No basis in constitution, law for NICIL holding billions – Goolsarran’s audit

Despite a recent legal opinion that government holding company NICIL is under no obligation to deposit monies it gathered into the Consolidated Fund, former Auditor General Anand Goolsarran found that there was no basis in the constitution or law that permitted the retention of massive amounts by it over a number of years.

In his report into NICIL’s affairs, which now forms the basis of an investigation by the Special Organised Crime Unit, Goolsarran argued that the Companies Act, which NICIL and its counsel have cited, offered no legal cover.

Goolsarran also pointed out that for a decade after its formation NICIL functioned as a mere intermediary in government business and transmitted monies gathered to the Consolidated Fund.

Winston Brassington
Winston Brassington

“During the period 1991 to 2001, the Board of Directors had interpreted NICIL’s mandate in a manner consistent with the wishes of the Legislature. That mandate relates to NICIL performing a monitoring role for Government’s investments and ensuring that all proceeds from such investments were collected and paid over to the Consolidated Fund. Such interpretation gained the full support of the Auditor General and was consistent with the explanations provided by the Minister of Finance at the time NICIL was established,” Goolsarran said.

In the face of the forensic audit of the entity, legal advice given to NICIL’s Executive Director Winston Brassington indicated that the agency was under no duty to deposit its revenue into the Consolidated Fund and Article 216 of the Constitution does not apply to it.

“Section 216 applies specifically to revenues raised by the State. NICIL is not the State, but rather has a separate legal personality. The fact that the State is the sole shareholder of NICIL does not render its corporate form defunct, and accordingly, the automatic transfer provision contained in 216 does not apply,” the advice by attorney Devindra Kissoon, of London House Chambers, said.

Anand Goolsarran
Anand Goolsarran

“Moreover, even deemed to be a public corporation, absent Ministerial direction, NICIL is under no duty to deposit revenue into the Consolidated Fund. If NICIL is a private corporation, not only is it under no duty to deposit monies into the consolidated fund, but from a plain reading of the byelaws, there is no Ministerial power to direct NICIL how to allocate its revenue. Only a director resolution or a change to the byelaws or similar action can mandate payment into the Consolidated Fund,” Kissoon wrote in his advice, dated September 17, 2015.

Goolsarran, in his audit report, had cited NICIL’s “violation” of Article 216 in recommending the filing of criminal and/or disciplinary actions. Others had previously also argued that NICIL had violated Article 216.

He had said that NICIL’s retention of dividends received from public corporations and other entities and the proceeds from the sale of assets from 2002 onwards violates not only Article 216 of the Constitution but also the relevant sections of the FMA Act and successive years’ Appropriation Acts. “In addition, NICIL’s recognition of these funds as its revenues is a breach of the fundamental accounting concept of matching costs with revenue since the Government’s investments were transferred to NICIL as zero consideration. In other words, NICIL did not purchase these investments from the Government for which it claims ownership,” Goolsarran had said.

Unilaterally

He also said that the Executive Director of NICIL acted unilaterally in the interpretation of NICIL’s mandate following the signing of the Management Cooperation Agreement on December 28, 2001. That interpretation saw the retention of $26.858 billion covering the period 2002 to 2014, representing dividends received from public corporations and other entities as well as divestment proceeds, thereby denying the Treasury of the much-needed funds to execute government programmes and activities, as approved by Parliament.

“The Board must also accept culpability in that, although it advised against the Executive Director’s interpretation of NICIL’s mandate, it took no steps to prevent the retention of funds that previously were paid over to the Treasury. Cabinet must also not escape responsibility for approving an agreement that violates constitutional and legislative requirements,” Goolsarran had noted.

In tracing the history of NICIL and its actions in relation to revenues, he pointed out that during the period 15 July 1991, when it effectively began operations to 31 December 2001, NICIL operated as a small entity with a staffing of four persons, and received a subvention through the national budget to meet the cost of operations. For 2001, the subvention was $4.6 million. It increased to $53 million in 2002, thereafter the subsidy ceased.

“Although NICIL received dividends and other special transfers from public corporations as well as proceeds from the disposal of certain state assets, it did not treat such funds as its revenue,” he pointed out.

NICIL had responded that it did not agree with the above statement and contended that “These income items were clearly disclosed on the face of the income statement….”

However, Goolsarran said, NICIL failed to appreciate the difference between “revenue” which is matched with costs to arrive at a profit, and other sources of income. The latter is normally described as “below the line item,” he said. “In the case of dividends received from public corporations on the one hand, and dividends transferred to the Consolidated Fund (described as appropriations to the Consolidated Fund) on the other, these were in effect “hanging” below the line items in NICIL’s income statement,” Goolsarran said.

“In other words, since NICIL was collecting the dividends from public corporations on behalf of the Government, it merely passed them through its books en route to the Treasury. The fact remains that up to 2001, all dividends received were not treated as NICIL’s revenue and were paid over to the Consolidated Fund,” he asserted.

