Wednesday, 24 February 2010 06:55
By press release
In an effort to bring clarity to the discussion about the State Insurance Corporation (SIC) Divestment Project, the Divestment Unit – which was established in the Office of the Prime Minister in October 2009 to identify the potential for privatization of several state-owned corporations - has issued the present Fact Sheet which aims at answering the following questions:
1. What are the overall objectives of the Government’s divestment programme?
2. What is the rationale of the SIC Divestment Project?
3. Is it true that the State Insurance Corporation Act restricts SIC’s ability to expand beyond Antigua and Barbuda?
4. What are the objectives of the Divestment Project?
5. Why should the Government divest a company from which it receives dividends?
6. Would other divestment options be considered? What about a listing of SIC on regional financial markets?
7. Why wasn’t the first option for divestment that of selling the company to the general public?
8. Would SIC’s Board of Directors, Management and Staff and other stakeholders be involved?
9. What is the impact of the Project on State Insurance Corporation? On its customers?
10. What process will be followed?
11. And what if the Project does not succeed?
12. What are the criteria for qualification?
13. Would the Government commit to communicate on the Project to the media and to the general public?
1 - What are the overall objectives of the Government’s Divestment Programme?
In the wake of receiving a new mandate during the March 2009 general elections the United Progressive Party administration articulated the following objectives for its divestment programme:
i.Relieve the Financial and Administrative Burden of Government
Divestment is a means of generating revenue for the Treasury - revenue that can assist the government in fulfilling other obligations including poverty reduction.
Reduce the Size of the Public Sector
ii.There is consensus across the political spectrum and indeed the wider society that the public sector is too large and ‘not fit for purpose’. Divestment would serve to ‘right-size’ the public sector.
iii.Improve Efficiency and Productivity
The Antiguan and Barbudan public yearns for better services and a higher level of productivity from stated-owned corporations. Divestment will play a pivotal role in the realization of such a desire. The improvement in efficiency can be aided by the injection of new capital by the investors who take up the ‘divested shares’. The associated capital injection could also fund the introduction of new products, services and business models that will redound to the benefit of consumers.
iv.Broaden the Ownership Base
The Baldwin Spencer administration has repeatedly enunciated its policy of empowering Antiguans and Barbudans. The divestment strategy is a fitting way to operationalize that policy. In particular, employees at the state-owned corporations will have the opportunity to buy shares. As joint owners, employees will have a vested interest in ensuring that these corporations perform with maximum efficiency.
v.Depoliticisation of Decisions in the Target Industries
Throughout the years, successive governments have been accused of politicizing the management of state owned enterprises. Through divestment, new ownership and management structures along with the corporate governance principles will help to restore and/or augment confidence in these corporations.
As the forces of globalization continue to impact domestic, regional and international transactions, small states in particular are being forced to adapt to new economic realities. In this regard, state owned corporations must change their ways of operations if they are to be competitive in these liberalized markets. If state owned corporations cannot be brought in line with 21st century modalities, then the economic footing of this country may be weakened
2- What is the rationale for the SIC Divestment Project?
Two types of considerations are the basis of the SIC Divestment Project: on the Corporation itself, and, most importantly, on the insurance sector in Antigua and Barbuda.
A-On State Insurance Corporation
An initial review of State Insurance Corporation was conducted in October 2009. It highlighted the following:
· Since its appointment in 2004, the current Board of Directors has effected a significant turnaround of SIC’s operations. SIC has been operationally profitable over the last several years.
· However, it was determined that the Company is currently operating at close to a peak performance as:
o The company’s market share has not grown in the last five years. Its market share has remained stable at 18-19%, according to data from the Financial Services Regulatory Commission (FSRC). It was assessed that the company is not aggressively pursuing new opportunities in terms of developing new distribution channels, addressing new customer needs and reaching beyond Antigua and Barbuda.
o There are significant areas of operational improvements for instance human resources, information systems, customer service and marketing.
o SIC’s status as a statutory body seems to restrict its ability to develop its activities notably outside Antigua and Barbuda (please see question 2 below).
