In closing the Budget Debate on Wednesday, April 23, 2008, the Minister of Finance asserted that there were two transactions involving DB&G and the Ministry of Finance (MOF) which he characterized as "sweetheart deals".  On Tuesday, May 13, I provided a clear response to the development and execution of the first transaction and I also stated that the second transaction did not take place. Last Wednesday, the Minister presented to Parliament various pieces of documentation which he asserted offered proof that there was indeed a second transaction.

To place the issue in context, it is instructive to review precisely what Minister Shaw said on April 23, concerning this second transaction:  He said, inter alia,

"The second example, Mr. Speaker.  On March 31, 2005, one year later, just before Budget time again, Mr. Speaker, receivables due from the Jamaica Redevelopment Foundation with a face value of US$29.6 million, was (sic) sold to DB&G at a discount rate of 2.4%, plus an agency fee of 1%....But, Mr. Speaker, these receivables were due for payment by 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 $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".

What are the facts?  FINSAC had advertised and received three bids for the sale of its share in the bad debt collections from the portfolio being managed by the Jamaica Redevelopment Foundation (JRF).  The winning bidder approached DB&G to assist in structuring and financing the transaction.  FINSAC and DB&G initiated the process of negotiating the legal documentation with the aim of finalizing the purchase before March 31. However, the deal was frustrated when JRF refused to allow access to their files in order to carry out a due diligence exercise.

Having expected that this sale and other FINSAC related inflows would be part of the revenues for the current fiscal year, the MOF had to find substitute resources to meet expenditure obligations and to meet the fiscal targets.  It was known that DB&G had access to US dollar liquidity, because the company had prepared itself to be in a position to fund the purchase of the FINSAC share of the bad loan portfolio.  DB&G was, therefore, approached by the MOF to provide a 120-day short-term bridge financing facility to the MOF, pending either the anticipated flows or other financing coming into place.

This short-term financing was structured as a 'repo' using these same JRF receivables, rather than a loan, since DB&G, as a securities dealer, did not make loans in US dollars. (Section 22A of the BOJ Act).  The costs to the government, in the form of a discount plus the fee by DB&G on the 120-day transaction, together aggregated to an interest rate equivalent of approximately 9.5% per annum. This was in line with prevailing market conditions for US dollar financing, raised at very short notice.

Proof that the transaction was a short-term financing arrangement in the form of a ‘repo' and that the receivables were not in fact sold is contained in the very documentation submitted to Parliament by Minister Shaw, which shows full repayment of the US$29.6M by MOF to DB&G within 120 days.

Further evidence that the receivables were not sold to DB&G, is the fact that FINSAC retains, to this day, ownership of its share of the bad loan portfolio, administered by JRF.  It continues to receive its residual share of the collections of the portfolio bought by JRF. In fact, those collections were projected to continue until at least 2011, and therefore Minister Shaw's statement that "these receivables were due for payment by JRF in July of the same year, only three months later" was far from the reality of the situation as I knew it to be.

The J$70 million to which the Minister of Finance referred and alleged that "taxpayers were deprived" of, simply comprises the financing charge of approximately 9.5% per annum on US$29.5M for a period of 120 days.  It represents the cost of those funds at prevailing market rates, and taxpayers got full value for money as the Government had the use of the funds for the 120 day period.  There was nothing in this transaction that could be described as a "sweetheart" deal.

The Minister's words were fairly interpreted by me as referring to the outright sale by FINSAC of its residual share of the collections from the bad loan portfolio administered by JRF.  As stated above, that transaction never in fact occurred.   Therefore, there was no intention on my part to mislead the House.

Similarly, I am willing to concede that what did take place thereafter was a 120-day financing facility to the MOF on arms' length terms, and which from the documentation, could appear to be a sale of these same receivables.  Therefore, given that there was a misunderstanding on my part as to the transaction the Minister was referring to, I am withdrawing my statement that the Minister misled the House because no such transaction occurred and regret any confusion this may have caused.

Mr. Speaker, I hope that this is sufficient to settle the matter.

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published: Thursday | May 22, 2008