Berbice Bridge Company Inc. - ChrisRam.net - Page 3

Tag: Berbice Bridge Company Inc.

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Berbice Bridge Company Inc. – Not really a profit

Introduction
At long last, the Berbice Bridge Company Inc. (BBCI) has decided to file annual returns and financial statements with the Registrar of Companies. The law requires that such returns and accounts be filed no later than around mid-August of each year for companies with a December 31 year-end. Why BBCI chose to file some years and not others is for speculation but one thing is certain: the return and the financial statements for 2010 make for very interesting reading or indeed for some serious concerns.

On the face of it the company did very well in 2010. Its revenue for 2010 is $1,115 million, up 17% over 2009, the company’s first full year of operations. Total non-interest expenditure was $287 million, up 16% over the previous year. Included in non-interest expenditure is a depreciation charge of $140 million, a small increase over the preceding year. And that is where the questions begin to arise. But before that important digression, let us continue the brief income statement analysis. Interest expense has risen from $694 million to $715 million, thus accounting for 64% of the company’s revenue. Because of its tax-exempt status the company was able to record a net profit of $137 million compared with $5 million in 2009.

More borrowings
The Balance sheet shows the company as having $8,865 million of fixed assets compared with $8,965 million in 2009, the entire reduction being attributable to depreciation charge in 2010. The more easily realisable current assets have declined in value from $161 million in 2009 to $24 million in 2010, with cash resources reducing from $152 million in 2009 to $24 million in 2010! Current liabilities which are amounts that are payable at the balance sheet date or within twelve months thereof amounted to $205 million, a significant decrease in such liabilities over 2009 as the company paid out $450 million in subordinated loan stock interest and returned some $130 million in corporate bonds.

This reduction in short term liabilities came at the expense of increases in long-term loans. The Beharry Group added to their investment in the company some $325 million through the Guyana Bank of Trade and Industry ($250 million) and North American Life and Fire companies ($75 million). Hand-in-Hand Life increased its investment in the Bridge Company by $70 million while its Trust Company reduced its investment by $25 million. Meanwhile the New GPC Inc. a member of a group that has earned some investing notoriety in Guyana took out its entire $35 million in loan stock in the company.

Capital Structure and concealment
The company has an interesting capital structure. Its share capital is $400 million shared between six shareholders with four of them – NIS, New GPC, CLICO and Secure International Finance Company – having $80 million each, and two – Hand-in-Hand and Demerara Contractors – sharing the remaining $80 million. But then the ubiquitous NICIL has a special $1 share which gives it a veto power over any major decision of the company.

If the financial statements are taken at face value it may seem that that is the extent of NICIL’s investment in the company. A closer look indicates that a single investor has some $950 million in preference shares in the company earning a rate of dividend of 11% per annum or $104.5 million per annum. It is a requirement of the law that the persons holding shares in the company be listed in the Annual Return. This has not been done and to that extent the annual return signed by Mr. Winston Brassington, the CEO of NICIL should have been rejected. But then again, the Registrar was probably thankful that the company filed any return after six years.

The concealment gets worse. Note 10 to the financial statements tells the reader that the dividends paid on the preference shares are cumulative, i.e. if they are not paid in one year they are carried forward to the next period for payment at an increased rate of 12%! Forget for a moment that unhelpful use of language. What is striking is that the company owed the preference shareholder at December 31, 2010 more than $600 million but that shareholder is reported in the 2010 financial statements as waiving “dividend and interest on dividend due up to December 31, 2010”.

It does not take a genius to realise that that investor is NICIL or one of its many satellites through which it can funnel money that should otherwise have passed through the Consolidated Fund and voted on by the National Assembly. In fact NICIL’s satellite for the billion dollar investment and which waived the hundreds of millions of dollars was a company called Aroaima Mining Company Inc. which is no longer in operation. Even if there is a real company called Aroaima Mining Company Inc. its controlling parent is NICIL headed by Dr. Ashni Singh among several Cabinet members who are also NICIL’s directors. That such a stellar collection of responsible men could make such as decision and then try to conceal it from the taxpayers is reprehensible.

