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The FINANCIAL IMPACT of UDeCOTT’s operations

Published Thursday April 1st,  2010

UDeCoTT is a state enterprise which lists value for money, professionalism and accountability among its core values.  At the Uff Commission we heard their attorneys saying that it is over $20Bn in size.

We need to record the deep public concern at the financial aspects of the UDeCOTT affair.

The State has undertaken the construction of 2.3M square feet of office space in Port-of-Spain and UDeCOTT is the main agent for the execution of those projects. 

To put that into easier terms, the Nicholas Tower at Independence Square contains 100,000 square feet of offices – which means that the State is building the equivalent of another TWENTY-THREE Nicholas Towers.

Key points are –

1.      Feasibility Tests – The feasibility test is vital for proper investment and one of the key elements of that is the financial test.  That test is carried out by adding up all the costs of carrying out the development – the four main items are –

a)     Land;

b)     Professional fees;

c)      Construction costs, and of course –

d)     Cost of Finance.

Based on those combined costs, the feasibility test will provide the ‘break-even’ rent.  That figure is the lowest rent per square foot at which the property could be leased to allow the investor to repay the lenders and obtain a reasonable return on capital.

When the Prime Minister addressed the Senate on 13th May 2008, he made it clear that UDeCOTT operated with the approval of the Cabinet and he also went on to say that there was a special sub-committee of Cabinet which advised on the financial implications of those proposed developments.  See link.  To quote the Prime Minister –

…In this respect, the Cabinet has ensured that:…a Finance Committee of Cabinet was established to review the financial implications of projects...

The first rationale advanced by the Prime Minister and his colleagues for this rush of office buildings was that they would result in government having to spend less on rent.  The idea being that all these new offices would save money.  It was then pointed out by critics that the new offices would result in less rent being paid, and that it was also certain that the cost of these would be huge.  The estimates were that the new offices would cost at least three times MORE than the rents now being paid by government.

In the case of the new office buildings erected by UDeCOTT in our capital, the ‘break-even’ rents are estimated to range from $25-$35 per square foot.  Given that the highest rent ever for office space in the capital was $16 per square foot, it is clear that this huge, public investment in new offices was never the subject of any feasibility tests.  The question remains, what was the advice of the Cabinet Finance Committee on the financial implications of those new offices.

Specifically, Calder Hart was questioned on this aspect of UDeCOTT’s operations at the Uff Commission on 28th January 2009.  Hart confirmed that only one of the UDeCOTT office projects in the capital had been the subject of a feasibility test.  That project was the International Waterfront Project and Hart stated the rate of return to be ‘about 8%’ and the ‘break-even rent’ to be ‘under $20 per square foot’.  When asked ‘what was the amount allocated for the land?’, Hart said ‘nil’.  Please note that to have included the proper land value in the feasibility test would have produced a significantly higher ‘break-even rent’, as outlined above.  Please also note that this is the same parcel of land, which was disclosed in UDeCOTT’s audited accounts as having a fair value of $180M in 2005 and $224M in 2006.

When the land element would have produced a high answer - at a time when a low ‘break-even rent’ would have made the proposed project look attractive - it was excluded.  When the land element would produce a high strong figure for UDeCOTT’s balance sheet, it was included.  That is a plain example of the absolute lack of a sound financial rationale for most of UDeCOTT’s operations.

This feasibility testing is not to be applied to non-commercial projects such as the Brian Lara Cricket Academy (Tarouba project) or the National Academy for the Performing Arts (North and South campuses).

2.      Borrowed Funds – Most of the UDeCOTT development projects are financed by borrowings, with a total of $2.9Bn being disclosed in their 2006 Annual Report.  The point here is that we are yet to start repaying those loans at a time of economic challenge.

3.      Maintenance element – Given current trends, it is unlikely that the monthly cost of maintaining these new office buildings would be less than $3.00 per square foot.  That implies a monthly maintenance bill of just under $7.0M, which is about $85M annually.

4.      UDeCOTT’s missing accounts – Our concern is grounded in the fact that the Companies’ Act 1995 specifies that Company Directors’ lawful duties include the proper management of the respective company’s affairs.  Proper management requires audited accounts as a fundamental tool.

Plainly, in the case of a complex company the size of UDeCOTT, it would be impossible to properly direct its affairs without audited accounts.

The Investments Division of the Ministry of Finance published its State Enterprises Performance Monitoring Manual in January 2008.  That manual can be accessed at http://www.finance.gov.tt/documents/publications/pub0DCE11.pdf and at page 16, we are told

"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.

