Tag: National Insurance Scheme

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On the Line – Annual Reports of the NIS 2008 and 2009

Introduction
As it enters its forty-second year as the workers’ retirement and short-term insurance fund, the National Insurance Scheme is facing one of its most serious crises ever. For several years during the Burnham Administration which set up the Scheme in 1969, its surplus funds were treated it as a source of cheap borrowings by the Government. I recall first looking at the finances of the Scheme with trade unionists Lincoln Lewis and Nanda Gopaul in the mid-to-late eighties and our shock at seeing all the investments in long-term, low-interest (5%) government paper when the inflation rate was considerably higher. Now, with seemingly more investment freedom, the Scheme is actually doing worse, partly a measure of the absence of quality investment opportunities in the economy.

In the context of its current travails, it is more than ironic that its 2009 annual report tabled belatedly in the National Assembly along with its 2008 report, has a creative cover design with the words “Embracing the Future….. Reaching New Heights!” As part of its near-term challenges, the Scheme’s directors must ponder about the safety of more than $5.8 billion the NIS has tied up in the collapsed insurance giant CLICO Life and General Insurance Company (SA) Inc. Readers will recall that the Guyana courts last year ordered the company to be liquidated after its parent in Trinidad and Tobago had over-extended itself and sought the protection of the Central Bank in that country. Within months, all the CLICO subsidiaries, from The Bahamas in the north to Guyana in the south, fell like pins at the bowling alley.

The CLICO fiasco
For several years, the NIS had over-exposed itself to CLICO, with its investment in that company – according to Finance Minister Dr. Ashni Singh – at one time running at about 40% of the Scheme’s assets. President Jagdeo too had described the investment as “bad” but they were defended by Dr. Roger Luncheon, the Board’s chairman since 1992, on grounds of “comparative analysis …. with other simultaneous investments”.

The Scheme derives its income from contributions and investments. Mature Schemes expect that as contributors retire, investment income from the accumulated savings would account for an increasing share towards the heavy cost of long-term pensions. That did not happen in 2009 when long-term benefits increased by 9.2% while investment income fell by 16.5%, from $1,615 million to $1,348 million. Total expenditure, mainly on benefits and administration costs increased from $7,835 million to $8,351 million, or 6.6%. This does not mean the Scheme is in immediate danger of collapse. It is not. On an annual basis benefit payments are still covered by contributions and the Scheme has liquidity cushion in the form of billions in fixed deposits in the commercial banks.

What is happening though is that partly as a result of CLICO, net income is falling at a rate that even the actuaries could not anticipate when they did their last review in 2006. Moreover, the viability of a Scheme is measured not by traditional cash flow models but by long-term considerations since a worker pays today to receive pensions well into the future. And if the Minister of Health is right about life expectancy increasing, the amount the contributor will receive in long-term benefits also increases. To deal with that danger, consideration has been given to increasing the NIS pensionable age but that is unlikely to go down well with the public.

Five-year summary

Source: NIS Audited Financial Statements

Section 37 of the National Insurance Act requires an actuarial review at least every five years, although the better view is for triennial reviews. Ever since the 2006 review, the financial statements consistently note that the Board is “reviewing and implementing the above actuaries’ recommendations.” That slothfulness is a luxury the Board cannot afford given that the actuaries had warned that using an intermediate scenario projection the Scheme’s expenditure would exceed its income in 2015. It now seems that even before taking any loss on the CLICO investment, the critical point will arrive long before 2015, and possibly in this very year.

The President and Vaitarna
One hopes that the directors will wake from their slumber and that there is a reversal of fortune. But for the government to make good on President Jagdeo’s pledge that the “NIS has not lost a cent because …they will be paid back”, taxpayers will be carrying the can for all those individuals and entities who got taken in by CLICO’S Ponzi-like interest policy to attract money to finance its parent’s Bahamas operations. The President, willingly or unwittingly, for reasons which we can only speculate, is prepared to compensate risk-takers in CLICO at the expense of the pensioners, workers and the NIS, one of the country’s most important and enduring institutions.

The President at the National Cultural Centre fifteen months later backpedaled and committed his government only to very specific sums for the CLICO recovery efforts – $3 billion from the Petroleum Fund and another $600 million from a source he did not then identify. It now seems that that money has been unlawfully diverted from the Guyana Forestry Commission in a transaction with Vaitarna Holdings Private Inc. which took over a Timber Sales Agreement previously held by Caribbean Resources Limited, a CLICO subsidiary. On that occasion, the President spelt out how the money was going to be used – to pay CLICO’S 4,366 holders of Executive Flexible Premium Annuities and 39 policyholders with balances in excess of $30 million who he said would receive the remaining $900 million, “up a maximum of $30 million each, with priority being given to non-institutional policyholders.”

