Scandal deepens at labour and social security ministry - Pending resignation, permanent secretary in the dark about recommendations
The scandal at the Ministry of Labour and Social Security (MLSS) over the loss or misuse of $3.3 billion in two years is deepening with the impending resignation of at least one member from an embattled board and revelations that 60 recommendations to fix problems did not reach the permanent secretary.
Pages of a 2017 internal audit of some of the National Insurance Fund Resort Management Company’s (NIFRMCO) operations point to chilling conclusions about how taxpayers’ money was being used.
It adds to the mounting pressure on Karl Samuda’s ministry which has oversight for the National Insurance Fund (NIF), the state’s pension fund which is funded from National Insurance Scheme contributions.
Last week, The Sunday Gleaner reported that the ministry accounted for $3.3 billion of at least $40 billion of tax dollars exposed to loss or misuse based on an analysis of the last two Auditor General Department’s annual reports.
Conclusions from the 2017 MLSS internal audit report noted that there was an “absence of internal controls” at the NIFRMCO, resulting in the “inability to properly” account for funds spent which “facilitated the ease of transferring of significant sums”.
One of the significant transfers included the $187 million the auditor general said was transferred from the NIF to the fund’s resort management company in 2017 without the required approvals.
It also said the NIF incurred “significant financial loss and unwarranted expenditure” while not receiving the investment inflows projected from NIF-owned Braco Village Hotel in Trelawny which is under the management of the private Spanish chain, Melia Hotels International.
“The fund has not received value for money,” the auditor bluntly stated, adding that the ministry “is exposed to reputable damage if public disclosure is made of the non-compliance with government regulations”.
Melia Jamaica Braco Village is among the NIF’s most valuable property in a real estate portfolio valued at more than $12 billion in 2017.
Following a $2.5 billion upgrade, the 232-room hotel was opened for business in 2015 with gross operating profit projections for the first five years, ranging from approximately $570 million in year one to $850 million in year five.
CLAUSE IN THE AGREEMENT
The contract included a provision for guaranteed returns to the NIF as owner that was conditional on the hotel being profitable after the first year of operations.
This ranged from US$7,000 per key in the second year of operations to US$7,577 in the sixth year of operations, based on the agreement seen by The Sunday Gleaner.
A clause in the agreement, however, stated that if targets were not met, a payment would still go to the NIF.
Not much detail on the hotel’s financial performance is published but The Gleaner reported in 2018 that preliminary information for 2016 suggested that the hotel made an operating loss of approximately $550 million, a near 200 per cent underperformance of the projected target.
Losses totalling approximately $125 million were recorded in 2015; $535 million in 2017; while 2018 showed a gross operating profit of about $53,000, leaked data suggests.
A cache of emails also showed a robust debate involving senior officials of Melia trying to determine when the operating year starts to determine payments to the Government.
This newspaper has also obtained documents of board meetings in which the issues were raised most notably at a September 2017 “without prejudice meeting” involving officials from the ministry and Melia in Florida, USA.
Efforts to get a comment from the management of the hotel were unsuccessful and a promised call Friday from the hotel to discuss questions was not returned up to press time.
Questions about payments to the NIF per the contract and on any debts owed to the government entity as well as steps taken to settle any outstanding sums were also put to the MLSS’ permanent secretary, Colette Roberts Risden.
However, she declined to give details, pointing to the ministry’s planned appearance on Tuesday before Parliament’s Public Accounts Committee.
The committee is expected to dig into the Auditor General’s 2020 annual report which has criticized the ministry for being ‘tardy’ in responding to recommendations stretching back to 2011.
Among the startling findings was that the ministry “was yet to respond” to 60 issues of systemic weaknesses stretching back to 2017.
“Many of the issues mentioned in the report (Auditor General) relate to matters several years old that have been long addressed. There are, however, some instances when budget and human resource constraints impede the pace at which some things were or are being addressed,” the permanent secretary added.
Roberts Risden, who took over as chief accounting officer in 2015, said the lack of a written response by the responsible managers to the internal auditor “does not mean that the issue has not been addressed or is not being addressed”.
“Matters brought to my attention by internal audit are addressed through decisions or actions taken at a higher level and would be reflected in follow-up audits,” she explained.
