tons per hour for 2004 to 2006, but just above 800 tons per hour these last few years under Abdul Khan.

Nor is there any discussion of the other milling indicator which is ‘actual crushing time as percentage of available time’ which averaged 70% prior to 2006, but was only around 60% these last few years.

There are tons of photos of mills and farmers and fields.

But no graphs of the ten year trends in cane produced, sugar produced, Tons of Cane per Ton of Sugar, or POCS, or milling efficiency.

There are some graphs given for the last four years for indicators which suggest that some improvements are taking place.

But not going back to 2006, when the Bainimarama Government took over.

There are many FSC statistics which students of economics and business will find fascinating, if you can get hold of them. But don’t hold your breath, expecting the FSC to release any of this ‘commercially sensitive’ information to researchers or the public.

A fascinating study for accounting students will be to examine the changes in auditors over the years, the subtle changes in their commentary, and how they signed themselves over the last 9 years.

Another fascinating study will be the shutting down of the Sugar Marketing Authority, and the impact on unit sugar revenues subsequently obtained by Bainimarama’s appointees (or let us be honest, Aiyaz Khaiyum’s appointees).

Yet another interesting study should be the callous destruction of the farmers’ organizations and the sacking of their leaders like Jaganath Sami, after the 2006 coup, for purely political reasons, and the impact it had on the cane farmers.

Aaah, I forget.

The ‘old politicians’ were so bad, weren’t they, that they produced twice as much sugar cane and twice as much sugar that is currently produced under the allegedly ‘non-political’ Bainimarama Regime.

What one can say with certainty is that you should just keep paying your taxes which can be guaranteed to rise in the future to pay for the mistakes of self-appointed captains of the sugar industry.

What really puzzles me is why FSC has not had a magical ‘rebranding’ exercise, the other time-honored way for managers to pretend that the past does not exist, and that the future will be hunky dory, under a new name, new paint, new symbols, while underneath it all, nothing changes.

Comments are closed.

%d bloggers like this: