Category: Private sector

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The problem of unincorporated associations

Introduction
Last Monday, August 29, I indicated in a letter to SN captioned ‘Nothing illegal about unincorporated bodies operating by the rules’ that I would be reviewing in today’s column the court’s decision in the case brought by the Secretary of the Berbice Cricket Board against the Guyana Cricket Board. The Chief Justice gave the parties short shrift on the grounds that all the parties were legal non-entities and that the court was not the proper forum or avenue for any relief or redress involving the Guyana Cricket Board or any of its three county boards which make up its membership. In my letter I expressed the need to dispel the myth or fear created by Mr Claude Raphael who had attributed to the Chief Justice a statement that the boards were illegal. I am glad to say that the Chief Justice at no point in his judgment described the boards as illegal as claimed by Mr Raphael.

Judgement
Having said that, it is necessary to state that there was in substance as much jurisprudence and law as there were policy and politics in the judgment. Maybe given the continuing saga of the rival boards and factions that have been fighting for control of cricket in Guyana, the Chief Justice was left with no choice but to tell the parties that they have no place in the court-house. But the judgment went beyond issues of locus and into discussions on what were described as matters “of national and general public interest.” For a jurist that is a slippery slope and on page 9, for example, the Chief Justice ventured that because there exists a Ministry of Culture, Youth and Sport responsible for sports in general, “the State has assumed executive responsibility for the welfare, promotion and proper administration of sports in Guyana.”

What the Chief Justice found was that the members of the Guyana Cricket Board were themselves unincorporated entities and therefore incapable of suing and being sued in their own names. Flowing from the non-legal status of the GCB the Chief Justice ruled that the court could not recognise the election of office bearers within that association. He noted that the position would have been different if the membership of the GCB had comprised of persons. In the view of the Chief Justice it “is difficult to see how those member associations could have sent delegates to vote at the GCB elections since their members were not persons but rather legally non-existent persons.”

In the circumstances the Chief Justice noted that while a legislative structure for the administration is desirable there is need for the intervention of the Minister of Sport to “impose his executive will in the national interest.” That solution appears to have been music to the ears of the President who within two days of the judgment moved to impose executive management of cricket in Guyana. This should be contrasted with the reactions in relation to recommendations coming out of the courts on constitutionally important issues such as the television case in Linden or the payment of damages to the teen who was tortured at the Leonora Police Station.

Unincorporated associations
Now what really is the position of unincorporated associations whether in Guyana and in other common law countries? This question was extensively considered in a report done by the Scottish Law Commission from which this column has extensively drawn. This column’s interest in the topic is a recognition of the large number of unincorporated entities in Guyana with two principal characteristics:

(i) as the name suggests, the association is not a body corporate which is incorporated under the Companies Acts or otherwise;

(ii) the association exists for a purpose other than the making of profit for its members, thus distinguishing it from a partnership or joint venture.

Because of these characteristics, unincorporated entities, together with charities are sometimes collectively referred to as the “Third Sector.” Unlike companies, statutory bodies and friendly societies, the law relating to unincorporated associations rests upon common law with the most striking feature being the absence of legal personality accorded to associations and clubs which do not choose to establish themselves as companies or as some other form of incorporated body.

Set out below are the principal problems encountered by unincorporated associations and which persons connected with these bodies need to familiarize themselves:

They have no capacity to enter into contracts. Contractual responsibilities must be undertaken by individual office-bearers or, possibly individual association members.

This restriction extends beyond contracts with third parties but also to contract with one of its own members. They cannot be held liable for wrongful acts committed by their representatives while acting on behalf of the association. Liability rests upon the individual personally responsible for the loss sustained, but it is not clear whether liability – possibly beyond the value of the association’s funds – also rests upon office-bearers or the whole association membership.

A member cannot sue for damages for injury sustained as a consequence of a wrongful act committed by an office-bearer or fellow member while acting on behalf of the association. This, it has repeatedly been asserted, would be tantamount to the injured member suing himself.

They cannot own property. Title must instead be taken in the name of individual members or office-bearers as trustees, necessitating further transfers when such members or office-bearers die or cease to participate in the association’s activities.

This does not however make them illegal. Indeed many laws proceed upon the (strictly false) assumption that an unincorporated association has some form of existence in law. The Companies Act for example requires foreign unincorporated entities seeking to do business in Guyana to register as an external company. The Corporation Tax Act, the Income tax Act, the National Insurance Act and employment legislation all deal with these associations as if they were legal persons.

Absence of recommendations
One of my disappointments in the ruling by the Chief Justice was the absence of any recommendations on addressing the unsatisfactory state on unincorporated associations. Admittedly the boards which had been before him had their attorneys to advise them but could the Chief Justice not have suggested how the vacuum in the law relating to unincorporated associations should be addressed? Or is it that he does not believe that the Third Sector is a matter of national interest and as Mr Claude Raphael demonstrated, the CJ’s ruling has been misunderstood and/or miscommunicated by members of the community. What makes it more unfortunate is that this was not the first time that the cricket boards were coming before the courts. Was cricket of any less national interest then that the court did not feel compelled to make the kind of sweeping recommendation that it made in the current case? While it is true that cricket should not have been thrown into this legal vacuum without any lifeline, the same acknowledgment should have been given to the boards which continue to play an important role in the national sport.