B-On the Insurance Sector in Antigua and Barbuda
There are approximately 88,000 inhabitants in Antigua and Barbuda, but we have 21 active insurance companies. None of them have more than 20% market share. Most of them have limited capital and operational means.
The main reason this situation prevails is that Antigua and Barbuda has been lucky not to have been hit by a hurricane in the last eleven years; therefore our insurance companies have not been exposed to the significant claims which such a dramatic event would trigger. Should a major hurricane happen, it is possible that many companies would collapse and the correlated default of payment of claims could significantly damage our national economy.
Consolidation must happen in order for Antigua to benefit from larger, better capitalized insurance operators with greater expertise who would sustain the risks created by our hurricane-prone location.
The situation is similar in the Eastern Caribbean where over 60 insurance companies are operating. This explains recent proposals made at the regulatory level to unify the Eastern Caribbean Market including the introduction of uniform insurance legislation throughout the Organisation of Eastern Caribbean States (OECS), the formation of an Insurance Association of the Eastern Caribbean States, and the establisment of an independent Single Regulatory Unit
(SRU) in each OECS country1.
Our initial review concluded that State Insurance Corporation would benefit from the injection of capital and the expertise of a reputable insurance investor in order to improve its operations and service offerings. Divestment will also enable SIC to participate in the necessary consolidation of the insurance market expected to unfold in Antigua and Barbuda and in the wider Eastern Caribbean.
These proposals have been backed by the Eastern Caribbean Central Bank (ECCB), the Caribbean Regional Technical Assistance Centre (CARTAC), and the Caribbean Association of Insurance Regulators.
3 - Is it true that the State Insurance Corporation Act restricts SIC’s ability to expand beyond Antigua and Barbuda?
A team of legal experts is reviewing this issue. At this early stage, it can be said that the State Insurance Corporation Act per se may not restrict the ability of SIC to develop its business including abroad. However, its charter as a statutory body may limit its ability to grow in certain areas for instance to forge equity partnerships with other operators.
Please note that the rationale for the Divestment Project is not based on a mere legal issue, but on more important considerations related to SIC’s sustainable development and on the viability of our insurance sector as explained above.
4 - What are the objectives of the Divestment Project?
Faced with the situation explained above, this Government took the decision to actively pursue a strategy which will enable State Insurance Corporation to grow further as well as address the weaknesses of our insurance sector. Therefore, the objectives of the State Insurance Corporation Divestment Project are:
1.To ensure the long term sustainable development of State Insurance Corporation through a partnership between the Government and a reputable private sector insurance investor;
2.To support the necessary consolidation of the insurance sector in Antigua which should lead to significant improvements in the sustainability, efficiency and quality of insurance services in Antigua and Barbuda; this will in turn support the growth of the national economy.
3.To provide fiscal revenues to the Government; this will be allocated to priority sectors thereby stimulating economic activity.
4. To give staff, policy holders and other interested Antiguan and Barbudan investors the opportunity to purchase shares in SIC. This will be accomplished when the Government divests some of its remaining interests.
5 - Why should the Government divest a company from which it receives dividends?
It is true that SIC has provided combined dividends of $18 million to the Government in the last two years. It has also benefited from a tax exempt status. With the Divestment Project, speaking on strict financial terms, the Government seeks to maximize the return on its investment in SIC. As will be explained in question 6, the value the Government could earn from this Project is expected to be much higher than the flow of dividends the Government would earn on a business as usual scenario.
In addition, strategic and timing considerations are involved. Should the expected consolidation of the national insurance sector happen without State Insurance Corporation, SIC could lose its current strong market position and its financial value to the Government would likely be significantly reduced.
6 - Would other divestment options be considered? What about a listing of SIC on regional financial markets?
