Tag: HDC

Property Matters – State Enterprise Accounts

State Enterprise Performance Monitoring Manual
In the next few weeks, this column will cover some of the issues which are likely to have a bearing on the 2012 Budget.

In my view the State and its Agencies must perform in an exemplary fashion if we are to progress.  A good example is worth a thousand words.

At page 22 of the 2010-2011 budget statement, the Minister of Finance said –

…Mr. Speaker, no coherent, co-ordinated planning or strategy for state enterprises exists.  As a result we have begun to rationalise the state enterprises, including the special purpose companies, which will incorporate a new accountability system that goes beyond the presently operating company ordinances. It is these loopholes in public accountability that resulted in the UdeCOTT scandal. This must never again happen in Trinidad and Tobago…

The Ministry of Finance has now published a new State Enterprises Performance Monitoring Manual 2011, it is over three times longer than the previous edition, so it will be something to consider in weeks to come.

Certainly, there are stricter requirements in relation to the filing of accounts – at pg 30 of the 2011 guidelines –

3.2.5 AUDITED FINANCIAL STATEMENTS

State Enterprises are required to submit the following:

  1. Audited Financial Statements (2 originals and 120 copies) to the Minister of Finance within four (4) months of their financial year end. These reports are to be laid in Parliament and subsequently submitted to the Public Accounts and Enterprises Committee for consideration;
  2. Copies of their Management letters issued by Statutory Auditors…

At pg 16 of the 2008 edition –

1.3.10 Publishing of Financial Statements by State Enterprises

Government has agreed that State Enterprises be required to publish in at least one (1) major daily newspaper a summary of the audited financial statements within four (4) months to the end of their financial year and a summary of the unaudited half-yearly statements within two (2) months of the mid-year date.

Such summary statements must be in accordance with the requirements of the Securities Industry Act, 1995.

The new guidelines appear to be stricter, but the requirement to publish to the press seems to have been removed.

There are swirling issues on this –

  • No accounts for years – As I have pointed out before, some of the largest State Enterprises have published no accounts for years.  UDECOTT and NHA/HDC are just two examples of this flagrant breach of the shareholders’ instructions as set out above. In the case of HDC, there is a greater concern in my view, since sections 18, 19 and 20 of the HDC Act require the audited accounts to be produced and published.  Anyhow you try to spin it, those are terrible signs.  For a private company to have no accounts, for even a few months, is indicative of poor performance at the very least.  No accounts for years is unacceptable.  One can only wonder how clearly could anyone plan if basic information is being obscured in this fashion.  We expect better from the chiefs of these State Enterprises and certainly we expect better from the Peoples’ Partnership.  In his preamble to the 2010-2011 budget, Minister Dookeran said –

…We must at all times remember who we work for. We must make Government work for the people.  As our Prime Minister always says: serve the people, serve the people, serve the people…

  • Serious debts outstanding – There are continuing reports, despite some efforts, that contractors, consultants and suppliers are owed substantial monies by State Enterprises for extended periods.  That has a disastrous effect on our local economy both on an immediate tangible level and in terms of the more subjective element of confidence.
  • Ambitious new projects continue to be announced, even as the basic accounts are incomplete and substantial bills remain unpaid.

Apart from the evident confusion, at the very highest levels of the State and Government, the unacceptable part is that there is not even an attempt to explain what is the hold-up or what areas of the accounts remain unresolved.  The few times anyone in authority has attempted to explain the delays in those accounts, it has been a model of vagueness and ambiguity.  That uncommunicative behaviour does not augur well.  These State Enterprises are not building a wartime bunker or a new spy satellite, only new homes and offices.

But there is more, according to S. 99 (1) of the Companies Act 1995

  1. every Director of a company shall in exercising his powers and discharging his duties act honestly and in good faith with a view to the best interests of the company; and
  2. exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.

Those provisions make mismanagement of a company an offence.  It is literally impossible to manage or direct the affairs of a multi-billion dollar company in the absence of audited accounts.  So there must be serious concerns as to how the Directors of those State Enterprises without accounts could have properly discharged their obligations under S. 99 (1).

SEC logoApart from these points, there is now the fact that the SEC has made Orders in respect of Contraventions of the Securities Industry Act 1995 and the Securities Industry Bye-Laws 1997.  Those Orders are in relation to the failure of these huge State-owned Enterprises to publish their accounts –

  1. 19th March 2010 against HDC, with fines totalling $121,000 – see http://www.ttsec.org.tt/content/pub100326.pdf.
  2. 15th June 2011 against UDECOTT, with fines totalling $120,000 – see http://www.ttsec.org.tt/content/Order-for-settlement-re-UDECOTT.pdf.
  3. 25th July 2011 against HDC, with fines totalling $400,000 – see http://www.ttsec.org.tt/content/Order-for-settlement-re-Trinidad-and-Tobago-Housing-Development-Corporation.pdf.

I was pleased to see the SEC taking this firm action against these offending State Enterprises, it is an important and necessary intervention.  I am not at all sure what, if any, ongoing penalties are being applied.  If there are no ongoing punishments or fines, this important regulator needs to take a tougher stand.  It is simply not good enough in my view for the regulator to levy these fines and allow the companies to carry on with ‘business as usual‘.  That would be like a dutiful policeman ticketing a motorist for smooth tires, no seatbelt and no headlights – issuing the ticket and then letting that motorist drive off.  The SEC needs to consider heavy daily fines and banning orders against Directors of these companies in breach of the law, if such do not already exist.

The era of irresponsibility in high office needs to be brought to a close.  The role of the Treasury in supporting this grossly irresponsible behaviour is questionable.  The silence on the missing accounts is intolerable.  The chapter of getting away with it needs to be ended.

