The Cayman Islands government acted unlawfully and “without proper authority” in signing two of the territory’s largest-ever private sector development agreements, the auditor general’s office concluded in a report released Thursday.
The original National Roads Authority agreement, which paved the way for construction of a Kimpton hotel and permanent closure of a section of West Bay Road along Seven Mile Beach, was negotiated by elected ministers “without the knowledge or assistance of civil servants.”
In the case of the agreement on Health City Cayman Islands, often referred to locally as the “Shetty hospital” after its founder Dr. Devi Shetty, auditors stated: “No approval from the Legislative Assembly was sought, even though the agreement committed government to hundreds of millions of dollars in tax, duty and fee concessions and contained obligations for infrastructure upgrading and expenditure.”
Auditor General Alastair Swarbrick said the NRA agreement and the Health City hospital were used in his report merely as examples of how the Cayman Islands government failed to properly manage, or in some cases properly participate at all, in the development process.
“The governance framework for government expenditure requires that ministers set objectives and policy, but do not become involved in selection of means or in operation implementation,” the report, titled “National Land Development and Government Retail Property,” states. “Moreover, all activity and expenditure must be approved by the Legislative Assembly.”
According to the report, Cayman Islands government officials admitted that elected ministers had played a greater role relative to these two projects than is prescribed. However, the unnamed officials noted that, in their view, “It is not practical to exclude ministers from them, regardless of the governance framework of the Cayman Islands government” due to the “national importance” attached to such projects.
Mr. Swarbrick said Thursday that he “had some sympathy” for the position expressed in that statement. However, he said ministers and the government in general had not followed the government’s own laws and regulations with regard to the approval of these two projects.
“This is a challenging issue and it’s something we continue to see across most of our audits,” he said. “Where does the political responsibility start and stop? There needs to be an open and frank discussion around that.”
The agreement concluded during the former United Democratic Party administration between government and Dart Realty Cayman Ltd. underwent some review prior to being signed, but auditors said a Cabinet paper presented by the former Ministry of District Administration was based entirely on reports from the private sector developer.
After signing the initial deal, government did conduct an “independent review” to determine whether it was receiving value for money, auditors said. However, that review raised questions about concessions made for stamp duty related to the project, as well as import duty abatements and a proposed hotel tax rebate.
“The agreement was too vague to determine what the government would eventually have to give [Dart Realty] in exchange, including the forgoing of future revenue,” the audit report noted. “The government had inadequate understanding of the costs in terms of duty and tax concessions to which it had committed itself for up to 40 years.”
Although the current government has since renegotiated the terms of the hotel tax rebate agreement with Dart, auditors noted that for a period of time the Progressives-led administration refused to honor that portion of the deal.
If the renegotiation had not been successful, there would have been a risk of expensive litigation and that could have left the government liable for damages to Dart Realty, auditors concluded.
Two studies were undertaken relative to the Health City Cayman Islands project before the hospital opened in East End in February 2014. One was completed by the private sector company proposing the development, the other was done for the government’s Ministry of Health.
Neither study resulted in a complete, fully documented report, auditors noted. The private sector review focused mainly on potential revenue streams and the company’s own financial forecasts, while the ministry study questioned the competitiveness and profitability of health tourism in the Cayman Islands.
Auditors revealed that when the hospital agreement was discussed in Cabinet, questions were raised about signing such a deal without “a full study.”
“Assurance was provided that the proposal had been researched by the former minister and that a full study was in progress,” Mr. Swarbrick’s report found. “No such study was ever completed.”
The conclusion from auditors was that the government committed to tens of millions of dollars in expenditure for the Health City Cayman Islands project without adequately researching the costs involved.
“There is a risk that, should Health City expand to its full size, the Cayman Islands government could come under pressure to provide infrastructure which it cannot afford,” auditors found. “While employment of Caymanians would increase and there would be private benefits, there would not be a proportionate growth in tax revenues due to the concessions given the company.”
According to auditors, concessions for the hospital project included US$800 million in customs duty concessions on medical equipment and supplies, an unknown amount in reduced work permit fees, provision of water at a preferential rate by the Water Authority, Cayman for “an unspecified period of time” and a commitment to upgrade airport facilities to accommodate an expected increase in traffic due to medical tourism.
“Again, no information was provided to the Legislative Assembly, even though the agreement committed government to hundreds of millions of dollars in tax, duty and fee concessions and contained obligations for infrastructure upgrading and expenditure,” auditors found.