Last Wednesday’s lead article in the Guyana Times newspaper carried the headline “NICIL under APNU/AFC Govt still retains billions in dividends – source”. The article stated that despite pre-election criticisms and the forensic audit recommendations, National Industrial and Commercial Investments Ltd (NICIL) continues to retain dividends from several State-owned entities. We note that NICIL has since responded indicating that since 2015 all dividends received were paid over to the Consolidated Fund. However, there is no evidence that audited accounts of the entity are available beyond 2013, which would have provided conclusive and verifiable evidence as to whether or not the entity is still retaining dividends received from public corporations and other entities. NICIL therefore needs to clarify the status of its audits for the years 2014, 2015 and 2016, considering that Section 346(1) of the Companies Act requires audited accounts to be presented to the Minister within six months of the close of the financial year and for those accounts to be laid in the National Assembly within three months thereafter. The forensic audit report indicated that the Auditor General was in the process of auditing the 2014 accounts, and a review of his reports for the years 2015 and 2016 indicated no further progress.
The article referred to main finding of the audit report which was that during the period 2002 to 2014 NICIL retained $26.8 billion in dividends and divestment proceeds in breach of Article 216 of the Constitution. It quoted a legal opinion that NICIL had sought subsequent to the issue of the draft audit report, as follows: “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.”
In today’s article, we revisit the issue, drawing heavily on two of our previous articles under the caption “A classic case of constitutional breach in public finance”, published on 25 January 2016 and 8 February 2016 respectively. These two articles were put together using mainly the contents of the forensic report on NICIL that is available on the Ministry of Finance’s website: https://finance.gov.gy/wp-content/uploads/2017/05/nicil_audit_report.pdf.
Legal status of NICIL
NICIL was incorporated under the Companies Act 1991 on 18 July 1990 as a private limited liability company with the main objective of “subscribing for, taking or otherwise acquiring and holding shares, stocks, debentures or other securities of any company, co-operative society or body corporate”. The word “private” does not suggest that NICIL is in no way connected with the Government. It simply means that there are restrictions on the transferability of shares, unlike public companies, such as Banks DIH Ltd., where shares are freely transferrable. Section 344 of the Companies Act defines a Government company as one in which not less than 51 per cent of the paid-up share capital is held by the Government and includes a company which is a subsidiary of a Government company. Since the Government owns 100 percent of the shares in the company, NICIL is a Government company.
NICIL is not a public corporation. However, by Section 66(1) of the Public Corporations Act 1988, the then President issued an order dated 18 July 2000 making Section 5 of the Act applicable to NICIL. That section provides for the vesting in a public corporation movable and immovable property of the State. The Act does not define “property”. Therefore, we must seek guidance from the Fiscal Management and Accountability (FMA) Act 2003 which defines public property as:
All property, other than moneys: (i) belonging to or under the control of the State; and (ii) in the custody of or under the control of any person acting for or on behalf of the State in respect of that property, including all property that is held by the State in trust for, or otherwise for the benefit of, any other person.
It is important to note that the definition does not include Government’s interest, in the form of shareholdings, in public corporations and other entities.
NICIL’s interpretation of its mandate: 1991-2001
In a correspondence dated 25 October 1995 to the Head of the Privatisation Unit of the Ministry of Finance, the Executive Secretary of NICIL clarified that the mandate of NICIL was one of facilitating “a unified and systematic management of Government shareholdings”. He indicated that the general terms of reference of NICIL were:
(a) To advise the Government on the disposition of shares it holds in
corporations/companies; (b) To establish a communication link with all
corporations/companies in which Government has shares; and
(c) To act as “watchdog” on what is happening to shares owned by Government and recommend to it steps to be taken.
The Executive Secretary went on to state that, with the establishment of the Privatisation Unit in 1993, NICIL’s role was confined to “supplying available information on state-owned Enterprises to the Privatisation Unit, and to the collection of dividends from Corporations/Companies in which the Government held shares and paying same over to the Accountant General”.
It is evident that the holding of shares in public corporations/companies by NICIL and the vesting of State assets in it, reflects an agency or custodial relationship on behalf of the Government. It does not connote ownership, considering that there was no exchange of value. Indeed, the Vesting Orders must be viewed in the nature of a Power of Attorney (POA), and in the same way that the proceeds from the disposal of an asset via a POA belong to the real owners and not the holder of a POA, so it is with the Government’s interest in public corporations/companies.
Of relevance is the fact that during the period 1991 to 2001, NICIL collected $3.415 billion in the form of dividends from public corporations/companies, disposal of State assets and special transfers from public corporations. These were promptly transferred to the Consolidated Fund, and NICIL met its cost of operations from annual subventions received through the National Budget. This practice was consistent with the Executive Secretary’s interpretation of NICIL’s mandate and attracted no adverse comments from the then Auditor General in his reports on the accounts of NICIL during this period.
