The Cost of Dismantling the BAI Group: Rs 20 billion!

Titbits

The Report of the Director of Audit on the accounts of the Republic of Mauritius for the financial year 2017/18 provides a good deal of information that makes it possible to estimate the cost of dismantling the BAI Group

By Rattan Khushiram

The Report of the Director of Audit on the accounts of the Republic of Mauritius for the financial year 2017/18 provides a good deal of information that makes it possible to estimate the cost of dismantling the BAI Group.

National Property Fund

 1.The National Property Fund (NPF), a state-owned company, was set up in 2015 for refunding holders of Super Cash Back Gold policies of BA Insurance, a core company of the BAI Group, and investors of Bramer Asset Management, also a member of the BAI Group. To further this objective, NPF took a loan of Rs 3.5 bn from the Bank of Mauritius (BOM) in June 2015.

It was then considered as a bridging loan (i.e. short term) by BOM, but it turns out that the loan is now payable in a one bullet repayment of capital and interest in June 2022 (i.e. 7 years later). Accrued interest at June 2022 will amount to Rs 0.9 bn, so the total amount to be repaid by NPF in June 2022 is Rs 4.4 bn (3.5 + 0.9).

2. The NPF took a new loan of Rs 6.4 bn from SBM Bank (Mauritius) Ltd in Sep 2017. The loan repayment date is not mentioned in the Audit Report, but the loan is most likely to extend beyond 2019.

3. The debt liabilities of the NPF from both BOM and SBM currently stand at Rs 9.9 bn (3.5 + 6.4). Including accrued interest, the total NPF debt exceeds Rs 10 bn.

Maubank Ltd

1. Maubank Holdings Ltd was incorporated in Sep 2015 with an equity investment of Rs 1.6 bn by Government for onward equity investment in Maubank Ltd, which was set up to take over the merged activities of Mauritius Post and Cooperative Bank and National Commercial Bank (NCB). NCB took over selected assets and liabilities of Bramer Bank, a member of the BAI Group, after BOM revoked its licence in April 2015.
2. In 2016-17, Maubank Holdings Ltd took a loan of Rs 3 bn from SBM Bank (Mauritius) Ltd, guaranteed by Government. At Oct 2018, Maubank Holdings Ltd could not refund the SBM loan, and got an extension of the facility for another 2 years.
3. The liabilities of Maubank Holdings Ltd in respect of both equity injection by Government and debt currently amount to Rs 4.6 bn (1.6 + 3.0). These financial obligations shored up the bank’s solvency, serving mainly to resolve the capital and liquidity issues stemming from the closure of Bramer Bank.

Cost Estimate

1. The liabilities of both the NPF and Maubank Holdings Ltd total Rs 14.5bn (9.9 + 4.6). Inclusive of accrued interest, the total amount of equity invested by Government and of debt, to cover repayments to holders of BAI’s Super Cash Back Gold policies and Bramer Asset Management investors and to fund the solvency gap arising from Bramer Bank, is around Rs 15 bn.
2. This figure of Rs 15 bn represents a measure of the current outstanding cost of dismantling the BAI Group. The public has already borne a small share of this cost, namely by a Government capital injection of Rs 1.6 bn in Maubank. The major part, or Rs 12.9 bn, represents loans to be repaid in future to SBM and BOM. In addition, interest on the debt will also be payable. In all likelihood, the public will have to bear this burden by way of additional Government equity investments.
3. The proceeds from the sale of shares of Britam Kenya, held by the BAI group, for Rs 2.4 bn in 2016, were also used by the NPF for BAI repayments. The current gross cost of breaking up the BAI Group is thus higher, or Rs 17.4 bn.