It would seem as well that under the Financial Management and Accountability Act NICIL has no authority to waive any such sums and that its Board including the Minister of Finance and the Cabinet Secretary are guilty of misfeasance in public office.

Wrong treatment
Then there is the question of the fudging of the depreciation versus amortization. Depreciation is the annual charge to write off the cost of a long-term tangible asset over its useful life. Amortization is the systematic allocation of the depreciable amount of an intangible asset over its useful life. I am aware that someone closely connected with the company had been calling around asking whether or not there was a need to charge any depreciation on the Bridge. Clearly fudging was being considered at some level. On being told of the query, I thought it was some junior not familiar with even basic bookkeeping. I should not have been so dismissive.

In fact it is clear to me that the entire treatment of the cost of the Bridge is wrong. The company does not own the Bridge as confirmed by the special share and its own note to the financial statements. Under a Concession Agreement that the law setting up the statutory framework for the Bridge has made so secret, the company has the right to operate the Bridge for a period of twenty-one years. Indeed note 1 to the financial statements described the principal business activities of the company as the construction and operation of a floating bridge. This is the classical Build-Operate-Transfer arrangement and gives the company not ownership of the public asset but a right to operate the Bridge. Such a right is an intangible asset subject to amortisation over the period of the right.

Arbitrary and self-serving
I would think that the treatment as a tangible fixed asset is more than simple unfamiliarity with the relevant International Financial Reporting Interpretations Committee (IFRIC) guidance on the matter. So what did the Board featuring Ms. Gita Singh-Knight and Mr. Winston Brassington choose to do? They chose a write-off period of thirty-eight years under the reducing balance basis. If this is converted to the more common straight-line basis the Board is assuming a useful life of the Bridge of more than one hundred years! And to compound the grey areas they estimate that at the end of its so-called estimated useful life the Bridge would have a residual value of more than four billion dollars.

But the absurdity of it all comes from the company’s own financial statements. As the system implies, under the reducing balance method the depreciation charge declines each year so that if there is a $100 investment in an asset with a useful life of 10 years the depreciation in the first year will be $10 ($100/10), the second year would be $9 ([$100-10]/10) etc. The magicians at the Bridge Company claim to be using the reducing balance but end with straight-line depreciation charges!

Responsibility
Just who are responsible for the type of fudging that is taking place with the Annual Report’s omission, the mistaken application of tangible versus intangible asset and the fiddling of depreciation? To start with the Board is headed by Ms. Gita Singh-Knight of CLICO infamy. Ms. Singh-Knight was the CEO responsible for shipping billions of dollars of NIS and other funds for her boss Duprey who then squandered it abroad. Ms. Singh-Knight is an accountant by training and indeed is the only professional accountant on board.

Other members of the Board include Hand-in-Hand executive Keith Evelyn, Beharry Group executive Paul Cheong, engineer Edward Carter, Attorney-at-law Paul Fredericks and former jurist Cecil Kennard. The annual return should state the business occupation and particulars of other directorships. None is stated. The only other person with any claim to some amount of accounting knowledge is Mr. Winston Brassington whose role in prevailing upon entities like the National Insurance Scheme and the New Building Society for investments in the Bridge has been addressed before in this Page.

The political dimension
While the Government stoutly resists claims that its decision to bypass and in the process practically kill New Amsterdam as a commercial centre in favour of the Corentyne Coast, it was forced to have a skewed consultant report to justify its decision. But economics has a way of trumping race and politics. Having sited the bridge at D’Edward Village instead of Everton it must now contrive all forms of financial and other shenanigans to make the Bridge seem viable. Competition has been frustrated if not ruled out while the company, its investors, sub-contractors and everyone else connected with it enjoy a range of tax concessions that would make even the Ramroop Group green with envy.

Conclusion
Had it not been for some admirable creative financing and accounting the Berbice Bridge Company would not only have recorded continuing and significant losses but it would have been unable to meet the generous interest and dividend obligations to its investors. The public needs to be reminded that the President Jagdeo–Singh-Knight combination has placed a six billion dollars hole in the balance sheet of the NIS. And as a result of the Brassington– Luncheon work on the NIS, the Scheme had at December 31 2010 over $1.5B invested in the Berbice Bridge. Let us hope that the group combination will not cause the company to sink.

