How to borrow money with no revenue - the NROCC model
A.C. Countz, Guest Columnist
The National Road Operating and Construction Company (NROCC) is a government-owned company - apart from two shares still registered to Kingsley Thomas and Wayne Whittingham (why?) - started in 2002.
It was creatively established to licence and promote highways, and has been able to borrow the enormous amounts needed, even with no revenue, and keep these loans from appearing in the national debt.
At March 31, 2013, its latest accounts, NROCC had:
a share capital of J$1m;
rapidly growing long-term liabilities of $55 billion;
no operating revenue; and
accumulated losses of $36 billion.
It is surprising that lenders accept this level of gearing and challenging inability to service. The lenders might wish to consider whether by their actions they are not abetting Government in its imprudence of building public debt not accounted for in the national debt.
Kimberly Thompson, quality and corporate planning manager of NROCC, kindly sent in the company's accounts. It would be helpful if Managing Director Ivan Anderson now sent us the 2014 accounts and report, plus the latest in-house accounts.
NROCC had no operating revenue and an operating loss of $617 million - in 2012 the operating loss was J$310 million - and overall losses of J$7.5 billion.
After adjustments for impairment, net financial costs and inflation, pension and bonds, the company has long-term liabilities of $55 billion, well up on the $46 billion owed a year before.
The company has large borrowings from the PetroCaribe Development Fund totalling US$80 million. This loan is repayable between December 2013 and December 2018.
A creative and hopefully effective deal has been cooked up to guarantee the loan repayment. The expected inflows of toll revenues between Linstead and Moneague are hypothecated to repay the loan. One wonders how the transfer of this portion of Highway 2000 to China Harbour Engineering Company has adversely affected this hypothecation.
The Ministry of Finance and Planning has had to advance funds in order to service the various obligations of the company.
The amount owed to the Ministry of Finance was some $10 billion at the 2013 accounting date. NROCC also has borrowings from Halcrow and the Development Bank of Jamaica. Interest payable, but unpaid, in March 2013 was more than $1 billion.
NROCC was granted a 70-year concession by the Government under the Toll Roads Act to establish and operate a tolled highway. An arrangement for 35 years, ending November 2036, at $1 per annum was made for TransJamaican Highway - owned by Bogues Travaux Publics SA and two other companies - to construct, operate and manage Phase I of Highway 2000, Jamaica's first tolled highway.
A portion of this concession relating to the Kingston to Ocho Rios leg has been terminated. NROCC has entered into a 50-year sub-concession agreement ending in 2062 with Jamaica North South Highway Company Limited, owned by China Harbour, for the completion of this leg.
This road, the Mount Rosser bypass, was recently opened. However NROCC is required to procure further lands and lease them to the concessionaire for the construction and operation of the full highway. At what cost?
The 2013 accounts do not contain details of the termination or financial arrangements with Bogues Travaux Publics nor details of the new arrangements with China Harbour.
Auditors KPMG have produced accounts on a "going concern basis" because of the Government's indication that it will continue to provide funding to keep NROCC alive.
NROCC has negative equity and massive foreign exchange exposure. In 2013, it had write-offs of $60 million and an impairment on loans of almost $700 million. NROCC was, and still is, grossly under-equity-funded.
It is a creative device by which the Government can incur large liabilities without showing these loans as part of the national debt.
In a later article we will have a look at NROCC's very unusual real return convertible bonds from which the company received $3.5 billion on issue in 2002, while the bonds now sit on the company's books as a liability for $11.26 billion.
Past studies of the national debt have shown that it was largely created by parastatals borrowing money, being unable to service these loans and so forcing the Government to assume the obligation.
NROCC is almost certainly one of these animals.
Reality would be better served if the Government of Jamaica accounted for all the amounts borrowed by all the parastatals as part of the national debt, then add to this the value of the unfunded portion of the public-sector pension scheme.
At that point everyone should be sweating with apprehension.
This column reviews the audited and in-house accounts and reports of companies and entities owned or influenced by Government.
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Minister: Dr Omar Davies
Chairman: Wayne Reid
Managing director: Ivan Anderson
Other directors: Steven Whittingham, Janet Coleman-Howlett, Millicent Hughes, Rezworth Burchenson, Veronica Warmington.