Posts Tagged THA
On Wednesday 11 June 2014, the Senate unanimously approved the Public Procurement & Disposal of Public Property Bill 2014 and that Bill is soon to go to the House of Representatives for their deliberation. I was present to witness the collective efforts made by Senators on Tuesday 10 June and it was a really thought-provoking experience for me. I started to wonder just how much we could achieve if the banal point-scoring and ritual picong was to become a thing of the past. The basis of decision-making on public issues would have to shift to a fact-based one, which would be a huge, healthy step away from the sad formula of ‘might is right’.
What a day that would be for us all, just imagine.
But we have to exist in this place, as it is, with all its imperfections. Which leads me to discuss the constant questions put by people who want to know if ‘this law we are fighting for‘ could prevent this-or-that corrupt practice. So the two projects which I would use to give worked examples are –
- the THA/BOLT office project on which the High Court recently ruled;
- Calcutta Settlement/Eden Gardens land purchase by HDC.
This project was analysed in a previous article, which set out certain questionable aspects of those arrangements. In my opinion, the greatest areas of concern were –
- Size – THA stated that the Divisions for which this building was being leased now occupy 28,500sf, yet the completed project is to comprise 83,000sf – almost three times more space.
- Quality – The new building is projected to cost $143M, which equates to $1,723 per sq ft and that is at the upper end of office costs, even when we consider that the contract was reported to be for a fully fitted building.
- Rent – The current rent paid by the THA for the Divisions to be located in the new facility is an average of $8.17 per sq ft. The rent for the new facility was agreed at $15.61 per sq ft, which is almost twice the rate now paid. It was telling that the THA relied on the statements of a Civil Engineer, Peter Forde, who sought to justify that rent by reference to the fact that $10 per sq ft was being paid for some offices in Scarborough. Mr. Forde is an esteemed engineer with whom I have worked well in the past, but that is like relying on my advice, as a Chartered Valuation Surveyor, as to the correct steel to use in some complex structure.
- Total Costs – The total monthly rent now paid by THA for those Divisions is $231,788, while the new project is set to cost a monthly rent of $1.295M – more than five times more.
All of these arrangements being made by a public authority which makes a compelling case that the Central Government has starved them of financial resources over a considerable period. The THA, starved of money, is justifying a deal which will hugely increase their monthly rent bill, for an office building three times larger than required at a higher quality than any other in Tobago. That is the sense of this deal.
The recent litigation over this project was altered after it started, to two questions of ‘construction’, being ruled by the Court to be issues of public interest –
- Finance Ministry approval – Is THA required to obtain approval from the Ministry of Finance before entering a BOLT arrangement?
- Tendering procedure – Is THA required to follow the procedures of the Central Tenders Board Act (CTB Act) in entering a BOLT arrangement?
The High Court ruling on 30 April 2014 was claimed by THA to be an endorsement of their course of action, but this is what it actually meant.
|ISSUES||High Court Ruling||Proposed Public Procurement Law|
|Preliminary considerations||No ruling by the Court.||A Needs Assessment would be required to take account of a life-cycle costing, which includes both initial and cost-in-use aspects.|
|Ministry of Finance approval||At para 33, the Court ruled that THA is not required to obtain approval of the Minister of Finance. In that respect, one can understand THA’s claim to have been vindicated.At para 29, the Court makes the inescapable point that since this is a 20-year recurrent commitment which would have to be paid for by financing from the Central Government, it would be prudent for the THA to consult with the Finance Ministry before entering such arrangements.||This is a transaction in ‘Public Money’ via a ‘Public Private Partnership’ which is included in the remit of the proposed law.|
|Tendering Procedure||At paras 48 through 51, the Court was emphatic that the THA was required to follow the provisions of the CTB Act.||The proposed law abolishes and replaces the CTB Act and would include this kind of project under the oversight of the Office of Procurement Regulation.|
In this case, the THA’s claims of victory appear unrealistic, but the good news is that the proposed arrangements will act to prevent a recurrence of this wasteful type of project.
This 2012 purchase of 50.5 acres (comprising 264 residential lots with ancillary uses) by the Housing Development Corporation (HDC) was also the subject of a series of articles in this space, which highlighted these questionable aspects –
- Private sales as individual lots – Eden Gardens lots were being offered for sale in 2011 at $400,000.