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A potpourri of NICIL, the Berbice Bridge and the TUF (with some computers added)

Introduction
It has been all quiet and stable on the business scene this past week, or at least what could make news. The column will resort to a number of issues which could not individually justify a column but together represent matters of some concern. One rather publicised issue was the appearance of the Minister of Finance Dr Ashni Singh with the Minister of Education Mr Shaik Baksh at a press conference to defend questionable contracts valued at approximately $300 million for the procurement of computers for schools.

The result was hardly what they would have intended. It was defending the indefensible. But please remember that this most recent contract is separate from the $5.4 billion for the laptop computers that have also generated concerns from beginning to end. One wonders whether this is why the PPP/C has made a joke of the constitutional requirement of a National Procurement Commission. If such a commission is established, the cabinet would have no role in the award of contracts and the country would be spared the extravagance and corruption we witness with each disclosed contract.

NICIL
Readers will recall that the Minister of Finance last year stoutly defended the award of the Amaila Falls Road Contract to Mr Fip Motilall – that time not for $300 million but $3 billion – ten times more than the school computers’ contract. The joke about road contracts is the building of a road to nowhere. In this case it is no road to anywhere, as far as Mr Motilall is concerned. Prominent in the award of Motilall’s contract was the Privatisation Unit headed by the ubiquitous Mr Winston Brassington, the Chief Executive Officer of National Industrial and Commercial Invest-ments Limited (NICIL), a company that enjoys corporate infamy even by Guyana standards for its failure to have audits and to file statutorily required Annual Returns for decades.

Despite this failure being raised on numerous occasions NICIL, whose directors are mainly ministers of the government, continue to receive public monies and to spend it however it pleases. It infamously played the role of handmaiden to President Jagdeo and his cabinet in the unlawful tax concessions to Queen’s Atlantic Investment Inc and has failed to provide properly audited financial statements for its expenditure of hundreds of millions of dollars of GGMC funds to build hinterland roads. It is at the heart of the proposed Marriot Hotel deal and indeed has been busy shopping around for any partner which would give the project legitimacy. No one knows where the funds will come from.

What is clear is that NICIL continues to receive public funds and late last month the Official Gazette (Legal Supplement) of June 25, 2011 carried fourteen Orders under which public lands were disposed of to individuals mainly in Linden, under agreements of purchase and sale in which NICIL was named as the seller.

One wonders whether the nest egg being built up by NICIL is for the Kingston Marriot which President Jagdeo wants to see before the elections – whatever the financial and other implications.

The Berbice Bridge Company
Some weeks ago, a group of courageous Berbicians joined in a protest at the high cost of traversing the Berbice River Bridge, demanding that it was time that something was done about it and calling on the Transport & Harbours Department (T&HD) to reintroduce the services of the pontoon MV Sandaka on a regular basis. The government has been less than responsive. To make the bridge feasible for the investors – many of them friends of the government – persons seeking to cross the river have little option but the bridge.

At the protest, persons complained that only the rich people could enjoy the bridge, describing it as “terrible” since the bridge was one of those elections promises to Berbicians. According to reports, individuals have to pay $100 to go to the Rosignol Stelling and wait a long time until the bus is full and pay $300 to cross. In all they pay $800 return and lamented that some persons who work in NA earn just $1,200 per day and are barely left with a little money. Security guards receive less.

One of the big defenders of the high fares is President Jagdeo who had told Stabroek News that especially for private cars and minibus operators crossing the river using the bridge, the one-time toll of $2,200 toll was cheap. Mr Jagdeo and his entourage never have to pay a cent so he would not know what is cheap or expensive. Unlike the Demerara Harbour Bridge, pedestrians and cyclists are not allowed to use the bridge. This would surely be what a low carbon economy would require.

