A horrible bankruptcy is the inevitable end of Access Real Estate (ARE), if its current saga could not be resolved amicably, argues Abdulmena Hamza – email@example.com - accounts manager at Portbello Group Ltd, United Kingdom.
The Access Real Estate (ARE) saga is a nightmarish experience for both shareholders and homebuyers. Both are still haunted by unfavourable news hovering around this giant real estate firm. The recent disclaimer audit report issued by Kokeb Moges & Co. on the financial reports of ARE for the year that ended on June 30, 2012 seems a nail on the coffin of the ARE.
Lack of workable solutions is making the matter beyond repair. Most of the suggestions seems to lack clarity and misunderstood the degree of the problem. Highlighting the major issues and coming up with practical solutions is of paramount importance.
The Company has done very well in marketing itself. Its customer base expanded significantly in few years.
But it has miserably failed implementing projects. The management of ARE has been very naïve about the complexities of taking on and managing such huge projects.
There are a number of complex issues beyond creating brand image and attracting good number of customers. Businesses in Ethiopia operate in unpredictable and rough business environment. Poor contract enforcement, frequent regulatory surprises, inefficient bureaucracy, hyperinflation, frequent foreign currency shortages, raw material shortages, inflexible and weak financial sector are common sight. Under such an atmosphere, moderate size projects, strong financial resources, hands-on approach to management, flexible contracts and contingency plans would enable businesses to survive.
Huge projects, new technology, few financial resources (capital of ARE to the size of its liabilities is less than three percent) and overtrading seem to have put ARE in trouble. Contributing to the problem were fixed price contracts, short delivery period agreements or refunds, instalment payment-terms, passive board of directors, overoptimism in bank funding and poor financial management, such as investment of customers deposits in shares of related companies.
What is more depressing is that ARE has not even maintained its books in order. And the external auditors rightly disclaimed the financial reports of ARE. They were unable to form an opinion on the financial reports due to a number of reasons, ranging from poor documentation to lack of due diligence audit on property acquisitions, and from customer dissatisfactions to long outstanding receivables.
Such audit reports are rarely given. I had come across such reports few times during my external audit career for over eight years in Ethiopia. If the current mess is not sorted out in an orderly manner, a nasty bankruptcy is inevitable.
The suggestions of the Home Buyers Committee from America are perplexing. The committee demands the government of Ethiopian to rescue ARE through financial support, arranging loans and taking the role of arbitrator in legal matters by invoking moral and legal grounds.
The committee cited the bailout of car manufacturers by the American government in the aftermath of the recent financial crisis. By exaggerating the negative consequences of the possible collapse of ARE on the real estate sector, the Committee has demanded the tax payers to pick up the pieces.
Such demands are indications of the Committee’s ignorance of the economic role and priorities of the government of Ethiopia, the laws that govern contractual matters, the mechanisms of settling disputes and the institutions that deal with such issues at best, offloading their responsibility for making negligent and ill-informed decisions at worst.
The murky affairs of ARE and its related companies have been all over the media for nearly two years. Those who advanced their money to ARE are the well-offs and the better educated section of our society. They are deemed to make informed decisions. Making a little bit of researches and using common sense before advancing such huge amount of money to ARE would have saved thousands from current misery and sorrow.
However, there are neither moral and legal grounds nor economic rationale for bailing out ARE. It is not ‘too-big-to-fail’ Western type bank or automotive corporation. A government which has countless priorities, from lifting the poor from crushing poverty to fighting treatable diseases that kills thousands every year, should not have the luxury of throwing badly needed money on ARE, leaving a precedent for moral hazard.
As it is a contractual matter between home buyers and ARE, it is squarely on the shoulders of the home buyers and shareholders to come up with workable solutions by working together. If they cannot, there is a legal venue.
I believe the current civil and commercial codes have enough provisions to deal with such issues. However, taking the matter to court could exasperate the situation.
The solutions forwarded by Ermias Amelga, the chief executive officer (CEO) of ARE, are even farcical. Ermias must be still naive in believing that a real estate firm its name tarnished by non-delivery of single home over three years, its customers’ trust shaken to the core, its financial report disclaimed, its employees are leaving day after day and is suffering from huge financial difficulties would able to sell the remaining units at two billion Birr and collect 700 million Br from existing customers.
The best solution is to settle the matter amicably. The home buyers should not push ARE to the wall believing they would recover their money. A court battle is lengthy and costly. Even if they could be successful after many years, the enforcement is complex.
Liquidating a company which has a web of inter-company investments, loans, receivables, and numerous of contracts with other companies and government is very difficult and mostly tends to take longer than expected. The possibility of recovering full advances, legal costs, interest and other related expenses by thousands of home buyers is very remote as ARE is left with no equity in its books due to pre-operational expenses.
It has to be stressed that the shareholders of ARE has nothing to lose except their investment as it is a limited liability company. Their investments have been consumed by pre-operational costs spent so far. The only factor that motivates them to keep ARE as a going concern is the possibility of running ARE as profitable venture.
Curbing the financial difficulties and making ARE a profitable entity needs a compromise between shareholders and home buyers. The compromise should be aimed at minimising losses for all parities rather than arguing on the terms of the existing contracts.
The shareholders have done the right job in removing those board members who have caused such messes. The new board should come up a convincing work plan so that more home buyers would not take the matter to court. It should also work hard to convince those home buyers who have already gone to court that there is still a room to turn around ARE.
The new board needs employing a team of professionals comprising accountants, lawyers and engineers to review the assets, liabilities, the works done so far, and the existing contracts with suppliers of materials and contractors.
Once the assets and the liabilities are quantified, and the nature of contracts understood, the construction works done valued, and the cash requirements projected, the team needs to assess the practicality of building houses at agreed prices and possibility of ARE to continue as profitable business. If so, things will be relatively smoother. The fundamental issues left would be funding, completion period of houses and compensation for delay in delivery of homes. Getting financing from banks is highly unlikely as ARE does not have notable assets to secure huge loan. Liquidating some of the investments that are not related to ARE core business and collecting some of the receivables would generate some cash flows.
It will be, then, up to the home buyers to make additional advances particularly those who have not done enough so far, and shareholder to beef up their capital sufficiently. Waiving the compensations for delay in delivery of homes and agreeing a new contract that stipulates a reasonable time for handing over the houses would somehow relieve ARE from financial and tight contractual shackles.
The matter would be complicated if building house at agreed prices is impossible. This requires agreeing revised house prices, delivery periods and payment terms. The home buyers and shareholders needs to show their commitment by providing the necessary funding.
I know some house buyers have so much to sacrifice particularly those who paid huge advances and their money locked up for years without any returns. But they got more to lose than to gain out of lengthy court process.
It has to be noted that the aim of this arrangement is to keep ARE as a going concern and enabling the customers to be home owners rather than rewarding shareholders with profits in the short run. Home buyers might put a covenant close that compels some form of compensations if ARE comes out profitable in the years to come.
Finally, the home buyers as creditors need to seek legal advice to have representation in the board of ARE before making further advances.
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