National Insurance Company Ltd

1. Further disposal of assets held by the National Property Fund will serve to meet loan repayments, and bring down the cost of the BAI breakup. The market valuation of National Property Fund assets is however highly uncertain. Moreover, the financial situation of the National Insurance Company Ltd (NIC), which took over part of the liabilities and assets of BA Insurance in 2015, is giving rise to serious concern.
2. Audited annual financial statements have not been produced by the NIC, and it is doubtful whether it is complying with the insurance regulatory requirements of the Financial Services Commission. The valuation of the NIC’s assets, especially of the Wellkin (formerly Apollo) hospital property, held through a NIC subsidiary, was recently questioned by NIC auditors. In response, NIC kicked out E&Y, an accounting and auditing firm ranking among the top 4 global firms, to be replaced by a lower tier – why?
3. It is critically important to conduct a proper actuarial evaluation of the NIC, and especially of liabilities arising from BA Insurance policies transferred to NIC. Otherwise, apprehensions about the adequacy of NIC’s actuarial reserves and of its solvency will continue to be entertained. It appears most likely that Government will have to strengthen NIC’s financial position with a capital infusion.

Final Cost

While the sale of the National Property Fund’s remaining assets will reduce the BAI’s dismantling cost, a capital injection by Government in National Insurance Company will raise it. Without more detailed information, it is not possible to state what the net effect will be. However, it can be reasonably estimated that the cost of the BAI debacle has already exceeded Rs 15 bn, and could well reach a final amount of Rs20 bn.

Coping with the consequences of BAI busting has contributed to the significant deterioration of the public sector debt ratio from around 60% of GDP in Dec 2014 to 65% in Dec 2018. And it’s the public that will be footing the bill in the coming years, after having been fed with illusions of high returns from the outright sale of National Insurance Company, Maubank, Apollo Hospital, and other BAI assets.

While the nTan Report considered that BAI operations were akin to a Ponzi scheme, the observed financial fudging in relation to the public cost of closing down the BAI comes close to portraying similar features.

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 Ocean economy: Any progress?

Since the release of ‘The Ocean Economy: A Roadmap for Mauritius’ in July 2013, successive governments have identified the Ocean Economy (OE) as another important economic pillar. Government aims to double the contribution of this sector to GDP in the medium term. By just by committing yearly investments equivalent to 1.6% of GDP over a period of 10 years, the OE’s share to GDP can be increased by 5%. The key sectors, including port infrastructure development, sustainable fisheries and aquaculture, offshore renewable energy, marine ICT and capacity building have been identified for investment opportunities.

Budget 2018-2019 also lays emphasis on the ocean economy of Mauritius as the next avenue for the import substitution strategy and for export growth in the medium- and long-term. As recommended in the 2017 World Bank report –‘The Ocean Economy in Mauritius: Making it happen, making it last’, the budget announced the setting up of an Ocean Economy Unit with the responsibility of preparing a National Ocean Policy Paper. A series of other activities were also envisaged including the development of an Ocean Observatory E-Platform to support the Marine Spatial Planning Initiative of Mauritius and a geotechnical study to be conducted in the extended continental shelf management area of the Mascarenes region to explore its potential for developing the ocean economy.

There is very little information on the website of the Ministry of Ocean Economy, Marine Resources, Fisheries and Shipping on the status of these activities/projects. The Minister seems to have gone for a long off-lagoon trip in search of whales. It is to be hoped that responsibility for driving the Ocean Economy agenda would be entrusted to a more dynamic minister in the next government.

Besides the regrouping of various institutions, no new developments seem to be taking place. Some time back, we were told that the Ministry has signed an agreement with the Commonwealth Secretariat to develop a National Ocean Policy Paper for the next five years and an action plan for the development of the sector. Has there been any development on that front?

And where are we with the Deep Ocean Water Applications project (DOWA)? Government had given the permit to a Mauritian firm, Sotravic Ltd, for the project at Bain de Dames. It consisted in pumping deep-sea water off the coast to be used as a cooling agent for offices in Port Louis. There were also other projects in the pipeline, namely, a) the bottled fresh water project involving the extraction of fresh water from the ocean depths, its bottling and export, b) the seabed exploration for hydrocarbons and minerals project, c) the fishing, seafood processing and aquaculture project where farming of high-value and niche products such as seaweed, oyster and oyster pearls, crabs, sea-urchins and other shellfish would be promoted, and d) the setting of a proper legislative framework. Have there been any developments?

