Speech by MP for Aljunied GRC and chairman of the Aljunied-Hougang-Punggol East Townn Council.
[Delivered in Parliament on 12 Feb 2015]We support the motion and as Town Council chairman I would like to put the concerns about the accounts of Aljunied-Hougang-Punggol East TC in proper perspective.
As we said before, we welcome the audit by the Auditor-General’s Office. The Workers’ Party believes in transparency and accountability. We have given whatever documents we could to facilitate the audit, including documents with mistakes made or that embarrass us. The Town Council has done its best to prioritise the audit with the resources it has. The past year has been gruelling for management and staff, as we were running a live operation at the same time. The team auditing us consisted of 8 members from the AGO, and 8 from PricewaterhouseCoopers, a total of 16, for the past 9 to 10 months. I wish to record my sincere thanks and appreciation to all those who worked long hours to complete the audit.
The Motion expresses concern about some aspects of the TC’s accounts and record keeping, particularly in FY 12, two years ago. We, the MPs of Aljunied, Hougang and Punggol East, are concerned about these matters.
Some of the matters flagged out have already been addressed or improved upon. Others are works in progress that require more time. To facilitate the public’s understanding of the key improvements we have made or are making, I wish to distribute Annex 1 to my speech.
In this debate, all the MPs of the town will be giving more insight into specific areas to enable the public to have a better understanding of the matter and the actions we have taken and are taking in response to the AGO audit.
I will focus on the findings about the Sinking Funds and Related Party transactions.
Sinking Funds
We note that there could be a misunderstanding among some members of the public that the Sinking Fund monies were somehow lost. This is not the case. At all times, the monies that were not transferred to Sinking Funds were still in the TC’s Operating Fund bank accounts. The issue picked up concerns the transferring of the monies from one bank account to another.
Let me explain how the omission to transfer arose, before I go into the corrective actions taken.
Monies such as income and government grants are first received into the Town Council’s Operating Fund accounts. During FY 11 and FY 12, the TC made some payments for Sinking Fund expenses out of the Operating Fund accounts, believing it could nett off the Sinking Fund expenses before making the transfers to the Sinking Fund accounts later.
The TC accepts that it should have transferred the full amounts due to sinking funds each quarter, and should have paid sinking fund expenses directly from Sinking Fund accounts. We have taken steps and made good the transfers. For FY 11 and FY 12, the necessary transfers have been done. We have also done the transfers for FY 13, and have been making transfers for FY 14. As for the errors in transfer amounts flagged by the AGO, we have also made the corrections and payments.
The AGO noted that the TC had wrongly used Sinking Funds for the Neighbourhood Renewal Programme. The TC had assumed that funds for Neighbourhood Renewal Programme should be deposited into Sinking Funds and paid from there. However, as there was actually no legal requirement to keep NRP funds in Sinking Funds, we have corrected this and henceforth transacted for NRP projects out of Routine or Operating Funds. This error arose because the Managing Agent had not encountered managing an NRP project before and was not certain whether such NRP monies should be transacted out of Sinking Funds or Operating Funds. This was not a case of using sinking funds for the wrong purpose.
Madam, there is still one issue to be attended to, and that is the amount of GST refunds to be transferred back to Sinking Funds. This will take some time to unravel. However, going forward, the TC will work with its IT system vendor to implement a function to capture Sinking Fund payments that attract GST. This will make it much easier to compute how much GST refunds from IRAS should go back into the Sinking Fund.
The observation about Sinking Funds lapses has thus been substantially addressed.
Related Party Transactions
I next move on to Related Party Transactions (RPTs).
The Town Council has never disputed that the Town Council and its Managing Agent FM Solutions & Services Pte Ltd are deemed to be related parties under the Financial Reporting Standards. In a small set-up like FMSS, which focuses on managing one Town Council, it is inevitable that the directors of the company would be involved in holding key positions in the Town Council as well.
This issue of RPTs in our TC has been the focus of much media attention. Misimpressions have been created that the TC Secretary and its General Manager, who are the main directors and shareholders of the company, are freely being given contracts without tender and paying themselves handsomely without accountability. Contract values have been highlighted in media headlines, as if these were profit margins. It is necessary to highlight some key facts, as these misimpressions need to be debunked.
