Is an NIS Funds Investment in the Four Seasons Development Appropriate?

Having witnessed the ups and downs of the Barbados economy for 41 years it is clear that the current crisis is certainly the worst we have experienced in that time, with no easy victories in sight and lots of hard slogging and tough choices yet to be made. Importantly, the current international environment in developed […]

By Peter N. Boos

October 13, 2011

Four Seasons Private Residences Barbados

Having witnessed the ups and downs of the Barbados economy for 41 years it is clear that the current crisis is certainly the worst we have experienced in that time, with no easy victories in sight and lots of hard slogging and tough choices yet to be made. Importantly, the current international environment in developed economies is expected to continue for a few more years, and to be characterized by slow growth and high levels of unemployment. The October 2011 report from the Central Bank of Barbados confirms this assessment.

We can all agree that these are tough times and Government has difficult choices to make. It is the job of all citizens to help get the country back on a growth path by being more innovative, productive, competitive and confident.

Recent disclosures that the developers of the proposed Four Seasons project have made an application for financing from the NIS Fund have surprised many. Even more surprising is the indication from Government that this should and will happen, seemingly as a matter of course.

No doubt there are many potential benefits of having a commercially viable, self-sustaining Four Seasons Hotel in Barbados, and few reasonably minded people in Barbados would want the project to fail just for the sake of it. This would simply not be a defensible position to take.

Nevertheless, the fact that we are in a deep long term economic recession should not lead to a relaxation of the legal and socio-economic principles governing the manner in which the NIS fund is allocated and invested. On the contrary, I am of the firm view that it is precisely in times such as these that the integrity of a fund in the nature of the NIS fund should be most jealously guarded.  The fund is not a commercial or development fund. It is a social security and pension fund, which should, for obvious reasons, be invested on a conservative basis to meet long-term liabilities.

Some may recall that CLICO failed essentially because it strayed from sound investment management practices as mandated in the law under insurance regulations, and took on several speculative investments, which eventually it could not support financially. Looked at objectively CLICO and the NIS have something very important in common: CLICO derived and the NIS derives large volumes of cash from insurance premiums, pension contributions, investment income etc. As a corollary to that, the people whose money was held by CLICO and is held by the NIS were/are depending on receiving the benefit of those funds. In many cases those funds are the only savings and retirement planning provision made by such people.

Against this background some important questions arise on the appropriate use of NIS Funds by Government.

Appropriate NIS Funds Investment

How should NIS Funds be invested? What are the Guidelines for NIS Funds investment and who sets them? What are the powers of any Government to mandate how these Funds may be invested?

Recent announcements indicate that almost 70% of NIS Funds are lent to Government. On what terms does the Government borrow these funds from the people? Sovereign debt crises in Europe and the USA should be sufficient warning for Barbadians that Governments too can default. At the end of the day, it is the taxpayers who have to make good any shortfalls, and it is they who are at risk if their future social security needs cannot be met.

In the recent 2011 Budget presentation [concerning] Government’s Proposed Strategy to Reduce the Deficit in Line with the Medium Term Fiscal Strategy (MTFS) the following statement was included:

“Designing of a borrowing package from the NIB to three statutory entities (UWI, Transport Board, BTA and Needhams Holdings ltd) to allow for financing of $110 million during the course of this financial year for specific aspects of their programme. This will address the level of current transfers made to these entities from government but allow for greater flexibility to do more to stimulate the economy.  Servicing of this debt will however be provided for, where necessary in the Consolidated Fund”.

Is it appropriate for Government to essentially use NIS Funds as a bank for its funding needs? The precedent set in 2011 is a very dangerous one. This is essentially window-dressing so that our debt to GDP ratio and fiscal deficit are artificially made to look better in order to satisfy the rating agencies and other interested International Agencies.

NIS Funds Investments – What are they?

We do not have published information on any of the investments held by the NIS at this time. Why not? These Funds belong to the people. It should be remembered, at all times, that the people do not have the freedom to consider all of their financial planning options and, if they like, choose to allocate some of their money to the NIS, on the basis that the NIS is the best, safest or most rewarding investment. Not at all. The people and their employers are obliged by law to make monthly contributions to the NIS Fund. Ironically, in the world of optional investments, one can examine a plethora of information about a prospective investment, before deciding whether or not to invest. In the case of the NIS, to which payments are mandated by law, the reality is that no meaningful information has been provided to the people for a number of years.

Looking at the deployment of NIS funds into  the range of possible investments as desirable as it is to have a Four Seasons Hotel in Barbados, should NIS Funds be invested in that way?

There are many other equally pressing national economic needs. Innovative solutions for the south coast tourism product, food security, expanded broadband connectivity, alternative renewable energy, niche manufacturing, economic diversification for exports (e.g. international medical services, arts/culture, international education services etc). So why the Four Seasons? Is this the role of the NIS? Is the NIS now to be a development bank with all the associated risks?

