This is only one of the findings documented in a report on BISX presented to the government by a special committee appointed last year to look into the viability of the exchange.
While officials remain tight-lipped regarding the findings and recommendations of the committee – headed by Central Bank Governor Julian Francis – the Bahama Journal can now exclusively reveal those details.
The revelation that BISX executives were spending lavishly could deal a blow to their efforts to convince the government to bail them out financially.
Last year, the Central Bank pumped $150,000 into the beleaguered exchange, but BISX officials had asked for $2 million.
By the end of the 2001/2002 fiscal year on June 30, 2002, BISXﾴs liquid resources had declined to approximately $240,000, according to the report.
The committee recommends that the Government of The Bahamas, through the Central Bank, “commit to continue its financial support of BISX for an additional maximum amount of $450,000 over the next three years.”
It also recommended that “it be proposed to the existing and prospective shareholders of BISX, that an additional minimum amount of $450,000 to match the government’s support be subscribed for by way of a rights offering.ﾔ
“It is proposed that such a rights offering proceed once the government has made its determination with regard to the recommendations concluded in this report and the proposed public sector policy statement has been issued,” the report says.
But an official in the Ministry of Finance believes that, “The recommendation for a further $450,000 of government financial support is divergent to the mandate of BISX being capable of operating without government subvention. It is hoped that with the restructuring of BISX along with the implementation of the other aforementioned recommendations that BISX would become a more efficient, fully operational exchange that requires no government subvention.”
The report points to a number of reasons why BISX is facing financial troubles. These include: the exchange’s cost structure; significant cost overruns on management consultancy fees; and the lack of anticipated public policy support.
The report said that the lease of prime office space at the British Colonial Centre in downtown Nassau which was encouraged by the government as an inducement to the developers of the centre, not only involved a major outlay of capital to prepare the premises for occupation and generation, but entailed a ten-year-lease obligating BISX to pay in excess of $1 million in rental payments over this period.
It also suggested that the consultancy contract with BTA Consulting Limited, in the amount of $1 million, may have been too generous.
The consultant was hired to implement all aspects of BISX’s domestic operations, in addition to other tasks.
The committee questioned whether the BISX board “exercised sufficient vigilance” as it relates to this contract.
The Finance official questioned why, given significantly lower revenues than anticipated, BISX didn’t reduce salaries and why it was not able to negotiate more reasonable consultancy fees and a lease agreement.
“It appears that these difficulties emanate from inefficient management of resources,” the official noted.
The official said that in order to become viable, BISX requires skilful and effective executive management and governance.
The report points out that in the absence of government support, BISX faces an imminent demise.
But the Ministry official believes that the government should not be required to support a privately owned institution unless it would be provided some ownership control and an agreement to phase out government involvement over time.
The report also indicates that the existing shareholders in BISX are unwilling to inject any new capital in the exchange. But it is believed that existing shareholders and new shareholders may be willing to support the exchange if certain changes were implemented.
The Ministry official believes that the focus of BISX should be on making fundamental changes in its management of expenses.
“The files indicate that the problem may be income generation,” according to the official. “In this regard, BISX should concentrate on convincing the financial sector that the new and alternate products it is now proposing to offer are commercially feasible and educating the public concerning the benefits of the exchange, so as to attract the necessary capital. The focus should not be so much on government support but rather on new business policies that reflect market realities.”
The committee recommends amendments to Exchange Controls to allow resident ownership of foreign listed securities; non-resident ownership of Bahamian dollar securities; and regional cross border listings.
One of the reasons for BISX’s poor performance since its inception is the lack of these changes to the existent Exchange Control regime, according to the committee.
But the Finance official pointed out that given the economic importance to the economy of the one-to-one relationship between the US dollar and the Bahamian dollar in terms of the ramification for foreign reserve levels, it is not prudent to relax exchange controls for a private company.
The report indicated that the listing of public debt securities on BISX was expected earlier in its establishment, however, the government had never made a policy decision in this regard.
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The committee also said that part of the problems experienced by BISX was due to the fact that it had anticipated that upon the privatisation of the Bahamas Telecommunications Company, stock would be listed on the exchange to support the liquidity of the market.
However, the government never officially communicated this intention to BISX, according to the committee.
The policy was to transfer 49 percent of ownership in BTC to a strategic partner who would be responsible for management of BTC and the exchange would not be the appropriate medium for this direct transfer to a single shareholder, the Finance official noted.
The committee also recommended a governmental review of the advisability of the National Insurance Board’s direct participation in BISX.
In addition, the BISX committee made several other key recommendations, which follow:
Reduce the size of the board of directors to a maximum of seven members, which would include two members from the public sector, two members representing broker/dealer institutions and the remaining two, excluding the chairman, representing BISX shareholders.
The Ministry of Finance official believes the chairman should be a professional of prominence in the Securities/Investment Management community, who would be able to bring unquestionable recognition to BISX.
The current Acting Chief Executive Officer to be allowed to manage BISX assisted by an individual, of the Central Bank’s choosing, with broad security exchange and capital markets experience.
Given the difficulties experienced by BISX, it may be more prudent to have management in place that is better skilled in the area of resource allocation, the official noted.
Upgrade BISX’s Horizon trading system from its current outdated version to the latest vendor-supported version.
Given BISX’s stage of development, consideration must be given as to whether an upgrade is suited to the needs of the exchange i.e. whether a cost-benefit analysis was conducted.
The committee also recommends that BISX move from an order-driven system to a quote driven system, in which market makers would be given the opportunity to earn revenue on a listed issue’s price spread.
While the report states that a quote driven system will help to address the lack of liquidity in the market, there is concern as to whether such a system will allow for the development of an efficient market – stock prices may not reflect the fundamentals. Additionally, there is concern as to whether there are enough brokers with the necessary level of capital to act as market makers.
The official said, given that BISX intends to conduct regional cross border listings, this would require that The Bahamas be part of a single clearing and settlement agency, for efficiency, if not, the cost of clearing and settling cross-border securities trade would be expensive, according to the official.
Candia Dames, The Bahama Journal