- HDC Valuations or Offers? – HDC obtained a private valuation of the property at $52M in November 2011. In January 2012 Eden Gardens is offered to the HDC at $200M. So why did HDC order a valuation in November 2011? Was there an attempt to offer the site to HDC before November 2011 and at what price?
- The State valuer exceeds the opinion of a private valuer? – Of course that is virtually unknown, but the fact is that the Commissioner of Valuations issued an opinion of value in April 2012 placing the property at $180M.
- HDC Purchase – The HDC buys the property in November 2012 at $175M, which equates to $663,000 per lot. Given that those lots were available in 2011 at $400,000, that is a 66% increase in the value of those lands within one year, which can make no sense. It makes even less sense when one considers that HDC was buying the all that land at once, so a discount would be the rational and expected commercial practice. So what was the basis on which this price was settled?
- Plan ‘B’ – The State had the power to compulsorily acquire the land if it was required for a public purpose, which housing is. The point being that the State could have lawfully acquired Eden Gardens for no more than $35M, if they had chosen to use their powers of compulsory acquisition. So, why did they choose to go the Private Treaty route?
- The ‘Ultimate Beneficial Owner’ – The basic business practice required of bankers and other finance professionals is to ‘Know Your Customer’ as a fundamental part of ‘Anti Money Laundering’ (AML) laws now in force in this country. Those laws and professional practices have now extended to cover the activities of real estate agents, so anyone selling land would be required to conform. The vendor of Eden Gardens was Point Lisas Park Limited, but from my research at the Registrar General’s Dept, it seems that PLP Ltd. has never issued shares. Which means that we can only speculate as to who was the ‘Ultimate Beneficial Owner’ of Eden Gardens and indeed, who received $175M for that property.
The proposed new laws do not contain any provisions to govern the State in ‘acquiring public property’, which was the case in Eden Gardens, since the State was buying land.
This is one of the outstanding serious concerns as to the proposed new law, which would not act to prevent this type of corrupt practice. Our Parliamentarians need to consider these aspects in finalising this law.
The last four articles in this series have focused on what I call ‘two sides of the same coin’ – the coin being the large-scale and improper use of Public Money.
I examined the THA/BOLT office project called MILSHIRV being undertaken with the Rahael group and the Calcutta Settlement land scheme in which the HDC acquired developed lands at several times the proper price the State could have paid.
Throughout this type of critique one has to strive for effective balance and fundamental integrity. The extent of the waste and/or theft is never easy to pinpoint when one is working from outside and relying solely on published documents, but my best efforts to establish those facts is what is presented. Of course it is impossible to say for sure that any amount of money was stolen in a particular project, hence the phrase ‘wasted or stolen’.
Objectively, it does not matter whether the money is wasted or stolen, if it is ultimately unavailable for the benefit of the Public. Once spent, that Public Money is gone forever, which is why Value for Money is of such importance in any proper Public Procurement system.
Subjectively, however, the errors of inexperience or poor process must be differentiated from an active conspiracy to defraud. Although the objective measure of loss might be identical in terms of the dollar-amount, there are different long-term consequences. Innocent errors and miscalculations can be rectified over time by ongoing review processes. Deliberate conspiracies to defraud require concerted and well-grounded attacks in order to be eliminated. What is worse about the deliberate conspiracies is that they affect the very atmosphere in which public business is conducted.
We end up with a situation where it pays to pay a bribe and the decision not to pay is to suffer delay.
That is why we are where we are today. Simple so.
One of the important lessons emerging from the Wall St disaster is that the variety of financial regulators with their varying rules and experiences allowed financial players to engage in ‘Regulatory Arbitrage’. That was the scenario in which financial players shopped for pliable or suitable regulators within which to channel their products, resulting in the unprecedented financial disaster we are all living through.
Here in T&T we have seen a similar pattern in our financial markets, but the point being made here is that it has also emerged in the Public Procurement arena, with TIDCO paving roads; the rising profile of State-owned entities which were deliberately excluded from the formal procurement controls; those same companies breaking their own rules and so on. That is the emergence of a toxic kind of ‘Procurement Arbitrage’, which is the reason why we must have over-arching regulations to control all transactions in Public Money.
