A still-confidential special report of the Auditor General on the Affordable Housing Initiative criticizes many aspects of the scheme.
The report, dated August 2004 with a subsequent event update on January 2005, finds particular fault with the way the project was initiated and with the method goods and services were procured.
The Report did, however, find that there was a genuine need for the affordable housing initiative.
The four-phase housing project has also been severely criticised by the Government Opposition in the past for many of the same reasons cited by the Auditor General.
The lack of tendering
In the Auditor General’s opinion, the contract to build 200 affordable homes signed in August 2002 with the Italian firm Vetromeccaniche Investment Limited was entered into without an adequate business plan, and without a proper tending process.
‘We observed that the Ministry did not tender this project out, which, in our opinion, would have enabled local firms to provide submissions of construction costs for similar homes to be built,’ the Report said. ‘We are informed that this was a Government decision via the Minister responsible for Housing (Frank McField) not to tender the project.’
The Report said one of the reasons suggested by the Ministry for not tendering the project was because private developers had little or not interest in that type of development because return on investment was minimal.
The Ministry also said there private sector initiatives to build low income housing without Government intervention.
In the Ministry’s subsequent comparison of selling prices between the Vetro homes and homes offered by two local contractors, Frank Hall Homes and Cayman Pre-cast Homes, the business plan showed its homes were lower priced.
However, the Auditor General noted the comparisons were not fair.
‘We are of the opinion that a number of factors were not incorporated into the analysis that would have made the comparison more equitable,’ the Report said. ‘Two such significant factors are Government waivers and land value.’
The Affordable Housing Initiative offered crown land valued at $1.375 million and also received waivers of $1.838 million in Customs fees, Planning fees, Lands & Survey fees, and Port Authority fees.
‘Because of the absence of documented discussion between the Ministry and the local firms, it is not clear whether these local firms were informed of the specific requirements to the
AHI (Affordable Housing Initiative), of the possible waivers that could have been provided if they were contracted to do the project, nor the impact these factors would have had on their projected cost for building the houses,’ the Report stated.
Another disparity in the price comparison dealt with specification. The Vetro homes had external walls of 2.36 inches in thickness, while CI Precast’s wall area six inches thick.
‘Any reduction in the thickness of the wall of the units constructed by CI Precast may result in a lower price per square foot,’ the Report said.
The Report also noted that all of the core materials used in constructing the Vetro homes was imported by that company.
‘The cost of this material was CI$3.12 million, which is 25 per cent of the total forecasted cost of the project. Whereas 95 percent of the materials used in the construction of units by CI Precast are supplied by local businesses, which would increase local economic activity.’
In the Auditor General’s opinion a more in depth analysis of the available construction options should have been conducted.
‘In addition, the comparison cost presented by the AHI business plan was prepared subsequent to a contract being entered into with Vetro, and therefore became meaningless as a decision making tool,’ the Report said.
In responding to the Auditor General’s opinion in the Report, the Ministry said the Business Plan was not being used a business tool, but only as a method to demonstrate that the National Housing and Community Trust could service the proposed bond and to show it was financial prudent for Government to guarantee up to US$29 million for the project.
Not up to Building Code
The Report also indicated the AHI experienced construction delays because Vetro’s homes did not conform to Cayman Islands Building Code.
Bringing the houses up to Code was also a factor in the price of the homes increasing.
The Report indicated Vetro had difficulty getting the homes up to standard.
‘An examination of the status of reviews conducted by BCU (Building Control Unit) showed that during the period 12 November 2002 through 16 April 2003, ten reviews of plans for the Windsor Park phase of the Affordable Housing Initiative were conducted, all of which were disapproved.
Nine of 28 reviews at the Eastern Avenue and West Bay phases of the project were also disapproved.
‘As of the date of this report (August 2004), amendments were still being made to the technical specs of the project in order to make the homes compliant with the Cayman Islands Building Code,’ the Report stated.
It also said the additional approvals still needed from BCU as of last August could have increased the overall cost of the project further, as changes were made to bring the houses to full compliance with the Building Code.
In the Auditor General’s opinion, the Ministry should have sought the assistance of the BCU as to possible Building Code problems before signing a contract.
‘By reversing this process and getting locked into a contract first, the Ministry has exposed itself to cost overruns and time delays…’ the Report said.
Land filling problems
The land filling contracts for the project were another major concern of the Auditor General’s report.
The job to clear, fill and compact three of the four AHI sites was put out tender in January 2003, and the lowest bidder, Paul A. Bodden Heavy Equipment, was awarded the contract, subject to final acceptance and adjustments.
However, that contract was retracted and another was awarded to Caristef Construction Ltd for the fill operations on two of the sites.
Another contract was awarded to J&P Construction (Transport) Ltd. And Quarry Product Limited for the fill operation on the third site.
The Report said the project manager for the AHI stated that verbal negotiations were held with Caristef based on a directive from the Minister of Community Services and that no negotiations were held with any of the other companies who had taken part in the original tendering process.
The reason cited for taking that approach and not conducting tendering procedures was the need to get that phase of the project completed in the most cost efficient and timely manner, the Report said.
‘In our opinion, this line of reasoning is not congruent with obtaining the best cost, as the principles of tendering would lead one to obtain the best value for money,’ the Auditor General said.
The Report also expressed concern over the original contract award and retraction.
‘…The practice of withdrawing awards and conducting selective negotiations reduces the appearance of a fair and equitable system for obtaining government contracts, increases the opportunities for kickbacks and cost overruns, and in general, is a departure from prescribed financial regulations,’ the Auditor General said.
The Report found a 34 per cent increase in the actual cost for the filling operations and the budget for those works submitted by the Ministry.
It also found a 73 per cent increase in the contract price and the actual billing rate from Caristef for the Eastern Avenue, resulting in a CI$43,143 variance.
The reason cited for the variance was the inability of Caristef to source material from it supplier.
‘It is necessary to point out that Quarry Product Limited, who also had a contract to supply material to the AHI project, was the supplier from whom Caristef was receiving material,’ the Auditor General said.
The Report stated that Quarry Products Limited was supplying material at rates less than market (value) to the AHI under a previous agreement with Government to work off an outstanding debt.
‘These rates were lower than the rates being charged to the AHI by Caristef for material received from Quarry Product Limited,’ the Report said.
‘No explicit reason has been given explaining why it was necessary to contract with Caristef to supply, at a higher cost, material that was sourced from a supplier with whom a contract with the AHI already existed.’
The Auditor General’s Report noted that costs of the AHI had increased by CI$1.22 million as June, 2004.
‘In our opinion, the actual costs incurred as at 23 June 2004 have exceeded the expected total costs to complete the project and are not consistent with the amounts originally projected,’ the Report said.
‘As a primary objective of the initiative is the provision of affordable housing, there is little scope for increasing the selling prices of the units in order to recover cost. As a result, if the total cost of the project exceeds the potential revenue for the sale of the units, Government would be required to provide a subsidy to cover the deficit.’
In response the Ministry said the cost figures were only rough estimates of the project and was done prior to the clearing of land.
The Ministry noted that the Windsor Park site had difficult terrain. It also said the Eastern Avenue site had ‘undetected but nasty swamp and peat areas that needed de-mucking and filling, as did the Windsor park site, all of which led to unexpected cost overruns.
In noting the 68 per cent increase from the estimated to the actual amount of fill needed for the first three sites, the Auditor General suggested that ‘not enough planning of this phase of the project was undertaken, resulting in overly optimistic estimates and in the end, cost overruns.’