The off-shore financial centre idea

Introduction

The announcement by the Minister of Finance in his 2008 Budget speech that the government was embarking on consultations on making the country into an off-shore financial centre must have taken those with whom he did not consult with considerable surprise. The Minister in his speech did recognise the country’s earlier experience with the concept, an experience that saw the advocate of the measure ending up in jail abroad. It is perhaps significant that at that time Guyana’s economy was in dire straits and the introduction of legislation to facilitate off-shore banking was at best no more than an experiment.

With debt write-offs and a change from a managed to a mainly market economy and the graduation from a Highly Indebted Poor Country (HIPC) to a lower-middle income country, much is new. But the announcement has been surprising nonetheless, being perhaps the only policy change in the entire budget speech. Although the Minister has announced consultations, Business Page today addresses the concept, the opportunities and the challenges, since from all accounts not many people have been consulted so far.

Origin

The ‘off-shore’ in the concept derives its name from the Channel Islands and the Isle of Man, just off the shores of England from which the wealthy sought to export their assets from the high-tax regime prevailing in the seventies on the mainland. While these islands continue to earn most of their income from the business, the major centre remains Switzerland, where bank secrecy was considered as sacred and impenetrable as the Da Vinci Code.

In the typical off-shore centre, operators with nothing but a member of staff or two and dealing mainly electronically, whether in opening accounts or in carrying out transactions all of which are designated in foreign currency, carry on the business often from a couple of rooms attached with modern telecommunication. The attraction of such centres, usually lies in:

1. low tax rates,

2. strict secrecy,

3. non-invasive legal, tax and oversight regulations,

4. protection of deposits and

5. insulation from the domestic political, social and economic conditions.

Those conditions by themselves in the post-9/11 world are hard to guarantee and the US in particular has been pressing with some success for a tightening of regulations and the relaxation of the secrecy rules. The result is that money of more dubious origin has been moving from the better regulated centres to the more questionable ones.

Caribbean centres

Despite the risks of being branded, many Caribbean countries have gone this route with varying degrees of success. Barbados and The Bahamas are perhaps the two most successful off-shore financial centres among Caricom countries, but competing with the US Virgin Islands and the Cayman Islands. At the lower level there are Antigua, Belize, Dominica, Montserrat, St Kitts-Nevis and St Vincent, all of which have off-shore banking legislation and which depend on the sector in varying degrees.

For Guyana to compete against its regional partners and the international giants of the industry however, it will have to overcome some uncomfortable truths at home and a negative image abroad. Some of the considerations associated with off-shore banking are embedded in the Guyana economic and social fabric. Off-shore banking is associated with tax evasion, the underground economy, money laundering, narco-trading and the Mafia.

With brutal frankness, the website of the US Embassy in Georgetown begins a 2007 report, “Guyana is a trans-shipment point for cocaine destined for North America, Europe, and the Caribbean,” pointing out that it has been ten years since there were any large domestic seizures, the last being in 1998 when a joint Guyanese/US operation confiscated 3,154 kilograms (kegs) of cocaine from a ship docked in Georgetown. The GOG announced no new drug policy initiatives in 2006. The 2008 International Narcotics Control Strategy Report was released yesterday, and its conclusions indicate that nothing much has changed.

Challenges

Very directly the 2007 report noted that Guyana had not yet implemented its ambitious 2005-2009 National Drug Strategy Master Plan (NDSMP) launched in June 2005; the Financial Investigations Unit (FIU) remained handicapped by the lack of effective legislation to deal with money laundering. In this regard the Money Laundering (Prevention) Act, 2000 was never brought into operation and the draft of a new act has been circulated for comments.

Lax laws – among which must be the non-bank cambios legislation – are an invitation to international crime rings which have been growing in numbers and national origins and destinations. Where at one time the Mafia was thought of as Italian -Al Capone, Antonio Calderon and Salvatore Conterno – the fall of communism has unleashed a new brand of Mafia in Poland and the countries of Eastern Europe which are themselves dwarfed by the Russian Mafia which according to an article on the BBC website controls 40% of private business and 60% of state-owned enterprises through thousands of organised gangs. They now play a big role in Colombia and Israel and are suspected of being involved in the casino business in the Caribbean.

Self-interest?

