The Tribune

• ‘Differences of interpretation’ lie behind liability accusations

• Deloitte: Switch to accrual accounting will resolve disputes

• Opposition slams ‘reckless’ signal to global capital markets

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Prime Minister’s accusation that his predecessor hid an “astounding” $650m of unfunded liabilities from its pre-election fiscal report was yesterday exposed as a “difference in interpretation”.

The long-promised Deloitte & Touche review of the Government’s “accounts payables”, tabled in the House of Assembly by Philip Davis QC himself, disclosed that the accounting firm had been asked to take a much “broader view” of its future spending commitments and obligations than the Minnis administration adopted when compiling the pre-election fiscal report.

The latter interpreted the Fiscal Responsibility Act as requiring it to only disclose the unpaid arrears that had crystallised, and were due for payment at that point, whereas Deloitte & Touche revealed that the Davis administration had post-election asked it to determine all current as well as future liabilities and spending obligations - a much wider exercise.

This, the accounting firm’s report said, accounted for the difference between the $821.52 worth of “unbudgeted obligations” that it detected at October 14, 2021, and the $108.806m worth of unpaid arrears identified as owed by the Government in the Minnis administration’s pre-election report.

Deloitte said the argument revolved around the interpretation of the Fiscal Responsibility Act, especially section (b)(viii) in its Third Schedule, which says the update only need include “the outstanding stock of arrears for all government entities, including showing separately all new unpaid invoices since the stock of arrears was last reported”.

While the Minnis administration and its officials took a narrower view, using the Government’s existing modified cash-based accounting, its successor took a much more expansive approach on what should be included by requesting that Deloitte use the accrual-based accounting method to determine the extent of all unfunded future spending commitments and liabilities.

“There are fundamental differences in the interpretation of this section of the Fiscal Responsibility Act between the former senior leadership responsible for the production of the pre-election report and those responsible for producing current reports,” Deloitte said.

“For the pre-election report, former senior leadership believes that it should include the stock of arrears and any unpaid invoices that have become arrears for central government only. Former senior leadership expressed that this report should not include total payables, nor should it include any amounts for state-owned enterprises (SOEs)”

Deloitte noted that the former Minnis administration, though, had requested such information from its SOEs for the pre-election report but nothing was received. As a result, that document detailed some $108.8m in unpaid invoices. Mr Davis, in his mid-year Budget address, yesterday threw in $64.3m to make the total $173.1m.

Turning to the Davis administration’s position, and the assignment it was to perform, Deloitte said it was asked to determine the Government’s “current payables position” by pulling together “all obligations/commitments (recurrent, capital and SOEs, which are not included in the 2021-2022 approved Budget estimates”.

Tellingly, it explained: “This differed from the request for total arrears only, used in preparation of the pre-election report. This is a broader view.” Adding in future spending commitments that have yet to crystallise, Deloitte said the Government’s unbudgeted obligations as at October 14, 2021, comprised $315.387m on the recurrent spending side and $130.442m for capital works.

SOE obligations totalled $120.37m, while there was an additional $255.32m in debt servicing - the latter sum relating entirely to the legacy Bahamas Power & Light (BPL) debt that the Government assumed responsibility for servicing.

“Current senior leadership also believes that the Bahamas Resolve bond of approximately $167.7m, which becomes due in August 2022, has crystallised as a current liability and should be reported,” Deloitte said, referring to the redemption that will make Bank of The Bahamas’ balance sheet whole. This would give the Prime Minister the $1bn in unfunded liabilities he was seeking.

Mr Davis, though, yesterday doubled down on his accusation that the Minnis administration had concealed the true extent of The Bahamas’ fiscal woes by omitting extensive unfunded liabilities from its pre-election report.

“It is extremely regrettable, Madam Speaker, that the previous administration fell well short in its legal and moral duties to be as transparent as practically possible in order that it might be held accountable for its decisions and actions,” Mr Davis said.

“In August last year, the former administration released its pre-election report as required under the Fiscal Responsibility Act. In part, this Act mandates the Government to disclose its account of arrears, unpaid bills and other unbudgeted financial obligations. Sadly, Madam Speaker, the report from last August fell woefully short of the standard required by law.”

Describing Deloitte’s findings as “simply astounding”, he asserted: “The previous administration failed to disclose significant liabilities and unfunded obligations of the Government, totalling some $821.5m - almost $1bn.”

