Finance minister Omar Davies has again pledged to bring full transparency to letters of comfort and letters of undertaking (LOUs) issued by the Government and rejected suggestions that he has used these instruments to fund a sort of parallel budget without the scrutiny of Parliament.

Davies. says there is nothing to hide

Davies also disclosed that a July 2001 opinion by the Attorney General's Office had argued that such instruments - mostly issued on behalf of government entities which pay their way - had said that there was no requirement to get parliamentary approval for LOUs and comfort letters if their payment was not intended from the Consolidated Fund.

"In these cases, the Government is free to conclude and will be legally bound by such arrangements without the need for parliamentary approval," said a part of the opinion quoted by the finance minister.

A simmering quarrel with the Opposition over the finance ministry's use of LOUs and comfort letters, erupted into a major issue last week when the senior deputy financial secretary, Robert Martin, reported to Parliament's Public Accounts Committee (PAC) that the Government had issued more than $19.6 billion in LOUs on behalf of several state entities over the past three years.

Martin suggested that it was common practice, since 1992, to issue such instruments and that the finance ministry might have been acting illegally since then, given that it was aware of the need for Parliament's blessing.

Petrojam refinery. state-owned oil refinery gets better deals with LOUs

Audley Shaw, the PAC's chairman and the shadow finance minister, claimed that the near $20-billion exposure from LOUs reported by Martin was likely to be far larger when comfort letters are eventually brought onto the books.

He also claimed that Davies had resorted to these instruments to bypass parliamentary oversight once the legislature tightened up three years ago on the use of deferred financing deals with developers to fund government projects.

But Davies, in a statement issued on Thursday, said that while it was always clear that letters of guarantee first had to receive parliamentary approval, comfort letters and LOUs were traditionally regarded to be of "a lower order of commitment on the part of the government".

Strachan. warned LOUs, comfort letters reaching level of guarantees

These, though, had now come in for additional scrutiny because of the 2003 report by Auditor General, Adrian Strachan, in which he complained that the language used in LOUs and comfort letters were increasingly approaching that of government guarantees. This was a point raised by Strachan at last week's PAC meeting and endorsed by the finance ministry's Martin.

Davies recalled that he had told Parliament on March 16, during a debate on the supplementary estimates that in the wake of Strachan's ruling, he would take action to comply with his directions, "including a full presentation on a regular basis of information issued".
Davies confirmed yesterday that the debt - such as the $19.6 billion reported last week - supported by LOUs and letters of comfort was not counted as a contingent liability and therefore as part of the country's debt stock.

He explained that these usually form part of rolling financing arrangements for government entities, which have the capacity to pay, but benefit from cheaper financing because of these instruments.

Shaw. claims that finance ministry uses LOUs to escape parliamentary scrutiny

For instance, the earnings by the Sugar Company of Jamaica goes into a special fund on which debt servicing has first call.

"The earnings are multiples of its debt servicing," Davies said. "And why would Petrojam's rolling debt stock, paid off in 365 days, be part of it (the national debt)?"

Petrojam is the government-owned oil refinery.
Davies, however, told the Sunday Observer that the Government would feel itself "morally obliged to pay" if these entities and other state entities which borrowed with guarantees, could not meet their obligations.

The finance minister, in Thursday's statement, drew on the examples of Petrojam and the Port Authority of Jamaica to underline some of the practical issues which he said had to be considered in dealing with LOUs and comfort letters.
These, like others, were entities involved in commercial activities, and because of these instruments can access credit with significant interest savings.

"Even whilst this debate is taking place, Petrojam requires a Letter of Undertaking to facilitate its importation of a shipment of oil which is part of its normal business activity," the statement said. "The ministry of finance has never had to meet any of the obligations associated with such letters."

Davies also complained that an LOU for $4.25 billion issued on behalf of the Development Bank of Jamaica was part of the controversy, given that it was issued to allow the DBJ to raise funds to finance the deferred financing programme, when this scheme was brought into the budget.

".This arrangement was explicitly presented to Parliament as a way of regularising the deferred finance programme whereby all contractors would then obtain funding through the DBJ," Davies said in the statement.

Said Davies: "The ministry of finance and the Government of Jamaica have nothing to hide and will proceed in the future to regularly take to Parliament full information on such letters of undertaking and comfort letters."

Executive Class

Gardens with Gravel

Death to the Mullet!