We are aware that the sector is still in its infancy and will take 10 to 15 years to be fully operational. But as in the case of the Metro project where we are being regularly informed of its progress, it behoves the Government to keep the public fully informed about initiatives being taken to make things happen. Are we moving ahead to realise our target of doubling of the share of the OE to GDP within the next 15 years?

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Disaster preparedness: Are we prepared?

A devastating cyclone has caused widespread destruction in Southern Africa, across the city of Beira, Mozambique, Zimbabwe and Malawi. Some 1.7 million of our African brothers and sisters are said to be affected, with no electricity or running water in areas where homes have been swept away and roads destroyed by the floods. “We are living an unprecedented natural disaster. A disaster that only matches major disasters,” said Mozambique’s Environment minister Celso Correia. “Unfortunately, no one in the region and in the world could predict a disaster of this size.” Intense tropical cyclone Joaninha caused significant damage in Rodrigues Island on Tuesday, March 26 and gusts of up to 184 km per hr were recorded.

In an age of advanced meteorology, when hurricanes and cyclones are named in advance and warnings go out as storms approach, it’s troubling to imagine how damaging Cyclone Idai was. It knocked Beira, a port city on the coast of Mozambique, back into a pre-digital world. Everything that modern Africa has come to rely upon has been snatched away. Telecommunication masts, satellite feeds and the internet bowed down to the cyclone’s force.

This disaster is a reminder that the world’s preparations to deal with disasters are not keeping pace with the growing threats to people and societies. We need to think through future contingency plans to cope with the current trends of worsening extreme weather conditions, together with expanding populations and cities, which seem likely to continue in future. The economic costs of disasters are likely to increase too. Every country has an interest in improving the economic effectiveness of decision‐making for disaster risk reduction.

Estimates of the likely impact on the economy under different climatic conditions were carried out by a World Bank team. They found out that “Mauritius over a 40-year period, the high-end climate change scenario greatly increases the chance of large GDP losses; and the probability increases as we look at impacts of increasingly larger magnitude. For example, the risk of losing 5 percent of GDP would go from a 30 percent probability in the current climate scenario to more than a 70 percent probability in the climate change scenario… For the 10 percent most damaging years, losses are expected to increase by an additional 3.7 percent of GDP.”

The World Bank’s analysis supports the important conclusions from work undertaken earlier which shows that storms associated with the current climate have led and will lead to significant damage in Mauritius; it however emphasizes the fact that climate change will make those losses much worse.

Philippe Boullé, expert in the mitigation of natural disaster risks, reminds us that –

“…le danger demeure cependant pour toutes les îles, grandes ou petites de la région. À l’instar de la puissance destructrice des vagues et de la houle pendant les périodes cycloniques, qui menace les zones côtières. Mais il faut constamment s’assurer de la résilience de ce parc immobilier qui ne cesse de grandir. Tout nouvel immeuble peut devenir un risque nouveau de vulnérabilité. …Mais le pays se développe et le développement équivaut à de nouvelles vulnérabilités qu’il faut donc constamment s’efforcer de réduire.”

The WB team had recommended that we regularly update our full island-scale risk assessments to reflect the latest climate science, including projections of cyclone and non-cyclone precipitation and flood events as well as the impact of rising sea levels. We should add climate/environment impact analyses on coastal erosion, encroachment of public beaches and our wetlands and also consider disaster risk financing options to mitigate the social and economic impacts of low-probability, high-impact climate shocks. Examples of such options include the Sovereign Insurance Scheme developed by Africa Risk Capacity and the World Bank’s Catastrophe Deferred Drawdown Option (or CAT DDO), a contingent credit line that provides immediate liquidity to World Bank member countries in the aftermath of a natural disaster.

This would come as an additional support to the suggestion of Resistans ek Alternativ of a new law to better respond to the disasters caused by climate change. Against a backdrop of worsening land, environment and social issues, a Climate Change Bill, according to the ReA, will usher in new ecological, social and economic policies with the public interest in mind as opposed to private and corporate interests.

* Published in print edition on 29 March 2019