By Professor Wadan Narsey
In this last month, worrying news have emerged about two of our most important institutions in Fiji- the Fiji National Provident Fund (FNPF) and the Reserve Bank of Fiji (RBF).
The public have largely focused on the FNPF, after it announced a $327 million “write down” in its investment value (with some $300 million of that due to the Natadola loan).
But FNPF also has some other large exposures which are not looking good: Momi, FSC and other private sector borrowers.
And the public has not picked up on the strange news that RBF has lent $22 million to the Fiji Sugar Corporation (FSC).
These are all extremely worrying developments for FNPF, RBF and for Fiji.
Need for Public Inquiry
The FNPF Board and Attorney General wanted the public to “know the truth” about the current real value of FNPF assets. Of course, that is good.
But more importantly, we need to “know the truth” about FNPF’s huge losses at Natadola, Momi and other loans. $327 million is more than the entire annual contributions into the FNPF by its members.
How did these massive losses take place? Who should be held responsible? Might it get worse for FNPF? And how should FNPF management be strengthened to prevent further unwise decisions?
When the National Bank of Fiji (NBF) collapsed and lost the tax-payers more than $200 million, we never had an inquiry into who was responsible for that massive disaster, till then, the biggest in Fiji.
All we know is what the Rabuka-appointed manager of the NBF (Makrava) is then reported to have said “if I go down, all the high and mighty in Fiji will go down with me” while the Minister of Finance then, (Vunibobo- also associated with the Natadola resort) said it was “water under the bridge”.
Yes indeed, there were quite a few high and mighty names in the full list of NBF defaulters, once published by The Fiji Times.
But unless we have a full public inquiry into the FNPF lossess, we will never really know who was responsible for this even bigger disaster, which increasingly looks like “flood-waters under the bridge” ready to carry away the FNPF ship.
The losses may be larger
Of great concern is that the real long term losses for FNPF (at Natadola, Momi and other precarious investments) may be much larger than the current $327 million write-down.
While the FNPF exposure at Momi has been around $80 million, the best tender at the previous auction was only around $40 million. Future auctions may bring even less, as many moveable assets at Momi were sold off at the last auction, while the uncompleted buildings, golf course and other infrastructure are all rapidly deteriorating and losing value. The eventual Momi losses for FNPF may be much larger than the $18 million write down announced.
Furthermore, if the FNPF tries to itself build and operate the Momi resorts, we are likely to repeat the mistakes of Natadola, where FNPF spent more than $380 million and now is supposedly in possession of assets worth only $80 million.
Put simply: the FNPF management and the FNPF Board, despite all their good intentions, hard work and personal stress, just do not have the commercial expertise to build and operate hundred million dollar tourism projects.
Neither does FNPF have the expertise for property development and sales, either at Natadola or Momi, that may generate some capital gains down the line.
Note that FNPF has not even been able to develop a valuable asset such as the Grand Pacific Hotel, which for several years now, has provided extremely costly accommodation for soldiers.
Note: FNPF has lent more than $44 million to FSC which continues to be a loss-making institution, with every indication that it will continue to make a loss for the next few years.
Note: FNPF also has other very large exposures to private borrowers whose investments (including massive shopping centres) are facing severe financial pressure because of the continuing economic stagnation.
We, whose savings are in FNPF, have to be worried that the write-downs required in the future may be far larger than the $327 million revealed now.
Who is accountable?
Before the 2006 coup the public could have held an elected Government to account. And indeed if ever there is an inquiry into the current FNPF losses, then the Qarase Government’s relaxation of FNPF’s investment policy in 2005, and the failure of their Board appointees to make sound lending decisions on large projects like Natadola and Momi, may be found to have been partly responsible.
But since the 2006 coup, the Military Government has changed the FNPF Board two times. Will the FNPF Board members who accepted their appointments after the 2006 coup accept personal financial responsibility down the line for any mistakes, regardless of their good intentions?
Or will personal responsibility be taken by those who implemented the 2006 and 2009 coups and appointed all the FNPF boards since then?
We, who have our savings in the FNPF, never asked or authorised this Military Government or its appointees, to take over the management of our pension fund.