Expenditure of Public money – Accountability – Transparency = CORRUPTION

State Enterprises and Public Procurement

procurement cycleState Enterprises were created to enhance the pace and quality of Public Procurement, yet they are now the scene of the most bedeviling paradoxes in the entire system of public administration.

Some of the key procurement issues which arise in this arena flow directly from the split character of the governance model.

The basic rationale for the existence of State Enterprises is they can be more effective because they are not bound by the strict rules which control the conventional civil service.  The absence of those rules is supposed to allow more latitude in terms of hiring, borrowing and contracting.  State Enterprises can hire professional staff at market rates, enter complex commercial arrangements and borrow on commercial terms, all of which should amount to significant improvements in public services.

The typical State Enterprise is owned by the State, with the shareholding held by the Corporation Sole, an exceptional legal creature which exists within the Ministry of Finance.  Apart from its owner, the State Enterprise will sometimes have a ‘line Ministry’, which would be its sole or main client.  For example, the Ministry of Housing & the Environment is the sole client of the Housing Development Corporation (HDC) and the Ministry of Education is the sole client of the Education Facilities Company Limited (EFCL).

State Enterprises can operate within the existing Companies Act or be established by a separate Act of Parliament, as is the case with the HDC.  That legal framework ought to ensure that a satisfactory standard of corporate governance and accountability is maintained.

The fact is that many of the Directors and Officers of State Enterprises are political appointees, which puts the entire rationale onto a doubtful footing.  Because the salaries and perks are so attractive, not to mention the commercial opportunities, the State Enterprises are prize targets for political appointments and favours.

Some of the main issues which arise when one is considering this sector are –

  • the number of State Enterprises – there needs to be a reduction in the number of State Enterprises.
  • If the politicians can instruct the State Enterprise, via the Permanent Secretary, on specifics, what is the purpose of the Board?
  • Given the preceding point, do the Board members of State Enterprises have the same duties under the Companies Act as in the case of other registered companies?
  • In terms of our proposed Public Procurement legislation, what is the boundary between the fiduciary responsibility of the Directors and the contracting powers of an ‘authorised officer’ – i.e. someone identified as having the power to enter certain contracts?

Proceeding along the Procurement Cycle and using the International Waterfront Centre (IWC) as an example –

  1. Needs Identification – This is the first stage of the Procurement Cycle and it ought to be an objective assessment of needs.  In this case, the IWC was part of a huge, disastrous boom in building new offices in POS – this is all detailed at ‘Capital Concerns – New Office Buildings’ – here.  Before the boom started in 2005, there was 6.5M sq. ft. of offices in Greater POS, at the start of the boom some 3.2M sq. ft., or an additional 50% of the capital’s office supply was approved for construction.  Please remember that Nicholas Tower, which took 5 years to fill, is only 100,000 sq. ft.  Just under 2.8M sq. ft of new offices was actually built in POS in the last 5 years, with 2.3M sq. ft. of that space (82% of it) actually built by the State.  Every State project identified at the outset was executed, but in stark contrast, virtually half the private sector projects stopped before construction began.  The obvious consequence of that over-building by the State has been a collapse in the office rental levels in the capital, which is detailed in the next point.
  2. Reconcile Needs with Funds – This is the stage at which a developer ought to consider critical questions such as the cost of funds, the cost of the project and the returns from it.  That is sometimes called a feasibility test and this is where the IWC dissolves into utter confusion.  When then PM Manning addressed the Senate on 13May 2008, he emphasized that every UDeCOTT project was approved by Cabinet and had been vetted by a Finance Committee on Financial Implications.  That is the most important address if we are to see the depth of the problem with these State Enterprises – see here.  The break-even point on such projects is the rent at which the project can repay its costs of construction – at minimum, those costs would have to include for land, design, construction and finance.  On that ‘bare-bones’ basis, which makes no allowance for maintenance or periods when spaces are vacant, the break-even rent for the IWC is in the $30 per sq. ft. range.  This is the largest single office building ever built in our capital and the best rents ever achieved for space of comparable quality is about half the break-even figure.  There is no way that the IWC project could ever have satisfied any proper feasibility test.  Every new office project started in our capital only increased the supply of offices, which reduced the market rent, which, in turn, increased the gap with the break-even rent.  Under oath at the Uff Enquiry, Calder Hart tried to rationalize the confusion when he confirmed that only one of UDeCOTT’s projects had been subject to a feasibility test and that one was the IWC.  He was even so bold-faced as to estimate a break-even rent in the $20 range, but, when pressed, had to admit that he had left the cost of the land out of the calculations!  That is the extent of the deformed thinking which typified the best schemes of the leading State Enterprise.  Only one of the State’s many office development projects tested for feasibility and in that case, the cost of the land is omitted, yet that same land is included as a part of UDeCOTT’s Assets at $224M in that very financial year.  Political imperatives were allowed to pervert a process which exists to protect the public interest from this kind of empire-building.  But it is in the next part that the full confusion comes to bear.
  3. The rest of the procurement cycle – This is the stage at which tenders were invited for design-build and the winning bidder selected, the project built and the complex opened.  According to UDeCOTT’s statements, the IWC project is its flagship and an outstanding success, having been built on time and within budget.  Even if one accepts those assertions as being true, the IWC project is an example of the tragic consequences of a limited application of proper procurement processes.

As a result we have a completed project which is said to have been built on time and under budget, yet makes no economic sense and has a break-even point at some uncertain point in the future, if ever.

Some collateral damage needs to be noted, to quote one of the former PM’s notable phrases.  Contrary to his statement to the Senate which is cited here, UDeCOTT did not publish its accounts since 2006, which is a breach of both the Companies Act and the Ministry of Finance guidelines.  A total breach of the elementary norms of good corporate governance, which is the protection the private sector structure was supposed to give us taxpayers as a safeguard.  Because of the political element in the operation, we can see clearly that UDeCOTT was carrying-out the instructions of the Cabinet and those Directors have not been punished or censured in any way, apart from their public dismissal.  The consequence of those breaches being condoned at the largest State Enterprises – UDeCOTT and HDC – how does one get the smaller and less-visible State Enterprises to conform to good governance?