Chicken feed
Not only did this exclude the NIS as an institutional policyholder, but $30 million is chicken feed to the $5.8 billion it has in CLICO. And there was worse coming from the President when he indicated that for purposes of the payout, “the balances outstanding would be those as of the time that the judicial management commenced, that is, February 2009.” Taken literally, that means that there will be no interest after February 2009 when CLICO went bust. If that is the case, then the NIS will have to write-off all the income it has taken up in its books from that date.

For some inexplicable reason the auditors of the Scheme appear to have misinterpreted a letter from Dr. Roger Luncheon as a guarantee on the basis of which they gave an unqualified opinion on the Scheme’s financial statements. If they were aware of all that was taking place around CLICO, they would have insisted on no income from the investment in CLICO being recognised and for the investment to be marked down. If the directors refused to do that, the auditors should have qualified their opinion rather than take the soft option of an emphasis of matter.

There are two favourable possibilities. Although the President’s remaining term can now be counted in months, if his Party is re-elected it is likely to feel compelled to pay the NIS the full principal and interest it has outstanding in CLICO. In this quasi-legal liquidation, there are only a few pension funds to challenge for parity of treatment. Second, with those pension funds paid off, the NIS will be the only entity entitled to the proceeds from disposal of CLICO’s remaining assets. For the NIS, the CLICO’s investment could be a major stumbling block in the 2011 actuarial review unless it is resolved by that time. I repeat however: any sums paid out of the Treasury constitute a cost to the taxpayers, plain and simple. Yet those very taxpayers and their representatives are completely in the dark about the various ways that the government will bail CLICO and its directors out of the illegal mess that they have created.

Valuable statistics
The NIS maintains some excellent statistics on its contributors and beneficiaries and I believe that it has been making real effort to address the weaknesses in its contribution records, some of which may never be resolved as employers have gone out of existence. Some of the statistics seem counter-intuitive or hard to explain. For example, is it credible that in 2010 there is less than half the number of self-employed contributors as there were in 1997 or that the number of active employed contributors is less than it was 20 years ago? I think not.

The future
The next actuarial study will be most instructive and will give an indication of what the future holds. Failure to act on the 2006 recommendations will make the 2011 recommendations that much stronger. The future calls for fresh ideas, boldness at the Cabinet level and new blood in the Board. Several of the directors – who are very much part of the problem – have been there since 1992 and most of the new appointees are due to ex officio changes, so for example Ms. Doreen Nelson replaced Mr. Patrick Martinborough on his retirement as the Scheme’s General Manager and Ms. Linda Gossai replaced Mr. Edward Layne on the Board after she succeeded him as Accountant General. The Board may even need individuals with paranormal qualities to exorcise the ghost of CLICO. Only then can they start thinking of a future.

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NIS annual report does not provide any evidence of a guarantee of the $5.7B CLICO investment

Dr. Ashni Singh, Senior Minister of Finance last week tabled in the National Assembly the annual reports and accounts of the National Insurance Scheme for the years 2008 and 2009, late to extremely late under the law but quite normal for this Minister.

Business Page in this coming Sunday Stabroek will place these reports under the microscope but for now there is one egregious matter which I think deserves the widest exposure and that is risk to the Scheme of losing $5.8 billion invested by the NIS in the failed CLICO Life and General Insurance Co (S.A.) Limited. At December 31, 2009 the NIS had invested in CLICO’s so-called annuities the sum of $5.748 billion, in addition to $90 million of income earned but not yet received from CLICO. The reality is that because of this reckless and possibly unlawful investment by the board in a Jagdeo-favoured company, 20% or $1 of every $5 of the accumulated fund of workers’ contributions in NIS is now at grave risk, earning nothing in income. The board and its auditors TSD Lal & Co. do not seem particularly concerned.