If this Military Government believes in the principles of accountability stated in its People’s Charter, it should immediately allow those who have savings in the FNPF to elect their own representatives to control the FNPF Board, in partnership with employers.
The Fiji Government (elected or otherwise), which is the biggest borrower from FNPF, should have no role on the FNPF Board which makes decisions to lend money to Government.
Happy to control the massive FNPF balances, Government after selfish Government has failed to reform the FNPF management structure- and we are now paying the price.
This Military Government and all its Ministers would do well to relieve themselves of the terrible burden of managing FNPF, before they turn it into another disaster like the NBF.
Of course, the FNPF Board and management are technically correct in saying that the Fund’s assets in book value are enough to cover the benefits owed to those who have their savings in the FNPF.
But the real difficulty is that the FNPF may not have the liquidity to be able to fully and freely pay these benefits when they become due. Look at these symptoms:
Symptom 1: The rate of return on FNPF assets has been gradually falling from more than 10 percent some fifteen years ago, to less than 6% currently. This year, for the first time in decades, the real rate of return (net of inflation of around 10% currently), will be negative.
Symptom 2: In 2008, when the amounts withdrawn from the FNPF became larger than the contributions coming in, the FNPF was forced to tighten up the grounds for withdrawals from the fund, at great cost to those who wanted to borrow for education or housing.
Symptom 3: Provisional migrants and large legal withdrawers, have not been able to take their FNPF savings all at once.
Symptom 4: The FNPF is already preparing for reduction of the future pension rate, probably down to 10% for single pensions.
Symptom 5: The biggest borrower from FNPF is the Fiji Government whose own liquidity is under threat.
These are all symptoms of increasingly severe liquidity problems faced by FNPF.
Applying band aid solutions will not work.
Because at the heart of FNPF’s liquidity problems, is the continuing economic stagnation, and lack of growth in employment and new FNPF contributions. And a management board system which the real owners of FNPF do not control.
Government Guarantee No Use
While Fiji Government guarantees to FNPF may have some long-term benefits for those with savings in the FNPF, it will not help FNPF or Fiji in the long run, simply because the largest borrower from FNPF is the Fiji Government itself.
A borrower cannot guarantee its own loan, especially when the borrower is itself in financial difficulty.
With the Fiji economy in the doldrums, the Fiji Government’s revenues have not been buoyant, while their recurrent expenditure has not been controlled. The 2010 Budget saw increased government deficits and increased public debt.
For the Fiji Government to repay its FNPF loans, it may have to borrow more, locally or abroad.
Problem 1: The commercial banks simply will not lend more to Government.
Problem 2: And with Fiji’s export earnings also not showing buoyancy, the international institutions like ADB and IMF will worry that Fiji will not be able service loans in foreign currency.
Problem 3: It would be extremely dangerous for FNPF to lend even more to Government, because it would effectively amount to FNPF repaying the loans due to itself.
All that will happen is higher inflation, leading to further loss in the value of the money held by all savers in Fiji, including those whose money is tied up in FNPF, and possibly further devaluations of the Fiji dollar.
If the Military Government finances its spending through higher public debt, it will simply be passing on the costs of our current mismanagement, to the future generations.
The RBF, FSC and FNPF
It should be of grave concern to all who hold Fiji money in their hands, that the RBF has lent money to the FSC.
By legislation, the RBF is tasked with regulating all the financial institutions and transactions in Fiji, including all lending to Government and the private sector.
For RBF to lend money to the FSC is therefore an inherent conflict of interest: how can the RBF be an objective regulator of private sector lending in Fiji, if it itself starts lending to the private sector?
This situation is even worse as the FSC is making losses and is likely to do so this year and the next, and will therefore have great difficulty repaying not just the local loans but also the substantial foreign loans it has taken out.
Yes, $22 million is not a large sum of money for the RBF. And yes, FSC is a critical industry on which hundreds of thousands of people, and indeed the Fiji economy, depend.
But if FSC is to borrow, then RBF should advise it to borrow from the private sector banks, the Fiji Development Bank, or as a last resort, from Fiji’s tax-payers through a Government of Fiji loan.