At this stage, all options are considered. We have just mobilized IFC, the private sector arm of the World Bank to advise on the Project. IFC has an impressive international track record and extensive experience in privatization transactions in the insurance sector. They have just initiated their work and started mobilizing technical and legal consultants. In two to three months maximum, IFC will submit to the Divestment Unit a report (“Strategic Options Report”) describing their recommendations notably in terms of which divestment option would best meet the objectives assigned to the project.
Please note, however, that an initial review performed by the Divestment Unit found that SIC would benefit from the technical expertise – which would lead to immediate improvements of the Corporation’s operations - as well as the economies of scale and capital a partnership with a reputable insurance investor would provide. This same initial review also mentioned the likelihood that such an option would lead to a higher valuation of the Corporation as it would be assessed both on its own merits and on these likely benefits.
7 - Why wasn’t the first option for divestment that of selling the company to the general public?
As mentioned above, the initial review highlighted the importance of technical expertise, economies of scale and significant cash injection. In the absence of these factors the sale of SIC shares to the general public is not likely to guarantee the long term sustainability of the company.
8 - Would SIC’s board of directors, management , staff and other stakeholders be involved?
Regular updates will be provided to SIC’s board of directors, management and staff in order for them to be aware of the progress made, and to give them the opportunity to raise their concerns and comments. To make the divestment possible and give the people of Antigua the option to contribute to SIC’s future success and standing, the company needs the continuous endorsement of its customers as well as the unwavering support and continued hard work of its directors, management and staff.
The Divestment Strategy Policy Paper which was approved by Cabinet in October 2009 mandated the establishment of an Advisory Committee. This Advisory Committee will be closely associated with the Project, will review its progress and advise the Government – through the Divestment Unit – throughout the process. The list of participants of this Advisory Committee is being finalized but would likely include representatives of the unions, of SIC’s staff and management, of the Ministry of Finance as well as other stakeholders.
9 - What is the impact of the Project on State Insurance Corporation? On its customers?
At this stage, the Project has no impact on the Corporation’s strategy, operations, management and staff. Under the leadership of Chairman Pedro Corbin, SIC continues to deliver its high quality services which are the basis for the company’s strong reputation in Antigua. After the successful implementation of the Project, we expect SIC to increase the efficiency of its operations, diversify its product portfolio and ultimately deliver a greater service value to its customers.
10 - What process will be followed?
Over the next two to three months, IFC will mobilize technical and legal consultants and analyze the regulatory, legal, business and financial aspects of the divestment process. Following such analysis, the Government will launch an international bidding process and invite reputable insurance investors to express interest. Investors with adequate financial strength and technical expertise will then be invited to submit their proposals. The qualified investor which will submit the strongest plan for the development of SIC and propose the highest value for the Government and people of Antigua and Barbuda will be awarded the Project.
The entire process is expected to last six to eight months.
11 - And what if the Project does not succeed?
If no investors of adequate technical expertise and financial strength submit a proposal; or if the proposals submitted are below the minimum requirement of the Government in terms of value; or if the proposals submitted do not ensure the sustainable development of SIC, then the Government would not divest State Insurance Corporation. At this stage however, given the performance of the company and the perceived opportunities in the market, we strongly believe that the Project will be successfully implemented.
12 - What are the criteria for qualification?
Potential investors would be qualified on the basis of their technical expertise and financial strength. The exact criteria, and broadly speaking the details of the bidding process, are being defined and will be communicated in the next two to three months through the media and on the internet.
13 - Would the Government commit to communicate on the Project to the media and to the public opinion?
Yes: we will provide regular updates on the progress of the Project as well as make ourselves available to address comments and concerns of stakeholders. It is most likely, however, that the next important announcement would not occur before the next two to three months – i.e. once the Government has reviewed the Strategic Options Report, has made a determination and isready to announce the final details of the bidding process/way forward.