Perhaps the board and the auditors, which by an unfortunate coincidence are/were also the auditors of CLICO, did not consider the investment bad or doubtful. TSD Lal & Co refers unambiguously in their audit report to a guarantee by the government of the NIS’s investment in CLICO and directs the reader to Note 22 in which the directors too, refer to a guarantee, but in looser language but which appears to have escaped notice by the auditors. The further information provided in note 22 does not by a long stretch provide any evidence of a guarantee but rather proof of a clear conflict of interest between Roger Luncheon, M.D. Chairman of the NIS Board and his position as Head of the Presidential Secretariat, a conflict that would put any careful auditor to great care and, in the circumstances of CLICO to extreme notice. Instead, the auditors and the Board were so impressed and reassured by a mix of quasi-legal/accounting “Luncheonese” that they accepted the following as constituting a guarantee.

“The Chairman of the National Insurance Scheme who is also the Head of the Presidential Secretariat at the Office of the President made the following representation in a letter dated 10th. August 2009:

“The Board of the National Insurance Scheme wishes to advise that it has noted the undertakings made by the President concerning the recovery of NIS investments in CLICO. The Board is also mindful of the unanimous Parliamentary Resolution guaranteeing state support for recovery (emphasis mine) by NIS of its investments in CLICO. As such, the Board has the utmost confidence that the undertaking would be honoured and the investments of NIS in CLICO will be recovered.”

Had the Board not included long-serving and experienced directors like Maurice Solomon FCCA and Paul Cheong, a top director of the Beharry Group, I would have said that it was a case of Luncheon taking the workers of Guyana for a $5.8 billion dollar ride. That he managed to take others along with him is a feat that only a Luncheon would contrive and succeed with.

Other than in note 22 – not Catch 22 – the directors did not even bother to refer to its CLICO exposure in their annual report. A serious Minister of Finance should have referred the report and its undated transmittal letter back to the Board for major revision. Dr. Singh accepted it.

If the investment is not recovered in the very near future, it will be drastically discounted (reduced) by the actuaries in the periodic evaluation on the viability of the Scheme due later this year, with the workers as contributors, bearing the cost. And if it is “recovered” from the public purse, the workers will still bear the cost, this time as taxpayers. In either case, that would leave President Jagdeo, Ms. Gita Singh-Knight of CLICO, Drs. Luncheon and Singh, the entire board of the NIS and its auditors, with varying quantities of red ink indelibly oozing from their hands, without having to bear any other responsibility for the consequences.

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The minister responsible for NIS is not the President but the Finance Minister

I applaud the initiatives in Friday’s Stabroek Business for persisting with certain issues that do not seem to receive much attention in the other sections of our newspapers. I must however take issue with the editorial in the Stabroek Business of May 8 in which the writer called on the President “to make clear his personal concerns over the particular transgression” regarding the non-deduction/payment by employers of NIS contributions for their employees.

Such a call is not only ill-informed but is also dangerous. Why do we need the President’s “personal concerns” when the minister responsible for the National Insurance Scheme is the Finance Minister? And the writer must surely know that the Attorney General, who just shifted chair back into Cabinet, can with proper respect for the principle of separation of powers among the arms of the state, raise the concern with the Chancellor.

It is also dangerous because as a paper of record Stabroek News should avoid endorsing the improper but regular practice of having the President interfere in matters completely outside his portfolio. We have seen what a mess he makes even when he speaks of matters within his portfolio, such as the Integrity Commission affair. Let me mention an example of the President speaking on the NIS. In 2007 before I resigned as a member of the NIS Reform Committee I wrote the President asking for particulars supporting an announcement he had made in Berbice that “thousands of persons” were being deprived of their pensions because of the state of the records in the NIS. After several weeks, the list I got back had just over 20 names, and on investigation, many of them did not qualify and were therefore properly denied.

While non-deduction/payment is indeed a problem, the NIS faces real and disastrous consequences from Cabinet’s failure to act on the recommendations contained in the 2001 and 2006 Actuarial Reviews and the unlawful and high-risk investments in Clico and the Berbice Bridge, apparently made under a paper baptised by Cabinet. The Head of Cabinet of course is the President himself, while his chief-of-staff Dr Roger Luncheon is the Chairman of the Board of the NIS.

Finally let me say that the scheme continues to act unlawfully or not act as the law requires with its misguided Ministry of Labour/NIS Memorandum of Cooperation. That seems to be the brainchild of someone who has not read the National Insurance Act or who does not have real work to do. Ironically any otherwise delinquent employer could challenge any action by this “inspectorate team” as being unlawful. Oh, what a mess we make!