The RBF itself should not be lending to the FSC. It is also not healthy that the current CEO of FSC is also on the Board of the RBF (even if he was not party to the decision to lend to FSC).
As before, the Fiji Government under-writing the RBF loan to FSC is of little use.
The RBF is tasked by its legislation to monitor and regulate the financial dealings of both the Fiji Government and the FNPF.
The RBF must be totally at arms length from both the Fiji Government and FNPF. This has not been the case, from even before 2006.
Following the 2000 coup, and again after the 2006 coup, in order to strengthen Fiji’s foreign reserves, the RBF forced FNPF to bring back most of its foreign investments.
FNPF lost its associated overseas interest income, which went to inflate the RBF profits, the bulk of which was then passed on to the Fiji Government ie this lost interest income is a continuing hidden tax on our FNPF savings.
Also remember, should FNPF ever be allowed to re-invest overseas, we will have lost a large chunk of our foreign asset value, because the Fiji dollar was devalued after FNPF was forced to bring back its overseas investments.
As a minimum, given FNPF’s current liquidity problems, it is only fair that the RBF should be annually crediting FNPF with the interest income lost annually, because FNPF has been forced by RBF to bring back its foreign investments to strengthen Fiji’s foreign reserves. Why should FNPF bear the burden for the country? FNPF is NOT the country.
Economic Stagnation and Loss of Investor Confidence
No amount of “telling the truth” about the current value of FNPF assets will help FNPF in the long run (or FSC or the Fiji Government).
Only sustained economic growth can create the increased employment, and employer and employee contributions into the FNPF that will take FNPF out of their long-term liquidity crisis.
Only sustained economic growth can generate healthy government revenues which will enable the Fiji Government to assist sick companies like FSC and sick industries like sugar.
The RBF’s recent release shows that total investment as a proportion of GDP is likely to be around 14% this year, as it has been for the last three years. This is continuing bad news for Fiji as we need investment to be well above 25% of GDP.
The sad reality is that the private sector (local and foreign) are reluctant to invest in Fiji, not just because of the political instability, but given their grave doubts about the ability of the judiciary to protect their investments.
All investors would have been frightened by the Military Government’s recent decree seizing private assets (whatever may have been their specific justification in the Natadola case).
Investors cannot have confidence in a country where a military decree can stop private investors from even bringing their grievances (legitimate or otherwise) to court.
It is extremely disappointing that this message is not going out from the current Governor of the Reserve Bank of Fiji, which is the only statutory organisation tasked with giving independent objective advice to any Government of Fiji, elected or otherwise.
It is also extremely disappointing that the Reserve Bank of Fiji is not advising the Military Government that the best way to save FSC and the sugar industry is by meeting the very mild conditions required by the EU for it to release its $300 million dollar assistance package.
Solution faces the Military Government
This Military Government can take decisive action to restore investor confidence in Fiji and enable the economy to grow immediately, if
(a) the EU can release the $300 million originally allocated to assist the sugar industry adjust to its ongoing crisis.
(b) Australia and NZ can relax their travel bans and allow experienced and honest people to assist the Fiji Government and the judiciary.
(c) Fiji can be readmitted to the Commonwealth, and the Forum Secretariat (and all regional initiatives such as the PACER Plus discussions).
(e) All our donors (Australia, NZ, EU, China, Japan, India and others) co-operate and assist the recovery of the Fiji economy.
I suspect that all the Military Government has to do is to begin an all inclusive political dialogue and, in return for aid commitments from our international partners, agree to bringing elections forward to 2012.
Preparation for that could begin immediately, including any minor constitutional changes, such as the electoral reform whose outlines are now accepted to all experts.
Note that by 2012, Bainimarama and the Fiji Military Forces will have already demonstrated their “iron fist” ability to run the Fiji Government for six years, with virtually no resistance from a docile Fiji public, despite the worsening economy and poverty.
Which future elected government (perhaps even a Bainimarama government) will step out of line with any genuine national development guidelines such as the Charter, established by the current Military Government?
The ball is clearly in the court of Frank Bainimarama, the Military Council, and the coup supporters.
Let us pray that they do not wait until the FNPF, the Fiji economy and the Fiji dollar have completely collapsed.