If the priest could play, who is we?

This is why we need a complete review of our procurement controls.

An Overview on the CIVIL SOCIETY submission to the Joint Select Committee on PUBLIC PROCUREMENT

This special publication is dedicated to the important issue of Public Procurement.  It is written by the a private sector group, headed by the Joint Consultative Council for the Construction Industry (JCC).  The JCC consists of:

  1. Association of Professional Engineers of Trinidad & Tobago (APETT)
  2. Trinidad & Tobago Institute of Architects (TTIA)
  3.  Board of Architecture of Trinidad & Tobago (BOATT) – observer status
  4. Trinidad & Tobago Society of Planners (TTSP)
  5. Trinidad & Tobago Contractors’ Association (TTCA)
  6. Institute of Surveyors of Trinidad & Tobago (ISTT) comprising Land Surveyors, Quantity Surveyors and Valuation Surveyors.

The private sector group consisted of –

  • Joint Consultative Council for the Construction Industry
  • Trinidad & Tobago Chamber of Industry & Commerce
  • Trinidad & Tobago Manufacturers’ Association
  • Trinidad & Tobago Transparency Institute.

The members of that Private Sector group were part of the Working Party on the Public Procurement White Paper, which was published in August 2005 and laid in Parliament the following month.

The Peoples’ Partnership’s manifesto, at page 18, commits to –

Procurement

  • Prioritise the passing of procurement legislation and appropriate rules and regulations
  • Establish equitable arrangements for an efficient procurement system ensuring transparency and accountability by all government departments and state enterprises…

In keeping with those campaign promises, the Minister of Finance tabled two legislative proposals in Parliament on 25 June 2010.  Those were a Bill to amend the Central Tenders’ Board Act (originally prepared in 1997, when Ramesh Lawrence Maharaj was Attorney General) and the Public Procurement Bill (originally prepared in 2006, after publication of the White paper).  A Joint Select Committee (JSC) was established on 1 October 2010 to examine those proposals, invite submissions and make recommendations.

The stated target of the PP government is to have the new Public Procurement legislation in place by the first anniversary of their electoral victory – i.e. by 25 May 2011.

Our Private Sector/Civil Society group reconvened last year and made a joint submission to the JSC in December 2010 – it is available here from the JCC‘s website.  Our Private Sector group has had several meetings with the JSC – which was chaired by Education Minister, Dr. Tim Gopeesingh – but the results of those are not featured in this publication.

This special publication is intended to inform readers of the necessity for new Public Procurement legislation in our country and to set out the objectives of our proposals.

The guiding Principles

 These are –

  • Transparency
  • Accountability
  • Value for Money

The broad picture

One of the most serious findings of both the Bernard Enquiry (Piarco Airport Project) and the Uff Report (UDeCOTT and HDC) was the extent to which the largest State projects were being executed outside of any normal system of accountability.  The very purpose of setting up these companies and procurement methods was to bypass the Central Tenders Board.  The natural consequence of that way of proceeding being that if the CTB could be sidelined as a deliberate act of public policy, then other important elements of the regulatory framework are violated as a matter of course.  In the case of both UDeCOTT and NHA/HDC, accounts were not filed for years – since 2006 for the former and 2002 for the latter – in flagrant violation of the rules and laws.

These were the largest State projects – often described as being the flagship or centre-piece of this or that government’s policy – yet they were breaking the main rules and getting away with it.  The ‘getting away with it’ is the cloudy part of the picture, because we never hear of any penalty being sought against those State Enterprise Directors who broke the governance rules.

But that is the very centre of the puzzle and we need to understand it before we can try to unlock it.  So, we are told, time and again, that the only way to really get important and urgent projects done in the correct fashion is to go outside the rules.  The stated reasons are that the old rules are too cumbersome, slow etc… and yet, we end up, time and again, in the same mess.

Some of the features of these fiascos are –

  • Huge cost over-runs on virtually every project.
  • Unfinished projects which virtually no one can make sense of – to date there is no proper rationale for the huge and loss-leading International Waterfront Project, apart from Calder Hart’s bogus explanation to the Uff Enquiry.
  • A gross burden on our Treasury going forward – The continuing delay in completing the accounts for these State Enterprises shows how difficult it is to work out exactly what the State owes and to whom.

What all that tells us is that the existing rule-book seems to be blocking progress and the attempts to bypass it have done little better, if not far worse.

The dismal picture on public procurement is not limited to construction projects and can be found in all the other areas.

A new approach is needed and that is what is at the foundation of these legislative proposals.

What is Public Money?

Central to the new proposals is that any new Public Procurement system must be in full effect whenever Public Money is spent.

‘Public Money’ is defined at page 5 of our proposals as money which is either due to, or ultimately payable by, the State.

Our proposals are intended to form part of a financial management reform package to include for a National Audit Office and a Financial Management and Accountability Bill.

The intended move is towards a greater transparency and duty of care in terms of how taxpayers’ money is spent.  Our citizens, particularly the unborn ones who will have to pay for some of the wasteful schemes which are littering the landscape, deserve no less.

The new equation confronting us is –

Expenditure of Public Money
minus            Accountability
minus            Transparency
equals         CORRUPTION

We must fix that.

So, what is at stake here?

Our society is beset by large-scale corruption, which sustains wrong-headed decision-making.  The wider social consequences of that toxic culture are now hatching, with a vengeance, in the naked violence and wily crimes which pre-occupy our head-space.