In venturing as it did on policy and executive matters the court gave the government complete latitude in deciding on how long it will control cricket, the terms of reference of whatever body is considered appropriate and the inclusion or exclusion of identified interested parties. Having given its decision in the matter would the court be concerned with the consequences of its decision or has it washed its hands of the matter? The landscape in Guyana is occupied by many temporary bodies, notably GuySuCo’s interim Board which the Minister of Agriculture has assessed as incapable of managing the corporation’s most important asset, and the various extended local government bodies which – for whatever reason – are not doing an impressive job.

Guyana law provides various legal forms, including incorporation by way of an Act of Parliament, that might not have been inappropriate in the case of cricket and perhaps other national sports bodies. Then there is the Companies Act under which even one person can incorporate a company, which should be contrasted with the Friendly Societies Act which requires a minimum of seven persons. What reduces the efficacy of the Companies Act in terms of the not-for-profit organization is that the form of company most appropriate for such organizations – the company limited by guarantee – was abolished when the 1991 Act came into force in 1995, and which despite pleas from the Third Sector has not been substituted. This column can do no better than repeat the call not only for the restoration of the company limited by guarantee, but also for a Charities Act. It is instructive that the England and Wales Cricket Board is incorporated as a company limited by guarantee. The partnership form is inappropriate unless the partnership is a for profit arrangement. Of course, the partnership is, like the unincorporated association, without a legal personality of its own but must register under the Business Name (Registrations) Act.

Conclusion
The cricket boards would need to consult on regularizing their own legal status and that of their members. Whatever they do, however, it is clear that the law relating to unincorporated associations generally is not satisfactory and the various arms of the state should join in bringing forward recommendations so as not to leave the law in its present state. An obvious solution is to confer legal personality on unincorporated associations under defined circumstances. What are these conditions? Here is a wrapped-up recommendation which I have copied from the Scots.
The main conditions for attribution of separate legal personality should be that a body has adopted a constitutive document which includes the following matters:

(a) the name of the body;
(b) the purpose for which it exists;
(c) the criteria for membership;
(d) procedures for election or appointment of those managing the body (including office-bearers, if any);
(e) powers and duties of office-bearers (if any);
(f) distribution of the assets of the body in the event of dissolution; and
(g) procedure for amendment of the constitutive

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Guyana in a housing bubble – not really (but maybe)

Introduction
I ended last week’s column by suggesting that the commercial banks – which account for 58% of the mortgage lending by financial institutions – have both the liquidity and the reserves to withstand any significant reduction in house prices and consequential foreclosures. I believe that the position is different with the non-bank mortgage lenders which would include the insurance companies and more significantly the New Building Society which by definition is heavily invested in the housing sector.

The NBS accounts for 31% of the assets of the non-bank financial institutions and has some 51% of its own assets in mortgage loans, by far the most exposed institution in the sub-sector. Part one of this column two weeks ago noted that the commercial banks have been gaining market share in the mortgage market mainly at the expense of the NBS.

Over the five year period 2006 to 2010 NBS increased its mortgage loans from 6,299 to 8,197, an increase of 30% over the period, or an average of 380 new mortgages per annum. It is at least surprising that the NBS which offers very competitive lending rates could only increase its annual number of mortgage loans by less than 10% of the number of houselots allocated by the government. This probably points to a situation of allottees not being able to build for several years, if at all.

In part two last week, I noted that the PPP/C 2006 elections manifesto had stated a figure of some 70,000 house lots having been allocated across the country since 1992. The annual budget speeches since then have revealed that since 2007 the government has spent over twenty billion dollars on development of these communities. One would therefore have expected the country’s sole housing and loan institution to have done much better during the house lots boom. Whether NBS’s failure to cash in on the boom is a weakness or serendipitous is debatable, but it would still be the most exposed entity in case of a bubble in the housing market.

NBS and speculators
The average balance on the mortgage loans outstanding by the NBS has increased from $2.28 million at December 31, 2006 to $2.64 million at December 31, 2010, though about 50 % of the number of its loans is for less than $2 million. Unless there is a serious loss of income by borrowers there should be no major difficulties in servicing those debts, even if there is a fall in house prices. But that would not be the whole story.

The NBS has seen its lending limits increased significantly over the past few years and if the notes to the 2010 audited financial statements are correct, it has been engaging in some adventurous lending which could have serious consequences involving $313 million.

Except for this, NBS is protected because the overwhelming majority of its homes are owner-occupied. In such circumstances, regardless of the state of the housing market there should be no problem once homeowners can service their debts whether from their own resources or from remittances. NBS’s conservative lending policy will also work in its favour since the policy is structured to ensure that the institution does not lose, even in a forced sale.