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On the Line:National Insurance Scheme Annual Report 2007

Introduction
The column on March 29, 2009 featured the National Insurance Scheme (NIS) along with the New Building Society in a supporting role to Clico Guyana in which the NIS stands to lose several billions of dollars worth of investments. Today’s column is entirely on the NIS and specifically its Annual Report for 2007 which recently became available, well outside the statutory deadline, a recurring feature of just about every public body. Yet, the 120-page report is a rich minefield of statistical, demographic and economic information of potential importance and relevance to those engaged in policy formulation.

Some of the data seem inconsistent with the statistics provided by the Finance Minister in his 2008 Budget presentation, particularly as they relate to sectoral growth and labour participation. I will refer to some of those apparent inconsistencies later but now offer a review of the operating performance of the scheme for the year and compare it with the preceding three years.

20090426_table1
Source: NIS Annual Reports 2004-2007

Before discussing these numbers we need to be clear: Dr Roger Luncheon who has been Chairman of the Board since 1992 is incorrect in stating that the audited statements prove that the NIS is sound. The soundness of an entity, such as the NIS, that provides long-term benefits is determined, not by the auditors but by an actuarial examination which, using a range of data and assumptions, projects into the future. In fact the auditors draw specific attention to the report by the actuaries while the financial statements devote a full two pages to the recommendations of the actuary. Those, like the recommendations for the 2001 examination, are still being “reviewed” by the directors. Among the actuary’s many recommendations is the immediate need to address a shortfall of 7.1% in the contribution rate − hardly a sign of financial soundness. The problem for Dr Luncheon is that he seems unable to distinguish when he should speak as a politician, or as a director with fiduciary obligations or as a key policymaker responsible for oversight.

Commentary
Income over the period 2004 to 2007 has increased by 24.6% while expenditure has increased by 38.4%. Expressed another way expenditure as a percentage of income has moved within the short period of three years from 80.7% to 89.5%, a significant increase indeed. On the other hand, the composition of expenditure between Benefits and Administrative Costs has remained − as the Table shows − extremely constant. The significance and danger of the increase is best seen when compared with say the average of the five years 1997 to 2001 when it was below 60%. The warnings to the decision-makers about the growth of expenditure relative to income are not new and have been as consistently made as they have been consistently ignored.

With over 80% of its expenditure being in long-term benefits, the scheme should be concerned primarily about its actuarial viability which automatically takes care of its financial soundness, to use Dr Luncheon’s word. But to make up for the unwillingness of the government to raise the rates of contributions to levels that would meet actuarial sustainability, the scheme has become involved in investments that could seriously undermine both its actuarial and financial viability.

The 2006 Actuarial Report projected that total expenditure would, in 2014, exceed total income for the first time in the scheme’s forty years and unless contribution rates are increased the scheme’s reserves would be exhausted by 2022. With the (temporary?) loss of its capital and income in Clico investments and the inaction of the government and the board, including in addition to Dr Luncheon, PPP/C fixtures like trade unionist Komal Chand and Chitraykha Dass, it is possible that the actuary’s fears about expenditure exceeding income may happen sooner rather than later.

Blame the employers
Much of the problems of the Scheme are attributed to delinquent employers not paying over their contributions. As the logic goes the scheme would have been able to invest those monies and earn investment income. However there is nothing to indicate that investments are managed any better than contributions. According to Dr Luncheon the scheme’s investments are made based on a Prudential Investment Progamme which was “baptised by cabinet.” It is therefore surprising that the President recently criticized investments made under that programme when he is the head of the cabinet.

Dr Luncheon correctly states that the law governs the NIS and its investments (particularly those outside government paper) but does not recognise or acknowledge that the report and recommendations underlying that programme did not once mention the restrictions which the law places on the type of investments which the scheme can make.

There is increasing evidence that many of the scheme’s investments are not authorised by law and are not as profitable as they may appear. We will look more closely at the question of the investments under Balance Sheet but with respect to investment income, while $1.492B appears in the income statement, some $790M is shown as investment income receivable. The level was likely to be the same when Clico was put under judicial management and there is still uncertainty as to whether the government would cover accrued interest in its bailout of that entity. The possible infringement of the law, the high risks being undertaken in the search for high returns and the apparent delay in the receipt of investment income would cause even ordinary persons serious migraine. It is therefore very surprising that this does not seem to trouble the board which includes Messrs Maurice Solomon and Paul Cheong who have been on the board for several years and who would be fully aware of the concerns of the actuary about the viability of the scheme.