1. The MA has no decision-making power in relation to the award of tenders. Tenders are awarded by a Tenders & Contracts Committee consisting of Members of Parliament and appointed Councillors with no interest whatsoever in the MA.
2. The MA is not involved in evaluating any tender in which it is participating. When the MA and EMSU (essential maintenance services unit) tenders are involved, the MA is excluded from the deliberations.
3. The only time FMSS was appointed to provide services without tender was in 2011, in the aftermath of the General Election. These waivers were only for two contracts for very short periods of time – one for MA services for one year, and the other for EMSU services for nine months. They were transitional arrangements.
4. For all subsequent contracts involving FMSS, open tenders were called and advertised in the papers accordingly.
5. For the first contract in 2011 for MA services, it was triggered as the incumbent MA, CPG Facilities Management, asked to be released from the contract with the TC for business reasons. There was an urgent need to put in place a computer system due to the termination of the former system in use. FMSS was appointed for a one year period only, to help the TC in the transition phase. Their rates were the rates that CPG FM charged the former Aljunied TC.
6. For the first contract in 2011 for EMSU, there was no intention to waive competition. The TC’s preference was to extend the existing contractors until a tender could be called for the whole town. However, the existing contractors were not agreeable. FMSS was appointed to provide these services for 9 months until the tender could be awarded for the town. I shall elaborate more on this shortly.
7. In 2012, open tenders were called for MA services as well as EMSU services, for the six wards in Aljunied-Hougang Town. For MA services, 3 companies purchased the tender documents, including EM Services that is the MA for many PAP Town Councils. When the tender closed, only FMSS tendered to be MA for AHPETC.
8. Prior to submitting their tender, FMSS submitted their declaration of interest in accordance with Town Council Financial Rule 76(3). As the TC was left to evaluate FMSS as the sole tenderer in 2012, the TC decided that it was prudent to have the tender evaluation process for MA services subject to a voluntary audit. It called for quotations from three audit firms, and appointed one firm to do the review. The agreed-upon scope included considering whether the current procedures and practices were adequate to ensure that the procurement was made in the ordinary course of business, and whether there were adequate controls to ensure the award was conducted in an unbiased, objective, fair and transparent manner; it also covered assessing whether the evaluation and award of the tender was conducted in accordance with existing requirements and good corporate governance practices. The auditors examined the records of the evaluations done and also sat in on an evaluation meeting. After this voluntary audit in 2012, the TC was graded “A”.
9. Contrary to some misimpressions that the Managing Agent has a free hand to manage the Town Council, the Town Council in fact has in place various structures to overseee the work of the Managing Agent. I would like now to distribute Annex 2 to my speech, showing the various committees and channels that aid monitoring of the MA’s services. As can be seen, there are multiple avenues by which the Town Council holds the Managing Agent accountable for its work and service levels.
Disclaimer re RPT in FY 12 Financial Statements
In the TC’s audit for FY 12, our auditors put in a disclaimer that because the project management fee details were not disclosed in the Financial Statements, they were unable to determine the completeness of the related party disclosures. The TC could not understand this at the time, as there was no clarity of practice in the financial statements of Town Councils. For instance, the same auditors audited us in FY 11, and only required a related party disclosure of the MA fees. The former Aljunied Town Council management also had related parties, and yet there were no related party transaction disclosures in Financial Statements, which had no disclaimers.
The TC has no issue with disclosing the value of the related party transactions. Moving forward, we have suggested that the Ministry make it clear which parties are considered related in the town council context. Most TCs are managed by MAs, with the TC Secretary and GM being fairly senior staff in their respective companies.
Should all TCs then make such related party disclosures?
I also note that due to certain media reports, there may be a misperception that the values of the project management fees and EMSU fees paid to the MA were not recorded in the Financial Statements. There are no off-book payments whatsoever. These fees are recorded in the Sinking Fund expenses and Operating Fund expenses. The auditors’ issue in FY 12 was that they wanted specific disclosures under a Related Party
Transaction heading.
EMSU contract for 9 months
I next move on to the EMSU contract awarded to FMSS for 9 months commencing October 2011. AGO has flagged several lapses related to this, such as not planning properly so as to call a tender, and lack of due diligence in assessing the fee proposal. We agree we should have handled the situation better. However, please allow me to explain the situation at the time.
