Today we conclude a two-part series on the auditor-general’s report on the Intec Fund. The first part, carried on Page 5 of yesterday’s Observer, looked at NetServ Jamaica Limited.

Jamaica Call Centre

ON the 3rd August, 2000 a loan of J$64 million to be repaid as US$1.5 million was made to Jamaica Call Centre. The loan was at zero per cent interest and was to have been repaid over a five-year period after a moratorium of three years. My audit disclosed no evidence that appropriate due diligence work was done prior to disbursement of the funds. For example, there was no indication that any credit or other business reports had been received about the company and its principals. There was also no evidence that a detailed analysis of the company’s business plan was done. In the minutes of the Loan Approval Committee meeting held on 31st July, 2000, it was suggested that NIBJ should analyse the project documents and submit findings by 2nd August, 2000. In a memorandum dated 2nd August, 2000 NIBJ’s then director of projects advised, among other things, that a complete appraisal had not been done. In another memorandum dated 6th February, 2002 NIBJ’s current director of projects advised that her “review of the JCC file does not suggest that an appraisal of funding proposal was done for the particular project. It would appear that since its funding was the subject of a Memorandum of Understanding (MOU) between the company and the Ministry of Industry, Commerce and Technology that none was done”.

She further stated that she was not able to advise if a proposal ever existed. It should also be noted that although an executed promissory note was seen, no signed loan agreement or debenture document was produced for the loan. I was advised that this transaction was undertaken in keeping with a commitment given in an agreement dated July 7, 2000 involving the Government of Jamaica, Port Authority of Jamaica, Kingston Free Zone and English Sports Information Processors (ESIP), that the government would make available to ESIP an interest-free loan of US$1.5 million to be paid within 21 days. The loan was to aid in the retrofitting and establishment of telecommunications infrastructure in the Kingston and Portmore Free Zones. The agreement was signed on behalf of the government by the then minister of state in the MICT (Colin Campbell).

Documentary evidence seen indicated that officers of the NIBJ had expressed certain concerns about the project before disbursement was made. In documents dated 20th July, 2000 and 2nd August, 2000 respectively, the then director of projects expressed reservations about the viability of the project and realisation of the number of jobs projected. She was also concerned about the decision to proceed without the required due diligence having been done. A memorandum dated 3rd August, 2000 from the president of the NIBJ (Rex James) to the permanent secretary of MICT indicated that these concerns were brought to the latter’s attention. In a letter dated 3rd August, 2000 the president of NIBJ mentioned, among other things, that “the criteria for handling of these funds in general have not been agreed but there is no objection on our part to signing these at a later date on the strict understanding that this case will not be used as a precedent for future loans of this type”. He also expressed that “It is not clear to us why it is important to disburse the funds today when we can in fact give a commitment letter today and comfortably complete the documentation and have a proper signing on Wednesday, 9th August 2000 …” The president also expressed concern about the method of disbursement proposed.

No information was seen as to the equity funding that the company was required to inject into the project. There was no evidence in the minutes of the Loan Approval Committee meetings seen that this loan was approved by the committee. Efforts to ascertain by whom it was approved have so far proven futile. It was noted that in a letter dated 2nd August, 2000 the then permanent secretary in Ministry of Industry, Commerce and Technology told the NIBJ to proceed with the disbursement of the funds. She advised that “The company has been asked to forward directly to you the additional documents which you have requested. As we understand it they will be with you shortly and hence disbursement need not await their receipt.”

In December 2000 an agreement was entered into which changed the arrangement and instead Jamaica Call Centre was to transfer to the Kingston Free Zone the assets acquired from the proceeds of the loan in settlement of the loan. The company in turn was to lease the equipment from the Kingston Free Zone. Valuation reports presented suggested that equipment to the value of approximately US$2 million was seen at the Kingston and Montego Bay locations of the company. The reports cautioned, however, that verification of ownership of the assets had not been requested nor done.

Up to the time of my audit — over a year after the agreement was made — there was no indication that any of the assets had yet been legally transferred to the Kingston Free Zone. A lease document signed by the company was seen but it was not signed by KFZ.