20090426_table1
Source: NIS Annual Reports 2004-2007

Included in Current Assets for 2007 is an amount of $197M as sundry receivables (2006-$207M) and prepayments of $62M (2006-$2M). Neither of these amounts is explained for the poor contributor, a key stakeholder. Included as well is an amount of $790M (2006-$753M) described as Accrued income, ie income recognised but not received. Nothing would be wrong with such accounting unless the entities in which the investments are made do not have the cash resources to pay the interest. Other than Treasury Bills the scheme’s principal investments are the Berbice Bridge Company Inc $1.560B; Clico $5.195B; Hand-in-Hand Trust Corp Inc $2.465B; a 25-year US$4M loan to the Government of Guyana for the construction of the Caricom Headquarters and Laparkan Holdings Limited $276M. From a concentration perspective, directly and indirectly the NIS is dangerously exposed with the Berbice Bridge.

With one exception (Laparkan), the private sector entities have recently been subject to public scrutiny − mostly negative – which can impact on their own profitability and their debt service capability. Clico is an immediate and major problem for the NIS. The Berbice Bridge can become another if its cash flows do not pick up significantly to allow it to meet its huge annual interest obligations. Hand-In-Hand Trust (HIHT) has just lost almost its entire reserves with its Stanford investment and as a consequence, a major income stream.

At more than $10B, NIS investments and accrued income in Clico, the Bridge and HIHT account for about 35% of the reserves of the scheme. A significant portion of the $10B is already impaired. The loss has implications not only for the balance sheet and therefore its reserves but annual income as well. It has been estimated that the income the NIS is losing on a daily basis on the Clico investment alone is more than $1M. When the actuary predicted the evaporation of the scheme’s reserves, he did not contemplate the kind of man-made, governance-created misfortunes we are now experiencing. Employees and employers better prepare for what can be a rough and costly ride.

Some statistics
2007 was the year of the World Cup, the biggest sporting extravaganza ever hosted by Guyana. According to Dr Singh there was 5.4% real growth in the economy with increased contributions by sugar (2.7%); mining and quarrying (22.7%); engineering and construction (5.7%) and transportation and communication (9%). Inflation grew by 14% and the minimum wage in the public sector grew by 14.5%. These significant numbers and impressive statistics however are not matched by growth in contribution income (8.01%) or registrations of employers by industry types (Table A of the report) which disclose that not a single sector had a new employer registrant with over 100 employees, and only three had between 51 and 100 employees. These were Transport, Community and Business Services and Personal Services, an interesting and eclectic mix indeed.

Women registrants in the Employed Persons category are fast catching up with their male counterparts and in 2007 for every 100 males there were 87 females. In the self-employed category the ratio is about 2:1. Compared with the gender mix of pensioners (more than 3 males for every 1 female) there is a dramatic transformation in the workforce, even as women still carry the burden of the work to be done at home. Only in the age group 41-45 do women come anywhere close to men in the number of self-employed registrants in 2007. Table G of the report indicates that some sixty-five persons in receipt of Old Age Pension are aged 98 and a surprising 389 are 95 years and older. With such numbers we should have far more centenarians than our newspapers consider worthy of celebration. We need to make sure that there are no phantom pensioners.

One other significant gender difference appears in Table N which presents the number of sickness spells by diagnosis and sector. Here women seem to do very badly. Diseases of the female genital organs accounted for 880 sickness spells, the fourth highest. Complications arising from pregnancy and childbirth account for 845 sickness spells, the fifth highest. Such statistics should impress both our Ministers of Health, and the Ministers of Labour and Human Services. While the statistics are not significantly different from preceding years it is yet hoped that we will see some policy initiatives to address them.

Conclusion
The state of the NIS confronts the government with a real dilemma. The government seems to have an insatiable appetite for spending which it finances mainly through direct taxes (Income and Corporation Tax) and indirect taxes (VAT, Excise and Customs) borne mainly by the workers and the lower income group. As a result Guyana is now among the most taxed countries in the world. In public finance, NIS contributions are a tax. Except that in a contributions-based scheme such as ours, the contributor can get back benefits in proportion to contributions. Even without the Clico debacle and the other challenges, contributions should have been increased. Based on the recommendations of the actuary the required contribution rate (without Clico) should be around 20% instead of 13% but the government’s reluctance to increase the rate may reflect its own recognition that increased NIS contributions are already too high for the overtaxed Guyanese.