The new team had just taken over management on 1 August 2011, and was focused on priorities such as stabilising the estate management operations and also upscaling the computerised financial accounting system to cater to the GRC accounts. At that time, the EMSU services for the six wards in Aljunied-Hougang Town were then being provided by 3 different contractors, due to electoral boundary changes for GE 2011. Aljunied GRC had 4 wards serviced by CPG FM, one ward drawn over from Marine Parade GRC being serviced by EM Services, and Hougang SMC being serviced by FM Solutions & Integrated Services. The TC had wanted to preserve the existing contractors until a tender could be called for EMSU services for the whole town. There were verbal discussions with CPG FM to extend their contract for six months, but in the end, it did not materialise. By the time the official reply was received, it was mid-September, two weeks before the contracts expired on 30 September 2011. The Town Council had appointed a committee to evaluate a proposal by FMSS to step in due to the urgency and the public interest.
The Committee met on a Sunday 18 September 2011 and went through the proposal to use the existing rates charged by CPG FM and EM Services. Unfortunately, it was not noticed that for 2 of the items, the wrong multiplier was used; the items were costed per equivalent dwelling unit (EDU) rather than per lift and per block. There was also a rounding of a unit rate to 2 decimal places instead of 3, resulting in an erroneous calculation. Approval was obtained from the Town Councillors via email for an estimated fee of about $70,000 when the fee should have been in the region of about $50,000.
We have gone back to investigate the matter. Though the approval was for a fee of $70,000, the actual amounts billed by FMSS were lower, being about $67,000 to $68,000 each month. The TC has since calculated the amounts using the correct multipliers. There was an unintended over-payment to FMSS for the 9 months. A sum of about $122,000 has since been paid back to the Town Council to correct the error.
Why did the error occur? I bear personal responsibility, as I was Chair of the evaluation committee. Despite the urgency of the matter, I should have ensured that the former contractors’ invoices were sighted for comparison before the Committee accepted the pricing proposal and obtained the Town Council’s approval. That said, the error was not deliberate. There was absolutely no intention on the part of the Committee nor the contractor to approve higher payment rates for this interim period of 9 months.
Disclosures of RPTs
It was pointed out that before entering into contracts with FMSS, the relationships and extent of past or existing dealings should have been recorded as considered by the Town Councillors. We note the advice and will exercise more diligence in detailing and recording the RPTs in future and to discuss how to mitigate the risks. To this end, we will implement a checklist to be filled in by all tenderers and contractors to facilitate this.
I wish to highlight however, that, in the circumstances, there was little risk that the Town Councillors did not know of the relationships and past contracts. At the time the contracts in 2011 and 2012 were entered into, the appointed Town Councillors remained the same (See Appendix C para 1.20). They knew of the circumstances of the formation of FMSS and contracts being awarded to FMSS and their values. When the tenders from FMSS were received, the ACRA corporate profile of FMSS was submitted and considered by the Committees evaluating the tenders.
Oversight of payments
Much has been published about the fact that the Secretary and General Manager issued invoices, certified work done and approved and signed cheques to FMSS. Appendix C Attachment 1 and its total amount for 84 invoices of $6.6 million has been the subject of a front page headline on 9 February 2015. The Lian He Wan Bao headline entitled: “TC Secretary and GM pay their own company $6.6 million” has caused the intended alarm. However, the alarm is not warranted. Let me explain why.
First, regarding cheque payments to FMSS, the TC adopted an SOP on 8 September 2011, soon after the new management took over. It was the policy that no cheque to FMSS, of whatever amount, could be issued unless either the TC Chairman or one of the Vice-Chairmen co-signed the cheque. Thus, it was not possible for FMSS to pay itself unless authorised by the TC Chair or Vice-Chair, who have no interest in FMSS whatsoever.
Secondly, out of the amount of $6.6 million in payments, about 96% or $6.4 million pertain to agreed monthly sums for MA and EMSU services rendered. These were monthly payments under contracts approved by the Town Council, where the rates were already approved.
Third, regarding the issue of segregation of duties, it is clear from the Appendix C’s list of 84 invoices that, from item 30 onwards, following the appointment of a new finance manager, we adopted an approval process whereby there were three other persons not being a director of the MA who were involved in the certification of work, issuing of payment voucher and signing of cheques. In other words, the segregation of duties was done on the TC’s own initiative within FY 12 itself. It should be noted that the bulk of the invoices in the Attachment 1 are subject to the improved approval procedure (55 out of 84). As for the 11 invoices where the General Manager also certified work done, these were before July 2012, and 9 pertained to agreed monthly fees for EMSU and MA services approved by the TC earlier, leaving just 2 items (s/no 17 and 21) totalling just $1,165.
