Ryan Hamilton-Davis and Kinnesha George-Harry
The Tobago House of Assembly (THA) recently announced its first bond issue, raising over $164 million. But the most important details of the issue remain a mystery.
In a release dated May 28, the Division of Finance and the Economy said the Executive Council had granted approval in February 2019 for the issuance of bonds. After approval was received from the Minister of Finance, the release said, the Assembly worked with the Finance Ministry and First Citizens bank as the arranger, to ensure all the legal and regulatory requirements were fulfilled.
The release said institutional investors in both islands participated and the first tranche raised $164.175 million with a tenor of six years at a fixed interest rate of 5.2 per cent to be paid semi-annually.
Business Day has tried to get more information on the bonds, including where it's listed and who are the investors, but that information has been difficult to come by.
Also unclear is where the money to pay the interest will come from.
One senior economist Business Day contacted wasn't aware of the issuance at all, while another had only heard of it, but had no additional information.
There were some questions, though, such as who can purchase the bonds? Are they still available? Is the return on the bond worth the investment? What are the liabilities of the bond?
Since its annexation to Trinidad in 1899, Tobago has contributed in one way or another to the national economy.
When the Tobago House of Assembly (THA) was established by Act 37 in 1980, so was the THA fund, which, in a way, linked the two islands’ finances together.
The Act dictated that the Parliament would allocate funds to address the financial and developmental needs of Tobago, and through that fund, Tobago would address all its needs and deposit all its profits, such as proceeds from goods, services and the use of government properties.
Section 50 of the Act stipulated that any excess funds would be split in half, with Tobago using its half to further fund projects for development and the other half surrendered to central government.
In 1996, the Act was amended and section 51 of act 40 allowed Tobago to borrow and invest on behalf of the country.
With more volatile energy prices and the tourism industry grinding to a halt owing to the covid19 pandemic, as indicated in the THA's budget statement for last year and the year before, Tobago now more than ever, has to find ways and means to contribute to TT’s overall GDP as well as garner its own revenue.
The recently announced issuance of THA bonds would, therefore, seem to be a clever use of the assembly's right to borrow.
Tobago economist Dr Vanus James acknowledged the importance of the bond, but said there must be checks and balances.
In a recent interview with Business Day, James said the THA's announcement did not give any information on the contingent liabilities of the bond for TT.
“The public has been informed via Executive Council press release. The public has not been informed of any contingent liabilities of the bond for TT.
"Surely investment in Tobago is risky business, but the Executive Council has not reported any associated contingency that is likely and the amount of the liability that can be reasonably expected.”
He said the requirement under Section 51A of THA Act 40 of 1996 that the minister of finance must approve it makes any Tobago borrowing a direct liability of TT.
“In any event, what matters is that the bond counts as part of the national debt stock and should only be undertaken if it offers a credible risk-adjusted promise of a significant growth and development effect. So far, Tobagonians have received no evidence-based assurance that this is the case.”
He said given the way Tobago is funded at this time, provisions will have to be made in the national budget for payment of the obligations associated with the bond. James said these would normally have to be counted as part of the Tobago allocations.
James asked, "Is the interest rate on the bond reasonable? Does the expected return in the form of the growth rate generated by the total investment programme justify the 5.2 per cent interest rate paid? How can the national community and the Tobago public judge?”
Government bonds are debt security bonds which can be used for funding government projects. The bonds are issued on the stock market and buyers of the bond would see a periodic return – most times bi-annually – at a specific rate of interest. When the shares mature, the capital is paid in a lumpsum to the buyer.
But the bonds are not normally traded on the market, because they are long-term bonds which come into maturity after a number of years. Brokers at a major securities company who spoke on the condition of anonymity said these bonds are usually bought and held until they mature.
Business Day checked with various financial institutions and thus far it does not seem like the Tobago bonds are on the market. One source at First Citizens Asset Management told Business Day, however, that these bonds do not necessarily have to be on the market to be sold.
If the bonds have less than a certain number of investors it could be considered as a private placement issue and be sold on the Over the Counter (OTC) market. A bank would arrange the bond on behalf of the government and it would seek out its own investors.
