REPORT OF THE.

PARLIAMENTARY STANDING COMMITT;EE ON THE PUBLIC ACCOUNTS ON THE SPECIAL REPORT OF THE AUDITOR GENERAL ON THE MOTOR VEHICLE SAFETY AND EMISSIONS TESTING PROGRAMME

TO HIS HONOUR THE SPEAKER .AND THE MEMBERS HOUSE OF ASSEMBLY:

OF THE HONOURABLE

The Parliamentary Standing Committee on the Public Accounts has the honour to submit the following Report:1. INTRODUCTION a. Your Committee lis pleased to report to the Honourable House of Assembly that we have reviewed the outstanding 'Special Report of the Auditor General on the Motor Vehicle Safety and Emissions Testing Programme'., dated October 2010. Your Committee's work is still not closed on this special report and there will be further review of issues raised in it as more data comes to hand .. b. Matters raised in the Auditor General's Special Report were sufficiently serious that your Committee felt it should concentrate its investigations on matters relating to this report and try to drill down as much as our remit allowed. Since our last report your Committee has met eleven times and has held two public sessions.

c.

2.INTE,RVIEWS
a. Your Committ.eein its deliberations interviewed a number of individuals whose responsibilities were directly related to the selection of Bermuda Emissions Control Ltd. (BECL) as the vendor to provide Government with an emissions control and testing facility, as well as on-going, oversight of their operations at the Transport Control Department (TCD) of the Ministry of Transport (MoT), later the Ministry of Tourism and: Transport (MTI). The interviewees were: i. Mr. Herman Tucker, former Permanent Secretary, MoT (in camera) .. ii. Mr. Kevin Monkman, former Permanent Secretary, MoT (in camera). III. Mr. Donal Smith, founder & President, BECl (in camera). iv. Mr ..Randy Rochester, Director of TeO (public meeting).

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v,
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VII.

viii. b.

Mr. Marc Telemaque, former Cabinet Secretary and Permanent Secretary, MTT (public meeting). Ms ..Joyce Hayward, Accountant General (public meeting). Ms. Roseanne Fay, Assistant Accountant General, (public meeting). Mr. David King, Assistant Accountant General (public meeting).

Your Committee would like to thank the above mentioned individuals for their cooperation and assistance in our deliberations.

3..

Your Committee investigated all five segments of the Auditor General's Special Report: 8.. Vendor selection b. Project definition c. Oversight of construction d. Disbursement of funds e. Operating Agreement

4.

VENDOR SELECTION a. BECl'g founder, a local entrepreneur, brought the concept to the attention of Government in the 1990's and after several years of analysis by Government, including a formal report by a recognized expert in the field, the 'idea that pollution emitted by motor vehicles in Bermuda was something that should be controlled, took root in Government circles. b. Your Committee could not g.et much clarity with regard to how the decision was arrived at to pursue a centralized Government-owned approach versus a decentralized private sector approach most commonly found in other countries, although a former MoT Permanent Secretary [Interviewee Oi)] stated that he had supported the decentralized approach. But the decision to have a centralized government-owned model was a crucial one insofar as all of the subsequent issues are concerned, as a decentralized private sector model would not have given rise to the level of public spending that took place. BECL 'initially shareholders. had only its founder and one other individual as

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d.

Interviewees testified that even as early as 1999 it was a foregone conclusion that if emissions testing were to go ahead BECL would likely be overseeing the project development. August 2001, the then Minister of Transport signed a letter declaring

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BECt as "the preferred vendor" for emissions control, even though: Such preference had not been approved by Cabinet. ii. Such preference contravened Financiallinstructions which called for at least three competitive bids,

i.

f.

At that time, BECL was essentially a one man company with no resources to construct a major structure in Hamilton and two satellite facilities. Neither did it appear that BECL had the financial resources to provide the working capital required that such an enterprise demanded. The Committee found no evidence that such issues were viewed as critical by Government. We were informed that Correia Construction Company Ltd. (CCCL) took a shareholding in BECL in February 2003, as a result of the former paying off unspecified expenses incurred by BECL. MoT viewed CCCL's stake in BECL as providing "financial backing!" for BECL, suggesting that at least somewhere in MoT the matter of BECL's lack of financial resources might have come up. However, MoT did not have any concern about a potential conflict of interest developing. Insofar as MoT officials were concerned, there was no other potential vendor "on the horizon" and, insofar as BECL had been working with Government on researching the matter and developing standards, there was "an understanding" that BECl would be awarded the contract. There was no evidence of a tendering! process which would have allowed for any comparison of bids .. In December 2006, BECL was awarded a contract, "Consultancy Agreement," relating to the construction of as well as two satellite facilities. This agreement became through which BECL then contracted CCCL to carry out work ..In December 2008, Cabinet approved the Operating BECL. by way of a the main facility the mechanism the construction Agreement with