The CLICO failure is primarily as a result of speculative, risky investments of policy holders’ funds.  Many people have lost their entire investments and pensions, and the Barbadian taxpayers may yet have to carry the burden of its [shocking demise]. Consequently, the climate is such that there is widespread fear and concern that the NIS fund, which seems to be the only substantial fund left in the country, and which is a public pension and social security fund, may be risked as well.

We should not invest scarce national savings managed by Trustees on behalf of the people in a way that is not within the NIS mandate, without open and full disclosure, within published and approved investment guidelines and subject  to management according to rigorous governance procedures.

The fiduciary responsibility of the Board of the NIS [includes the obligation to] invest the funds they manage, on behalf of the contributors, [in a manner which will] ensure stability of its investment portfolio for the long term to meet its future pension liabilities to contributors and other beneficiaries.

I am informed that the NIS manages $3 billion in assets and has surpluses of $30M a month; and some are aggrieved that the commercial banks take advantage of this by offering low returns on deposits. However, given the current economic climate, it cannot be expected that returns will be generous. This much is clear and acceptable.  To swing to the other side of the spectrum and posit that NIS funds should be invested in risky real estate developments, in the absence of the highest level of scrutiny must be a breach of fiduciary duties owed to the people of Barbados. Given the nature of the fund, the investments would be safer with the commercial banks since the principal would be safe. The assertion that the NIS fund is in surplus does not, in the absence of meaningful disclosures as to the state of the NIS fund, justify investment in risky ventures.

Is this a Fronting Arrangement?

Indeed in the circumstances it is understandable that people are asking: is this proposed investment not just another way of NIS lending money to Government through a ‘fronting arrangement’ to pursue its development agenda? If it is, then the investment should be categorized as such. At least then the investment would be a Sovereign Liability and of potentially greater value to NIS beneficiaries. Should the investment fail, what then? Unless the Government is willing to issue a guarantee to the people in respect of this use of the NIS fund, there is no acceptable answer to this question.

Management and use of NIS Funds should be separate and distinct from Government’s funding needs. This really is the issue. Does Government determine the investment policy and choices of the NIS? Does it have the authority to do so under the law? More and more we see Government essentially regarding the NIS as a source of funds to finance Government’s operations. This is a dangerous course because even the wisest, most well-intentioned of Governments is not infallible.

The public have become increasingly concerned in the past year or two about this, and the current Four Seasons proposal is a cause of deep concern for many stakeholders.

The argument in favour of an NIS funds investment of this project is that, in these recessionary times, Government has to support development projects in order for them to gain impetus. However, Government support is one thing, while, given the social security nature of the NIS fund, expending it for the proposed purposes is quite another. Put another way, Government support for a project should not automatically translate into depleting the NIS fund simply because this is the only source of real cash remaining.

Full Disclosure is Imperative

The people of Barbados are the owners of the NIS fund. As such they are they entitled to full disclosure including:

  • most recent unaudited financial statements (to 30 June 2011 would be acceptable)
  • 2010 audited financial statements as soon as possible.
  • access to most recent approved audited financial statements.
  • current list of the components of the investment portfolio totaling $3 billion.
  • the investment guidelines of the NIS Fund.
  • the governance policies of the NIS Board.
  • the powers of the Minister of Finance as regards NIS investments.

Once these disclosures are made, the proposed NIS funds investment in the Four Seasons project can be fully and fairly evaluated.

The writer is not opposed in principle to that project or to investment in it, if the project is viable and the investment is structured in a fashion that will not put every Barbadian taxpayer at risk of having to “pick up the pieces” if things fall apart. The writer also does not advocate the disclosures highlighted idly or out of mischief. Indeed one of the reasons why the disclosures would be so welcome is because while the reality is that there may be nothing to hide or obfuscate, the prevailing absence of total transparency creates the impression, bewildering to the country, that there must be something to hide. Dispelling these fears through full and ready disclosure would give people more comfort in the context of the investment of their life savings into development projects generally; and an understanding of how this particular investment into the Four Seasons would be structured, especially as regards protection of the people’s funds and mitigation of their risk, would help to persuade us all that it is in fact a compelling investment, which serves the best interests of the people who have worked so hard to generate the NIS fund.

Peter N. Boos

Chairman Emeritus Ernst & Young Caribbean (since 2004); Founding partner Business Barbados publication (1999) and the Barbados business web portal (2009); Co-Founder, Chairman and CEO Substance Abuse Foundation Inc. (1996 to date); Founding Sponsor (2009) and First Chairman (2009-2014) Barbados Entrepreneurship Foundation Inc.; Founder of the Peter Boos Foundation (2004), (supporting youth development, entrepreneurship, education, addiction treatment, environmental protection, arts & culture development, relief of poverty and support of various community and charitable causes); Founder, Patron and first chairman ASPIRE Foundation (Barbados) Inc. - 'helping charities help' to strengthen and expand the Barbados Third Sector (2014 to date).

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