The killing-fields of East POS, the decimation of African urban youths, the URP and CEPEP gangs and the battle for turf are all part of this picture.

As long as our society continues to applaud and reward dishonest, corrupt behaviour, we will continue sliding downhill.

The structure of our economy is that most of the country’s foreign exchange is earned by the State in the form of oil & gas earnings.  The rest of the society relies on the State and its organs to recycle those earnings for the benefit of those of us not directly engaged in the energy sector.

For that reason, the State casts a very long shadow in our country, far more so than in other places.  Virtually every substantial business relies on the State and its organs for a significant part of its earnings.  A healthy connection with the State is essential for good profits.

But that is where the particular problem is, since the conduct of the State and its organs is often found to be lacking in the basic ingredients of fairplay, accountability and transparency.

If the State is the biggest source of funds in the place and the State is not playing straight at all, a serious question arises – How can we hope to uplift our society?

The State has an over-riding duty to behave in an exemplary fashion in its policy and operations.

Due to its tremendous footprint, the State has to behave in that exemplary fashion if we are to move out of this mess.  A positive shift in State conduct will have a salutary effect on the commercial culture and wider society, one that is long overdue.

So, who spends Public Money?

We have a vast, expensive and confusing array of organs, all of which are authorized to spend our money.  For a country of about 1.4M people, we have 26 Ministries.  Just consider that the UK, with a population of about 65 million, has 19 Ministries and the USA, with a population of about 300 million, has 16 Ministries.  For a Caribbean example, Jamaica has twice our population and 16 Ministries.

Quite apart from the number of Ministries, there are two further layers of agencies which also have the power to spend – our country has 73 Government Bodies and 58 State Enterprises.

Given the vast range of operations undertaken by these agencies, any new system would have to be flexible in order to cover all those types of transactions.

The main features of the new system

Three new independent organs will be created –

    1. The Procurement Regulator (PR), with the duty to create overall Guidelines and a common handbook to guide the public procurement process.  The Regulator is appointed by the President in his own discretion and reports only to the Parliament.  Agencies can create their own procurement handbooks, once these conform to the overall Guidelines, as approved by the Procurement Regulator.
    2. The Public Procurement Commission (PPC) will be the investigative arm of the new apparatus to which complaints will be directed.
    3. The National Procurement Advisory Council (NPAC) will be purely advisory and comprises 14 members from a broad range of named private sector/civil society organisations – the JCC, Manufacturers’ Association, Chamber of Commerce, Transparency Institute – as well as the Ministry of Finance and the Tobago House of Assembly.

All expenses are to be drawn on the Consolidated Fund, with the Procurement Regulator and Advisory Council required to report annually to Parliament.

A vital part of our proposals is that Cabinet, Government Ministers or politicians are prohibited from instructing or directing these new agencies in any way.

They are intended to be entirely independent of political influence, which conforms to the proposals in the White Paper.

That freedom from political influence was also specified in both the 1997 and 2006 draft legislation.

A Complaints Procedure

The proposed system will create clear rights to make complaints or report wrongdoing.  Those rights are an important aspect of any modern procurement system and we propose three types of complaints/investigations –

  1. Potential tenderers/suppliers can complain, in the first instance directly to the Agency with which the tendering opportunity resides, then, if that is not dealt with satisfactorily, they can complain to the Public Procurement Commission.  Ultimately, the right to seek the protection of the High Court is preserved, once the established complaints procedure has been followed.
  2. The Whistleblower – We are proposing that whistleblowers be given legislative protection and practical means to bring their complaints direct to the Public Procurement Commission.
  3. The Public Procurement Commission can also, on its own initiative, start an investigation into an area of concern.

There are strict time-limits for acknowledgement and resolution of complaints.

Our proposal is for the Public Procurement Commission to have powers to punish both frivolous complainants as well as parties found to be in breach of the new system.  Those can range from fines to embargoes, during which offending parties can be banned from tendering opportunities.  Offending public officers can be subject to both fines and/or imprisonment.

The concern over the cost of the new apparatus

One of the most frequently expressed criticisms is that as critics of the rationale and operations of significant State Enterprises, we seem to be proposing a new series of state-funded agencies.  Some people have pointed out that these offices are unlikely to be cheap, particularly the PPC, which is to be constituted as a standing Commission of Enquiry under those existing legal provisions.

Yes, there will be new agencies and yes, they will cost money.

Given the recent revelations as to the cost of the Uff Enquiry – already estimated to exceed $50M – there are genuine concerns that we could soon have three new state-funded agencies which could absorb maybe $100M a year.

The challenge here is to move beyond the obvious and factual observations so that we can consider the decisive factors.  Our proposals have the promotion of Value for Money as one of its founding principles and that is good for the public.  So, how can we measure the value for money of these proposals, at this stage?

The scale of public procurement spending

In the case of expenditures direct out of the Ministries, the 2011 Budget has an anticipated capital expenditure for the Ministries of $7.050Bn, as per para 8 at page 4 of the Public Sector Investment Program (PSIP).

Also in that Budget there is an anticipated capital expenditure for the State Enterprises of $6.725Bn, as per the Foreword at page 4 of the Supplementary Public Sector Investment Program (Supplementary PSIP).  The combined figure of $13.775Bn is only for projects, so it excludes the salaries, rents and normal running expenses.  Please note that other elements in public expenditure, beyond just capital projects, will be covered by these proposals.  The guiding principle being that those activities involve the expenditure of Public Money.

There are very limited exemptions from the proposed provisions and those can be viewed at the JCC website.

I am also sure that there are other ways in which Public Money is being expended which are not shown in the national Budget, so the amounts are surely larger than that estimate.

