Once again the relationship between the Ministry of Finance and the brokerage house Dehring Bunting & Golding (DB&G) during the People’s National Party administration is under the spotlight.

Those sympathetic to the Opposition are declaring that the decision to investigate all dealings between government agencies and DB&G during Dr Omar Davies’ tenure as minister of finance is nothing more than a political witch-hunt intended to smear the reputations of Opposition security spokesman Peter Bunting (the former lead principal of DB&G) and the former minister of finance.

The issue centres around transparency and fairness and whether DB&G unduly benefited from Dr Davies’ largesse. For years, many securities dealers, financial commentators and players in the wider financial sector have noted DB&G’s propensity to continually secure government contracts while its competitors were unable to get a look-in. Some shrugged it off as: “That is how things run in Jamaica. It’s not what you know but who you know.” Others resented it and were green with envy as DB&G continued to prosper during the nineties and into the new century.

In 1992, the young founders of the innovative brokerage house raised US$1.5 million and opened their doors for business. In 2007, fifteen years later, they sold DB&G to Scotia Group for US$100 million.

The drama unfolded in the theatre that is parliament when the present Minister of Finance Audley Shaw, in April 2008, accused DB&G of profiting handsomely from “sweetheart deals” under circumstances which may have been irregular, improper or lacking in transparency and fairness, and not in accordance with the relevant provisions of the Contractor General Act and the Government Procurement Procedures and Guidelines.

Bunting dared Shaw to repeat his allegations outside of Parliament, intimating that Shaw was hiding behind the skirt of parliamentary privilege.

Such was the seriousness of the allegation and its accompanying repercussions that in May 2008 the Office of the Contractor General (OCG), acting on behalf of the Contractor General and pursuant to Section 15(1) and 16 of the Contractor General Act (1983), initiated an investigation into the circumstances surrounding the alleged “sweetheart deals”.

It is instructive to consider Section 15 (1) of the Contractor General Act which reads ” a Contractor General may, if he considers it necessary or desirable, conduct an investigation into any or all of the following matters –

(a) the registration of contractors;

(b) tender procedures relating to contracts awarded by public bodies;

(c) the award of any government contract;

(d) the implementation of the terms of any government contract;

(e) the circumstances of the grant, issue, use, suspension or revocation of any prescribed licence;

(f) the practice and procedures relating to the grant, issue, suspension or revocation of prescribed licences.”

What led the Contractor General to conduct a thorough investigation into the matter was not political cajoling, but rather Section 16 of the Contractor General Act which expressly provides that “an investigation pursuant to Section 15 may be undertaken by a Contractor General on his own initiative or as a result of representations made to him, if in his opinion such an investigation is warranted”.

Contracts must be awarded impartially and on merit

The linchpin of this whole affair is determined by Section 4 (1) of the Contractor General Act (1983) which mandates that Government contracts must be awarded “impartially and on merit” and in circumstances which “do not involve impropriety or irregularity”.

This in no way is an attempt or a suggestion to besmirch Bunting. Over the years he has carved out a stellar reputation both as a banker and a politician, and if he was offered lemons, why not make lemonade? The question remains, why was DB&G the only finance house to benefit from some of these lucrative deals? What did it possess that other finance houses did not?

Complying with the rules is all very well, but perception has to be a predeterming factor. Because of the nature of the relationship between Bunting and Davies, the then minister of finance should have taken extra measures to ensure that barbs of impropriety could never be levelled at him.

So what did he do? He left himself wide open to an investigation and his judgement and decision-making being questioned. Bunting’s organisation presented a solution that was beneficial to it and the minister went straight ahead and green-lighted it. That in no way makes Bunting culpable — he simply engineered a sweet deal for his company and at the end of the day that’s the name of the game. How he was able to and get away with it is another matter.

So what did he do? He left himself wide open to an investigation and his judgement and decision-making being questioned. Bunting’s organisation presented a solution that was beneficial to it and the minister went straight ahead and green-lighted it. That in no way makes Bunting culpable — he simply engineered a sweet deal for his company and at the end of the day that’s the name of the game. How he was able to and get away with it is another matter.