That then leaves us with the property developers who build with a view to sell down the road. This is the group normally most at risk since they build now with a view to sell later. In a deteriorating market this is bad for the developer. Experience has shown however that in many instances this is a group and an activity that is characterised by money-laundering and they do not mind waiting a few years to dry-clean their money.

In summary, therefore, there are many reasons why at this stage lenders need not be overly concerned about a housing bubble. The banks are not disproportionately exposed and have sufficient reserves and liquidity to cushion any problems in the housing market. Of the non-bank financial institutions the one with the biggest exposure is the NBS but it too ought to be able to withstand any decline in the market.

And many of the property developers have characteristics of their own that allow them to act in their own special way – outside of the normal rules of economics and even the law.

One million per house lot
This does not mean that a housing glut will be problem-free. It could bring an important sector of the economy to a halt and cause ripple effects on the construction industry, the wood sector and distributive trade, lending and government revenues.

For lenders, if demand for homes dries up lending will also decline and the institutions may be even more reluctant to take in deposits. Even a modest decline can have wide ripple effects.

But there are other issues we need to consider in the housing policy. Whatever its faults, the PNC did have some excellent housing projects and decades after their establishment, Meadow Brook Gardens and South Ruimveldt are pleasant communities with decent amenities.

By contrast the Stabroek News editorial of July 7, 2011 may have only just overstated the position when it said that under the current housing policy a large expanse of bush crisscrossed with mud dams earns the accolade housing scheme.

Yet the government reported that in 2009 it spent some $1.5 billion to develop six new sites to provide 1,504 new houselots – or one million per house lot in low-income settlement schemes. It just makes no sense other than to those spending and those benefiting from such expenditure.

Basic facilities
And what do these areas have to show for such generous spending? Whether a community is low income or top range, it needs places for the children to play and adults to exercise and socialise, schools to teach and learn, post offices for the elderly, temples mosques and churches for worshippers and good roads, electricity, water and sewerage for all.

They need roads in and out, wide enough for traffic not today but twenty years hence. The residents need jobs conveniently located or accessible to where they live. One of the ironies that are being confronted by the ever expanding number of commercial banks is that the person living in Diamond still finds it more convenient to do their banking in Georgetown than at the Diamond branch for the simple reason that s/he works in Georgetown.

In many areas where house lots have been sold basic sanitation facilities would be considered luxuries. The Guyana Population Census 2002 reported over one half of the country’s households still use pit latrines and that the proportion of households using the modern method of water closet linked to sewer line has declined! Surely after sixty years we should have extended the sewer system beyond Georgetown.

Spending spree
The other major problem associated with the housing policy is corruption, wastage and extravagance. Budget speeches show that over twenty billion dollars have been expended on housing schemes since 2007. Not surprisingly, the house lot policy does not seem unrelated to electioneering. For example in 2006, the year of the last general elections, $795 million was spent on developing infrastructure for 9,000 houselots “in areas such as Zeelugt North and Sophia.” The budget speech announced us that “similar work was undertaken on 4,700 houselots under the Low Income Housing Project in areas such as Westminster, Belle West, Plantation Glasgow, Cummings Lodge and Sophia.” No value was given. And then the same paragraph states that “nearly $251 million was spent on providing house lots in areas such as Vigilance South, Amelia’s Ward, Vryheid’s Lust and Block II Enterprise.”

In 2010, one year before the next general election, the nation was told that 6,331 house lots were allocated and some $9P.6 billion dollars was spent (average $1.5 million), against an original budget figure of $2.8 billion. What is interesting is that many of the communities benefiting from the 2006 spending such as Belle West, Westminster and Sophia are again part of the loot. As if that is not enough, some $3.6 billion has been allocated to the housing sector in 2011 and some 7,500 houselots are earmarked for allocation.

If there is a problem on the expenditure side, the income side is no different. I am reliably informed by one of the recent on-the-spot purchasers of a house lot that receipts for the sale of land are issued by the Central Housing and Planning Authority (CHPA), a statutory body.

Appendix T of the National Estimates for 2011 showing an abstract of revenue and expenditure of this body indicates that almost the entire income of the CHPA for 2010 comes from the central government – $150 million as a subsidy and $7.5 billion as a capital grant. If indeed 6,331 house lots were allocated in 2010 then even if the average sale price is $300,000 (some lots are sold for more than $1.2 million) the revenue should be over $1.8 billion. Something is missing.

Conclusion
Over the course of the last three weeks I have had my closest look at what constitutes the country’s housing policy. Prior to 2006 the house lots given out by the government should have far exceeded the unmet needs of the entire population with many to spare.

Further allocations since then would have exacerbated the situation.

It is therefore necessary for a survey to be done to ascertain the number of house lots across the regions that have still not developed into houses.

It would be useful too for a value-for-money audit – or better still a forensic audit – of the housing programme and expenditure to be carried out. Housing is a major public policy/social/basic needs issue with important long-term implications. It requires coordination with and can contribute significantly to several other sectors. It should not be left entirely to an overenthusiastic individual who cannot remember a payment of $4 billion.

While the lending institutions do not face any immediate risks of and from a bubble, an extra bit of caution in their lending programme could be very useful.