While the NIS inherited by the government in 1992 was not as healthy as one would like, its condition is now much worse. The expenditure to income ratio was already 67% in 1992. It is now 89%. Failure by the government over the years to act promptly on successive actuarial recommendations has aggravated the situation. This however does not exonerate the directors of the NIS who have sat back and done precious little to stem the drift.

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Clico, the NBS and NIS

Introduction
Clico is by far the worst financial disaster ever to have hit Guyana. For hundreds of thousands of Guyanese the Clico saga is direct, personal and painful, a real life disaster in which many could be made paupers. And even if that calamity is averted, the so-called guarantee that the people and the opposition have been calling for will have two effects. First, the taxpayers will be worse off by several billions of dollars. And second, having demanded heads for the Clico fiasco, the opposition members of the National Assembly will give the government a crucial let-off. When it did have the opportunity, instead of mounting an investigation into Clico and related matters, the National Assembly simply asked the Economics Affairs Committee to monitor the Clico affair.

Clico in combination with Stanford is the public face of unprecedented fraud in the securities sense of the word, practically non-existent corporate governance, outrageously bad regulatory failures, an arrogant display of political ineptitude, and inexcusable conflicts of interest and duty in various manifestations. The two are our Enron, Madoff and Satyam wrapped in one. They are the stuff of which bestsellers are made; of heroes and villains exchanging roles and of juicy material for the economic historians. They offer the potential for the most intriguing legal cases of breach of fiduciary obligation, fraud, lifting the veil of incorporation in the private sector and misfeasance in the public sector.

Winding up Clico
Despite the urgency of the matter, the Economic Affairs Committee of the National Assembly has done nothing so far. The Judicial Manager of Clico, Ms Maria van Beek is supporting the retention of (former?) Clico CEO Ms Geeta Singh-Knight who up to recently Ms van Beek was saying had persistently breached the Insurance Act. Ms van Beek must be aware that in her other role as Commissioner of Insurance she has a continuing duty to prosecute those involved in such breaches and that her endorsement of the retention of Ms Singh-Knight could be construed as granting her immunity. When Ms van Beek first approached the court she asked, as an alternative to her first choice of winding-up, to be appointed as Judicial Manager. Now she seems unclear of the nature and extent of the duties involved. Even if the Insurance Act is unclear, she should be guided by commonsense, experience, professional advice and as necessary, by the court. Logic dictates that the closest analogy to the Judicial Manager is the Receiver Manager under the Companies Act. That person displaces the management and takes control of the company. What is wrong with that formulation?

Having asked the court for a winding-up order the Judicial Manager seems bent on vindicating her initial judgment. Neither she nor the government has shown any interest in saving Clico. If they wanted to save Clico and jobs then Trinidad provided a most recent and eminently sensible model – take over the company and use the very funds of the Jagdeo guarantee as capital injection. But because of the ambivalence and dithering of the government and the Judicial Manager, Clico is collapsing faster than anyone could have predicted.

Breach of promise
And perhaps there should be a mild reminder that President Jagdeo promised that small depositors in Globe Trust would be protected. Several years later, not a single, blind cent has been paid, despite the finding of the then Chief Justice that the regulator was partly responsible. In the case of Clico, President Jagdeo again has made promises but when it comes to confirming that promise, his party in the National Assembly is silent. They and the President know that the public has become accustomed to broken promises.

Mr Jagdeo has said that Clico is insignificant in the wider scheme of things – only 3%! But does the President realize that the Clico/Stanford duo now pose a risk to the New Building Society (NBS), the National Insurance Scheme (NIS), Hand-in-Hand Trust, Trust Company Guyana Limited and undisclosed pension schemes over several sectors? Mr Jagdeo claims to be guaranteeing the Clico clients but what about the pension schemes – are their members any less important?

Milking the NBS cow
Carefully built up some sixty years ago out of the ashes of its failed predecessor, the NBS through conservative and tight-fisted management under the late Jules De Cambra, was one of the strongest financial institutions in the country. Under Moen McDoom and Nanda Gopaul, that soundness has been slipping away. It is history that the NBS was cajoled into investing in the Berbice Bridge. Its own independent consultant said it was a bad idea, that the assumptions underlying the financial projections were way too optimistic. Some members of the board were scared but not wishing to upset the government opted for a considerably smaller investment − an amount that the NBS could afford to lose. Next the board decided to spend several hundreds of millions of dollars on a state-of-the-art head office, causing two of its directors to resign in protest. Now, as Clico started to sink, the NBS again featured as a lifeline and the politicians went to work – turning up the heat and milking the NBS cow.