With the range of concessions under the Berbice River Bridge Act surpassing those given to the Ramroops, one would have expected that these would have been seen as subsidies to be used to make the tolls affordable. Compare the toll between the two bridges: Cars – Demerara Harbour Bridge $100 while for Berbice it is $2,200.

Here is a summary of the concessions that the company and its shareholders whose names seem to be a state secret receive: Exemption from all the duties and taxes under the Tax Act; all imports of goods, equipment and services on design, construction, expansion, rehabilitation, repairs are exempt from taxes, import duties, purchase tax, consumption tax, motor vehicle taxes and all other taxes; and licence fees and other similar fees or charges. This applies to the concessionaire, contractor and subcontractor.

Other concessions are: Complete exemption for the concessionaire from corporation tax, income tax and withholding tax for the entire concession period; exemption from corporation tax, income tax and withholding tax of all dividends and interest paid. Additionally, all income earned by a contractor or sub-contractor pursuant to the Concession Agreement is exempted from income tax.

Like NICIL, the Berbice Bridge Company Inc, whose chairperson is Ms Geeta Singh-Knight of Clico fame, has not filed annual returns and financial statements since its incorporation, so we cannot tell whether the company is making money or not and if so how much. So much for the rule of law, transparency and good governance.

The PPP/C’s embrace of free enterprise
In a letter to the press earlier this week Mr Dennis Lee, an executive member of the TUF, claimed a pivotal role for his party’s leader Mr Manzoor Nadir in the PPP/C government’s adoption of the free enterprise system. That the statement has not been challenged by the ideological wing of the PPP is probably more surprising than the accuracy of the actual claim.

It is true that the government has practised a crude form of the free enterprise system in which major segments of the economy are at best poorly regulated and at worst allowed to run literally on illegal oil. Many of the nouveau riche actually started and or sustain their empire with illegal fuel, narcotics and customs evasion.

That key pieces of legislation including the Prevention of Money Laundering Act are poorly administered with none of the requisite resources to make them work is not free enterprise but abject lawlessness and deception. Indeed the TUF leader can take credit for his role in weakening the trade unions and in keeping the minimum wage of $800 per day for security workers.

But it is also true that despite his decades of railing against the IMF, Dr Jagan came to power in 1992 after he had given commitments to run with the Hoyte-inspired IMF- directed Economic Recovery Programme. The PPP/C under four successive Presidents including Mr Jagdeo who was Finance Minister to three of them comfortably ran with the free enterprise system so warmly embraced by Mr Lee.

It would be interesting to learn whether the new TUF leader Ms Valerie Garrido-Lowe shares Mr Lee’s exuberance over the free enterprise system. What she did tell me on Plain talk was that she would like to see a more compassionate system to take account of our present situation where the free enterprise system has widened unbridgeably the gap between the rich and the poor.

One might also question Mr Lee’s praise of Mr Nadir as the TUF’s investment in Guyana’s future and whether in fact the TUF was Mr Nadir’s investment in his personal future.

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What’s happening at the New Building Society?

Introduction
How can a financial institution that just a few months ago boasted about a “liquidity of 40% of the total assets or 47% of members’ funds, a position exceeding the approved industry standard” – whatever that means – suddenly start telling current and potential loan customers to come back in six to eight months time? That is what a staff member of Ram & McRae was told after he had applied for a modest loan from the New Building Society. When he related this to me I thought he had it wrong and suggested that he return to the Society and seek confirmation and some details. He came back with the same message. Then someone contacted me from abroad complaining that his mother had a similar experience. I said that I had heard of reports of the NBS restricting lending. Then I received a letter dated September 15, 2009 purportedly from a member of the staff complaining generally about the state of the Society and that “since August the Society had stopped giving loans and has been telling loan applicants to go to GBTI or Republic Bank.”

I have independently confirmed this, which the commercial banks have found a dramatic reversal from the position not too long ago, where the NBS was actually poaching the banks’ commercial customers with the lure of lower interest rates made possible by the tax exempt status of the Society. What then is the cause of this development whereby the Society has ceased or severely restricted loans, described only a few months ago by the Society’s Chairman Dr Nanda Gopaul as its core business? In fact Dr Gopaul had earlier gone further, boasting of the reduction of mortgage rates from January 1, 2009 to 6.95% and 4.95%, in the case of low income loans.