For those seeking a home, the advice might soon be to buy rather than build.

As the supply of homes increases relative to demand, cost may very well exceed market price. Buyers welcome that.

Corrections
I apologise for two errors in last week’s column which are regretted but which did not affect the thrust of the article.

The last sentence under ‘Self-Help’ should have read: And as we have said this does not take in the number of private houses built by individuals on privately acquired lands.

The second was in respect of the dimensions of the lots being offered by private developers.

In the first sentence of the second paragraph under the heading ‘Friendly domestic capitalists’ these were stated as 50 yards by 100 yards instead of feet in both cases.

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Guyana in a housing bubble – not really (but maybe)

Introduction
I was totally surprised at the very informed responses to last week’s introductory part on the country’s housing situation. What made it even more interesting were the sources of the comments and the insights they offered. Indeed they made me do some previously unintended research, the results of which are indeed quite revealing and troubling particularly given the level of accountability and integrity we have experienced in the housing sector.

What has now emerged is that there is more to the superficial impressions and conclusions on the government’s housing policy. They point to an absence of national planning and coordination, developments of some regions and areas at the expense of others, political opportunism and not unexpectedly and increasingly, concerns about accountability, transparency and corruption. Perhaps that is why in a recent talk to young members of the Alliance For Change, Dr Tarron Khemraj a talented economist and academic said that if called upon to grade the PPP/C’s housing policy, the most generous he could give would be a B Minus.

Just maybe
I will return to my concerns later, but for now I go back to the caption of this article and the question whether or not Guyana is in a housing bubble. Last week I was fairly certain that we are not. Further investigation however forces me to qualify that opinion and I have to state at this stage that a bubble is not entirely unlikely in the short term – any time in the next three years.

Recall from last week that a bubble arises whenever the fundamentals of the market do not apply to a sector of the economy. That fundamental states that as more of a commodity becomes available, prices fall. The converse is also true – as supply decreases, prices will rise as we are currently witnessing with the price of chickens. If there is a housing bubble, consumers will continue to pay higher and higher prices for real estate, regardless of whether or not the stock of housing units increases – that is until the Day of Judgment when the bubble bursts.

House lots and housing stock
We must of course be clear to distinguish between house lots and housing stock – something that I am not sure is understood by the government that continues a mad rush to distribute ever more house lots. Indeed it has now decided that with an over-allocation to residents, it must move to allocating lots to non-resident Guyanese and we ought not to rule out house lots for the Chinese and Brazilians too. The evidence points unmistakably to an oversupply.

But we must also distinguish between a bubble and its consequences. The fact that there is an oversupply does not mean there is a crisis, if there are persons who are prepared to pay the obviously inflated prices. The problem arises if the real estate is paid for by borrowings from the financial sector and if the borrowers are unable to meet their mortgage payments. The result of this is that a whole lot of properties come on the market as a result of foreclosures and forced sale of several properties almost simultaneously. This is essentially what happened in the USA and resulted not only in the collapse of the real estate market but a number of financial institutions as well.

Background
Housing policy formulation has not been a recent phenomenon. The first formulation of a country-wide housing plan was undertaken in 1954 by the Interim Government which was put in place following the suspension of the 1953 government. Perhaps because of political considerations – the deficit was in unfriendly areas – the PPP government from 1957 to 1964 did not allocate sufficient funding for the programme and the housing deficit – the technical word for shortage – therefore increased. The policy was revisited in succeeding PNC administrations with a number of new schemes established mainly in – not surprisingly – PNC friendly areas.

Those efforts however did not fully satisfy the need for housing which at 1980 stood at 137,374 units, giving an estimated deficit of 12,360 units, according to a paper prepared by the Hoyte administration in 1986. That paper calculated that by 1986 the deficit had increased to between 25,000 and 30,000, a generous number but which the paper attributed to the increasing number of households arising from cultural factors, the need for specialised accommodation and the decline in housing construction.

Self-help
It means that the PPP in 1992 inherited a housing stock of approximately 150,000 units and a deficit of 31,000 units for a population of 723,673 women, men and children. It responded with great speed – if not decency – and in a move that has become quite characteristic of the PPP, the Jagan administration immediately fixed the housing deficit for its political elite by the establishment of Pradoville 1 where several ministers, party chiefs and top civil servants were given prime real estate at peppercorn prices. Ironically, and for some strange reason the Housing Minister at the time, Dr Henry Jeffrey, was not among the lucky few.

In a Housing Policy paper tabled in the National Assembly around 1994 by Dr Jeffrey, the housing deficit to the year 2000 was projected at 20,078; a figure arrived at by assumptions of the then number of households (rather than housing stock), the size of the population and the replacement factor. Fast forward to 2000 when the population was 750,000 and divide that number by an average family/household size of four.

On that basis the number of housing units needed to house each family in their own homes would be 190,000. By that time the number of housing units had increased to approximately 160,000 leaving a need for 30,000 units. If we make allowance of one-third of that for construction on previously owned lands, lands purchased from both the state and individuals and houses bought from private developers then the house lots needed since 2000 to meet the deficit would have been approximately 20,000.