The potential for savings

The scale of the public transactions, involving Public Money, which will come under the control of this new system is huge, at least $14Bn in size.  Even if the new system only saves 5% of that sum every year, we can easily justify an annual running expense in the $100M range, as mentioned earlier. 5% of $14Bn is $700M.

In the next 30 days, we expect our Legislators to make the crucial decisions on this series of proposals and we all need to be vigilant to preserve the key points.

Those key points would include –

  • Heads of Independent organs to be appointed by the President
  • Separation of the Regulator from the Investigator
  • Regulations laid in Parliament for negative resolution, with no Ministerial or Cabinet approval required.
  • Independent Organs funded from the Consolidated Fund, with no requirement to seek a Ministerial approval or Budget vote.
  • Accountability is ensured by the requirement to report annually to Parliament.
  • Private Sector/Civil Society oversight via the National Procurement Advisory Council.
  • Proper provisions for complaints and Whistle-Blowers.

The ultimate question, given what we know now, is – Can we afford not to take this step?

At this unique and challenging moment in what has been a long, twisted journey, the prospects of more corruption and waste are grim.

For these proposals to succeed, the legislators will have to vote in favour of a new law which reduces their power and discretion.  To some, that might be an impossible contradiction and an unreasonable thing to expect, but there will be considerable political credit to the account of those who make this change happen.  Our citizens deserve no less.

Property Matters: Housing Policy Review as an element of the Welfare State

There has been a recent, refreshing discussion on the shape and necessity of our welfare state.  The Welfare State is used to refer to the various administrative arrangements which redistribute the nation’s wealth to assist the more needy citizens in our midst.

The discussion was initiated in the T&T Review of  January 3 in Gregory McGuire’s thoughtful and solidly-based review of the welfare spending trends and their wider consequences.  The responses ranged from a two-part article (Part I & Part II) in the Express from Professor John Spence, with an attempted rebuttal from Dr. Errol Mathura in the same newspaper.  From the Guardian, there has been a serious commentary on Sunday 16 by Dr. L Trevor Grant – ‘Curb escalating poverty in rich T&T’ – and the editorial of Monday 17, dealing with the fate of the empty HDC houses.

That Guardian editorial – ‘Housing Shame’ – was based on the reports of an investigation into the situation at several of the HDC virtually-completed, but unoccupied housing projects.

Sunday’s Guardian headlined with ‘Scandalous’ on an abandoned $156M HDC project and that is my point of discussion on this Welfare State matter.  The empty homes built by the HDC are symbolic of a serious need to re-examine our housing policy.

Above and beyond the case of the vandalized HDC homes, the fundamental public housing situation is scandalous.  Scandalous is my word to describe a policy of allocating of scarce resources to build homes, without satisfying the needs of the poorest applicants.  That is a blatant misallocation of public resources.

As I wrote in the Trinidad Guardian newspaper in 2007, our housing market is divided into 5 layers, moving from the neediest to the wealthiest –

  • Homeless – People who have nowhere to live or rely on charity for shelter.
  • Permanent Renters – People who can never afford to buy.
  • Transitional Renters – People who are renting now, but will end up as home-owners.
  • Home Owners – People who own their homes.
  • Multiple Home-owners – People who are wealthy enough to own more than one home – these people are also the ones who rent property to the others.

According to the latest figures released by the Housing Development Corporation in March 2010, there are over 10,000 empty homes in their stock of newly built units.  In addition, there is a waiting-list of hopeful applicants believed to be in excess of 100,000 people.  How can we reconcile those figures?

Dr. L Trevor Grant is the only author, to my knowledge, to have written on the plight of the homeless in our society and his column in Sunday’s Guardian gave telling details on the level of need in those communities.

Showing Trinidad and Tobago A New Way HomeWe have constructed a national housing policy which pays only lip-service to the housing needs of the poorest applicants.  The clear preference – PNM or PP – is for the applicants who qualify to buy a home from HDC.  That is the only explanation for the reality of 10,000 empty new homes and 100,000 waiting applicants.

There have been some recent handovers of new HDC homes to applicants featured in the press and those have all detailed the incredible length of time these applicants waited for their new homes.  Waiting periods in excess of 20 years have been mentioned.

There is a severe disconnect between these expensive policies to provide subsidized housing and the reality of being a poor applicant on HDC’s waiting-list.

At this point, an estimated 76% of our people live in owner-occupied property.  That is comfortably above the comparative figures for the USA or the UK, where the numbers are in the 68-69% range.  It seems clear that we are approaching the limits to which we can realistically grow home-ownership in our country.  In some ways we may already have exceeded those limits.

Another point I detailed in my 2010 series ‘Housing Policy Imperatives’, was the nature of the housing subsidy being offered by the HDC.  For example, if the HDC sells a home with a market value of $500,000 to an applicant for a price of $325,000, the difference between those two figures is the housing subsidy.  Yes, in this example there is a $175,000 housing subsidy to each of those people who buy those homes from HDC.

The big question is – if the HDC can afford to provide these benefits to applicants in the layer of ‘transitional renters’, what are the levels of subsidy and number of new homes being provided to those in the poorer layers?

If that relationship does not improve to favour those who cannot ever afford to buy, we will be stuck in an increasingly frustrating housing fix.

The housing fix is notable for the inequity with which the country’s scarce resources are allocated and the hopelessness of the poorer applicants.

There are also secondary problems which run very deep and those include the issues highlighted in the Guardian’s story on the abandoned HDC estate.

What is the cost of securing all these virtually complete, but vacant homes?  I am reliably informed that the annual cost of security is of the order of $50M, yet there are still significant episodes of vandalism and squatting.

Additionally, we have to factor in the cost of maintaining and repairing the unoccupied homes.  Empty properties deteriorate at a faster rate and that is a cost to the HDC which could be avoided by putting people to live in these empty homes.