Just like a private company it would then reserve the right not to disclose who the buyers are. Government would also have the right to not disclose details of the transaction until it is complete, and even then, it has no obligation to disclose the buyers of the bonds, just that it was sold.
If the issuance of the bonds were used as a loan facility, it would not have to go to the market at all. Government would simply make the transaction, and repay when the bonds mature.
James also noted that the projects which would be funded by proceeds of the bonds, the possible liability from putting the bond on the market and any associated contingencies have not been identified to the public."
The THA's release simply said that the bonds would help reduce “perennial shortfalls of funding” for the THA’s Public Sector Investment Programme.
Responding to Business Day via email last week, Deputy Chief Secretary and Secretary of Finance and the Economy Joel Jack described the bond issue as a major achievement for the people of Tobago and a significant milestone for the Assembly.
Jack said, “The raising of the bond is historic, in that, it is the first time since the establishment of the THA in 1980 in general, and since the passage of Act 40 of 1996 more specifically, that the THA has received the approval from the Minister of Finance to engage in modern financial transactions, and to use this development financing modality to fund capital expenditure, thereby significantly reducing the perennial shortfalls of funding for the Assembly’s Public Sector Investment Programme.”
Proceeds from the bond, he said, are expected to fund a number of priority projects inclusive of housing, health, and coastal infrastructure.
“These projects were assessed and determined by the Executive Council through a rigorous process which included projects that are closely aligned with medium term policy and planning framework, projects that are likely to have a positive impact on employment generation, economic diversification, the expansion of social infrastructure, the environment and income generation; and, capital projects that are sustainable over the short term and are revenue generating.”
He said given the current restrictions owing to the covid19 pandemic, an exact timeline is difficult to provide.
“However, the people of Tobago can rest assured that their health care and housing needs will be given priority while the Assembly effectively addresses coastal erosion, to mitigate against land slippage, incessant flooding, and the direct and indirect threats to residents and their livelihoods.”
Additionally, he said the Assembly is also in possession of a stand-alone rating from Moody’s, and the ability to access funding as a stand-alone entity is certainly an achievement that all Tobagonians should be proud of.
A check with Moody's shows the THA has a BA1 credit rating, and although the rating was updated to estimate a negative outlook, it still is an indicator that the island is able to pay its debts.
Jack noted, “We are not only able to approach the market based on our own credit worthiness, but also able to chart the way forward to ensure that the developmental agenda for the island is realised.
“Additionally, this bond issue is without a sovereign guarantee and is based primarily on the Assembly’s own credit worthiness and will be serviced from the Assembly’s parliamentary appropriation as well as THA revenues.”
He said the Assembly will work towards ensuring that Tobago is positioned to be able to withstand national and external economic shocks and allow for a more resilient Tobago economy.
THA Chief Secretary Ancil Dennis said, "It (the bond issue) is historic. For the first time Tobago has been given the approval to borrow – so it is a historic and proud moment for Tobagonians and it has been in the making for some time. I'm looking forward to the funds being made available to the THA so that we can utilise it towards Tobago's continued development."
Since the January 25 Tobago elections the THA has been dissolved. The elections resulted in a two-way tie between the PNM and PDP and an impasse as to who would be the presiding officer and take the lead in handling the business of the people of Tobago.
To this day, there remains 12 elected councillors but no presiding councillor. Tobago is now being managed by a hold-over executive council.
Business Day's efforts to contact PDP leader Watson Duke and deputy leader Farley Agustine for their comments on the bond issue were unsuccessful.
Without an Assembly, James said the people of Tobago have no way of monitoring and evaluating the long-term loan.
“A constituted Assembly could inquire properly into whether the borrowed funds pose an unmanageable risk and are put to sufficiently productive use,” James said. “It would assess whether the interest rate on the bond is reasonable.”
“A constituted assembly would normally push for answers to the most basic questions arising. Without a constituted assembly the Secretary cannot be forced to answer such questions for the people of Tobago, or for the nation… So the first casualty of 'no Assembly budgeting' is democracy itself.”