Apart from the $255.3m legacy BPL debt, Mr Davis identified other unfunded arrears as:

* $155.5m in unpaid bills and other obligations owed by SOEs

• $25.7m for the Ministry of The Public Service, “largely representing outstanding payments for insurance services”

• $17.7m for the Office of the Attorney General “to settle outstanding legal claims”

* $14.2m in VAT refunds for the Department of Inland Revenue. Mr Davis said this amount represented what has been refunded to-date, and added that total refund claims “exceed $100m”. The balance has not been verified and the Government is still working with those anticipating receiving reimbursement

• $15.8m for the Ministry of Health, including outstanding payments owed to Doctors Hospital for critical care COVID-19 patient support

• $129.5m in unfunded contract obligations for the Ministry of Public Works

• $23m in bills for water purchased by the Water and Sewerage Corporation

• $56m for the Public Hospital Authority, including over $25m in potential liabilities for the 2018 union agreement

• $34.2m for the Ministry of Tourism, including a significant amount of unpaid bills for Bahamasair

 “Are we to assume that all these invoices and unfunded obligations magically appeared in less than two months after the election?” Mr Davis asked, adding that “for the first time the Bahamian people, investors and lenders now have a comprehensive picture of the progress we are making towards our fiscal targets”.

The Opposition, which includes several former Minnis Cabinet ministers, yesterday hit back immediately by attacking the Prime Minister for “reckless” and “irresponsible” statements that sent the wrong signal to rating agencies, investors and lenders through suggesting the previous administration deliberately concealed the depth of The Bahamas’ fiscal crisis.

Kwasi Thompson, former minister of state for finance, told Tribune Business that Mr Davis’ statements represented “a lot of smoke and mirrors”. He argued that while the pre-election and Deloitte reports could both be deemed correct, it was impossible to compare them because they had very different remits and were based on two separate accounting methods.

“Deloitte’s report clearly indicates that the difference is as a result of different interpretations, and it was spelled out clearly in the report. It was a difference of interpretation between the Ministry of Finance officials under the previous administration and Ministry of Finance officials under this current administration,” Mr Thompson said.

“We are very concerned about the message this sends out to the rating agencies and international community. It is one thing to have political differences and political back and forth, but it is an entirely different situation to make an accusation that really puts the reputation of the Government in jeopardy.

“That is not just the former FNM administration. It puts the entire reputation of the Government in jeopardy when you make those unfounded allegations, so we’re very concerned. The Deloitte report clearly indicates the difference, and what that accounts for and what should and should not be in the report. It’s wholly irresponsible to make these allegations under these circumstances.”

He was echoed by Opposition leader Michael Pintard, who accused the Prime Minister of seeking to “score political points” despite the Deloitte report itself “saying something else and having a different tone to his. Mr Pintard also suggested a substantial portion of the unfunded obligations referenced by Mr Davis had been accumulated under the last Christie administration.

Tribune Business reported last year that while the Deloitte report likely provides a more accurate picture of the Government’s financial position, it is based on an accrual accounting method not presently employed by the public sector.

The Government presently uses a cash-based system, as reflected by the pre-election report, while Deloitte was requested by the Davis administration to use the accrual method - the difference creating the wild variation between their findings.

Deloitte, in its March 8, 2022, assessment, concluded that the pre-election fiscal report was “generally compliant with the Fiscal Responsibility Act” apart from two areas. These were revenue and expenditure forecasts, where the Minnis administration was deemed “partially compliant”, and non-compliance on new spending and outstanding arrears.

While the latter was disputed by persons close to the Minnis administration, the accounting firm added: “These areas of deficiency are pivotal to compiling an accurate accounts payable position... It is our view that pre-election and other periodic reports and updates, to be meaningful, should provide a reasonable assessment of the obligations of the Government.

“The stock of arrears should be reported, as stated in the Fiscal Responsibility Act, for all ‘government entities’ which, for us, would include the SOEs. It is also our view that any significant unbudgeted obligations should be brought to the Government’s attention in a timely manner.”

Revealing that Ministry of Finance officials had admitted the failure to include the Government’s arrears in all previous mid-year Budget reports had been “an oversight”, Deloitte called for the Fiscal Responsibility Act’s terms and definitions to be clarified so that there is no room for misunderstanding or interpretation.

It added that for the Fiscal Responsibility Act “to become fully potent and enable the Ministry of Finance to sufficiently and accurately determine the country’s full risk profile, it should be amended to include all outstanding liabilities inclusive of stock of arrears”. Otherwise, Deloitte warned, The Bahamas’ risk profile will “always be understated”.

Questioning whether the Ministry of Finance reviews information received from all other departments and agencies thoroughly, given the “discrepancies” it uncovered, Deloitte said the only area both administrations agreed on was the need to transition the Government to accrual-based accounting.

“This has been the intent of multiple administrations without any significant progress,” Deloitte said. “The challenges noted in this report are a direct consequence of maintaining the current approach to accounting.”