The estimated annual sum of $50M to secure these homes is staggering.  That sum of money could build over 200 badly-needed low-income homes every year.

HDC board
HDC Board

There is a newly-appointed HDC Board and the time is now opportune for a review of this important Welfare State policy.

A critical factor in all this is the role of rent controls, since the long-established rent control boards were allowed to wither on the vine by the last administration.

Rent controls and the planning regime need to form a part of the Housing Policy Review.

There is no right way to do the wrong thing.

Creating a Context – the role of planning

investment-decisionFor me, the key point at which we lost our way in the UDeCOTT/HDC/NIDCO bobol, was the crossroads of the Investment Decision.

That Investment Decision is an indispensable part of any rational process of development, for families, businesses and countries alike.  The national level is my concern and there must be broader considerations in making those decisions.

It is clear from the depth of the failure, that the last administration lost its way completely, insofar as elementary concepts such as opportunity cost, payback periods, cost-benefit analysis and so on.  We have only now begun to scratch the surface in terms of understanding the extent of the losses and corruption – readers, please be reminded that as yet, we have no accounts for UDeCOTT or HDC for several years.  In normal business thinking, the failure to publish accounts without even an attempt at an explanation is tantamount to an admission of the most serious problems.  Only State-owned organisations can get away with that kind of irregular conduct, which is maybe why they do it.

My concern in this article, is that apart from the Investment Decision in the case of specific projects, the State has an obligation to consider the wider picture in terms of fine-tuning, timing and phasing those projects.  Our last land-use plan in our country was approved by the Parliament in 1984 and we have had several fruitless attempts to revise that plan.

The focus here is on the need for a proper practice of integrated planning, in particular long-term land-use and town-planning.  By integrated planning I am speaking to an approach which takes account of varying principalities, such as land-use, financial constraints and national targets.  In addition, the approach allows a balance to be struck between the competing demands within various time-horizons, such as immediate demands, medium term demands (say, 10 to 20 years) and longer-term considerations.

Lack of an updated national Land-use plan
As I wrote in the Business Guardian of 9th October 2008 –

Dr. Emily Gaynor Dick-Forde, former Minister of Planning
Dr. Emily Gaynor Dick-Forde, former Minister of Planning, 2007-2010

“The Minister of Planning, Housing and the Environment spoke at a breakfast meeting of the Couva/Point Lisas Chamber of Commerce on September 10, and some of her reported comments deserve our close attention.

The minister told her audience that the National Physical Development Plan was passed in 1984 and had been continually updated, but that “that plan has somehow never reached to Parliament.” Somehow. The mind boggles.

One report said, “Dick-Forde said the external and internal committees on national development were working towards the completion of the National Development Plan, which will be taken to Parliament in the next two years.”

When this tidal wave of development is at an ebb, we will then have a plan tabled in Parliament for discussion. To what end?”  see http://www.newsday.co.tt/politics/0,85974.html

Given the last Minister’s stated timetable, we ought now to be having a draft plan published for consideration.  Where is this, Minister King?  When do the consultations start?

Transportation planning

Austin 'Jack' Warner, MP, Minister of Works & Transport
Austin 'Jack' Warner, MP, Minister of Works & Transport

This is a vital, related area and Minister of Works & Transport, Jack Warner, told us that the PNM government paid $21M for an incomplete Comprehensive National Transportation Study (CNTS) – see http://guardian.co.tt/news/general/2010/10/09/warner-pnm-paid-21m-non-study – and I agree.  That fact only makes the situation more doubtful, since we seem to be making major transportation system decisions in the absence of a strategic plan.

Just consider –

  1. The Tunnel to Maracas
    This was first announced in the 2011 Budget – see http://www.finance.gov.tt/content/Budget%20Statement%202011.pdf at page 24 

    …We all know how difficult it is to access Maracas Bay through the North Coast Road.

    Currently, it takes approximately 45 minutes to get from Santa Cruz to Maracas Bay. Furthermore, landslips on the North Coast road are a major deterrent to persons wishing to access this scenic route for pleasure or business. As a result we will do a business plan for a new: ‘Connective Development Project’. This project would create an underground tunnel from Maracas Valley to Maracas Bay, to enable quicker access to the North Coast…

    That strange project was then taken up by Warner at length – see http://guardian.co.tt/news/general/2010/09/26/warner-s-tunnel-take-next-year

  2. The expansion of the Highway Network
    We are now aware that the National Infrastructure Development Company (NIDCO) is proceeding with ambitious Highways packages from San Fernando to Point Fortin, with the San Fernando to Mayaro route under active discussion – see http://www.newsday.co.tt/politics/0,124988.html.
  3. Coastal Water Taxis
    It seems that the government has changed its mind, three times, on this part of our public transportation system.  Firstly, we were disposing of two of the four new water-taxis as being superfluous.  Secondly, there was an about-face, in which it was decided to keep the new water-taxis.  Most recently, I have seen advertisements for the provision of brokerage services for the disposal of these vessels.  Again, what is the basis?

Sewer Treatment plants and the threat of cholera
We recently had shocking stories about the leaking of significant amounts of untreated sewage into the Maraval reservoir – see  http://guardian.co.tt/news/general/2010/11/19/wasa-boss-moka-residents-must-pay-repair-sewerage-plant.  That is no surprise, given the widespread practice of property developers walking away with their profits in hand upon completing the sales of their properties, but with no proper plan for the maintenance of the sewer treatment plants.

Once again, this is an area which urgently needs to be addressed in terms of town planning, local health, WASA regulations and adequate financial mechanisms for ongoing maintenance of these facilities.

The Housing Development Corporation (HDC)
hdc-logoThe HDC’s new target for 2011 is 6,500 new homes and that is still a huge number.  Given our limited land resources and the absence of a national planning framework, how is this to proceed?