Cognisant of these deals, the present minister of finance would indeed be very concerned and rightfully so. Speaking in Parliament and recorded in Hansard he declared: “On March 26, 2004… receivables due from AIC for some J$2.5 billion, was sold by the Ministry of Finance to Dehring, Bunting and Golding Limited… at a 6 per cent discount… with full recourse to the Government and interest assignable at the Treasury Bill rate.

“…a fee of 1 per cent for a very low transaction was charged by DB&G. The total discount plus transaction fee — some would say income earned on this initial phase — was J$175 million.

DB&G in turn sold 34 per cent or J$852 million to the National Housing Trust and the National Insurance Fund…

“The discount that was given there was 3 per cent. That is, NHT and NIF bought the receivables from DB&G for 97 per cent of the face value.”

And here is a very telling point. In respect of the NHT… the Agreement for Sale was signed with the Ministry of Finance on the 26th day of March 2004… the DB&G Agreement with the National Housing was approved on March 15, 2004.

In an entirely different situation, Shaw again brings to the attention of the nation: recivables due from the Jamaica Redevelopment Foundation, with a face value of US$29.6 million, was sold to DB&G at a discount rate of 2.4 per cent plus an agency fee of 1 per cent. Again at full recourse to the government.

Said Shaw: “…these receivables were due for payment by the JRF in July of the same year, only three months later resulting in a further deprivation of government resources when calculated in Jamaican dollars of J$70 million that the taxpayers were deprived… that went … because the minister sold it at a discount three months before the instrument was due to be paid.”

Concerns

This cannot be said to be becoming of a “world-class finance minister” and if Dr Davies is honest with himself, he would concede that such a transaction would raise questions.

Speaking under the condition of anonymity the operator of a brokerage house said: “The pricing for the Joslin deal was very generous by any standard and there were many of us who would have liked to have scored that deal. There was a time there where it seemed like DB&G was the intermediary of the government and able to walk away with a 1 per cent fee for their troubles.”

This echoes concerns Shaw raised when he said in Parliament: “… the Ministry of Finance technocrats communicated their concern as to pricing being too generous, the one per cent fee as being excessive; saying that what is the norm is one/quarter of one per cent, and not one per cent, and the lack of competitive bids.”

It would have been a prudent move, in at least one instance, to open up the process to a competitive bid and so allay fears of transparency issues. This was a glaring oversight on the part of Dr Davies, and he allowed the brokerage community to countenance the notion that he was particularly favourable to DB&G.

With the ensuing backlash, Bunting became indignant and initially made it clear that as far as the Joslin deal was concerned, “no such transaction ever took place. DB&G did communicate with the Government about the potential benefits of a transaction arising from the Government’s ongoing dealings with the Jamaica Redevelopment Foundation. However, those discussions did not lead to any form of transaction”.

Later, Bunting retracted statements he made accusing Shaw of misleading the House with his claims about a so-called “sweetheart deal”. Bunting said the transaction which occurred was a short-term financing arrangement which showed full repayment of US$29.6 million by the Ministry of Finance to DB&G within 120 days. Bunting went to great lengths to then say that Shaw was referring to a short-term bridging facility which was facilitated.

An overpriced facility with little risk to DB&G

As far as the Jamaica Redevelopment Foundation deal is concerned, a number of things stick out which need to be addressed. Murna Morgan of the Debt Management Unit to the Financial Secretary recommended 0.75 per cent which she deemed “more than fair compensation for an overpriced facility with little or no risk to DB&G”. The transaction fee was 1 per cent. Furthermore, the minister of finance signed off on a deal that saw no risk to DB&G as the sale and assignment of the receivables was with full recourse to the Government of Jamaica. In effect, the Government bore all the risk in the event that the Jamaica Redevelopment Foundation did not pay prior or up to the payment date. Of the US$29.59 million due by Jamaica Redevelopment Foundation, only US$9.5 million was collected, with the Government having to source the remaining US$20 million for payment.