The forensic auditor said that a review of NICIL’s audited financial statements for the period 1991-2001 indicates that the Board of Directors interpreted NICIL’s mandate as articulated by former Executive Secretary J. M. Worrell, who said that the mandate of NICIL was one of facilitating “a unified and systematic management of Government shareholdings.”

“Specifically, the Board viewed NICIL’s main responsibilities as: (a) to monitor the Government’s investments in public corporations and other entities; (b) to dispose of identified State assets/properties; and (c) to ensure that all returns on such investments, special transfers from public corporations and the proceeds from the disposal of such assets, were collected and paid over to the Consolidated Fund. At no time did the Board consider these inflows as funds belonging to NICIL, and hence its revenue. In this regard, for the period 1991 to 2001, NICIL transferred amounts totalling $3.415 billion to the Treasury and met its cost of operations via a subvention from the National Budget,” Goolsarran pointed out.

Guided

He emphasised that during the period 15 July 1991 to 31 December 2001, all the funds received by NICIL, other than the subvention from the National Budget, were paid over to the Consolidated Fund.

“In its interpretation of NICIL’s mandate, the Board might have been guided by the fact that, although ownership of Government investments was vested in NICIL, the question of a parent company/subsidiary company relationship did not arise, especially since there was no exchange of value. In other words, NICIL did not purchase the investments that the Government vested in it,” he said.

“The Board might have also considered NICIL’s role as one of a custodial or agency relationship for these investments. In this case, the issue was one of substance over form which is a fundamental accounting principle that guides the accounting and financial reporting. It is relevant to note that Mr. H. E. Heyligar, a leading Chartered Accountant and Commissioner of Inland Revenue, was the Chairman of NICIL’s Board during the period 1991 to 1999. By virtue of his substantive position, he would have been considered an expert in Company Law requirements, especially as they relate to parent company/subsidiary company relationships,” Goolsarran wrote.

He said that the Auditor General had concurred with the Board’s interpretation of NICIL’s mandate, as evidenced by the absence of any adverse comments regarding such interpretation in his reports on NICIL’s financial statements for the period 1991 to 2001. “As a minor qualification, he did refer to the absence of a register of institutions in which the State has investments, showing the amounts collectible as dividends in order to verify the amount shown in the financial statements,” he said.

Goolsarran also said that Carl Greenidge, the Minister of Finance at the time NICIL was incorporated, at a meeting held with him at Goolsarran’s request, confirmed that the intention behind the establishment of NICIL was consistent with the Board’s and the Auditor General’s understanding of NICIL’s mandate.

Greenidge explained that NICIL was formed to take over the some of the responsibilities of the Public Corporations Secretariat, since the Public Corporations Act of 1988 had dissolved the Guyana State Corporation of which the Secretariat was part. Those responsibilities were essentially to monitor the performance of public corporations and to ensure that all dividends received, divestment proceeds and other returns were paid over to the Consolidated Fund.

Goolsarran pointed out that NICIL’s Articles of Association specifically state that “The business of the company shall consist wholly or mainly the holding of shares or securities of companies, co-operative societies and other corporate bodies.” He said this is further evidence of a restriction of NICIL’s mandate, consistent with the Board’s interpretation and the explanations provided by the then Minister of Finance.

According to Goolsarran, the fact that Parliament approved of a subvention to meet the cost of operations of NICIL would suggest that the Board’s understanding of NICIL’s mandate was consistent with the intent of the Legislature. “NICIL was also incorporated at a time when the Government was embarking on a major privatisation programme, especially as regards loss-making State institutions, and therefore the rationale for the establishment of NICIL could not have been one relating to creating another entity with a commercial and profit-making orientation. Indeed, NICIL’s establishment came at a time when the Government was receding from its involvement in commercial activities to allow the private sector to undertake such activities best suited to it,” Goolsarran said.

Intention

He wrote that a review of the Estimates of Revenue and Expenditure and the audited public accounts for the period 1992 to 2001 indicates that there were two budget line items, namely: (a) dividends and transfers from public enterprises and equity holdings; and (b) sale of assets, including proceeds from divestment.

“This clearly suggests that the intention of the Legislature was to ensure that proceeds from these two sources were collected, whether via NICIL or otherwise, and paid over to the Consolidated Fund. Indeed, one of the financial statements constituting the public accounts relates to a comparison of budgeted revenue with actual collections and payment to the Consolidated Fund. This is further evidence that NICIL’s Board’s interpretation of its mandate was consistent with the wishes of the Legislature. In this regard, it is relevant to note that at a meeting of NICIL’s Board on 12 March 2010 at which the form and content of NICIL’s accounts were discussed in the context of Section 346 of the Companies Act, the then Head of the Presidential Secretariat had advised that budget laws should take precedence over any company law requirements as they relate to government companies. Budget laws are essentially Appropriation Acts,” Goolsarran said.