There remains the unanswered question as to what is the basis for these decisions?

The Limits of our financial resources

The Minister of Finance recently called for Ministries to not implement any new large projects, due to the financial limits constraining state expenditure – see http://www.newsday.co.tt/news/0,129148.html.  That is a valid call, which shows that the time is ripe for us to plan our major strategies and projects so that they can conform to some sort of national context.

That context would have to include elements such as land-use, transportation implications, financial limits and the question of the capacity of the economy to meet the targets being set.

SIDEBAR: Fuel subsidies in national planning

The question of fuel subsidies is an important part of this integrated planning discussion, since, at approximately $2.8Bn, they are a large part of our national expenditure.  More to the point, the effect they have on our behaviour is largely unremarked, which is paradoxical – the gas price being so low that we do not really consider it in our daily choices.

It is a classic example of the sort of ‘policy silos’ which the integrated planning approach seeks to overcome.

The Minister of Works & Transport speaks out strongly against the heavy subsidies necessary for the operation of the Coastal Water Taxis – no statement from Warner on the larger sums spent on the fuel subsidy.  The Minister of Energy, in the run-up to the budget, says that these fuel subsidies may need to be reduced.  The Minister of Finance, in his budget address, said –

“…The largest Subsidy is on petroleum products, particularly gasoline which usually represents one to two percent of GDP per annum. All of our citizens benefit from this subsidy. It is often difficult to determine whether resources are being used wisely to achieve the intended objectives of subsidies. We are currently reviewing whether alternate options are more efficient…”

We need to develop a holistic view of the various subsidies being paid in our economy and transportation subsidies, including fuel, are important considerations.

The goal of promoting the wider use of public transportation has to be adopted with some vigour and creativity.  The fuel subsidies enjoyed by small vehicles – say, less than 12 passengers – should be gradually reduced with a shift of those subsidies to larger-capacity vehicles.  They make more efficient use of our limited roadways and would reduce the adverse effects of traffic and pollution.

The three Ministries concerned should join with the Ministry of Planning in mapping out these strategies and policies.

The strategic goal should be to decrease the convenience of individual car-journeys and increase the convenience of the mass-transit approach.

It is no easy shift to go from today’s congested reality to the medium-term goal of a much-improved transportation system with travelers having several choices.  That journey would involve a virtual culture-shock for most of us, but it is one we should start, sooner than later, for our common good.

That is one of the examples of how an integrated planning approach can offer fresh solutions to serious problems.

Housing Policy Imperatives – part 5

This week the examination shifts to the scale of the failure of our national housing policy – see <http://www.vision2020.info.tt/pdf/Policies and Procedures/Strategic_Corporate Plans/Housing Plan.pdf>.  Three main points for consideration are –

  1. Meeting the targets
    The original target was for the HDC to construct 100,000 new homes in a decade, which figure was generated from the 1994 ‘PADCO reports’—The Review of Shelter and Land Development Policy Study (PADCO reports): The PADCO reports is a series generated by The Planning and Development Collaborative International, Inc. and Laughlin and Associates Limited (who were contracted by the Government of Trinidad and Tobago in 1993)—that study is available at the Ministry of Housing & Environment’s library.  The annual target was reduced to 8,000.  As noted in the previous article, the reduced targets should have yielded 60,000 new homes by now, but the HDC has built only 15,394 new homes.The HDC made a recent statement that the number of empty new homes was approximately 10,000.  So just about 5,000 new homes have been built and distributed since the inception of this ‘accelerated housing programme’ in September 2002.  Even if we omit 2002, that is an annual average of 667 new homes being built and distributed. Even with the most optimistic assumptions, one is looking at considerable challenges in achieving these demanding targets.  At the current rate of performance it would take over 140 years to satisfy the original target.  That is how far off-track this accelerated housing programme has gone.  Deep into the long grass.
  2. The Cost-based Pricing model
    In previous articles in this series, I have been critical of the HDC’s cost-based approach to pricing its units.  In terms of the central mission of the Ministry of Housing  – i.e. creation and distribution of housing to the needy – that pricing model is inappropriate.  That is because it does not identify either the housing subsidy allocated to successful applicants or the opportunity cost of the HDC’s policies. The value-based approach is the more appropriate model to satisfy those basic requirements.  That is because it offers greater clarity to policymakers, since it is based on the market value of the completed homes, with the housing subsidy and the opportunity cost being the difference between the value and the actual HDC selling price. On 21st March 2008, this newspaper carried a report headlined “PM’s son in line for apartment” – see http://legacy.guardian.co.tt/archives/2008-03-21/news8.html – on allegations that Brian Manning, son of the then-PM was in line to receive one of the HDC apartments at Fidelis Heights in St. Augustine.  Noel Garcia, the then-MD of the HDC, was reported to have said –

    …the Government had taken a decision not to subsidise this  particular development. It is being sold at market rates in HDC’s thrust to expand and attract an open market clientele.

    Noel Garcia, former MD of HDC. Photo courtesy Trinidad Guardian
    Noel Garcia, former MD of HDC. Photo courtesy Trinidad Guardian

    Given that the units were reportedly being sold for a maximum of $875,000 and that they were worth a minimum of $1.7M, it is clear that each new home there is sold with at least $800,000 in housing subsidy.  The only way Garcia’s incredible statements could be correct is if one were using the misleading cost-based approach.

    I entirely agree with his statement that the Fidelis Heights development “…is therefore not part of HDC’s provision of subsidised housing for low-income earners.”  It is really subsidised housing for the middle-income groups, but that could never be right when the waiting list is bulging with needy people who cannot even get an HDC unit to rent.

    Fidelis Heights was, even by its name, a monument to misleading and wrong-headed thinking.  The HDC project with probably the highest level of housing subsidy per unit was built for the least needy on their waiting list.  Only if the underlying philosophies and resulting models are appropriate, can we avoid a repetition of this blatant waste of public funds in the face of real, human need.