Madam, please allow me to distribute Annex 3 to my speech, setting out some key facts about the 84 invoices.
The question was asked as to how much the Chair or Vice-Chair would verify works done before signing cheques. The 3 categories of works FMSS provides are project management, MA services and EMSU services.
(a) For projects, the cheque signer would usually see the architect’s certificate and quantity surveyor’s calculations of the value of works done. The project management fee is a fixed 3.5% of the works. The auditors said that they were unable to verify what was presented to the cheque signer at the time viz FY 12. The TC had explained that the supporting documents had been detached after the cheques were signed, as they needed to be filed by the estates and projects department.
(b) For the MA payments, which are based on agreed monthly rates, the level of services provided is the subject of evaluation on a daily basis. (App C para 1.23). Annex 2 to my speech refers. It would be interesting to know what independent checks other town council chairmen make before signing cheques for payment. We would be enlightening to know so that we can learn from best practices.
(c) For EMSU services, monthly reports are additionally churned out to show performance based on the time of response and actions taken based on various indicators.
Managing RPTs better
The TC had started to introduce more oversight into works and payments to its MA. Annex 2 refers.
(a) As regards project management, we continue to require the architect’s and quantity surveyor’s certificates before processing project management fees. Since April 2013, the Members of Parliament started attending project meetings, to assess the necessity for works and the details. Since late 2014, the Town Council’s Estates and Community Liaison Committee has been tasked to approve works and project management fees before the works commence. The TC Chair is also now asked to sign off on the Works Orders before invoices are issued for project management fees.
(b) For MA and EMSU fees, additional procedures have been introduced. Instead of direct invoicing, a works order is raised by the Office Manager and countersigned by the TC Chairman. Thereafter, FMSS would raise its invoice which is forwarded to the Finance department. The payment voucher would be approved by the Deputy General Manager before the cheque is issued. These enhancements were noted by PwC (App C para 1.39).
Madam, going forward, we will draw up a checklist in assessing tenders and contracts, to ensure that the necessary information is captured and presented to the persons deciding on awards. The decision-makers can then also decide how best to manage the conflicts of interest.
Responses to Minister Khaw Boon Wan’s speech
The Minister stated in his speech earlier that the TC or MPs had shown disrespect to the auditors or Parliament for not submitting documents as requested. This is not the case. Throughout the audit, thousands of documents were provided. For example, more than 16,481 payment vouchers were produced.
In Appendix C of the AGO report (p.3, Attachment 2), Members will see there is just one out of 22 requests outstanding. In Attachment 3, just three out of 75 are outstanding.
If Members were to review the last column of the Attachment 4, they will see that most of the documents requested have been provided.
Regarding the late submission of Annual Reports, as the Minister knows the AGO audit was called in February and commenced in March 2014, we were not able to commence the audit for FY13 while the AGO had our documents.
As for the submission of reports on cyclical maintenance, we have submitted some information to MND and are still in discussions with MND over some of the data.
The Minister also raised concerns whether lifts in the town are overhauled on time. From the information that I have here, there currently just 12 lifts that are due for overhaul and we are attending to them. Some lifts are due for Selective Lift Replacement Programme (SLRP). For the parts and hoist ropes, we are on time and the batteries have been scheduled in accordance with the list given to MND.
The Minister also gave AHPETC a deadline for submitting the FY13 and FY14 Annual Reports by June and August this year. I am not sure whether we can meet the deadline. We will have to check with our auditors.
Conclusion
Madam Speaker, FY 12 was the first full year of our operations in Aljunied-Hougang Town. Despite the almost year-long intensive audit, the 12 auditors have not uncovered any basis to suspect deliberate malpractice nor any loss of funds. There has been no finding that we have been dishonest or have falsified records. Despite the issues in financial management, our residents’ interests have not been compromised.
I have set out the circumstances leading to the lapses in relation to the management of Sinking Funds and the Related Party Transactions, so that the public may understand more fully what led to them.
We thank the public, and especially our residents, for their kind understanding and support of our work.
We will continue to put in efforts to do better.