The moves to clamp down on poorly-regulated centres became pronounced in 2000 when in the space of two months a number of centres were labelled as “non-cooperative” by the Financial Stability Forum (FSF) in the context of global financial stability. Then on June 22, as “non-cooperative” by the Financial Action Task Force in the context of money laundering, and on June 26, as “Tax Havens” by the Organisation for Economic Co-operation and Development (OECD) in the context of tax competition. Among nine that were named twice in two months were three Caribbean countries – The Bahamas, St Kitts-Nevis, and St Vincent.

These led to calls for stricter controls of off-shore centres, which became more pronounced after the attack on the US in 2001. Defenders of off-shore banking see these as the work of the countries of the OECD which are concerned about competition rather than security and financial considerations.

Off-shore centres do have a number of advantages associated with the industry, not least of which is that there may be little else to choose from in terms of economic strategies as no doubt is the case with Niue and Nauru with populations of under 25,000 people. Whether these advantages translate into success is doubtful, just looking at some of the countries with which we are familiar.

Lawyers and accountants

Off-shore banking is also very attractive to lawyers and accountants who practically manage and make tons of money from the sector. From an employment perspective, however, it is even less than insignificant with business being largely conducted electronically. On the other hand their attraction to depositors may lie in the model where withholding tax is not charged on interest earned from deposits which can result in deposits being shifted from the commercial banks to their off-shore counterparts.

Guyana has double taxation treaties with Canada, the Caricom states and the UK, and a tax exchange information agreement with the USA, which all provide for the disclosure and sharing of information, and all of which may need to be reviewed in the proposed scheme of things. Given the US’s views of Guyana in relation to crime, that country may almost certainly want to ensure that there are sufficient safeguards in the regulation of off-shore businesses that may take away many of the advantages usually associated with the industry.

Conclusion

At present there is nothing to suggest that the Bank of Guyana is incapable of regulating the existing financial sector, although it has hardly done its job in relation to the New Building Society, and one wonders whether it is really in control of the non-bank cambios. It is likely that the off-shore business will come under its supervision requiring several changes to the Bank of Guyana Act and regulations. Again that may be seen as intrusive by potential operators. And can we hope to do all of this essentially with a minuscule Financial Intelligence Unit?

That this is the only policy issue identified by the Minister in his budget presentation must cause concern whether the government has any fresh ideas to deal with the challenges facing the major sectors of the economy or the taxpayers in the PAYE system and on whom the Budget now reveals has been placed additional tax burden.

Civil Society missed a great opportunity

I think the representatives of civil society were right to accept the invitation from President Bharrat Jagdeo to meet with him on the crime situation following the Bartica massacre.

My concern that they may not have properly grasped the opportunity for a meaningful exchange with the President arises from the anodyne statement coming out after two days of consultations.

That statement certainly does not make me feel safer or optimistic as the only matter of substance agreed is that civil society will have an opportunity to review the government’s security plan. Does this have anything to do with the reports referred to Special Select Committees chaired by the Prime Minister, including the one referred to as the Chang Report?

If the “plan” to which the representatives are privy is a separate plan what is the relevance of the work being done by the Special Select Committees?

Budget Focus 2008

2007 was the year of Cricket World Cup, the single largest sporting event ever held in Guyana. It was an event on which billions were spent by the Government of Guyana and the private sector, yet there has been no analysis of the returns and the extent to which expectations were met. Significantly, visitor arrival numbers were about 12% above the preceding year. With World Cup done, we do have tourism and infrastructure assets but the Stadium for example, which may have cost close to $10Bn to build, will have to be maintained at substantial annual cost.

Budget 2008 which had been planned for earlier in the year became a casualty of both the Lusignan (January 26) and Bartica (February 17) massacres. In the latter case the presentation was set for February 18th but the massacre on the evening before forced a cancellation. It was presented four days later on February 22.

Despite the extra days and the gravity of the situation only one paragraph on the Bartica massacre appears to have been added to the Budget Speech. The work of the Government and the nation must of course go on but the events of the weeks preceding the budget should have impressed on the Minister the pressing issues confronting the nation – crime, the increasing threat of flooding, inflation and the brain drain. To the extent that he dealt with any of these it was how many billions the Government was going to spend.

The ability of the economy to withstand the pressures of crime and spiralling prices will be tested in 2008 as Carifesta returns to Guyana. This and other significant events such as local government elections, the completion of the Berbice Bridge and the Skeldon Modernisation Project were the backdrop against which Minister of Finance Dr. Ashni Singh presented a G$119Bn budget – 8.5% higher that the latest estimates of 2007.