Again quoting the Chairman from the 2008 Annual Report, “the Society has always adopted responsible and prudent approaches to its operations to counter any adverse development in the economic and financial environment.” What indeed could have gone so wrong so quickly that persons are now seeking advice on whether or not to withdraw their money from the Society and why the inaction from the ever so silent Bank of Guyana and the not usually silent Chairman Dr. Gopaul?

Bad governance
I wrote the Society’s Director Secretary asking him to provide me with unaudited half-year financials for this column but he has not even acknowledged my letter. He is part of the same board that complains that commentators and analysts should first contact them before writing.

So, is it that the rules are so restrictive that the Society cannot lend or is it the result of what concerned members of the Society have feared as bad governance by a team of seven with no prior experience of a private sector organisation let alone a multi-billion dollar financial institution? Forced by the media to comment on the development, Dr Gopaul gave as the reason for the sudden and unannounced development “the result of a One Stop Shop campaign by the Ministry of Housing and Water wherein numerous persons are being issued with house lots.” The reality of course is that the ministry has been giving many more house lots for more than a decade and there was no cessation of loans to existing members, so that explanation has a hollow ring about it.

Debt/mortgages
Senior staff members of the Society have been advancing a totally different reason which can have serious implications for the Society – and that is a hardly ever considered provision on the New Building Society Act. A proviso to section 7 of the act restricts to no more than two-thirds, the relationship between the aggregate of deposit and loans raised, and the amount of mortgage loans by the Society. In other words if there is $100 out on mortgages, the Society should take in on deposits and/or raise by way of loans, no more than $66. Mortgage loans at December 31, 2008 amounted to $19 billion so that amount of deposits (there were no loans raised by the Society) at that date should have been no more than $12.7 billion. The rest it seems should be raised by way of equity. Under what appears to have been the broad definition used by the Society over the decades, deposits amounted to $30 billion at December 31, 2008, an excess of $17 billion, if the proviso is applied.

As I sought to assimilate this provision I realised that it was as elegant a formulation of the thin capitalisation rule as I have ever seen. The problem it was designed to prevent is the Society having customers’ deposits and lenders’ loans tied up in long-term assets beyond a certain level, so that even a significant level of withdrawal should not have a fatal effect on the Society’s operations.

Logic and rationale
To understand the logic one also needs to understand the rationale behind the New Building Society Act. It certainly was not to support any government policy or to make commercial loans, as this current Board seems to think. Under section 6 of the NBS Act the Society is a “Housing Association for purposes of the Housing Act” which defines a housing association to include a society whose objects include the construction, improving or managing or facilitating or encouraging the construction or improvement of houses for the working class.” These are not my words but those of the act and it was on that basis – referred to in taxation jargon as mutual trading – that the NBS has been granted tax-exempt status. One has to wonder whether the Minister of Finance Dr Ashni Singh considers this provision when he authorises increasing lending limits well beyond the reach of the working class. An earlier statement by Chairman Gopaul calling for a significant increase in the lending limit “in an effort to meet the demands for the construction of more middle income houses” shows that he is not too familiar with the NBS Act or its mandate.

Aggressive management
And this is, if not entirely, certainly a big part of the problem. In 2005, the largest loans accounted for $105 million; now it is $234 million. More dangerously, they now include what are patently commercial loans granted to persons with good connections, but at least one of whom left a bad record with the GNCB. Because the Bank of Guyana seems impotent in regulating the Society there is, unlike for the commercial banks, no single borrower restriction so that one borrower can abuse the single loan limit. Had the rules which apply to the banks applied to the Society, it would not have been able to make the Bridge investment, plain and simple.

