THE finance ministry confirmed yesterday that it has over the past three years provided more than $19.6 billion in illegal loan guarantees by way of letters of undertaking (LOUs), but shadow finance minister Audley Shaw says that the potential exposure could run into billions more when comfort letter guarantees are taken into account.

Robert Martin, the senior deputy financial secretary, did not bring to Parliament’s Public Accounts Committee (PAC) the value of comfort levels the government had issued over the years when he reported yesterday.

But Shaw, the committee’s chairman, argued that these instruments, in addition to the LOUs, had become the method of choice to bypass parliamentary scrutiny after the legislature tightened up on the finance ministry’s ability to enter deferred financing deals for projects.

“Once deferred financing came under the closer scrutiny of Parliament, what has clearly happened here is that the goal posts have changed,” Shaw said at the PAC meeting.

“Instead of using deferred financing as the preferred instrument you go to the LOUs and you go to comfort letters. It is another case of circumvention. That’s what it is.”

Through deferred financing arrangements the finance minister, Omar Davies, had been able to afford several build-now-pay-later projects.

Contractors would up-front much of the money for the projects, with the finance ministry providing some level of security to financial institutions for the debt until the cost of the schemes were eventually brought onto the budget.

But last year Parliament amended the Financial Administration Act, requiring that such deferred financing be first brought to the legislature for approval.

Since then there have been few of these arrangements, but Auditor General Adrian Strachan had in his last report, pointed to the increasing use of letters of undertakings, causing Shaw, a fortnight ago, to demand that Martin return with a list of the outstanding LOUs.

Martin’s list of LOUs dates back to December 2001, extending up to December last year, but the senior deputy financial secretary said the practice has been common since 1992.

He conceded that the finance ministry had all the time known that the process was illegal.

“We recognise the breach (of the law),” Martin said. “But over the years the wording (of the letters) has changed because the requirement of the financial institutions is to have what you call a guarantee.”

Shaw: “So financial institutions create guarantees outside of Parliament?”

Martin: “No, chairman. In terms of requesting guarantees, the wording has been modified and we do admit, sir, that we are in breach. But, it would be interesting to note that prior to 1992 the FAA Act didn’t mention Section 43 (covering letters of undertaking) as requiring parliamentary approval. The amendment in 1992 then required the approval of Parliament, that’s when we should have complied with the requirements of the Act.”

Shaw argued that the absence of the information on letters of comfort, which provide a lower grade of guarantee, he had to be concerned about the real level of exposure of the government.

He noted, for instance, that only in the last budget it was revealed that the government’s allocation to the University of the West Indies was $4 billion and not the $1.5 billion that had previously appeared in spending documents. The real expenditure had been masked by letters of comfort issued on behalf of the university.

Auditor General Strachan noted, however, that comfort letters were “quite historical” documents that been used not only locally, but throughout the world.

“In essence,what it constitutes is a gentleman’s agreement and it doesn’t rise to the level of a guarantee,” he explained.

“It is a statement of good intent – that you will do all that is necessary to ensure that what is required is put in place. But, it usually doesn’t rise to the level of a clearly legally enforceable commitment.”

Strachan, however, said that over time what had happened in the case of Jamaica was that the “demarcation line has been crossed and the letters of undertaking, which hitherto were considered comfort letters, have now begun to assume the position of guarantees”.

“In other words,” Strachan said, “once you reach the point where you are saying to the lender if the principal debtor does not pay ‘I will pay’, that has crossed the line.

“That is no longer a comfort letter,” he said. “That becomes, in our view, a guarantee. And what Mr Martin is admitting is that over time that line was crossed.”

The PAC has required the ministry to produce information on all comfort letters, promissory notes and any other form of guarantee or undertaking still outstanding. Shaw said that this would be discussed at a final meeting of the PAC before its report on the 2002/2003 Auditor General’s report is tabled.

The PAC also heard yesterday from two other deputy financial secretaries at the Ministry of Finance – Ann Marie Rhoden and Devon Rowe – as well as Accountant General Millicent Hughes.

-balfordh@jamaicaobserver.com