Net profit for 2019-2020 reversed to a net-loss in 2020-2021

Durrant Pate/Contributor

The Auditor General’s Department (AGD) has painted a dismal picture of the chronic receivables situation at the National Solid Waste Management Authority (NSWMA), during a review of its financial statements over a five-year period.

This examination was executed in the context of the Government of Jamaica (GOJ) Fiscal Responsibility Framework (FRF). The review showed that the NSWMA’s current assets declined in FY2020-21 relative to FY2019-20, consequent on a 19.1 per cent fall in Trade & Other Receivables and a 57.3 per cent decline in Cash & Cash Equivalent.

There was also a 62.9 per cent fall in inventories. Concurrently, current liabilities increased based on upward movements in Accounts Payable and Provisions (up 35.5 per cent) and Lease Liabilities (up 24.8 per cent). NSWMA’s adverse liquidity condition was also reflected in an increase in the average number of days in receivables outstanding to 383 days in FY2020-21 from 251 days in FY2016-17.

Concurrently, the receivables turnover ratio fell to 0.95 in FY2020-21 from 1.45 in 2016-17 based on NSWMA’s slower collection rate vis-a-vis credit extension.

“Nonetheless, despite the high volume of outstanding receivables, which included uncollected revenue from waste collection services and the high downtime of collection units, the NSWMA faced lower liquidity risk given guaranteed access to Government Subvention and other resources,” the AGD reviewed revealed.

Fall in asset turnover

NSWMA’s total asset turnover ratio fell to 0.25 in FY2020-21 from 0.27 in FY2019-20 and relative to 0.32 for FY2016-17, averaging 0.26 over the five-year review period. The Total Asset turnover ratio measures how efficiently an entity utilises its assets to generate revenue, with a higher ratio being more desirable.

NSWMA’s total assets comprised primarily Property, Plant, and Equipment, fleet of collection units used for commercial operation, Trade and Other Receivables, Cash and Cash Equivalent.

The AGD review showed that the low Total Asset turnover ratio was related to the fact that Government Transfers which form the bulk of NSWMA’s income, was not generated by NSWMA’s operational activities.

NSWMA’s revenue from operations accounted on average for only 8.1 per cent of total income, thereby contributing negligibly to its revenue generation capacity. During the review period, there was only a moderate increase of 25.5 per cent in commercial income relative to the 62.4 per cent increase in total assets over the period.

Net loss posted in FY2020-21

NSWMA recorded a net-loss of J$861.5 million in FY2020-21, relative to net-profits of J$198.9 million and J$208.6 million in FY2019-20 and FY2016-17, respectively. Accordingly, net-profit margin fell to negative 1.55 in FY2020-21, from 0.29 in FY2019-20 and relative to 0.47 in FY2016-17.

NSWMA’s profitability was largely underpinned by the GOJ, as its other income sources, namely, contracts and fees from the collection of commercial solid waste and from landfill waste disposal, generated minimal revenue. Over the five-year review period, GOJ subvention (net) which averaged 88.8 per cent of NSWMA’s total income, increased to J$6.2 billion in FY2020-21 relative to J$4.4 billion in FY2016-17 but fell marginally relative to the $6.9 billion for FY2019-20.

The net loss in FY2020-21 was in a context where Government reduced its expenditure budget due to fiscal challenges brought on by the COVID-19 pandemic. To ascertain the impact of GOJ subvention on NSWMA’s balance sheet, the review excluded the subventions from the AGD’s calculations.

Fall in profit margins

As such, it was “observed that net profit margin fell to negative 12.65 for FY2020-21 relative to negative 9.45 for FY2016-17, as revenue from operations was insufficient to offset the impact of increasing expenses, which amounted to J$7.9 billion in FY2020-21, relative to J$5.0 billion in FY2016-17, averaging $6.5 billion over the five-year review period. NSWMA’s return on assets ratio which averaged 0.03 for the five-year period, also displayed an increasing trend, notwithstanding a decline to negative 0.38 at end FY2020-21 relative to 0.15 at end FY2016-17″.

The fall in FY2020-21 indicated that for every dollar of assets invested, NSWMA recorded a net loss of $0.38, reversing a positive position underlined by four successive years of net profits. NSWMA’s total assets over the review period expanded by $866.6 million (62.4 per cent), primarily driven by Account Receivables which increased by 37.3 per cent to $522.5 million in FY2020-21 from $380.6 million in FY2016-17.

Breaching FAA Regulations

For the period reviewed, NSWMA did not meet the criteria established in the FAA Regulations, related to the attainment of positive working capital. Working capital refers to the day-to-day management of an entity’s short-term assets and liabilities. Despite an improvement in FY2018-19, NSWMA’s working capital was generally negative over the five-year review period moving sharply to minus $1.2 billion in FY2020-21 relative to minus $540.6 million for FY2016-17.

The significant decline in working capital in FY2020-21 relative to FY2019-20 was underpinned by a 57.3 per cent decrease in Cash & Cash Equivalent and 35.5 per cent increase in payables. Given the negative working capital throughout the review period, NSWMA’s working capital turnover ratio was negative 0.46 in FY2020-21 relative to negative 0.82 in FY2016-17, indicating that the Authority had to utilise external sources to fund its operations.

NSWMA solvency ratio fluctuated around the solvency threshold of 0.2, declining to negative 0.41 at FY2020-21 from 0.13 in FY2019-20 and relative to 0.19 in FY2016-17. The solvency ratio measures an entity’s ability to meet its liabilities in the long-term. A negative or low solvency ratio indicates a greater likelihood that the entity can default on its obligations.

However, given the guarantee of Government funding support, the risk of NSWMA defaulting on its obligation would be minimal or non-existent. Nonetheless, the movement in NSWMA’s solvency ratio was driven by changes in Government Subvention (inflows) on the one hand, and Other Payables (outflows) on the other, including statutory obligations.

Although Government Subvention income generally increased during the period, in the latter years, inflows were outpaced by a rise in Trade Payables and Statutory Liabilities as reflected by the increase in the ratio between FY2016-17 and FY2018-19, and the decline thereafter.

Recommendations

The AGD put forward two primary recommendations, as a solution to remedying the problems shown up in its five-year review.

1.    Management must take steps to strengthen its collections, by tightening its credit policy and reviewing its approved list of contractors to address its chronic aged receivables.

2.    NSWMA must also implement controls to limit the growth in Trade Payables and to prioritise clearing Statutory Liabilities, which directly impact staff welfare.