Another development is the spirited efforts to attract deposits with offers of rates of interest that suggest that the Society is willing to offer very high rates on borrowed funds. That is never a good sign and one only has to look at recent experiences at Clico and Stanford to appreciate the inherent danger. In fact the rates currently being offered by the Society are almost in line with what is being charged on the low-cost housing loans, so that on a total cost basis, those loans have minimal or no profitability. Not only is this strategy dangerous, but it also means that sooner rather than later, the rates charged even on existing loans and mortgages would escalate with consequences for affordability and considerable bad debts. Again we note the lack of urgency with which the Bank of Guyana has approached the NBS which operates without any statutory deposit or loan provisioning guideline to which commercial banks are subject.

The Bridge and the Head Office
Then we come to that other serious and questionable matter – the purchase of Berbice River Bridge Bonds of $1.5 billion dollars to help bail out the sinking Clico whose CEO and the NBS Chairman are fellow directors on the Guysuco Board. The Bridge has not achieved the optimistic revenues projected and many suspected that the belated payment of interest on its bonds for 2008 was made to stem concerns about its viability. Let us recall that Mr Winston Brassington who used some very unorthodox methods to raise money for the Bridge Company was a prominent attendee at the NBS’s Annual General Meeting (AGM) in Cotton Tree earlier this year at which he played up the performance of the Bridge. Nothing more has since been heard about that performance and efforts to obtain a copy of the company’s 2008 annual report from Mr Brassington and the Bridge Company’s Vice-Chairman were referred to its CEO who did not take or return any of my calls. So much for transparency and accountability.

The NBS Board, made up almost entirely of persons close to the ruling party, has shown a remarkable stubbornness that in normal circumstances would guarantee their removal. The way the NBS is run is certainly not normal. The directors have illegally refused to carry out the mandate of the last AGM for the repatriation of the Society’s Pounds Sterling investments and more than likely, the setting up of a Loans Sub-Committee, both of which may have helped to prevent or at least minimise the current problems in the Society.

They are persisting with the construction of a new Head Office with no firm arrangements for the disposal of the current one. With the large network of branches being constructed the pressure on the existing Head Office would have reduced significantly but the Society is set to spend close to $900 million on a spanking new structure with no customer parking! The combination of the politically expedient investment in the Bridge Bonds coming right on the heels of the $900 million Head Office and the unwillingness to repatriate the Sterling Investments explains why the Society is in its current mess.

Another misjudgment of the board is yet to be made public but members should worry about developments following the decision by the board prior to the last AGM to change the long-standing auditors Jack A. Alli, Sons & Company in preference for a relatively new auditing partnership, Solomon and Parmessar. This partnership is splitting up even before it can complete a single audit and the board, which has not a single accountant among its seven, would now have to decide whether to go with one or the other of the partners, or indeed go back to its former auditors, the reason for whose removal was never shared with the members.

Conclusion
It is hard not to worry about the sloth of the Bank of Guyana in relation to the NBS. The central bank appears to have learnt nothing from Globe Trust and Clico which it now supervises. It has categorically refused to meet members of the Society whose fears have proved more than justified and it has been promising for close to ten years to bring the NBS under its supervision.

Members of the Society may need to consider how best to protect their funds and the Society from those whose management of it seems dangerously lacking. I would caution against any precipitate action by members however and am yet hopeful that the directors would get to grips with reality. The board needs to do something to reassure members that they have the situation under control.

Note: I am a former member of the Board of the NBS.

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On the Line: New Building Society Limited Annual Report 2008

– $200M exchange loss

Introduction
Forgive the rather misleading heading which is the standard for the review of annual reports in this column. It is misleading because at the time of writing the annual report of the Society, including the report of the directors and the financial statements, has not yet been made available to its members. Compelled by its own law that the AGM must be held before April 30, the directors have chosen for the venue of the meeting the Cotton Tree Primary School, West Coast, Berbice on Saturday April 25 with the first item on the agenda “to receive the financial statements and the Reports of the Directors for 2008.”
The financial statements of the Society audited by long serving and proposed-to-be-replaced Jack A Alli, Sons and Company show growth in deposits by just over 5% from $28.9B to $30.5B. This is the smallest percentage increase in deposits since 2002 and represents a recent trend of declining annual percentage increases. More significantly, however, is the decline of more than $103M in profits for the year. This is the second successive decline but is the highest decline recorded by the Society in recent history. Readers will recall that the 2007 profits were charged with the sum of $74M resulting from the fraud on an account holder.