The PPP/C’s manifesto for the 2001 elections states that the number of house lots projected to be distributed is 50,000 – well over twice the number needed to meet the deficit! Then in its 2006 manifesto the party boasted of having created a housing boom in Guyana with 70,000 house lots distributed since 1992 – or sufficient to house 280,000 persons in households of four.

That means that by 2006, if all the house lots had been used for housing, there would be sufficient houses for close to nine hundred thousand persons – more than the entire population of Guyana. And as we have said this does take in the number of private houses built by individuals on privately acquired lands.

Friendly domestic capitalists
The situation is worse when we consider certain other developments. In the Providence East Bank Demerara area the Jagdeo administration has given/sold some one thousand acres of GuySuCo land to close friends, supporters and contractors including Messrs Lumumba and Shivraj both of whom have been the beneficiaries of the Jagdeo administration’s largesse, BK International, Courtney Benn Construction and VIKAB.

These new capitalists are now offering lots of 50 yards by 100 yards which gives eight lots per acre. In the Providence area alone there will therefore be land for another eight thousand housing units or 32,000 persons! And then there is the other friend Mr Eddie Boyer who acquired from the Privatisation Unit some 103 acres, of which some 400 hundred lots are on offer which will house another two thousand persons!

The housing bazaar
The other factor that actually makes the whole bazaar for house lots more suspicious and that can create problems for the housing market is that except for the Linden area the house lots are on or within miles of the coast. In other words even the very strange situation painted by these facts is decidedly worse if we deduct the population in the hinterland areas to which the concept of house lots is completely alien.

What has emerged recently is that the house lot policy is not devoid of political considerations and reminds me of the word gerrymandering – a favourite word of Cheddi Jagan when he wanted to accuse his opponents of redrawing the demographic map for electoral purposes. The allocation of land at Diamond and Eccles on the East Bank of Demerara will make an enormous difference in the 2011 elections and can for the first time give the PPP control of Region 4.

In the government’s reckoning, economics take second place to politics and it matters not that there are implications for the other regions from which large numbers of allottees are drawn, issues of public services, utilities, access, etc. In any case none of the political elite lives in Diamond and only a few remain in Eccles.

Oversupply and its implications
Based on these numbers, Business Page safely concludes then that there is an oversupply of housing land, if not yet housing. Had there not been selective controls over disposals of house lots, market forces would have brought down the price for land since it is clear that there are lots of house lots which have not been developed into houses. And of course the price for land cannot be entirely divorced from housing market.

What then are the implications for a bubble? That depends on whether or not the housing boom is financed by borrowings from the banking sector. The real estate problem in the US was triggered by the mortgage crisis as homeowners faced with a contraction in the economy and the loss of jobs were unable to finance their sometimes 100 % mortgages, causing the lenders to foreclose or the borrowers to sell and cut their losses. The effect was the same – too many properties going on the market at the same time and prices collapsing. What started as a problem for individual homeowners and single financial houses soon became a deluge that affected the entire economy from which the US has so far not recovered.

Bank lending
As noted last week, available information from official sources indicates that the total amount of mortgage loans at December 31, 2010 was approximately $60 billion, with the non-bank sector accounting for about 42% and the banks accounting for 58%. The 2010 Bank of Guyana Report shows that the share of the commercial banks’ loans and advances to the private sector in real estate was 31%. At first sight this might seem to include both commercial and personal loans but there is reason to believe that lending is categorized by the nature of the underlying business rather than the purpose of the particular loan or advance.

In other words, lending to the distribution sector for real property acquisition is classified not as real estate but distribution. This means that the 31% is really only for personal loans and that the banks are more exposed to the real estate sector than may at first appear. Since commercial properties are on average much more expensive than residential housing, President Jagdeo may have been far too quick and way off target to lightly dismiss concerns about a potential housing bubble.

Banking resilience
What the Bank of Guyana 2010 Report unambiguously discloses is that the total assets of the commercial banks at December 31, 2010 amounted to $296 billion of which total loans and advances were $112 billion, or approximately 38%. On the other hand foreign assets owned by the commercial banks at December 31, 2010 alone amounted to $47 billion, investments in central government were $67 billion and amounts with or claims on Bank of Guyana of $45 billion.

This is more than enough to weather any drastic decrease in real estate prices and prevent any shocks. It would mean however that the value of the banks’ securities and the matching lending would decrease, their profitability and tax obligations would fall, and their overall lending framework would alter. But as we saw some years ago in the rice crisis, and are even now seeing in the US, banks can be extremely resilient and have a remarkable capacity to recover, even from the sternest of tests.

Next week I will look at the implications for the non-bank financial institutions of any sharp decline in the housing market and any other dark clouds hovering over the horizon. As one is always forced to do with matters concerning the Ministry of Housing, I will also ask where all the money for these land sales has gone.

