Thu | Aug 24, 2017

Karl Bennett | Misleading statements regarding HAJ losses

Published:Saturday | July 16, 2016 | 7:00 AMKarl Bennett
The Housing Agency of Jamaica headquarters in Cross Roads.

I am responding to articles and comments reported in the media as coming from the chairman of the HAJ and the minister without portfolio with responsibility for water, land and housing, Ministry of Economic Growth and Job Creation, regarding losses of approximately $3 billion at the Housing Agency of Jamaica within the past three years and on "questionable decisions".

For the record, I was engaged to serve as the managing director on December 13, 2013, at a time of great turmoil at the agency. I resigned in March 16, 2014, on a principled position of ethics that I have vowed never to compromise. The board resigned within 24 hours of my resignation. A new board was appointed and I was subsequently re-engaged as managing director on March 25, 2014.

(1) So-called losses and questionable decisions have been offered as reasons for the termination of services of five senior managers at the agency. By so doing, the public has been left with the impression that the outgoing management team is the reason for the state of affairs at the agency. It should be noted that the majority of the outgoing management team had only been in place since January 2014, while other senior management had been in place for less than six months.

Further, irrevocable decisions and prior construction contracts were in place prior to the tenure of this outgoing management team. As instructed by the outgoing board, the outgoing management team started no new projects. Instead, efforts were directed at closing existing greenfield projects that had been started in 2011 because (a) they were financially burdensome on the agency, and (b) they were a source of significant customer dissatisfaction.

Table 1 shows the financial performance of the HAJ over the past five years.

Significant losses have been accumulating at the agency for years prior to the tenure of the recent management team and the previous board. The outgoing senior management team inherited more than $608m in losses in fiscal year 2013-2014. At the end of fiscal year 2014-2015, the senior management team reduced the agency's losses by 11.45 per cent. Furthermore, by the end of the senior management's second year of leadership (2015-2016), the losses had been reduced further by 87.99 per cent. These reductions in losses had been achieved by adhering strictly to generally accepted accounting principles and implementing strict financial controls. KPMG, the agency's auditors, has consistently raised the matter of the viability of the agency as a going concern in each annual report over the period.

 

ACCOUNTING PROFIT

 

(2) While an accounting profit for the years 2010-2012 was recorded, this is attributable to the decision of the previous management during that period not booking known losses on some projects during the years in which they occurred. For example, postponing losses of approximately $440 million on the Whitehall 2 Operation PRIDE Project created an illusion of profitable performance during the period. Had the losses been taken in the years that they became known (2010-2012), as is the standard accounting practice, the agency would have shown losses for the years 2010-2012.

Making a provision for these losses in 2015-2016, as mandated by the current board, gives the appearance that the outgoing management team was responsible for the out-turn. Until 2014-2015, the agency's policy for senior management was to receive a performance incentive when the company showed a profit. The outgoing senior management and board eliminated this policy as a cost-savings mechanism. Why were project losses not taken in the year that they were known? Was there any link between the postponement of loss provisions and large incentive payments to management during that period (see Table 1)?

(3) Construction loans were utilised to fund the development of two projects (Stadium Gardens and Westmeade) prior to 2013. The projects were completed and homes were sold to the customers prior to 2013, but there is no record to show that the home-sale proceeds were used to repay the construction loan since a balance of $120 million still exists.

(4) The Jamaica Economic Housing Project was funded by a RMB387 million (US$72.4 million) loan by the Chinese Ex-Im Bank to the Government of Jamaica. Contracts were negotiated and signed in 2010-2011 and prior to the tenure of the outgoing board and management. The Government subsequently converted the loan to a grant to the HAJ to cover project expenses on three PRIDE projects and two greenfield projects. Irrevocable decisions and high rates in the bills of quantities were incorporated in the design-build contract in 2010-2011. Unsurprisingly, expenditure on the resulting housing solutions is high compared to industry norms.

When the outgoing senior management's tenure began, more than 70 per cent of the contract resources had already been spent and another 20 per cent had been committed. The outgoing management team was not able to renegotiate or modify any of the project contracts.

Furthermore, payments were made from the Chinese Ex-Im Bank directly to the Chinese builders on the authority of the Ministry of Finance. As a result, while the projects have been completed, the final product is now set to be sold at a price that is below the construction cost. This is not a viable financial model. The outgoing senior management cannot be held responsible for irrevocable actions prior to their tenure or for decisions taken above them.

(5) Project variations and cost overruns on the Whitehall 3 and Hills of Boscobel Greenfield developments are a result of inadequate designs that were completed prior to 2011. Delays in sales closures on both these projects are primarily because of the time required to correct design flaws during construction.

 

CONSTRUCTION CONTRACTS

 

Specifically, the Whitehall 3 construction contract award was made without adequate designs. Some surveys were done during construction and instructions given after contract award. Two separate construction contracts, one for infrastructure and another for housing units, were awarded. Without a coordinated set of drawings, significant issues related to drainage, house placement on lots, and infrastructure encroachment on lots manifested themselves during construction. Correction of resulting issues is ongoing and includes abandonment of housing units, resurveying lots to amend titles on previously closed sales.

In the case of the Hills of Boscobel development, a construction contract was awarded in 2011 based on construction documents that bore no relationship to the conditions on the site. Aerial survey data used in the design were found to be inaccurate, and yet the 2011 management team proceeded with construction. Efforts to correct infrastructure designs during construction led to contract variations, delays, and cost overruns. It was only as a result of prudent management by the recent management team that the once-stalled project was completed in December 2014.

(6) In summary, many of the decisions and challenges listed in points 1-5 above have contributed to losses from 2012 to 2015.

(7) Despite the many challenges that existed, the following had been accomplished during my tenure:

• Eliminated performance incentives for senior management;

• Avoided crippling losses to the agency on the proposed Bernard Lodge Project by terminating the public-private partnership agreement with Malphrus International IBC, while protecting $725 million in purchasers' deposits;

• Reduced payables to contractors from approximately $400m in 2013-14 to approximately $80m in 2015-2016;

• Reduced annual losses from $609m in 2013-2014 to $539m in 2014-2015;

• Made all payroll and statutory payments and reports on time;

• Secured a $150-million financing facility from NCB and paid off the facility in accordance with the terms of the agreement on time;

• Improved agency's technical capacity to execute projects;

• Completed the previously stalled Hills of Boscobel Housing Project in December 2014 in accordance with a plan and schedule agreed with the board;

• Purchased and installed new elevators in the head office building;

• Corrected many deficiencies in previously 'completed' projects, (e.g., Stadium Gardens III, Portmore Villas, Whitehall II) and relieved residents of long-standing problems;

• Implemented a lunch-subsidy programme for employees;

• Created a multi-purpose space at the head office for employee use;

• Negotiated with the Bustamante Industrial Trade Union, the bargaining unit representing the HAJ's employees, and implemented a permanent buy-out of incentive clauses in employment contracts. This saved the agency millions of dollars in past-due payments for 2013 and permanently eliminated incentive payments valued up to 35% of basic pay annually;

• Implemented a companywide customer-service training programme, which saw the adoption of new mission and vision statements and provided training of all staff and which has had a positive impact on service delivery to internal and external customers.

• Completed housing solutions at Runaway Bay with a potential of $1.6 billion in immediate sales revenue.

- Karl Bennett, PE, is former managing director of the HAJ. Email feedback to columns@gleanerjm.com.