It really has not been two good years for the Society under new Chairman Dr Nanda Gopaul, who signed the 2008 financial statements along with Mr Floyd McDonald, Deputy Chairman and former Commissioner of Police now on contract with the government, and Mr A Khan, Director/Secretary.

Commentary
The major reason for the decline in 2008 is an exchange loss of $200M, arising almost entirely on UK Government Treasury Bills which are denominated in pounds sterling, the exchange rate of which declined to the Guyana dollar by more than 20% between December 31, 2007 and December 31, 2008. While the Society had an exchange gain of $67M in 2007 it may be time for the directors to consider whether in the light of the volatility of international currencies it should liquidate those investments and repatriate the proceeds or invest in a currency to which the Guyana dollar is more aligned.

Loan assets have increased by 12.1 % from $16.99B to $19.1B almost a third more than GBTI, the performance of which was reviewed in a guest column last week and which has deposits of considerably more than the NBS. NBS, a creature of legislation, is restricted to how much it may lend and the nature of the security it has to have. On the other hand its income is tax-exempt and it can afford to and does pay the highest rates of interest on deposit accounts and charges the lowest rates on lending.

Despite the fall in income, reserves have increased from $4.5B to $4.79B or 6.4%. The Society is cash strong with some $4.2B in cash resources, almost all being held in interest-bearing fixed deposits. As discussed later in this column, that position would change significantly in 2009. The average interest earned on those resources was 5.6% compared with 4.2% earned in 2007. Investments which with the exception of the bridge bonds are liquid, amount to $11.3B, down from $13.55B. They earned an average return of 4.3% in 2008 compared with 4.5% in 2007.

Governance, the bridge and Clico
Perhaps the most controversial issue arising out of the financial statements is its investment in the Berbice Bridge. When financing for the bridge was first sought, the Society was approached by Mr Winston Brassington for a $3B investment. Independent consultant Raymond Gaskin questioned both the lawfulness and the viability of the investment and it is understood that on a split-decision the board, with Mr Moen McDoom as Chairman, accepted the advice and rejected the approach but went for $350M, a sum it was “prepared to lose.” Just over one year later the board with Dr Gopaul as Chairman reversed itself, and according to the financial statements bought bridge bonds with a face value of $1.5B. Regrettably the financial statements do not disclose the price paid for those bonds, but it is believed that they were bought at face value. More controversially, not only did the board reverse itself, but from all reports it did so by way of round-robin, ie without a physical meeting of the directors.

The composition of the board has changed significantly since its rejection of the $3B overture. Of the four who voted against the investment Mr McDoom has been replaced by Dr Nanda Gopaul, Director Secretary Mr Maurice Arjoon’s services have been terminated and directors Leon Rockliffe and Steve Bovell were voted off the board. As a result of the changes, the board with one exception is now made up of persons close to the government or the ruling party, some of whom are in receipt of compensation from the public purse. Mr Clement DeNobrega, a professionally qualified accountant who was elected as a director in April 2008 resigned some five months later, apparently dissatisfied with the way the board conducts the business of the Society. Once again there is no accountant on the board nor, as far as I am aware, is there any governance committee in the Society. Mr Kenneth Joseph, Head of NAACIE and the pro-government breakaway trade union organisation FITUG, was appointed by the board to fill the vacancy left by Mr DeNobrega’s resignation. His appointment is to be confirmed at the AGM.

Another possible reason for the reversal of the decision to invest in the Bonds may have to do with note 23 to the financial statements: Events After the Balance Sheet Date. This reports ambiguously that the Society’s retirement benefit plan held at December 31, 2008 a flexible annuity policy with Clico amounting to $110.9M. Note 12 to the financial statements devotes a full two pages to the plan, but did not refer to note 23. The directors should not by their silence encourage speculation that the Society may have undertaken the purchase of the bonds from Clico on the understanding that it could deduct the value of the policy from the purchase price of the bonds. That is a possibility fraught with serious legal implications and requires an unambiguous statement from the board which despite the public furore over the matter has so far not even publicly acknowledged the purchase.