Mr. Carl Greenidge, the Minister of Finance at the time NICIL was incorporated, confirmed that the intention behind the establishment of NICIL was consistent with the then Executive Secretary’s and the Auditor General’s understanding of NICIL’s mandate. He 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.
NICIL’s interpretation of its mandate: post 2001
On 28 December 2001, a management cooperation agreement between NICIL, the Privatisation Unit and the Government was entered into for: (i) the Privatisation Unit to provide management and administrative services to NICIL; and (ii) the Head of the Privatisation Unit to assume the position of Executive Director of NICIL. At its first meeting held on 11 July 2002 after the agreement was entered, NICIL’s Board discussed the issue of matching costs with revenue and took note of the following:
(a) Dividends by any equity holding should be paid over directly to the Treasury;
(b) 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
(c) All administrative costs relating to the operations of NICIL should be met by
way of subvention.
At the said meeting, the Executive Director stated that at his last meeting with the then President, the latter had expressed an interest in NICIL continuing to receive subvention from the Treasury and for all dividends received from public corporations to be paid over in full to the Treasury. The former Minister of Finance who was the then Budget Director, indicated his agreement with the President and stated that “dividends stated in the reports by Public Enterprises should equal to dividends received by NICIL and paid over to the Treasury”. This he said, would assist in the IMF stipulation which required that the dividends received should match the amount shown as going to the Treasury. He went on to state that “along with dividends received lease payments should also be paid over fully to the Treasury”.
At NICIL’s board meeting of 2 June 2003, Executive Director reported that all dividends received were being paid over to the Treasury. He stated that: (i) prior to 2002, the company was acting as a “post office”; (ii) the objective was to make NICIL a properly functioning holding company; and (iii) there would be consolidated accounts with effect from 2002. The Board did not take a position with regard to Executive Director’s statement. In addition, at its meeting of 21 July 2003, Executive Director stated that based on a suggestion from the Director of Budget to cut the expense of the Treasury, NICIL would continue to have its budget but could have money from proceeds of NICIL to finance day-to-day operations of its office.
At NICIL’s board meeting of 28 August 2003, Executive Director stated that as dividends were received, they were paid over to the Government. He drew attention to the high cash balances NICIL was carrying and further stated that NICIL “needs to identify at what point transfer should be made to the Government… if strategic objectives for NICIL were developed that included facilitating investment, by leveraging the use of NICIL assets, in say the Berbice Bridge, then this would affect what NICIL did with said funds”.
At the Board meeting of 12 March 2010, the question was raised whether the audited accounts of NICIL could be tabled in the National Assembly without annual reports. Section 346 of the Companies Act 1991 was referred to, which states that the Minister may prescribe the level of detail financial statements of Government companies can be presented. The minutes recorded the then Head of the Presidential Secretariat (HPS) as having expressed concern about whether this provision might be in conflict with budget laws. He advised that budgetary laws should be made applicable.
Despite the Board’s view on the matter and the assurances given by the Executive Director, for the period 2002-2014, NICIL received amounts totalling $26.858 billion representing dividends from public corporations as well as privatization proceeds. These were retained by NICIL and treated as its revenue.
NICIL and Article 216 of the Constitution
Article 216 of the Constitution (re-numbered as 217) states that “All revenues or other moneys raised or received by Guyana …shall be paid into and form one Consolidated Fund”. Section 38 of the FMA Act repeats this requirement. The Act defines “Government receipts” as moneys and other assets received by or owing to the State, including, among others:
(a) Dividends and profit-sharing paid to the State by public enterprises, statutory
bodies and the Bank of Guyana;
(b) Proceeds from the sale or lease of any public property; and
(c) Interest earned on the investment of assets of the State”.
The Act also defines “public moneys” as all moneys belonging to the State received or collected by officials in their official capacity or by any other person authorised to receive or collect such moneys and includes: (i) tax and non-tax revenue collections; and (ii) moneys received or collected for and on behalf of the State. Finally, the Act defines “public property” to include all property, other than moneys belonging to or under the control of the State; and in the custody of or under the control of any person acting for or on behalf of the State in respect of that property.
In addition, the National Budget traditionally reflected two standard revenue line items: (i) dividends and transfers from non-financial institutions, equity holdings and Bank of Guyana profits; and (ii) sale of assets. This, along with Article 216 and the FMA Act’s definition of “public property”, clearly suggest that proceeds from dividends from public corporations/companies and proceeds from the sale of State assets are “revenues and other moneys raised or received by Guyana” as well as “Government receipts”.
Notwithstanding that NICIL is a company separate and distinct from the State, it nevertheless acts as an agent of the State in respect of all property vested in it. There is no question of ownership but rather one of a custodial relationship for such property. This is why both the Cabinet and the Minister of Finance have to approve of the vesting of property in NICIL as well as their disposal within the framework of the Privatisation Policy Framework Paper which specifically identified the entities to be privatised. Accordingly, such proceeds are required to be paid into the Consolidated Fund, and the failure to do so constitutes a serious breach of Article 216 of the Constitution and Section 38 of the FMA Act.