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Compensation for lives and properties

Introduction

It took the January 26 massacre in Lusignan to bring home to the government that it had to confront the situation on the lower East Coast. Typically, one of its responses was to react to the calls by residents to “deal with” the Buxton crisis that has been festering for years. Despite an army presence over a couple of years the solution to what the government sees as the criminal dimension to Buxton seems as far away as when Shaka Blair was killed by the police in 2002.

Last weekend I again visited Lusignan meeting with relatives of the victims whose hopes for improvements in their daily lives are rapidly receding. The wish of many is to pack up and get out, not only from the community but from the country. All these persons claim to have been lifelong supporters of the PPP/C – and indeed the results from successive general elections would support this. As a community they feel deserted, with very little interest shown by officialdom after the initial public intervention.

Hopelessness

And over at Buxton, which I also visited, the situation is both different and similar. Hopelessness envelops a once glorious village and poverty is all around. This too is a village that except at one election has given its full support to the PNCR for which it seems to have received little in return. It is a broken community where, like Lusignan, any semblance of participatory democracy vanished decades ago. This is despite the fact that we now have three experienced ministers with relevant experience in the Ministry of Local Government – another example of a waste of taxpayers’ money and the creation of state jobs for party persons.

In their desperation, these communities now alternate between a dream that their political leaders will represent them and anger at themselves for even thinking this will ever happen. Yes the government went in the early days in Lusignan and in their typically imaginative manner even opened an account with one of the shops in the area where those who suffered direct losses could get some material assistance. And in Buxton the leaders of the PNCR have been visiting almost daily to meet with the residents including those who operate farms, but who are now subject to formidable restrictions on access to their farms.

Police capacity

While the government appears to have back-pedalled from the initial decision to clear all the farms in the backlands to improve security, it appears that there is still considerable clearing being done and that the police have been assigned responsibility for assessing and paying. It has been a long time since the government has shown such confidence in the police!

I am not convinced that the police under the Police Act have the authority or the capacity to assess and make compensation payments in what is a very complex technical issue. In fact every Commissioner of Police I have spoken to since 1993 has admitted that the force does not have the capacity to investigate more than basic fraud cases. How it will move from that level of incapacity to being able to assess losses and award compensation beyond the kind we had in the 2005 floods is to be seen. We recall that in 2005, surveys and data bases were conducted at some cost, which should mean that records are available to make some advances to those who suffer losses while their claims are prepared and submitted and for examination and payment.

Before President Jagdeo set up the Commission of Enquiry into the allegations against then Home Affairs Minister Gajraj, it had been suggested that a wider commission should be appointed to look into the matters concerning the East Coast. There can be no better time for that than now with the question of compensation high on its terms of reference. Despite our experiences with the flood we have no legislation or regulations governing the payment of compensation and instead the government relies on benevolence and ‘ad hocism’ to guide policy in this critical area.

Compensating agriculture

Despite the agricultural base of our economy we do not have a Compensation Fund or national insurance system for the sector. Agriculture, even in the best of circumstances is typified by persistent, high and a wide range of risks which could come from rain, sun, drainage and irrigation issues, pests, El Nino and La Nina, poor farming practices and good old government incompetence. Our present Minister of Agriculture holds an MBA, and while this may not have been in agriculture it should allow him to formulate a suitable compensation scheme for “his farmers.”

The Minister would find compensation schemes for agriculture as recent and as close as in Jamaica in August 2007, in South America, in Canada and the US, Europe and Asia. The one model that I especially like is that of Vietnam, setting out in considerable detail the basis for entitlement of compensation arising out of a 2003 resettlement scheme which had as its focus health care.

Constitutional guarantees

Given our own experiences, Guyanese would of course be cynical about whether what is set out in theory and law does in fact operate in practice. Usually it does if the citizens and their leaders hold the government accountable. Our constitution and the Investment Act 2004 guarantee citizens adequate and timely compensation, but for all practical purposes those guarantees seem to have been suspended when it comes to Buxton. The farmers who are suffering losses as a result of what Dr Luncheon calls the ‘line of sight’ initiative would certainly be affected, but when a people feels as deserted and dis-empowered as those communities do, constitutional rights are a useless luxury.