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Guyana in a housing bubble – not really

Introduction
In an op-ed column in the influential New York Times on December 21, 2007 Paul Krugman, winner of the 2008 Nobel Prize in Economics, columnist, bestselling author and professor of economics at Princeton University, wrote of the mortgage crisis in the USA that “the explosion of ‘innovative’ home lending that took place in the middle years of this decade was an unmitigated disaster.” He was responding – in his usual confident manner – to a statement from Fed Chairman Ben Bernanke in connection with the then pending mortgage crisis in the USA stating specifically that “Market discipline has in some cases broken down, and the incentives to follow prudent lending procedures have, at times, eroded.”

Do the sentiments in that column have any resonance in Guyana where the term ‘housing bubble’ has appeared twice – albeit by one writer – in the letter columns of this newspaper? When it was first raised President Jagdeo, the country’s economist-in-chief sought to counter the fear, noting in his usual manner that the exposure of the financial sector to housing is not very significant. When Clico collapsed he said the same thing, ignoring the six billion dollar hole in which the NIS was thrown and from which it is still reeling.

Pool of fools
What really is a housing bubble? It is a marketplace phenomenon in which one of the most basic fundamentals of economics does not apply – that as supply increases, prices fall. In a bubble, prices go up simply because prices are going up. Persons invest in the expectation that there will be someone who will be willing to pay a higher price – the Greater Fool theory. Of course at some point the pool of fools is exhausted and there is no one willing to pay the exorbitant price not justified by economic fundamentals. At this point the bubble bursts, sanity returns to the sector and several persons start counting their losses. For those who can afford to hold the asset on the expectation that prices will recover, there is only a paper loss. For those who have to sell, the loss is real since they recover much less than they have invested.

But let us return to the bubble and take as an example the recent sale of the St Barnabas Church in Regent Street for $500 million. The Greater Fool theory states that the next property of similar size and location that comes on the market would fetch more than $500 million. For speculators, it does not matter if the annual return on their investment is less than the interest they will receive if they placed their money in an interest bearing account. They bank – pun intended – on prices going further up and what they lose in holding costs they recover in capital gains when they sell in a rising bubbling market. Of course even in such an irrational situation rational economics are not completely thrown out of the window and there are still expectations of things remaining equal.

Guyana – an unequal place
Things in Guyana are not only distinctly unequal but there are other considerations that have to be factored into the equation. Take for example the sale by President Jagdeo of his Pradoville 1 house to PPP/C friend and confidante Ernie Ross at the unrealistic price of US$600,000. There are other and far better properties in Pradoville 1, but one can be sure that none will fetch a price anywhere close to US$600,000, much less $750,000 which would be the pre-Capital Gains Tax equivalent. For this there is more than one reason, with one being the unexpressed statement that Pradoville I is no longer the commune of the super elite; that is now Pradoville 2 where the President and a limited number of persons will be taking up ocean-front residence.

The second is that there is probably only one Ernie Ross who would be willing and able to pay above market price to the President, confidently assuming that his intensive work in the months of the 2011 elections will provide him with tons of money to compensate him for buying a property which he still has not occupied or rented.

Another telling factor at the higher end of the market is the levelof narco and illicit money to be washed and what better to do so than casinos, gas stations, restaurants and cambios – all essentially cash operations.

A hotel can incorporate many of these, making it an excellent vehicle for laundering money. Notice the eagerness with which hotel ownership or operation is pursued by the cash rich businessperson despite the fact that the level of occupancy in Guyana is by far the lowest in the Caribbean. Our one-man (and little support) anti-money laundering unit is harmless and ineffective in this marketplace where any currency of any amount is available on the street, often at low interest and in respect of foreign exchange, at very favourable rates.

Economic logic does not apply to the world of the elite and their friends. They enjoy a high level of immunity in law enforcement, administrative rules and regulations and probably assume that any attempt to investigate them will be terminated with a single nudge or a telephone call.

The importance of information
Let us now seek to examine, as far as a column can, whether there is any danger that Guyana is in a housing bubble. And if it is, what are the potential consequences and what the lenders and the authorities should be doing to prevent a situation referred to as locking-the-barn-door-after-the-horse-is-gone, that is to regulate lending while it is booming, rather than after it will have collapsed – ie taking curative rather than preventive action.

To make any sense of this real or imagined problem it may be necessary to understand who the players in the housing market are and to examine their respective roles.

It goes without saying that a discussion on such a crucial issue requires proper and reasonably accurate information, something that is regrettably scarce in this economy. In this country where telling the truth is not considered necessary or virtuous and where politicians routinely lie, hard facts from regulators are the best check against anything that politicians say.

By law and necessity the Bank of Guyana and the Statistical Bureau are supposed to be independent, but in practice they are controlled and compromised by politicians, often merely following instructions, continuing to do what they did last year, their output seldom demonstrating innovation, initiative or even relevance. So that like the politicians, they simply assume that the obvious benefits of broadened home ownership justify a rather liberal approach to lending by the commercial banks and the non-bank financial institutions.

The government and its agencies
For the government any attendant mishaps to its housing policy – which even its critics agree has been a defining success – will be a major setback, but nothing compared with the losses which the bursting of any bubble would have on the individuals and investors in the housing sector and their lenders.

