An Unjustified NIC Investment

While the recent National Insurance Corporation’s (NIC) investment in Cabot (St Lucia) Inc. may not be illegal, it is not in- keeping with the institution’s usual high standards of accountability and financial prudence. The latest investment policy and guidelines of the NIC, 2018, developed by the board, the investment committee, and the minister of finance clearly circumscribe the conditions in which NIC can invest in loans and other fixed-interest bearing securities.

According to section 4 (C) of investment guidelines of the NIC the conditions for investments in loans and other instruments (non- government) are as follows:

(1) Statutory Bodies; where the government is the sole guarantor of the loan it should be categorized as government lending.

(2) Other financial institutions for on-lending under specific programs established by the National Insurance Corporation

(3) Other financial institutions engaged in on-lending for educational, housing, agriculture, manufacturing, tourism and information technology projects

(4) Companies engaged in the essential Services. Essential services for the purposes of this section comprise:
(a) Electricity generation, transmission and distribution
(b) Supply of pipe borne water
(c) Provision of health care
(5) Subsidiaries established by the National Insurance Corporation.

In all cases, lending should only be to reputable institutions that are properly managed with a good track record.

The NIC’s loan to Cabot (St Lucia) Inc. or the secured mortgage debenture, the actual instrument still unclear, given the NIC Chairman’s reference to both during his press briefing, clearly does not satisfy any of the above conditions. If it is a secured mortgage debenture, then the instrument would be issued by Cabot (St Lucia) Inc.; a company with no assets other than the land it is to acquire from the proceeds of the said debenture. Moreover, given the company was only recently formed in 2016 according to its 2018 Annual Returns at the Registry of Companies, Cabot (St Lucia) Inc. has no track record. It would, therefore, have failed the tests of good reputation, and proper management, an understandable, compulsory requirement of the NIC’s investment guidelines. Cabot (St Lucia) Inc. is not engaged in any trading activities, which raises the question, how will it honor its financial obligations to the NIC? The answer to this question should not be a matter of confidentiality as the chairman of the NIC board would want us to accept. Public confidence in the proper management of the fund is vital to its long term sustainability and the moment it is compromised potential contributors are likely to shy away from the fund.

Strategic efforts, currently undertaken, to encourage greater participation in the fund by the self- employed will founder if public confidence in the management of the fund is absent. There should, therefore, be no confidential arrangements with any company or institutions where NIC funds are being invested, so as not to create doubt or suspicion about the proper management of the fund. While it is fair that private companies should have a right to privacy about their financial arrangements, it should not be at the expense of transparency and accountability in the management of the NIC’s funds. It is for this reason that within the guidelines, provisions have been made to preserve this fundamental principle. Under section C (vii) of the corporation’s investment policy and guidelines, it states: “the corporation (meaning the NIC) should not engage in direct lending to the general public.”

If the NIC wishes to support tourism projects as a priority area of the government, then, the avenue should be through lending institutions set up for that purpose, as provided for in the earlier mentioned section of the investment guidelines.

Changes to the investment guidelines, which allows the NIC to directly accommodate tourism related projects, is not in-keeping with the fundamental principles of the original guidelines, and has introduced internal contradictions within the NIC’s investment policy and guidelines. Under section 5(2) of the 2018, updated, NIC’s investment policy guidelines, tourism has been identified as a priority area and a distinction has been made as to how investments should be conducted involving existing companies and new companies. NIC investment opportunities are required under its guidelines to meet three main objectives: safety, liquidity, and yield. It is, however, now, in an about turn, prepared to allow through changes in its guidelines, to invest directly in new companies (tourism related), by way of fixed –income instruments (loans and bonds), as long as they are properly secured with a first claim on the company’s assets, and nothing more- no requirements regarding how the loan or bond should be repaid. Ironically, where the financial risk is higher, with new companies, with no track record, the qualifying investment standards are lowered. Worryingly, there has been no definitive statement from the board of the NIC regarding the interest rate attached to the instrument, except to say it is above the return on its investment portfolio and how the NIC will be repaid. The cloak of confidentiality presented by the board is unacceptable and flies in the face of public accountability to the contributors.

The board of NIC continues to make reference to the relative size of the Cabot investment being only 1.2 percent of its investment portfolio. This point is irrelevant, in fact, the quantum is a significant figure of EC$30 million. Reference to the relative size of the Cabot investment to the NIC’s investment portfolio is a pathetic attempt to defend the indefensible.

While I appreciate that the formulation of the investment policy is an internal matter for the board, the investment committee and the minister responsible for the NIC, the special arrangements regarding tourism projects are incompatible with section 4 of the guidelines and the high standards of public accountability and financial prudence we have grown to expect from the NIC. Moreover, board members should not allow themselves to be unduly influenced by politicians who are very often ill-equipped to provide investment advice; their duty should be first and foremost to the contributors, who rely heavily on their professional skill and integrity to manage the fund well. Those directors who cannot stand up to political pressure, to resist what they know in their professional judgement to be imprudent, would better serve the good of the organization and its contributors by vacating their board positions.