UK pushing for financial reform

The United Kingdom has developed a document called Framework for Fiscal Responsibility that it has presented to the Cayman Islands government for discussion and eventual signature.

“The matter has the potential to impact not only government’s financial policy-making, but our broader economic status and government’s overall performance in terms of good governance,” Premier McKeeva Bush said in a statement. “This policy document, which we are negotiating with the UK, therefore has the ability to affect the quality of life and the standard of living in these Islands.”

Mr. Bush met with Minister for Overseas Territories Henry Bellingham on Monday to discuss the financial reform agreement and other matters. Although Mr. Bush is scheduled travel to London in a couple of weeks for the annual Overseas Territories Consultative Council, he said Mr. Bellingham preferred not to include the “urgent” matters of Monday’s discussion in the agenda for the talks later this month.

The Framework for Fiscal Responsibility presents what Mr. Bush called “unquestionably laudable and sensible principles”, however, he said his government has reservations about some of the methods it puts forward as a means to achieve its principles.

The document lists three objectives: creating a vibrant and sustainable economy; enhancing tourism and financial services as the twin pillars of the economy; and creating opportunities for Caymanians.

“Restoring prudent fiscal management is central to achieving these objectives,” the document reads.

The word “restoring” apparently suggests the UK believes there is no longer prudent fiscal management in the Cayman Islands, something Mr. Bush said is a reflection of the People’s Progressive Movement’s handling of the country’s finances.

“As everyone well knows, this government took over from a previous government that had borrowed and its overspending had placed this country in a dangerous financial position,” he said. “Because of this the United Kingdom government has asked us to sign an agreement with them. Based on the historical evidence of what can happen when a financially irresponsible government that spends without any thought process or a carefully thought out plan, I am in favour of signing such a mutually agreed Framework for Fiscal Responsibility.”

The document calls for controlling government expenditure; limiting new borrowing; realigning the revenue base; improving the performance of statutory authorities and government companies; and reducing costs by working in partnership with the private sector.

It outlines a number of requirements for delivering value for money with regard to projects.

“There are five key stages that will be undertaken by the Cayman Islands government in the planning, development and execution of a project,” it states, listing appraisal and business case; procurement; contract management, delivery and evaluation.

With regard to appraisal and business case, the Framework for Fiscal Responsibility will require that all projects “are suitably appraised before the procurement stage to ensure value for money and that a robust cost-benefit analysis has been carried out”. The business case which results from the appraisal process “should demonstrate the economic need for the project; include a fully argued and costed risk and impact assessment; and specify the benefits the project is designed to deliver to ensure that an informed decision can be made on whether or not to proceed to the procurement stage”.

“The Cayman Islands government will adhere to agreed statutory tender processes,” the document reads. “For projects with a lifetime value above CI$5 million and for those where Public Private Partnerships or any other form of alternative financing is used, the Cayman Islands government will retain independent accounting, legal, financial, economic, environmental and other technical advice to ensure value for money”.

One aspect of the document that drew concern from the government was section 28, which deals with debt.

“Unless in exceptional circumstances different arrangements are agreed in writing by the Cayman Islands government and the Secretary of State, the Cayman Islands government will borrow only to fund capital expenditures which will yield sufficient revenues to fund debt service costs,” the document reads. “This will lessen the strain on operating revenues used to fund debt service costs.”

“The government and I interpret that paragraph 28 of the [Framework for Fiscal Responsibility] means, as an example, that separate juvenile remand facilities which are required in order to comply with the Islands’ Bill of Rights – scheduled to come into effect in 2013 – could not be constructed using borrowed funds, because such a facility will not generate a revenue stream to fund debt service costs,” Mr. Bush said. “Further, under the Bill of Rights, the government must build and maintain schools to provide primary and secondary education, free of charge. If in the future government needed to borrow funds to finance additional educational facilities, it would appear that the FFR would disallow such borrowing – simply because such facilities would be unlikely to yield sufficient revenues to meet its associated debt service costs. Understandably, government has concerns with respect to this provision of the FFR, and are robustly questioning its application.”

The government has also taken issue with Appendix A of the [Framework for Fiscal Responsibility] because it indicates that the entire debt servicing costs, which consist of repayments of principal as well as interest payments by government and all its statutory authorities and government companies, cannot exceed 10 per cent of government’s revenues.

“The revenues of statutory authorities and government companies are excluded in this computation, but their debt servicing costs are included,” Mr. Bush said. “It is government’s view that this definition is overly restrictive.”

The document cites strict procedures for noncompliance. Should the Cayman Islands government not be compliant with the Framework agreement, it would be required to present for the approval of the UK Secretary of State, a plan consistent with the Strategic Policy Statement that will remedy the breach, in non-exceptional circumstances, within three fiscal years from the point the breach occurred.

During any time of breach in the Framework agreement, the Cayman Islands will be required to obtain, on an annual basis, the approval of the Secretary of State before: finalising the Strategic Policy Statement; proceeding with any public borrowing or refinancing of public borrowing; proceeding with any project with a lifetime value of more than $5 million; using public assets as collateral as part of any arrangement with a non-government entity; pledging any government revenue stream as collateral for borrowing or debt; or divestment of public assets.

“For the avoidance of doubt, any failure to comply with the borrowing limits or forecast failure to comply within the lifetime of the [Strategic Policy Statement] will be deemed a failure to comply with the Framework,” the document reads.

Mr. Bush said senior civil servants of the Cayman government had reviewed the Framework document and had provided suggested changes, which will be discussed with the FCO.

Although the document has not yet been signed by the Cayman Islands government, Mr. Bush indicated in a telephone interview on Sunday it would have to sign something.

The Framework for Fiscal Responsibility will be published on the government website on Tuesday.

“I urge everyone in the Cayman Islands to make themselves familiar with it so that they will better understand any debate on this which may follow,” he said.