So, there are two types of losses being charted here –
- Firstly, inexperienced officials or poor processes can approve wasteful uses of Public Money through sheer ignorance.
- Secondly, there is deliberate conspiracy to defraud the Treasury of our precious Public Money.
Only a Court can establish whether the lost Public Money was wasted or stolen, so I have ventured no opinion as to which is which. Readers can reach their own conclusions.
These charts illustrate the extent of the waste or theft of Public Money in the THA/BOLT and Calcutta Settlement projects.
‘A good example is worth a thousand words‘
THA/BOLT – MILSHIRV Project
Click on the charts above to see full size version
Calcutta Settlement Land sale – Eden Gardens
Click on the charts above to see full size version
With the THA elections having become a kind of national contest, the issues of governance and integrity loom large. The two relevant controversial issues, both of which emerged late last year, were the THA/BOLT office project and the HDC’s proposed purchase of land at Calcutta No. 2 Settlement.
Both those projects have given me serious cause for concern in terms of proper public procurement practice, so much so that I see them as being two sides of the same coin. Both these cases are models of inadvisable dealings in Public Money of a type which no prudent or reputable company would undertake. I am choosing my words carefully since recent reports are that litigation has already started on both projects.
I do not at all agree with the widespread myth that corruption is a minor thing which adds maybe 10% or 15% to the cost of projects. That misinformation is nothing but public mischief which has blinded us to the scale of the theft of Public Money, so it must be completely demolished. In the case of the 1970s to 1980s ‘Government to Government Arrangements’ the then PM, George Chambers, told the nation that two out of every three ‘Petro-dollars’ was wasted or stolen. In the ongoing imbroglio over the $1.6Bn Piarco Airport project, we learned from the DPP’s S.34 statement that $1.0Bn of Public Money had been located in offshore bank accounts.
The DPP’s S.34 Statement on Wednesday September 12, 2012
“…These cases involve allegations of a conspiracy to defraud the Republic of Trinidad and Tobago of over TT$1 billion by the fraudulent use of bonds and the rigging of the contracts for the various Construction packages for the Piarco Airport Project…”
The DPP’s full statement is here.
Also, from “Cops target MP in $1Bn airport scam” in Trinidad Guardian of Friday 5 March, 2004 –
“…TV6 News reported last night that Lindquist and Interpol officers had discovered more than $1billion stashed away in off-shore accounts, arising out of corruption in the airport project…”
This article deals with the THA/BOLT project, which is a Public Private Partnership. The PPP is a procurement model now being pursued by this government, according to the strategy outlined in the 2013 budget.
Build Own Lease Transfer (BOLT) is a subset of the PPP procurement method. Under a BOLT arrangement a client has a facility built by the private sector at their expense – the client makes agreed rental payments so that the developer can cover the cost of building the project and a reasonable profit. At the end of the agreed lease period, the facility is transferred to the client.
There has been effective use of PPP to produce Public Goods like the Brian Lara Promenade. BOLT has also been used to procure prominent POS buildings such as NALIS, UTC HQ and Ministry of Works HQ (via Republic Bank) and the AG’s office at Cabildo Chambers (via NIPDEC).
The PPP can be a feasible method of procuring public goods, offices or other facilities in situations where the State is unable to commit to the capital expenditure and there is a pressing need. The strong selling-point of the PPP is that the private sector takes the risks and is allowed to make a reasonable profit while the public sector can add to its stock of capital goods without the risks of project execution.
These PPP arrangements are now being intensely criticized in developed jurisdictions as having served the public interest very poorly. The focal point of much of the criticism has been the fact that, despite the rubric, the private sector has seldom taken any genuine risk.
Turning to the actual THA/BOLT deal, I have to say that the decision to publish a large number of the important documents in relation to this arrangement is to the credit of the THA. The 225-page ‘bundle’ is here.
In response to the request from the Minister of Finance, THA leader Orville London said:
…that under the laws and the T&T Constitution the Finance Minister has no authority to instruct him to provide information to him within any timeframe.