My understanding is that the Board of the NBS, which does not have any financial specialist and did not even meet in person to decide on buying Clico’s bonds in the bridge for $1.5B. However that decision may have been made, Dr Gopaul and his fellow directors have a duty to justify their decision to the members of the NBS. So far, the bridge is generating far less than Mr Jagdeo had predicted. It did not meet its 2008 interest obligations in their entirety. While the bridge company enjoys the most generous package of tax concessions imaginable, it will struggle to meet its obligations to pay interest or redeem the bonds as they fall due. To add to the risks, there is explicitly no government guarantee.

Despite the slippages, the government and the Bank of Guyana seem very comfortable with NBS remaining completely unregulated. The soundness of the NBS which this column has consistently praised has been undermined by the decisions and practices of the board and its bridge investment. That investment which had to be sanctioned by the Minister of Finance became possible when government did an underhand amendment to the NBS Act, through the Berbice Bridge Act. The NBS’s investment in the bridge now amounts to 40% of its reserves – an over concentration in a single company. No doubt we will hear from the President that we should not worry, that such investment represents only a small percentage of the assets of the financial sector. That is what the government said about Clico and the Bank of Guyana repeated in relation to the Hand-in-Hand Trust.

As political players gain the ascendancy at the bank it is becoming increasingly subservient to the Ministry of Finance, its role diminished to collecting statistics and undertaking bank inspections. It is abandoning − or doing very badly − one of its most important roles, the oversight of the financial sector.

Milking the NIS
The other institution under severe stress from Clico and the bridge is the NIS. Again we see the overlapping roles of the Minister of Finance, other government politicians and public and private sector functionaries at various levels, but connected in one way or the other to the Office of the President. One of the members of the NIS Board is also a director of the Berbice Bridge Inc. Two leading companies have used NIS funds to invest in the Berbice Bridge and have been rewarded with seats on the board of the Bridge Company − the same company in which Mr Winston Brassington confidently guaranteed “investors” in the bridge that the “NIS will not have a director” or be able “to exercise any influence” (Business Page March 12, 2006).

Several weeks ago, I wrote the Minister of Finance about the legality of the NIS investments, having in mind the bridge, Clico and the Hand-in-Hand Insurance Company. Investments made by the NIS are required to be approved by the Co-operative Finance Administration of which the Chairman is the Minister of Finance and who appoints all its directors. He has not responded to me. The board, it seems, is operating under an Investment Framework prepared by Mr Patrick van Beek. That framework had no reference to the restrictions imposed by the act but was accepted by cabinet. If it turns out that the investments are unlawful surely there are many who should be held responsible including the entire board of the NIS.

The NIS directly and indirectly is the largest investor in the Berbice Bridge which the government likes to boast is a private sector initiative. The manner in which Mr Brassington cajoled the NIS into investing in the bridge is a matter of public record, and the country’s collective failure to take note then is coming back to haunt us. Of course this is not the first time that the government is undermining the NIS’s finances. We recall that the government forced the NIS to lend it US$4M for the part-financing of the construction of the Caricom Secretariat. That loan is repayable over 25 years at a rate of 4% in the first 15 years and 5% in the next ten years. Those rates are well below the rates of inflation, but does the government care how the cow is milked?

Conclusion
The cost of the Clico failure is mounting, but with ‘Clico fatigue’ already setting in public interest may wane. For the NIS and NBS the implications are huge. The Minister of Finance, the government, the regulators and the directors of the NBS would be the beneficiaries of ‘Clico fatigue.’ The misuse of the NIS funds which began with small sums now involves billions. The risky investments of the NBS have likewise increased from millions to billions. The public has to show more interest while the opposition parties need to be more consistent and persistent.

Will we ever get to the bottom of the Clico saga? Unlikely. The PNCR, which endorsed the assurances given by the government on a Clico bailout, is now calling for an “urgent and impartial” inquiry. Aware that any inquiry will only confirm their massive failures and deception of the public, the government will stoutly resist such an inquiry. As far as the Finance Minister is concerned he has outmanoeuvred the opposition by his 16-page rambling in the National Assembly. The actions (or inactions) of the government and Clico’s Judicial Manager suggest that Clico will soon be dead and gone. All it will leave to its Children of Guyana are massive debts.