We have been repeatedly told that UDeCOTT is a top-performing State Enterprise, with whose operations, this administration is well-pleased.

The recent public declarations by the remaining UDeCOTT Directors only add to the seriousness of this situation.  We are left to speculate as to the true depth of the issues existing at UDeCOTT and, more pertinently, given the rising public concerns, whether there is any true appreciation of that company’s financial situation.

We were told on 28th January 2009 by Mr. Hart, under oath, that those accounts would be published “…in the next couple weeks…”.  No accounts yet for 2007, none for 2008 or 2009.

We have repeatedly been told that UDeCOTT is an exemplary and highly-efficient State Enterprise.  In light of those assertions, coming from the Prime Minister and his colleagues, we are entitled to be concerned as to their lack of financial transparency.

5.      The International Waterfront Project –

The largely-vacant International Waterfront Complex was financed via a 15-year bond which, by our calculations, would now be requiring a monthly payment of the order of $14 million.  That project is UDeCOTT’s flagship and, as such, it formed a key part of the executive chairman’s report in their 2006 Annual Report.

The phrase was: “…project financing on competitive terms without the requirement of a government guarantee or government letter of comfort...”  In other words, we were being assured that UDeCOTT was able to repay the lenders without assistance from the State.  In the absence of the usual State guarantees, how is UDeCoTT paying the financiers for this project.  More to the point, how is the carrying cost of the largely vacant complex being shown in the accounts?  The terms of finance secured by UDeCoTT were very competitive.  The rental value of the complex, if it were occupied, would barely cover the debt service.  The plain meaning of that is that it is now a liability in terms of market value, since its rent, even if it were occupied, would be grossly insufficient to cover the real costs as outlined above.  All these issues are present across the entire portfolio of projects, many of which are now completing, post-2006.

The accounting effect of all this will be a significant decline in asset values and a simultaneous leap in debt-servicing/maintenance requirements.

6.      Jearlean John – The newest element in the UDeCOTT story is the appointment of Ms. Jearlean John as Chairwoman of UDeCOTT.  Ms. John is also the recently-appointed head of the Housing Development Corporation.

Ms. John has made several statements as to her intentions to act with transparency and accountability and we welcome those.  A first step must be to publish the missing UDeCOTT accounts.  It cannot be credible or professional to keep proclaiming this State Enterprise as the top-performing one and yet continue to function without the benefit of proper accounts.

We are calling, as a matter of urgency, for the publication of UDeCOTT’s audited accounts without any further delay.  That is the only way that we, the taxpaying public, can form a view as to the true financial position at that most important State Enterprise –

·         How much does UDeCOTT owe?

·         When are those sums repayable, and on what terms?

·         Is the company insolvent?

·         How sustainable is the company’s operations, given the decline in national tax revenues – noted in budget documents to be of the order of $19.0Bn less in 2010, than in 2009 – and the general decline in the real estate market?

These are all legitimate questions, which can only be answered by reference to the audited accounts.

Mr. President, I must repeat that this Government is resolved to ensure the highest standards of conduct, propriety and accountability in all areas of the Governmental process.  At the same time we must resolutely stand firm against the growing propensity of some who keep screaming about corruption without a scintilla of evidence in support thereof.  The people have entrusted us with a heavy and serious remit which we shall discharge in a responsible manner in their interest.

The lack of an explanantion for non-publication of UDeCOTT’s accounts only add to the concerns.

There can be no delay, the UDeCOTT accounts must be published NOW.

Afra Raymond is a Chartered Surveyor, Managing Director of Raymond & Pierre Limited and President of the Institute of Surveyors of Trinidad & Tobago.  afra@raymondandpierre.com

This is an edited version of a presentation made at the Joint Consultative Council for the Construction Industry (JCC) press conference on Tuesday 16th March 2010.

Afra Raymond - Property Matters

We are calling, as a matter of urgency, for the publication of UDeCOTT’s audited accounts without any further delay.  That is the only way that we, the taxpaying public, can form a view as to the true financial position at that most important State Enterprise –

* How much does UDeCOTT owe?
* When are those sums repayable, and on what terms?
* Is the company insolvent? * How sustainable is the company’s operations, given the decline in national tax revenues – noted in budget documents to be of the order of $19.0Bn less in 2010, than in 2009 – and the general decline in the real estate market?

These are all legitimate questions, which can only be answered by reference to the audited accounts.