The ministry’s report submitted to the PAC for the scheduled meeting maintains that line, but also includes a major admission while raising questions about the depth of the auditor general’s investigation.
“At no time was this list of 60 outstanding issues brought to the accounting officer’s attention,” read the ministry’s response, a copy of which The Sunday Gleaner has obtained.
The ministry said further examination showed that “in many instances” the internal auditors did not include the appropriate programme auditors in the audits.
Actions to prevent recurrence include the planned establishment of an internal audit register to facilitate monthly and quarterly tracking of reports.
Divisional directors and chief technical directors will also be required to monitor the status of the internal audit queries, recommendations, and state actions taken and provide quarterly updates.
The assertion from the permanent secretary that the auditor general was resurrecting issues long addressed put some of the spotlight back on Pamela Monroe Ellis’ office, which has received criticism elsewhere for the latest annual report.
Shane Dalling, the chief executive officer of the Firearm Licensing Authority, whose agency was flagged in the 2020 report, claims the auditor general is chasing newspaper headlines “to boost performance”.
“Unless you create a news catching headline, it would seem like the Auditor General’s Department is not functioning. If every morning you’re in the newspaper to find corruption or mismanagement in a government entity, you’re the best performing government entity that exists,” argued Dalling, who claimed he was reflecting the views of other civil servants afraid to speak out.
Regarding the NIF, The Sunday Gleaner has learnt that it was the permanent secretary who ordered the 2017 special audit which discovered the alleged mishandling of pensioners’ money and the disregard for internal controls.
An October 5, 2017 memorandum obtained by this newspaper showed Roberts Risden writing to the then chief technical director, Audrey Deer-Williams, requesting a response to the findings on the operations of the NIF’s Resort Management Company.
“The report highlights significant weaknesses and breaches,” she said.
But questions are also likely to be asked of the permanent secretary about the actions taken by the ministry to secure the interest of pensioners in the dealings with Melia.
For example, the NIF is required to pay Melia Hotels a base management fee linked to Braco’s gross income, an incentive fee linked to gross operating income, and a marketing fee.
If the hotel underperforms on specific targets, Melia’s contract can be terminated or, alternatively, the Spanish hotel chain may pay monies over to NIF to cover the performance gap.
It is not clear whether in light of the years of underperformance, what steps the NIF has taken to ensure the best outcome for the investment.
Additional documents suggested that at one stage, arbitration between Melia Hotels and the NIF and the possibility of terminating the agreement were on the agenda for a September 15, 2017 board meeting of the NIF Resort Management Company.
At another meeting on October 12, 2017, discussion was had on three options the NIF put to Melia on improving relationship between the parties – the closing of operational day-to-day account into which US$1.5 million as working capital was put; renegotiating of the management agreement and the possibility of transitioning to a lease arrangement.
Lennox Elvy confirmed Friday that he intends to resign from the board of the NIFRMCO.
Elvy, who chaired the NIF from 2016 to last year when the tenure expired, declined to discuss his stewardship of the fund, instead directing questions to the ministry.
The problems at the NIF, its affiliated entities and questionable decisions relating to the Melia property did not originate in 2016 but span multiple administrations going back to 2010.
In a 2014 report, the Office of the Contractor General, now a part of the Integrity Commission, concluded that the “actions and inactions” of the NIF and the ministry in relation to a 2011 deal struck with hotel group Blue Diamond Hotels and Resorts to manage the hotel, was “improper, irregular and inappropriate”.
Concerns were also raised about the affairs of the state pension fund and its questionable investments under the Portia Simpson Miller administration.
The Blue Diamond arrangement for the hotel ended in 2013, making way for Melia.
Officials in the current Andrew Holness administration argue that the Simpson Miller administration “must shoulder” some of the blame for a “poor” agreement struck with Melia that put the NIF at a disadvantage, resulting in millions in expenditure, in a rush to open the hotel in December 2015.
Derrick Kellier, Dr Fenton Ferguson, the late Shahine Robinson, and for a few months, Mike Henry, served as labour and social security ministers since 2011.
Samuda took over the reins in the new Cabinet formed after the September general election last year.
The NIF has been at the centre of two other controversies – the use of $27 million in 2017 to purchase company shares owned by the spouse of a senior executive and a $600 million fraud uncovered 2018.