Governance and risk
With the recent purchase significantly altering the composition of the Society’s assets and liquidity position, the Society is betting more than 40% of its accumulated profits on the Berbice Bridge Company meeting its annual interest obligations of about $800M. The financial projections were considered “overly optimistic” by the independent consultant. If the Bridge Company is unable to do so, then the Society could find itself along with other bondholders having to mark down the investment in its accounts. A proper analysis would have to wait on the release of financial statements of the Berbice Bridge Company.

The liquidity situation of the Society will be further eroded as it engages on the construction of a new, near billion-dollar head office in Georgetown. Consulting work in connection with that building is now the subject of a court action, but the investment itself is hardly the type of investment any risk-conscious entity would undertake in an uncertain financial environment.

Governance and the Bank of Guyana
One concern that has been vociferously expressed recently is the non-supervision of the Society by the financial regulator, the Bank of Guyana (BoG). The bank does not dispute that the Society carries on financial business as defined by the Financial Institutions Act which requires it to have a licence issued by the BoG. Yet it has inexplicably failed to enforce this provision. Such laxity by the regulator can have serious implications for any financial institution, let alone one that is subject to the control of persons with strong political affiliations and no private sector experience.

Without such a licence the Society does not operate within the FIA, which among other things provides for single borrowers limits to minimise the impact of a failure of a single loan or investment. Even if the Bridge Company investment was lawful, had the FIA applied to the Society then it would have been prevented from investing more than approximately $1.2B in the Bridge Company. The Society would also have been subject to the reserve requirement and its directors to the “fit and proper test.” It is hardly likely that such a loaded board could collectively be considered “fit and proper” to direct the operations of the third largest financial institution in the country.

Governance and members
The decision by the Society to hold its first ever meeting outside of Georgetown in 2008 followed a contentious meeting in September 2007 requisitioned by members who questioned the board about a fraud, the existence and implications of which it had stoutly denied. Those members were vindicated when the Society was left to make good the fraud to the tune of $73M. This time the dissatisfaction is about the adequacy and contents of the notice of Saturday’s meeting. By law, notice must be given 21 (clear) days prior to the meeting which does not appear to have been the case. Item 8 on the agenda seeks to increase the lending limit from $10M to $12M and beyond, even as the quality of the assets to secure lending has been diluted both by practice and the Berbice Bridge Company Act 2006. The implications are huge – higher lending and lower security will lead to higher provisioning and loan losses.

Governance and the auditors
By a notice in Friday’s newspapers the Society is proposing to replace long-serving auditors Jack A Alli, Sons & Co “in accordance with Rule No. 16 of the Act.” Apart from the statutory rules governing change of auditors there is also professional guidance under which any auditor proposed for nomination should seek professional clearance from the outgoing auditors. My understanding is that this has not been done. This could lead to an absurdity if it had to wait until after the meeting. In any case the outgoing auditors would be represented at the meeting to answer any questions, should these arise.

The proposed new auditors are Solomon, Parmessar & Co, headed by Mr Maurice Solomon, a director of the National Insurance Scheme. At a minimum this late change which appears to have taken the outgoing auditors by surprise must be regarded with considerable concern, since a change in auditors is done only for very good reasons.

Conclusion
Despite the mounting concerns the Bank of Guyana seems unwilling to act in a timely manner. It failed to do so with Globe Trust. It failed to act with Clico in connection with its deposit-taking. It should not fail the members of the Society. A group calling itself the Concerned Members of the NBS (including the writer) will be meeting Tuesday coming to decide on its participation at the AGM.

Recent developments involving Clico, the NIS, the NBS and Hand-in-Hand Trust show how contagion plays out in the financial and credit markets. The role of regulations is to prevent, detect and minimise such contagion. But effective regulations require as well independence and will. The NBS offers the Bank of Guyana another opportunity to show that it is on the ball.

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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.