The government’s main role has been to conceptualise and to facilitate its housing policy largely with below-market sale of state-owned land, infrastructural works and tax exemptions on income earned by approved lenders. As an instrument of social policy, land allocation is dictated not only by economic considerations but takes account of several non-financial variables including of course politics.

The Bank of Guyana has the statutory obligation to regulate the financial sector, and now as well, the insurance sector, a task for which it does not appear to be properly equipped. For years I have complained unsuccessfully about the inadequacy of its statistics and the arrangement of the information in its periodic reports which include a Statistical Bulletin, a Banking System Statistical Abstract, and half yearly and annual reports.

These reports serve different purposes and seem to ignore the need for aggregate statistics to enable a proper understanding of the key sectors and equally importantly, for purposes of policy formulation. It is amazing that any government would actually make important monetary and fiscal decisions in the absence of proper information.

Other players
The other players are the lenders and the borrowers. Not too long ago, financing for the housing sector came mainly from the non-bank institutions. The most prominent was the New Building Society, with the insurance companies a smaller player using part of their long-term funds for housing purposes. It was an insurance company Demerara Mutual that played a major role in the development of Happy Acres, a success story on the East Coast Demerara, but which it did not seek to replicate elsewhere.

There has been a marked shift in the market share of real estate and housing loans over the past ten years. We estimate from various sources that the total amount of mortgage loans at December 31, 2010 was approximately $60 billion, with the non-bank sector accounting for about 42% and the banks accounting for 58%. That is a dramatic change from ten years ago when the banks accounted for 25% and the non-banks for 75%. The dramatic shift in the non-bank sector is attributable to the declining role of the New Building Society in lending to the housing sector.

From available information, we estimate that in dollar terms, lending by the non-bank financial institutions has remained practically static over the period 2007 to 2010. This coincided with the contraction of lending by the New Building Society resulting in a significant decline in market share and losing out to the Republic Bank whose lending on mortgages moved from near zero in 2001 to $6.6 billion at December 31, 2010.

Over the past ten years total mortgage lending has increased at a compound annual rate of 14%, ranging from 2.54% for the non-bank financial institutions, Citizens Bank 10.41%, and Republic Bank 29.4%, a high percentage coming from a negligible base ten years ago. My inability to provide similar information for other financial houses, including those commercial banks that publish annual reports, is because comparable information is not readily available.

To be continued

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The Clico fallout – Duprey, Monteil and Geeta Singh-Knight

Introduction
The Duprey name is legendary in Trinidad and Tobago. Cecil Duprey, a member of an ordinary local family in a matter of decades rose from practically nothing to become a household name in his country. He founded a successful conglomerate, established a business that would probably have been considered too bid to fail and his grandson Lawrence Duprey had visions of taking the company global. He was street smart and while living his vision – first in the Caribbean and then further afield – played the political field as a major supporter of the corrupt Basdeo Panday government. Duprey seems to have won President Jagdeo’s confidence here in Guyana which seems to have made available to him and his company CLICO endless opportunities to invest in Guyana. For example, CLICO’s forestry subsidiary Caribbean Resources Limited was allowed to retain concessions over huge swathes of Guyana’s forests even though it had for years defaulted on its obligations to the Guyana Forestry Commission. Duprey was preferred to DDL for GuySuCo’s molasses and was negotiating for an investment in an ethanol plant.

Mr Lawrence Duprey surrounded himself with some bright accountants, including Andre Monteil, a classmate of mine at South West London College from 1970 to 1973. Monteil is credited with being a key architect of CLICO’s expansion and some of its more aggressive and possibly illegal activities. While Monteil’s role in some transactions made him quite unpopular in Trinidad and Tobago, for the better part of two years, it was felt the Mr Duprey was untouchable. That belief was shattered this past week in Trinidad and both gentlemen are now in some real problems.

Double whammy
Reports emanating from Trinidad and Tobago suggest that the government of that country is moving against Lawrence Duprey and Andre Monteil for civil and or criminal conduct in the collapse of the insurance giant CLICO and its parent CL Financial. A civil lawsuit was filed last Tuesday by Trinidad’s Central Bank and CLICO against Duprey and Monteil for alleged mismanagement and misappropriation of CLICO assets which led to the fall of CLICO in January 2009. Then one day later Attorney General Anand Ramlogan directed that all files coming out of the probe into the collapse of insurance giant CLICO should be forwarded to Director of Public Prosecutions (DPP) Roger Gaspard to determine if criminal charges should be laid against Duprey and Monteil. The two hundred page suit should make interesting reading indeed.

Under normal circumstances the authorities in Guyana and the former key officers in CLICO Guyana should be taking great interest in the developments taking place in Trinidad. While the architects of the financial misadventure that has placed our National Insurance Scheme at risk were those in Trinidad, they found compliant Guyanese to carry out the Guyanese leg of transactions, even willing to ignore the country’s laws and defy its regulator. This column had previously called on the Bank of Guyana which has taken over responsibility for regulatory control of the insurance sector to work closely with its counterparts in Trinidad in the investigations and prosecutions of the region’s most expensive financial failure.