No lease payment had yet been made.

The company had proposed to provide 5,000 jobs over three years. Of this, 1,500 was projected for the first year. As at December 2001, 380 jobs were said to have been created.

The above observations suggest that funds were disbursed to the company prematurely.

Teleservices Jamaica Ltd

Teleservices Jamaica Ltd was incorporated on December 29, 2000. In January 2001 it was granted a loan of J$226 million (US$5 million) from the Intec Fund for:

* Retrofitting designated factory space.

* Financing telecommunications infrastructure and equipment purchase.

* Other appropriate and related build-out expenses.

This loan was for 3 1/2 years with interest at five per cent per annum. A moratorium of 1 1/2 years was granted on principal and nine months on the interest. It was secured by a debenture charge over the fixed and floating assets of the company for a sum of J$135 million (US$3 million) with power to up-stamp, and promissory notes. The debenture was subsequently upstamped to US$5.85 million.

Information seen in relation to this loan, which was disbursed between January and April 2001, disclosed the following areas of concern:

* The company undertook to inject equity of US$7 million by the seventh month of operation. There was no indication that upfront equity was required. An independent audit report indicated that at December 31, 2001 the company’s equity injection was only approximately US$5 million. There was, however, the disclaimer that “we offer no opinion on the amount contributed as equity since the majority of the contribution is via services and assets provided by related parties and we are unable to substantiate based on your terms of reference whether or not such goods and services constitute value”. The above indicates that this undertaking was not fully honoured.

* At an LAC meeting held on December 7, 2000 the acting chairman is reported to have advised that the loan had been approved by round-robin among the members. The minutes, however, also indicated that a meeting was held at Minister Paulwell’s office on November 20, 2000 at which the loan request of Teleservices had been discussed and approved. A memorandum of the same date (20/11/2000) from NIBJ’s then director of projects was seen referring an “Analysis of Teleservices Ltd” for the comment of Committee members. However, no minutes were seen for this meeting and there was therefore no record of the deliberations which took place.

* A credit report on one of the principals was received on March 7, 2001. It suggested nothing adverse. It should be noted, however, that it was received after the loan was approved and the first disbursement made on January 11, 2001.

* A pre-condition to disbursement of the Intec Fund Loan was for permission to be granted to NIBJ to contact the prospective clients of the company to confirm their intent of doing business with the company. This approval was given by the company on January 10, 2001. There was no indication, however, that this element of due diligence work had been done.

Project achievement

The loan agreement stipulated that the company should achieve and maintain at least 85 per cent of a targeted 14,000 new jobs over 3 1/2 years. I was advised that the company now employs 825 persons, down from a initial high two months ago of about 1,000.

The above observations suggest that for this project all the appropriate due diligence work had not been done before the loan was approved and disbursed.

It was noted that another loan of US$3 million involving NIBJ and the Development Bank of Jamaica funds was approved for the company in connection with this project. Up to the time of my audit, US$1.44 million had been disbursed.

Baytel Limited

A loan of J$35 million was approved for the purchase and refurbishing of a building situated at 17 Dome Street, Montego Bay, to house Baytel’s expanded data processing/conversion operations. This arrangement was executed by NIBJ lending the J$35 million to Factories Corporation of Jamaica Ltd (FCJ) between January and May 2001. A wholly owned subsidiary called ’17 Dome Street Ltd’ was formed by FCJ. Through the subsidiary a building was purchased and refurbished, and leased for 10 years, with the option to purchase, to Baytel. The building was purchased for J$31 million. The balance of J$4 million was reimbursed to Baytel for expenses incurred for renovation of the building. Repayment of the loan was arranged so that FCJ would be paid interest on the loan in the form of monthly lease payments. These payments would be remitted to NIBJ. The ‘repayment’ of principal would be placed in a sinking fund account opened by Baytel in its name with a requirement not to utilise such funds or encumber the account without NIBJ’s prior approval. Interest accruing on this account would belong to Baytel.