In the case of Vietnam, at the very early stages of project preparation, local authorities and leaders of different administrative levels in each of the communities affected were consulted and participated in the project design, while affected persons were informed on an individual household basis. The scheme provided for compensation for assets, income and businesses at full replacement cost with compensation for land regardless of the nature of ownership, while investments made on trees and crops are compensated at full replacement costs at current market prices. The headings under which compensation arose are: agricultural land; temporary loss of agricultural land; secondary affected persons; loss of structure; loss of business and income; loss of crops; and allowance during the transition period.

Guyana and Guyanese have the capacity to rise to this level of thinking rather than some mistaken belief or indeed strategy that we strengthen our own position when we fail to empower others. In fact all we do is push them towards the poverty mill from which the only escape route is out.

What about Lusignan?

This community has lost property and lives, but except in the most objective and impersonal way, it would be impossible to place a value on the lost lives. Yet, is it asking too much that even as it considers compensating the people of Buxton for their crops, that the government go beyond items from a friendly hardware shop and assist the residents of Lusignan who must now look only to private initiatives such as the one by Kaieteur News.

There is nothing revolutionary about victim compensation programmes to provide financial compensation for victims of violent crime. Such programmes are found around the world and in 2000 neighbouring Trinidad and Tobago proclaimed The Criminal Injuries Compensation Act, although I have been unable to ascertain whether the board to administer it has yet been brought into existence.

A typical financial compensation programme provides compensation of defined amounts to victims of reported violent crime who suffer serious injuries, dependants of deceased victims and scholarships for bereaved children. Injuries are not confined to physical or fatal injuries, but may be a medically recognised psychiatric or psychological illness. The schemes are generally statutory and there is no question of benevolence or handouts by politicians. Victims receive these as of right.

Conclusion

The festering problem of Buxton and the massacre in Lusignan must surely wake up the country to the backward state of our laws and management of the country. The absence of local democracy is exacerbating an already fragile national democracy. There is no logical, fair and timely system of compensation for our farmers arising out of natural disasters; databases created one year are destroyed the next. In matters of policing and security, there is an increasing tendency by the state to delegate security to the citizens by way of community policing, while victims are often left to fend for themselves. The knee-jerk reaction to clear the backlands, its almost daily modification and amendment and a display of the most incompetent judgment as to who should evaluate and manage an agricultural compensation programme are as clear signs as we can get that those with the duty to protect our communities have little idea how to do so.

It is time that there was a Commission of Enquiry to look at the whole of the East Coast, including Buxton and Lusignan, and that this be as wide-ranging as possible. We can then have a thorough examination of the root causes of the problems we are facing, no doubt including pitiable pay to the police, local government and economic issues, and consider sensible ways to compensate communities. Since Lusignan, such rational questions have been pushed off the bus.

A bridge over the river – a dream come true

Recently a Berbician friend in anticipating the opening of the Berbice Bridge within the next few months exuded that for her – she is about 50? – a Bridge has been a dream she entertained since she was a girl. It will be a major accomplishment in infrastructural development in this country and will probably mark the high point of the legacy of President Bharrat Jagdeo.

Compared with other capital projects undertaken in this country since Independence, it does not rank among the most expensive but the Government will rightly see it as one of the most significant capital projects undertaken during the PPP/C’s watch.

The opening of the Bridge will mark the end of a bad dream for Berbicians living in Region 6 especially those whose experiences and tales of being stranded on one side of the Berbice River waiting to cross to the other can easily fill volumes. There have been several criticisms of the Bridge including its financing, location and type. Financing will come from the private sector after some strong persuasion by the Government which itself will make no direct financial input; the location has been criticised on environmental and technical grounds; the nature of the Bridge which like the Demerara Harbour Bridge built by Forbes Burnham in 1978 is a floating bridge.

Welcome Relief

The Bridge will soon be a reality and the Government will deservedly take the credit for the achievement which coming so soon after the Lusignan Massacre will be a welcome relief. Despite the fact that the Bridge is touted as a private-sector project its chief spokesperson and key player has been Mr. Winston Brassington of NICIL, the holding company of Government entities, with the company itself being much less visible. The role of NICIL which should have come to an end after financing had been secured appears to have been extended though at some stage soon the Bridge Company would need to find its voice.

Expect therefore that the Bridge will feature prominently in the 2008 Budget Speech [see follow-up article below] and in public pronouncements. Still it would be un-Guyanese-like not to have critics waiting to see whether their fears will be vindicated while those private sector investors will no doubt be nervously looking to see how the numbers will turn out and whether their investment will produce the returns they expected. For Berbicians more concerned with living their dream, that would be the last thing on their minds.