He noted that on December 28, 2001, Cabinet approved the Privatisation Unit of the Ministry of Finance assuming the additional responsibility of providing management and administrative services to NICIL as per Management Cooperation Agreement between the Ministry of Finance, NICIL and the Government of Guyana dated 31 December 2001. Cabinet subsequently ratified the agreement at its meeting held on 23 April 2002.

According to the agreement, the Privatisation Unit is the authorised agent for the purpose of privatising any of NICIL’s holdings set out in the Privatisation Policy Framework Paper (the “White Paper”) laid in the National Assembly in 1993. It was also made the exclusive manager of NICIL for purposes of managing and administering all of the affairs of NICIL.

NICIL, for its part, became responsible for: (a) collecting and accounting for all privatisation proceeds, rents, dividends, and other income of NICIL, in the name of NICIL; (b) utilising and disbursing of the income of NICIL in accordance with the approval of NICIL’s Board; and (c) the payment of a management fee to the Privatisation Unit. The Agreement remains in effect unless the Cabinet decides otherwise.

Goolsarran pointed out that with effect from January 1, 2002, NICIL ceased paying over to the Consolidated Fund dividends from public corporations as well as the proceeds for the disposal of State assets. Instead, it retained such funds and treated them as its revenue to be used for purposes as approved by the Board of Directors.

NICIL responded that it was advised that a parent company/subsidiary company exists and that in 2001 a local Chartered Accounting firm had provided advice in this regard. “However, the contract with the firm was to prepare consolidated accounts and was entered into on 12 December 2003 subsequent to the statement made by the Executive Director at NICIL’s board meeting of 2 June 2003 that there would be consolidated accounts with effect from 2002. Therefore, the decision to consolidate preceded the engagement of the firm,” Goolsarran pointed out.

He said that for the period 2002 to 2014, NICIL retained amounts totalling $26.858 billion under this changed arrangement.

He noted that NICIL disputed the statement on its retention of the funds, contending that it is “false and untrue.”

However, the figure was extracted from NICIL’s financial statements which clearly show that dividends from public corporations and other entities were retained and treated as NICIL’s revenue, Goolsarran said.

Unit

He also noted that a closer examination of the Management Co-operation Agreement raises several issues. “First, the Privatisation Unit is not a separate legal entity but rather a unit within the Ministry of Finance. The question therefore arises as to whether it is legally possible for NICIL to enter into an agreement with a department or unit of a Ministry to what essentially amounted to a take-over of NICIL’s operations, and whether this arrangement would not be inconsistent with NICIL’s primary objective of NICIL. The Agreement has created in effect a merger between NICIL and the Privatisation Unit since after the execution of the Agreement, the latter did not maintain a separate existence. There was also no evidence of any management fee paid to the Unit,” he said.

Meantime, the former AG pointed out that dividends from public corporations and other entities as well as the proceeds from the disposal of State assets/properties are State revenues in the context of Article 216, as supported by legal advice. “NICIL’s involvement in this regard is one of an agency relationship with the State, and therefore the failure to pay over such revenues to the State is a serious constitutional violation. The vesting of public corporations in NICIL for zero consideration is akin to a Power of Attorney and therefore NICIL cannot claim ownership of these corporations and hence the returns from them,” he declared.

He pointed out that Article 216 only permits retention of revenues in some other fund established by an Act of Parliament and only to extent of defraying expenses of the concerned body. “NICIL was, however, not established by any specific Act of Parliament. Rather, it was incorporated under the Companies Act, which is an Act to regulate generally the formation of companies as well as their operations,” he said. Therefore, the exceptions in Article 216 are not applicable to NICIL and even if that were so, NICIL did not retain such sums as were necessary to defray expenses. “Rather, it retained the entire proceeds from dividends received from public corporations as well as privatisation proceeds and used them for purposes as approved by its Board of Directors,” Goolsarran argued.

He said that the Fiscal Management and Accountability (FMA) Act 2003 repeats the requirements of Article 216 but provides for an exception in relation to any extra-budgetary fund established by an Act of Parliament. “The Auditor General has consistently reported that no extra-budgetary fund has been established since the passing of the Act, as confirmed by his 2013 Report. It is therefore incorrect to consider NICIL as an extra-budgetary fund in the context of the FMA Act,” Goolsarran asserted.

He also cited minutes of the meetings of NICIL’s Board for the period 1 January 2002 to 31 December 2014 and said he found no evidence of the Board approving the retention of dividends and other income from public corporations and other entities as well as privatisation proceeds. “In fact, I have found the contrary which is consistent with the earlier interpretation of NICIL’s mandate. At its first meeting held on 11 July 2002 after the Management Co-operation Agreement was entered into, the Board discussed the Agreement and the issue of matching costs with revenue,” he said.

According to Goolsarran, the meeting noted that dividends from any equity holding should be paid over directly to the Treasury; Privatisation funds should be held by NICIL, and out of these proceeds all privatisation-related expenses could be met, including repairs and upgrades to buildings, and the balance transferred to the treasury; and all administrative costs relating to the operations of NICIL should be met by way of subvention.