Jobs created

The agreement with Baytel provided for the creation of 150 new jobs in 18 months. The jobs created were reported to be 120 as at December 2001.

Term sheet

The following concern was raised in relation to conditions in the related Term Sheet signed by the company on October 27, 2000:

* Investigation of Client Record — Baytel at first objected to having their clients records investigated on the grounds of confidentiality and previous bad experiences with breach of trust by potential lenders. NIBJ conceded to having one of its representatives inspect Baytel’s records and report by codes instead of actual client names. I made a request for the related report from NIBJ’s senior project analyst in a memorandum dated January 23, 2002. He verbally advised that such a report does not exist and I was therefore unable to verify whether this work was in fact done.

Peculiar lease conditions

Among the conditions of the lease agreement between Baytel and 17 Dome Street Ltd are the following:

* In the event that the tenant elects to cease business or to remove from the leased premises…Following such notice by the tenant FCJ will have 30 days further to decide whether to retain the property for its own purpose and if so, then NIBJ will release its interest in the sinking account and FCJ will account to the tenant for any increase in the market value of the property…

* If the FCJ decides not to retain the property for its own purpose then FCJ and the tenant will use their best endeavours to arrange for an interim lease and ultimate sale of the building to a third party at the best price obtainable at the time and any gain or loss on the transaction shall be for the tenant’s account. Upon the sale of the building as aforesaid, NIBJ will release its interest in the sinking fund account.

I was unable to determine the rationale for these clauses which did not seem to be in the government’s interest.

Pathway Technologies Limited

Pathway Technologies Limited was formed in February 1999. A loan agreement dated November 12, 2001 was entered into between the company and NIBJ for an amount of J$153 million. The loan was for:

* Retrofitting of designated office space.

* Financing telecommunications infrastructure and the purchase of equipment.

It was for six years at interest of five per cent per annum and moratorium of one year on interest and principal repayments. It was secured by a promissory note and a debenture charge over the fixed and floating assets of the company up to the value of the loan. The loan was disbursed over the period August 2001 to January 2002.

The following concern was noted:

* Loan condition 10(x) required evidence that the authorised, issued and paid-up capital by the company was US$3,277,000. However, an audited balance sheet as at November 30, 2001 showed equity of only J$56,936,975, “representing ordinary shares to be issued on or before January 31, 2002…” It did, however, also show a loan of J$44,927,000 which was hypothecated to the NIBJ and a Directors’ loan of J$75,653,524 which was said to be subordinated to the Intec Fund loan.

Caytech Jamaica Ltd

Caytech Jamaica Ltd, which was incorporated in November 2000, was granted a loan of J$59.2 million (US$1.3 million) on 13th March, 2001 to help establish a call centre at Crystal Springs. The loan was to finance building construction to the extent of J$47.36 million and the purchase of equipment for J$11.84 million. It was projected that the peak employment target was 1,396 persons. The loan was for five years on the construction component and three years on the equipment element at interest at five per cent per annum with a moratorium of 12 months on principal repayments and six months on interest. The loan was to be secured by a promissory note and registered first debenture over the fixed and floating assets of the company. Information seen was that J$25 million was placed in a joint account held between the company and NIBJ and or which the NIBJ’s director of finance was made a signatory. Amounts totalling J$12,301,000 were disbursed from this account.

The following concerns were noted:

* There was no indication that the security debenture had been dated, stamped and registered.

* There was no evidence that the land on which the related building was to be constructed had been transferred from the ownership of a principal to the company or indication of an irrevocable commitment to do so.

The above findings indicate that certain important loan conditions had not been met.

Project achievement

The project was said to be still in the construction phase and so no employees had yet been engaged.

Withdrawal from the programme

The minutes of a meeting held between the permanent secretary of MICT, officers of NIBJ and one of the principals of Caytech disclosed that the principal advised that a resolution had been passed by Caytech’s Board of Directors to end its relationship with the Intech Fund. Subsequently, a cheque dated 15th February, 2002 for J$12,751,845, which was said to represent the balance on the joint account, was received by NIBJ. There was no indication yet as to when the amount already disbursed from the account would be refunded.