WHAT MATTERS MOST: Dangling carrots
A buddy of mine recently reminded me that being the chief whistleblower in Barbados has gained me enemies, even as I educate and inform the public. If the latter is true, then gaining a few additional enemies is worth it.
In 2002, I heavily criticized the investment of National Insurance Scheme (NIS) funds in Hotel Resorts Limited.
The same principle is being used to criticize the NIS proposed investment in the Four Seasons project at Paradise.
In recent days, information has come to light that is very revealing. Some of the information supports a view expressed in this column that access to foreign exchange is one of the carrots being dangled in front of the Government and its advisers.
Once the National Insurance Board (NIB) agrees to invest BDS$50 million, it will receive United States dollars denominated preference shares. This is a carrot that can only be eaten when the investment realizes a profit. Some analysis has revealed that there are no clear indications that the company will be profitable after 15 years.
There is another carrot with respect to the ownership of the company before 2021. If the NIB were to invest at the level being offered, then it has the option to convert the preference shares to ordinary shares at any time within ten years from subscription.
Lo and behold, the NIB would become the major owner in the company with an ownership of 44.4 per cent of the ordinary shares. This scenario becomes real if all other preference shareholders convert their shares and if Four Seasons converts its intended US$5 million loan into common equity.
One of the investment guidelines of the NIS fund is that it holds no more than ten per cent of the equity of any institution. Until the sale of ten per cent of its shares in Light & Power Holdings Limited, the fund held 23 per cent of the equity.
Why would the NIS have been encouraged to sell its shares to earn foreign exchange in the short run to allow the foreign shareholder to withdraw profits, which now have to be paid in foreign exchange from a company that does not earn foreign exchange?
If this paradise project has the potential to be as profitable as some are suggesting, why would NIB have an option to the major shareholder after ten years? Furthermore, is the conversion ratio of ordinary shares to one preference share another carrot?
When the NIB becomes the major shareholder, it does not stop the company from being highly leveraged as it uses a lot of debt to finance the project. There is certainly justification for reasonable men to request much more information on this project, especially since it is the public’s money that is being invested.
What matters most is that there is a specific and direct benefit to each contributor to the NIS fund. This differs from the imposition of taxation which is not triggered by a benefit principle, and the politicians’ use of the fund is therefore fair game for the contributors’ questioning. It’s that simple!
The Government has already guaranteed a US$60 million term loan from Ansa Merchant Bank, which was supposed to have been repaid on or before September 12, 2011, but the arrangers exercised the option to extend the repayment up to March 12, 2012. To date, no long-term financing has been found to make the repayment, and so the maturity will have to be extended further.
In the absence of a further extension of the maturity date, the Government of Barbados will likely have to repay the term loan. A day of reckoning is less than two months away. This is the first of several days of reckoning for the once private sector-driven project.
The country’s chief economic adviser recently said that a new investor would come along and provide the much needed funds for the Almond Resort.
Along with having control of two other properties, the parent company is responsible for 624 rooms and hundreds of staff. Yet the principle governing the treatment of the three hotels is to allow receivership to play its part.
So why was the paradise project not allowed to go into receivership? This would have given a private sector consortium a chance to play its part in providing the finance and to receive an irresistible rate of return.