Deafening silence
So far we have heard nothing but a deafening silence from the Bank of Guyana whose Governor has, probably dangerously, been appointed the company’s liquidator. I say dangerously because it is not unusual for legal actions to be brought against a liquidator and the person most likely to do so would be the regulator. That is not going to happen even as the liquidation has in essence been contracted out! Indeed my understanding is that CLICO’s former CEO Ms Geeta Singh-Knight is still playing a paid role in the liquidation. We are truly an incredible country.

The CLICO debacle in Guyana has been addressed to some considerable degree in these columns before. I do not intend to do so again. Suffice it to say that the company had breached the provisions of the Insurance Act which require companies carrying on long-term insurance business to invest a base of 85% of its statutory fund in Guyana. In clear contravention of that legal requirement CLICO took the billions of dollars in the Fund and placed it in a related party in The Bahamas, incorrectly claiming that it was invested in Fixed Deposits, a matter that appeared to have escaped the diligent notice of CLICO’s auditors. The directors and officers of CLICO did not comply with a demand/request by the regulator to repatriate the Statutory Fund.

Trouble
Enter the law. Section 19 of the Insurance Act provides that any person who contravenes any provision of the Act, or any of its regulations or any direction or requirement made by the Commissioner of Insurance, is guilty of an offence. Unlike the normal presumption in law where the prosecution has the burden of proving beyond reasonable doubt the guilt of the accused, the Insurance Act shifts the burden to the “person” to prove that s/he did not knowingly commit the offence of omission or commission.

Sub-section (2) of the section provides that where an offence is committed by a company – in this case CLICO – and the offence is proved to have been committed with the consent or connivance of, or to have been facilitated by any neglect on the part of, any director, principal officer, or other officer or an actuary or auditor of the company, he, as well as the company, shall be deemed to be guilty of the offence. Ms Singh-Knight was both a director and principal officer of the local company and most certainly it would have been to Ms Singh-Knight that the Commissioner of Insurance would have been addressing correspondence and directions.

There is no doubt in my mind that as the new regulator the Bank of Guyana should have long initiated action against the officers and directors of CLICO Guyana, and that the failure by the BoG amounts in my view to a serious dereliction of duty. Now when the regulator fails, for whatever reason, to protect the public interest, there is trouble indeed. That is the situation we face.

Duprey and Monteil
The question has been posed to me whether Guyana can take similar action here against Duprey and Monteil. That is a question for really seasoned attorneys to answer. The Insurance Act recognizes that insurance may be offered in Guyana by persons who are not in Guyana. In fact the Act defines a person as including “a natural person and any corporation or other entity which is given, or is recognized as having legal personality by the laws of any country or territory.”

The challenge is that the laws of Guyana are generally only enforceable in the country’s courts and the question is under what law can the courts of Guyana compel Mr Duprey to submit to its jurisdiction. Article 38 of the revised Treaty of Chagauramas imposes an obligation on member states of Caricom, within defined limitations, “to remove discriminatory restrictions on banking, insurance and other financial services.”

Oddly, the treaty created a single economic space but left territorial jurisdictions intact, impervious to each territory’s domestic laws. The Caribbean Court of Justice only has original jurisdiction in relation to the treaty and the CSME and appellate jurisdiction from national courts. It may seem commonsensical that crimes or contraventions of provisions of the treaty committed in any territory should be dealt with in that territory. It is certainly worth further consideration and one only has to look at how the US used the long arm of its laws to bring to justice ‘Sir’ Alan Stanford for financial crimes committed in Antigua which defrauded Americans back home.

Local directors
But back to the directors of the local company and in particular Ms Gita Singh, its CEO who was at the centre of the questionable and disastrous transactions. In addition to the infractions of the Insurance Act there were clear breaches of the Companies Act (CA) which governs all companies incorporated or registered in Guyana. S 96 of the Act imposes on every director and officer of a company a duty to (a) act honestly and in good faith with a view to the best interest of the company; and (b) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.

In the discharge of their particular duties which they have assumed, directors are bound to take reasonable care. Failure to exercise such care constitutes negligence. While the normal legal principle is that directors owe their duty to the company and to no one else, directors may be liable to outsiders for their own wrongs. This means that directors who are parties to a fraud or the commission of any other wrong are personally liable on the general principle that a servant or agent who commits a wrong is liable for damages resulting therefrom as well as the company.
Time to act

We should long ago have started an enquiry into CLICO for possible criminal conduct and the Bank of Guyana should, like their counterparts in Trinidad and Tobago, have begun civil action against them and their Trinidadian masters. This would have been an excellent opportunity to expand on our jurisprudence while penalizing those who break our laws and cause our people and country huge losses.

It may be that the Bank of Guyana is afraid to take action because President Jagdeo has stood by Ms Singh-Knight while he throws red herrings about investigating Globe Trust and CLICO. There must be some good reason for him to want to do so but his failure sends the wrong signal that some people can do no wrong and if they do, there will be no consequences.