Tag: New Building Society

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The audited financial statements and annual reports were used to analyse NBS

I am pleased to see some new names surfacing in the discussion of topical issues. It suggests that there may yet be persons out there prepared to engage seriously in these issues even if sometimes without a sufficient knowledge or understanding of the facts. I therefore consider it useful to address some of the more salient matters raised by Mr Salim Khan in his letter in the Stabroek News of October 6, 2009 ‘Assessments from critics of NBS are counterproductive.’

1. Mr Khan claims I have a peeve about the NBS, having served as a director of the Society. I grant him an unchallenged right to psychoanalyse my writings and personality.

2. Mr Khan recommended that the facts be checked, although there is no evidence that he himself did so. Not only do I always use the audited financial statements and annual reports of the Society for my periodic analysis but before the most recent Business Page, I wrote the Society’s Director Secretary for a copy of the half-year 2009 financials. He is yet to acknowledge my request. Would Mr Khan please help?

3. With NBS being the only Building Society in the country, Mr Khan may wish to tell readers which industry in which country he is referring to in claiming that “NBS’s financial position is as sound as any in the industry.”

4. Can Mr Khan explain what he means in his letter by a “simplistic portfolio of loans” and whether he thinks that the board was wrong to support the members’ motion at the 69th AGM for a Board Loans Sub-Committee?

5. Is Mr Khan aware that commercial banks are subject to two rules on provisioning against doubtful loans – IAS 39 and Bank of Guyana Supervision Guideline 5, the latter of which does not apply to NBS?

6. If Mr Khan would care to read my reviews of the commercial banks’ annual reports posted at chrisram.net, he would immediately realise that their interest spread is a criticism that I invariably make. Having said that, I wonder if Mr Khan knows the following:

a. That unlike the regulated financial and banking businesses, the NBS does not maintain a non-interest bearing statutory deposit with the Bank of Guyana. If they did, it would easily mean on the basis of NBS’s 2008 financial statements setting aside more than $3 billion dollars as non-income earning assets. By not doing so, NBS can earn, at the average rate of interest it earned on mortgages in 2008, income of $275 million not available to the commercial banks.

b. That the NBS is exempt from corporation taxes and consequently for every $100 net income earned by the Society, the commercial banks paying corporation tax at the rate of 45% would have to earn $180.

c. For those commercial banks approved for lending for low income housing, the ceiling is $3 million per loan while in the case of the NBS it is $12 million.

d. That the NBS pays no property tax which on its 2008 net asset position would amount to approximately $40 million annually.

e. That legislatively, NBS with its emphasis on mortgages and prescribed limits, is precluded from the risks of commercial lending faced by the commercial banks.

7. When stacked up against those realities, it is surprising that the NBS does not report higher surpluses than it currently does.

The reason in my view is the result of the inefficiencies of the monopolistic privileges enjoyed by the NBS under statute, politicised, ineffective and self-serving governance and a board and management that lack the range of skills that a modern financial institution needs in a competitive environment.

8. Mr Khan is the only person I know who speaks as a keen observer but who considers directing business to the competition a virtue. As far as I am aware, the only business the NBS ever directed to competing lending institutions was for temporary, bridge financing during the period when the security for loans was being perfected.

Thereafter, the NBS would grant the loan including such amount as to liquidate the bridge-financing.

I trust that I have clarified and addressed Mr Khan’s issues and look forward to his extending me reciprocal courtesies. I trust too that others, including the directors of the NBS, who make similarly uninformed comments and claims, would be guided accordingly.

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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:National Insurance Scheme Annual Report 2007

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

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

20090426_table1
Source: NIS Annual Reports 2004-2007

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

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

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

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

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

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

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

20090426_table1
Source: NIS Annual Reports 2004-2007

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

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

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

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

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

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

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

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

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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.