Simply put, the Government paid twice for the sale of this asset, firstly by selling it at a discount and secondly by borrowing money from Capital & Credit Merchant Bank to pay back the full principal.

AIC deal

Looking at the NCB/AIC deal, the situation is no less strange. Here, with a deal of this importance, no competitive bidding took place and the question has to be asked: why not? It was a simple deal requiring no financial engineering. According to Citibank executives, the deal was a straightforward sale of receivables which needed no sort of senior technical expertise. Here DB&G was able to convince the Government to bear all the risks of an asset they had sold. Some may well argue that the Government should not have a continuing liability after the sale has occurred.

OCG Conclusions

Once again the conclusions of the Office of the Contractor General’s investigations are both instructive and can be deemed reasonable. Concerning the agreements referred to by Shaw in Parliament, the Office of the Contractor General has been led to conclude that the Ministry of Finance was approached by DB&G with a proposal for the sale of the AIC receivables in January 2004. The referenced proposal from DB&G amounts to the receipt and acceptance of an unsolicited proposal by the Ministry of Finance.

“Based upon the foregoing, the OCG has been unable to conclusively determine that the above transaction was fair, transparent and/or indicative of the most beneficial terms and conditions which could have been derived by the Government of Jamaica, given the lack of competition.

“Further, and based upon the sworn evidence which was provided to the OCG, the OCG has also been led to conclude that there is no evidence to indicate that attempts were made by the then Ministry of Finance to solicit and/or engage other financial institutions to provide the services which DB&G provided to the GOJ, in regard to the two transactions which were consummated in March 2004 and March 2005, respectively. The AIC receivables were in fact sold at a discounted rate to DB&G and included the payment of an arrangement fee by the then Ministry of Finance.

“Although the OCG has seen evidence that the referenced rates and discounts were negotiated between DB&G and the Government of Jamaica, the sworn evidence which was provided to the OCG by the Ministry of Finance has indicated that it is not a common practice to offer discounts on financial instruments whilst simultaneously paying a handling fee.

“Given the foregoing, the OCG has been led to conclude that the terms and conditions of the referenced transaction with DB&G were in fact favourable to DB&G. Should the referenced evidence be accepted as factual and correct, then as at March 16, 2004, DB&G had already credited the Government of Jamaica with proceeds from the sale of the AIC receivables transaction.

“The OCG must, therefore, conclude that whatever the circumstances and reasons were, the execution of a Government of Jamaica contract, prior to the finalisation of a formal written contract, was in fact irregular and highly improper,” read the investigation report.

The OCG has also concluded that DB&G presented the NHT with the terms and conditions of the AIC receivables transaction prior to the finalisation of a formal signed agreement with the then Ministry of Finance. In point of fact, the agreement between DB&G and the then Ministry of Finance was executed on March 26, 2004. However, DB&G presented its terms and conditions to the NHT on March 15, 2004, eleven days premature.

“Despite the short timeline which was identified as being available to complete the referenced transaction, the OCG must conclude that the foregoing actions of DB&G were premature, having regard to the fact that the terms and conditions of the sale of the receivables, by the Government of Jamaica, were not finalised in writing, and executed in writing until March 26, 2004,” the OCG report said.

As a result of these deals between the Ministry of Finance and DB&G, the OCG is recommending that an immediate review of the evaluation and approval processes for commercial agreements by the Ministry of Finance, be undertaken by the Public Administration and Appropriations Committee of the House of Representatives and by the Auditor General. The OCG is of the view that what DB&G did was an unsolicited proposal which can become invidious if allowed to continue.

As Bunting himself has said, because it was DB&G’s idea it would be unethical for it to go to tender, and furthermore the deal negotiated between DB&G and the Ministry of Finance was agreed to by all parties concerned.

The OCG proclaimed that the concept of the unsolicited proposal which has found its way into the country’s procurement conventions should be immediately excised from the Government’s Procurement Guidelines. The OCG said it was concerned that the unsolicited proposal mechanism “is a corruption-enabling device which can be utilised by unscrupulous public officials to direct lucrative multi-million dollar state contracts to connected, undeserving or desired contractors”.