The relationship between government and the private sector has often been hailed as one of the key factors that contributed to Cayman’s success as a financial centre.
In the early years the public and private sector worked together to draft important legislation beginning with the Companies Law in 1961 and extending to the Exempted Limited Partnership Law (1991), the Mutual Funds Law (1993) and the Securities Investment Business Law (2001).
Public-private sector cooperation in legal drafting
Often private sector specialists, typically in consultation with their legal colleagues onshore, produced the early drafts, in close cooperation with government to ensure that new laws met the needs of government and the private sector from a legal, regulatory and tax perspective.
The resulting legislation was not only modern but it also gave Cayman a competitive edge in the offshore world, as it attracted new business.
Over the years, however, innovations in the financial industry coincided with a period of new government objectives with more pressing non-financial legislation and complacency in the private sector which dedicated fewer resources to the legal drafting of new laws.
More recently external pressure from the OECD and G20 caused another focus amid which the successful collaboration of the early decades between government and the private sector was forgotten.
As a result financial services legislation became less effective and called for an update.
The idea to reinstitute the collaboration between the public and the private sector in the drafting of new financial services legislation was first raised by the Cayman Islands Law Society. After considerable time, in May 2010, Premier McKeeva Bush announced the formation of a Financial Services Legislative Committee, consisting of representatives from law firms and senior members of the Ministry of Finance.
The FSLC, chaired by former Maples and Calder Senior Partner Charles Jennings, identified the financial legislation most in need of modernisation and new areas where Cayman’s financial industry would benefit from new legislation. For each piece of new legislation the FSLC formed subcommittees.
2011 saw the first effect of the renewed partnership when a first wave of Companies Law Amendments was passed and a new Exempted Limited Partnership Law was completed. The Committee also advised on the Dormant Accounts Law and new mutual fund legislation.
Following the passing of the Companies Law Amendments Jennings said
“the adoption of these amendments has shown that the purpose of the Committee, namely to propose and draft new laws and amendments that will enhance the jurisdiction’s reputation as a leading financial services centre, has been achieved.”
The idea that the private sector may have a direct hand in the drafting of laws may have a negative connotation in other countries, where private sector influence is much less obvious in the form of lobbying.
In Cayman, however, the collaboration between government and the private sector is simply a matter of practicability that offers an additional layer of scrutiny in the legal drafting process and makes effective use of the expertise in the private sector that would be very difficult for government to obtain and maintain.
Public-private partnerships
Another area where the public and private sector relationship is becoming more of a practical necessity are large infrastructure projects.
Where in the past government was able to finance and manage its infrastructure needs in terms of roads, airports, hospitals and government buildings to schools and port facilities, its currently limited fiscal flexibility and inability to borrow will require more public-private partnerships (PPPs).
Under these arrangements, infrastructure projects are funded and operated in a close partnership between government and one or more private sector companies.
Premier McKeeva Bush believes they can be a win-win for all the parties involved and planned projects such as new cruise berthing facilities or the extension of the airport runway are prime candidates for public-private partnerships.
Yet, PPPs can pose considerable risks for government, the public and private businesses.
Because some or all of the initial funding has to be obtained by private firms, the risk that long-term projects will fall politically out of favour or become less economically viable is great. Private sector firms need continuous support from government over the life of a project and the certainty that the investment can be recouped with a margin. An accurate assessment of the ability to pay for the development is therefore a must.
In contrast, the government’s and the public’s main concern is that the partnership delivers value for money. This naturally limits the margin of profitability for the private partner and means a delicate balance has to be struck.
Not surprisingly the recently signed Framework for Fiscal Responsibility, which provides new guidelines for the management of public finances, has a number of things to say about public-private partnerships.
Firstly, it limits such partnerships to projects that have a lifetime value of at least $15 million, due to the generally high transaction cost of PPPs.
In addition it prescribes that PPPs, like other forms of alternative financing, can only be considered if several conditions are fulfilled.
Namely, the project needs to be underpinned by a sound appraisal, the financial appraisal must demonstrate a better value for money than conventionally financed alternatives, the long term affordability of the project is confirmed by independent technical experts and an independent opinion is obtained from a qualified accountant on the accounting treatment of the project in the Cayman Islands government accounts.
For all public-private partnerships the government must also retain independent accounting, legal, financial, economic, environmental and other technical advice as appropriate to ensure robust investment appraisals are produced, according to the framework.
The rules are a reflection of the complexity of these multi-year, high value projects but they do not question the viability of PPPs per se. The success of such projects is particularly dependent on the relationship government has with the private sector partner, the continuity of key project management staff and the rapport between the individuals making the main decisions and their ability to overcome problems.
Government also needs to be clear in the formulation of the desired project outcome, the infrastructure needs and explicit project specifications. At the same government must be able to resist the desire to micromanage the design, development and operation, which is best left to the expertise of the private partner.
Most importantly all stakeholders, in particular the public, must be involved at an early stage in a project to ensure its success.
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