    Given that the HDC is unable to satisfy the needs of the people it was intended to serve – the poorest citizens who cannot afford a proper home – it is scandalous that its scarce resources should have been diverted to Fidelis Heights, or the one at Federation Park in Port-of-Spain.

    The selection of this pricing model is proof of misguided policy at the most elementary level.  The basic concept of opportunity cost appears to have eluded the responsible officials and, what is more, that misguided policy appears to have been approved at the very highest level.

    Wrong-headed thinking can only encourage corrupt behaviour.

  3. Costs
    What has the national housing programme cost this country?  That is no rhetorical question, since this fact sits at the heart of the analysis.  The Housing Development Corporation (HDC) is the State’s implementing agency for production of new housing, it was formed in 2005 by an Act of Parliament and replaced the National Housing Authority (NHA).  The HDC’s funding comes from four sources –

    1. Treasury allocations – Those are announced in the budget and can be established from the Estimates of Expenditure as Capital Allocations to the Ministry of Housing.
    2. Sale of new homes – When the HDC sells a new home, that money is also available to them.
    3. Bond Issues – The HDC has also raised money by occasional bond issues; those funds can be used to either build more homes or ‘pay down’ on more expensive loans.  The bonds issued are government-guaranteed, so they are considered as virtually risk-free ‘sovereign debt’.  Given that the government itself issues bonds at lower rates of interest, it begs the question as to why these SPE’s are allowed to borrow on these terms.  That issue was raised by in the BG View of 20th August 2009 – see http://guardian.co.tt/business/business-guardian/2009/08/20/debt-depreciation-or-discipline.
    4. Bank Financing – The HDC also borrows money from commercial banks or the IADB to fund their construction programme.

    Try as I might, it has proven impossible to determine just how much the HDC has spent on building new homes in any given year.  That is because there are no accounts at all which are available to the public.

    The HDC Act, at section 18 and 19, mandates that the Board shall keep and properly audit accounts.  Section 20 requires the Board to submit its annual report to the line Minister within 3 months of the end of the financial year.  The line Minister is in turn obliged, by section 20 (2), to lay that report in Parliament within 3 months of receipt.  See – http://mphe.gov.tt/home/images/stories/pdfs/tthdc%20act%2024%20of%202005.pdf.

    The HDC has never laid either its annual report or audited accounts into Parliament for the public.  The failure to publish accounts is one of the most serious warning-signs of companies in financial trouble.

    That failure to publish HDC or NHA accounts over such a long period (since 2002 at least) spanning several administrations, is a serious indictment of the main participants – the politicians, the Board Directors and of course, the professionals involved in the entire huge operation.

    I have been reliably informed that the HDC’s new management is attempting to rectify this situation and that must be a priority if we are to properly assess the performance of this vital social programme.

The overall picture is stark –

  • Gross under-performance in terms of the output of new homes, only about one-quarter of the reduced target has been achieved:
  • Poor financial and project controls – as revealed in the Uff Report (at para 25:30 – see http://www.raymondandpierre.com/articles/article84.htm), not one HDC project has a signed contract:
  • No accounts or annual reports, given the preceding point, that is not surprising:
  • An inequitable allocations policy, with lower priority given to those who cannot afford to buy.
  • Approximately 10,000 new homes remain empty and that is the one which tops them all.  The ongoing adverse consequences include – vandalism, the greater rate of general deterioration afflicting empty homes, the high cost of security and of course, the continued pressure on those people on the waiting list ‘holding strain’.

Given the combined effect of all this, which is probably hidden to most of today’s readers, one can only wonder at the patience of our needy citizens.

The entire situation also raises potent questions about the purpose and performance of the SPEs.

SIDEBAR: The concept and importance of opportunity cost and housing subsidy

Let’s use a typical home at Fidelis Heights as an example.

  • Unit Cost – $825,000 (and it is not clear if land and professional fees were included)
  • Selling Price – $825,000
  • Market Value – $1.7M

    • In the prevailing cost-based pricing model, this is considered a satisfactory, ‘zero-subsidy’ result, since the State has recovered all of its costs. Another phrase in the lexicon is the ‘cost-recovery’ model of pricing.

    The danger, as shown in the example in this article, is that the ‘cost-based’/’cost-recovery’ model ignores opportunity cost.

    The opportunity cost is the difference between the actual selling price of the unit and the market value. The HDC could sell each Fidelis Heights home for $1.7M, but has made the decision to sell at a reduced price of $825,000, which means that each sale is at the loss of those possible earnings. That amount of the loss incurred by the decision to sell at a lower price is called the opportunity cost. It is important that opportunity cost be identified and quantified as an element in all decision-making, both private and public sector. A decision-making process which ignores or obscures opportunity cost is negligent at the very least and can encourage corrupt practices and the dilution of capital.

    In this example, the opportunity cost is $1,700,000 – $825,000 = $875,000.
    Opportunity cost

    $875,000 is enough money to build at least three modest homes, yet this system has allocated that much money to each Fidelis Heights purchaser, each of whom qualified for a mortgage at that level.

    As a result of this questionable choice and the resultant shaky pricing model, there is an enormous ‘leakage’ of housing subsidy and opportunity cost.

    The opportunity cost can also be described as the housing subsidy since that is the difference between what a Fidelis Heights unit actually sold for and what a purchaser in the open market would have to pay for a similar unit.
    The two terms are therefore synonymous – Opportunity Cost is exactly equal to Housing Subsidy.

    http://guardian.co.tt/news/general/2009/03/25/quality-performance-must

    •
    A version of this commentary appeared in print on August 5, 2010, on page 13 of the Business Guardian.

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