Prime Minister Gaston Browne said:
Transfer of Jolly Beach to Social Security
Background
The Government of Antigua & Barbuda (GOAB) in partnership with our National Social Security Scheme, proposes a strategic investment in Jolly Beach Hotel, to boost Social Security revenues and to ensure its long term sustainability.
The resort presently comprises 315 rooms on 27 acres of beautiful beach front land, valued at $67M. The asset value of the resort will be set off against outstanding interest and part principal reduction of a delinquent government bond instrument of $330M issued in 2010. This bond represented decades of borrowing arrears incurred by the previous ABLP and UPP administration. However, the debt has never been serviced and stands as a non performing asset on the books of Social Security.
Investment Financial Summary
The 315 rooms will be sold under the CIP program for EC$900K each and is expected to yield $200M net of selling and administrative charges.
Our government also proposes to invest a further $75M, to build out an additional 200 rooms on ten acres of the 27 acre property.
The sale of theses units at $1.3M each, is expected to yield a further $200M, netting Social Security, an aggregate revenues of 400M in ten years, or an average annual revenue yield of $40M.
This compares to investing $142M (67M+75M) at 2 percent, yielding 2.8M annually. Even if, my assumptions are optimistic, and the projected revenue is discounted by 50 percent; the real estate investment would still be superior, yielding an additional $17.2 more annually.
Should the directors of Security Security become paralyzed by the risk of failure, and abandon this great opportunity for superior returns ? Investments like these are crucial to placing Social Secuirty pension fund on a sustainable footing ? Not even government bonds will yield a better return.
In addition, Social Security would have the opportunity to run the hotel into perpetuity, increasing profitability from the current $4M annually, up to $10M annually, net of interest payments to homeowners.
The hotel plant could be maintained by the annual homeowners fees of $1K monthly, per unit, which would yield $6M annually.
In the unlikely event the Scheme was unable to operate the hotel profitably, it could sell the property with the government guaranteeing any short fall. This mitigating measure makes this investment safe and sound.
◦ Pensions Schemes Asset Class
It is well known that Pension schemes invest in different asset types to yield short, medium and long term returns. Deposits and other short term instruments, generally yield very low returns; currently two percent per annum for savings and zero percent for demand deposits.
Whereas savings and demand deposits are important to provide short term liquidity, the yield is generally below inflation.
Investing a significant portion of their assets in low yielding assets below the rate of inflation, would result in erosion of the asset value of the fund, compromising its ability to cover its medium and long term obligations.
This is precisely what happened to the Antigua & Barbuda Social Security Scheme. Since itA establishment the scheme has failed to develop a viable investment portfolio, relying almost exclusively on investments in fix deposits.
Consequently, the deposit were exhausted resulting an actuarial study finding in 2010; that the scheme was insolvent and required parametric changes to restore it to good health.
The failure of incompetence
Instead of making the urgent parametric changes, including an increase in premiums and the retirement age to salvage the scheme; the then Finance Minister, Harold Lovell did absolutely nothing, or as some may say “kicked the can down the road,” allowing the insolvency to worsen. Had he made the required changes then, the Scheme would have been solvent when my Administration took over and would be in a far better position today.
The consequence of his action was such that, pensioners had to line up at 5am in the mornings, to get ahead of the queue to receive their pension payments which were persistently late. Many suffered the indignity of returning home without their pension payments after several hours waiting.
Parametric Changes
In 2016, the Gaston Browne administration “took the bull by the horn,” making the necessary reforms that have now restored the Social Security pension fund to solvency.
It should be noted that the ABLP administration voluntarily paid in approximately $200M in ten years and will be making a further $90M payment from a bond that it is currently negotiating. This will bring the total payments to approximately $300M in eleven years.
It should be noted that the UPP administration, as an IMF borrowing condition, paid in a paltry $65M during its 10.25 years in office.
I accept that previous Labour Administrations did not manage Social Security Funds properly. They borrowed, ran persistent arrears and failed to effectively invest the funds to yield superior returns.
The UPP virtually continued along the same trajectory. No premiums or debt repayment for government borrowings occurred during the first six years of the UPP administration, and by 2010, the fund was deemed to be insolvent.
After Harold Lovell and the UPP allowed Social Security to languish; I ask the question – Do they have any moral authority, or demonstrable skill to give investment advice on the sustainability of Social Security ?
Harold Lovell has no training in finance or investment. He has never invested in anything.
Would any serious person rely on financial advice from Mr Lovell, with his long list of failures to include : four years of economic decline out of five years serving as Finance Minister and eight electoral defeats at the polls ?
Rationale for Illiquid Assets Investments
A sustaining pension fund requires a well balanced, diversified portfolio of liquid and illiquid assets to support long term obligations and risk smoothing.
Investment in real estate and other illiquid assets is quintessential hedge against inflation, to facilitate superior returns, ensuring long term growth through asset diversification.
Transparency & accountability
The investment portfolio will be governed by robust public accountability measures including professional audits and half yearly parliamentary reporting.
The Cabinet and the Social Security Board have agreed to strengthen the Board’s Investment Committee with additional qualified and experienced personnel and to increase the Cabinet & Ministry of Finance oversight.
All investments will be subject to the necessary due diligence including, deep analysis before the investment is made and there will be caps on exposure for each asset class, based on their risk profile. In addition, liquidity buffers will be maintained to meet short term obligations.
These will be supported by additional regulations to ensure prudence and risks controls, routine reviews, valuation and independent stress testing of the investment portfolio.
Benefits
The investments in Jolly Beach will result in:– Economic Growth and Development:increased tourism, foreign exchange, andincreased taxes.– Pensions Sustainability– Hundreds of construction and hospitality.jobs– Spin off entrepreneurial opportunities-Domestic pride of ownership.– Increased airlift
Summary & Conclusion
Having made the parametric changes restoring Social Security to good health, our government is now investing in its long term sustainability.
Our bold investment strategywill transform an underutilized national asset into a revenue generating engine for Social Security and the people of Antigua & Barbuda.
This is a visionary step to grow and secure Social Security Pension Fund, to restore and expand the land mark Jolly Beach Hotel, ensuring long term economic resilience.
The risk averse pessimists who continue to mire themselves in failure and despair will fight down this proposed investment.
However, the optimistic, competent, prudent risk takers and results driven Gaston Browne administration, will continue to expand national ownership of the hospitality sector, while ensuring that Jolly Beach, WIOC and the other existing public investments, as well as, future investments continue to work for our people.
This proposed investment is doable and would provide sustainable returns.
The ABLP administration will deliver.