However, London said, in the interest of public disclosure and considering that this particular transaction has generated so much discussion he believed that he had a responsibility to make the information available to the public and the Minister…
This is a bold and in my view admirable initiative by a leading Public Official and I have to say that it has tempered my scepticism over this project. I only wish that Cabinet Ministers took a similar view of their responsibilities.
The THA ‘bundle’ details the ongoing financial shortfall in allocations from Central govt, the main point of which is the fact that the THA is definitely resource-starved in relation to the arrangements with Central govt. When one considers the financial state of the THA alongside the national economic outlook – we are in our fourth year of deficit financing in relation to the national budget – it is a sobering background to this discourse.
I have spoken with all the main parties to this arrangement and this is a summary of the THA/BOLT deal. The THA purchased a 3-acre parcel of land at the corner of the Claude Noel Highway and the Shirvan Road from private landowners for $12M and immediately leased it back to them for a 199-year lease at a nominal rent. The private developers have agreed to erect an 83,000sf office building at a cost of $143M and the THA has agreed to lease it for 20 years at a fixed rent of $15.61psf – an annual rent of about $15.55M, totalling some $311M over the term of the 20-year lease – with the property reverting to the THA at the end of the lease. Those offices are to be built for the THA’s Division of Agriculture, Marine Affairs, Marketing and the Environment.
My concerns arise at the level of the Needs Assessment, which must be the first stage of any proper procurement process, public or private. The purpose of the Needs Assessment is to determine the rationale for and scope of the project so that preliminary consideration can be given to the key elements before any high costs are incurred. In this case, we are told that the developer approached the THA, which is unusual to the extent that best practice requires that extra care be taken with unsolicited proposals.
The main points concerning me are that once again we are seeing large-scale expenditure of Public Money without a proper business case having been made. The opinion of Hamel-Smith & Co as to the legality of the transaction is of no comfort to me, this is a matter of making a sound investment decision. A legal opinion is necessary but not sufficient.
That 6-page legal opinion,dated 3 January 2011,by Timothy Hamel-Smith (who was appointed Senate President on 18 June 2010) is at page 168 of the ‘bundle’.
- Quantity of space – at pages 68 and 69 of the THA ‘bundle’ there is a ‘Note for Executive Council’ which summarises that the offices occupied by that Division – a total of 22,500sf is detailed, while a further 6,000sf can be reasonably surmised for the last Department. The average rent being paid by the THA for this Division is $8.17psf, also please note that a total of 28,500sf is now occupied by the Division for which the THA is procuring an 83,000sf office building.
- Quality of space – The cost of $143M for that space equates to $1,723 per square foot and I am reliably informed that the contract calls for a fully fitted and finished office building. That figure is at the absolute upper end of the range of costs for office buildings.
- Rent levels – According to the THA’s adviser on this project, Peter Forde, at the THA Press Conference on 10 September 2012 – see
…the monthly payment of $15.61 per square foot per month was not an unreasonable rate because there were properties in Scarborough where tenants were paying as much as $10.00 per square foot. He stressed that even if there was inflation the rate will remain the same…
The first issue I have with that is the attempt to use the $10psf comparable to justify the $15.61psf rent. That is an unreasonable ‘stretch’ by my standards as a professional valuer. Did the THA seek the opinion of the Commissioner of Valuations? Secondly, the fact that the rent cannot be increased in the event of inflation is a distraction, since the likely effect of this new, huge THA office building is that the rental market in Tobago will become saturated with the offices they vacate. The result of that is the decline in office rental values, so in the absence of any provisions of provisions for rent adjustments, the burning question has to be ‘What real risk is this developer taking?’. Risk Allocation remains a real issue.
So, in summary, we have a semi-autonomous Public Authority contracting, at a time of tremendous financial strain, to build first-class facilities three times larger than the second-class ones it currently occupies. Finally, please note that according to the ‘Note’ I cited earlier, the current monthly rent bill of the THA Division is $231,788, while the new monthly rent under this arrangement will be $1.295M – over five times more.
At the start of this article, I gave examples of the ratio at which Public Money was wasted or stolen, so just compare this project to those figures.
My next article will delve into the Calcutta Settlement land deal and its own peculiarities.