The Louis Berger Group, the consulting firm out of the USA, contracted to undertake the feasibility study of the Bridge considered the Berbice River a major physical obstacle to communication between New Amsterdam and Georgetown and a key constraint on national economic development. With some of the most productive agricultural lands located in Region 6, the cost of moving goods and produce out of that region has been enormous with constraints and delays in vehicles being able to cross the River.

Optimism

The Study was optimistic about the Bridge’s potential for revitalising the region, making its produce more competitive, providing employment opportunities, attracting investors and just perhaps reversing the brain drain. Perhaps a bit over-optimistically it even contemplates a reduction of fares by the minibus operators since the Bridge will reduce the down time they now spend using the ferry.

Indeed Mr. Brassington has said the tolls for crossing the Bridge will not be higher than ferry fares “on average” and that fares will be paid on one side of the bridge while tolls will only be collected for vehicles and not passengers. Mr. Brassington in March 2006 projected a reduction in the fares in the latter half of the concession period with most of the initial financing being repaid for the project.

Over the decades, the region has witnessed significantly large population decreases but recognising it as its heartland, the PPP has since its return to power in 1992 committed itself to greater attention there whether in education, agriculture or infrastructure with significant investments in the Berbice Campus of the University of Guyana, the massive Skeldon Sugar Modernisation Project and rebuilding of the main roads leading from Mahaica to Rosignol and New Amsterdam to Crabwood Creek.

Sore need

Writing in Business Page of March 12, 2006, this columnist noted that a Bridge was sorely needed while a consultant who advised against investing in the Bridge conceded that as a project it was excellent, much needed and long overdue. The challenge for the company is whether the projections and assumptions underlying the project, particularly in relation to traffic and revenues, do in fact materialise or whether they are simply too optimistic.

For the user, such considerations pale into irrelevance when matched against the usefulness of the Bridge to them.


Budget 2008

At this time of the year, attention usually turns to the National Budget in which the Government signals its intention on policies, revenues and expenditures for the year. Some were even expecting that the 2008 Budget would have been presented this past Friday. But with the Lusignan Massacre still on the minds and lips of everyone and with no success at apprehending any suspects, the Government may have found it difficult to deliver an upbeat account of its stewardship and spending plans in the midst of fear and uncertainty.

The Government has up to March 31 to present the Budget although it would be ideal for the Budget to be presented before the year begins. Instead all we have had from the Minister of Finance is a request last month for the National Assembly to authorise some $9,398,373,968 to cover overspending by the Government which itself followed a similar request in November for $8,679,412,56.

Consultations

Overspending never reflects well on managers since it is evidence of inadequate planning and foresight. We will return to this matter in a subsequent column but for now there should be some concern about the failure of the Minister of Finance once again to consult with stakeholders prior to the Budget. Such consultation was standard fare with past Ministers of Finance who at least gave an audience to labour, consumers, business and even welcomed inputs from professionals.

It is true that the real benefit of those consultations was lost because the exercise was mere photo-opportunism. But the solution lay in enhancing, not dispensing with the process. In other words use the information gathered as far as could be done, explain why others were not feasible and build relationships with the stakeholders. Instead we seem to be throwing away the baby with the bath water.

President Jagdeo, who still exerts an unacceptable level of influence over the Ministry of Finance felt it necessary to appoint two Ministers in that Ministry and it is hard to believe that neither of them can meet with stakeholders who after all pay the taxes that fund the Budget. A Government that takes pride in its democratic credentials does not normally make changes without at a minimum advising the public and offering reasons.

In fact, in his last Budget speech former Finance Minister Saisnarine Kowlessar lauded the views of the private sector bodies, labour unions and ordinary Guyanese, thanking them for their contributions, which we [the Government] value highly. Has that now changed and if so by whom?

Troubling attitude

If the change is due to a new approach by Minister Dr. Ashni Singh this column wishes to place on record its strong displeasure at such high-handed behaviour. I recall publicly commending the appointment of Dr. Singh as ushering in a new, positive era and was actually criticised for going overboard in my praise of the Minister.

There have been concerns recently that the Minister is obsessed with concealing information to which the public have a right, such as data on inflation and VAT collections. I am sure the Minister does not need to be reminded that there is no monopoly on wisdom and the people must never be excluded.