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PROJECT DEFINlnON 8.. Your Committee endeavoured to ascertain from the interviewees how a project cost could balloon from the initial $5 .. million estimate to over $15 3 million.. It was difficult to obtain a definitive answer to this all important question. b. The best attempt at an explanation we received was from the former Cabinet Secretary and Permanent Secretary of MD, who declared that even before ground was broken the cost estimate had escalated from $5.3

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million to about $12 million, and that plans at that point in no way resembled the plans relating to the $5.3 million estimate. But there was no explanation of why the final project tally exceeded even the final-revised TAF by some $983,000. c. An important part of cost control is to define what is needed and to satisfy that need in a disciplined way. In this instance, significant structural additions were decided upon subsequent to the approval of the initial plans without due regard given to the soaring costs.

6.

OVERSIGHT OF CONSTRUCTION
a. In addition to major breaches in procedure for vendor selection, prescribed checks and balances were further eroded in the oversight of construction.

b.

MIT initially considered a "build then buy" strategy, which involved the vendor building and owning the facilities, then selling them to Government. This appeared a bit outrageous, given that the land already belonged to Government. It is ironic that the "build then buy" strategy was seen in Government as "not the most cost-effective way to proceed", because the approach that was actually taken turned out to be in no way cost effective . . t was in fact MTT that recommended I to have BEGUCCGl build the facilities as contractors for Government. This decision was critical. i. The advantage of the "build then buy" strategy to Government was that the operational risks, including those relating to cost overruns, would have had to have been shouldered by the contractors: i.e. BECUCCCl. The strategy actually taken by Government, which was "almost" the standard procedure, placed all the operational risks, including cost overruns, squarely on taxpayers' shoulders. "Almost" - because no Government ministry had a role in verifying change orders on the construction work ..
Financial Instructions prescribe that "all capital development projects, with the exception of minor works, must be the responsibility of Works & Engineering (W&E)", who employ engineers just for such purposes. This did not happen in this case. The Financial Secretary has attempted to explain why oversight of this project was not handled by Works & Engineering. He cites the passing of this responsibility to MoT when specialized expertise was required to resurface the Airport runways sometime in 2000/01. Your Committee requested sight of the document authorizing this change. No such document could be found. Certainly a Budget Book footnote stating, " ...projects of the Ministry of Transport are also outside the

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scope of responsibility of the Permanent Secretary of W&E..." is not
proper authority. In fact, the Auditor General has received a legal opinion stating that the responsibility and oversight role of W&E cannot be legally transferred without an amendment to Financial: Instructions. e. The transfer of supervisory authority to Transport, notwithstanding the absence of an authorizing document, was intended to be a one-off for the runway resurfacing project, and not permanent. However, no one in the Ministry of Finance appeared to be cognizant of the potential conflicts of interests that might arise from an operating government department also having supervisory authority over its own capital projects. Finance appears to have simply allowed MTT to proceed as if this was normal.
I.

MTT operated outside of the parameters of Financial Instructions regarding W&E oversight on capital projects.

f.

In addition to the appearance of fa government within the government', there was a conflict of interest between BECL and CCCL: the former being the contracting firm, the latter being the actual construction company, but having a shareholding in BECL. Significantly, BECL was a one man company and, for its operations on the TCD project, BECL used CCCL's accountant to produce its accounts ..How could BECL control or supervise the activities of CCCL under those circumstances? Clearly, it could not. The contractor, BECL, which was controlled by the subcontractor, CCCL, was in no position to refuse change orders. They were simply rubber stamped. Thus, CCCL had no risk of having change orders refused.
I.

g.

ii.

Change orders were being sent to BECL for approval. But BECL was essentially fulfilling a figurehead role for CCCL, the ultimate contractor, so there were no effective checks and balances, although the Director of TCD was required to sign-off on all payments. The retaining of Entech, the architectural consulting firm, did not remedy the problem because Entech was retained by BECL instead of the project's owner, the Bermuda Government.

h.

Statutorily, BECL was doing what W&E was supposed to be doing. For example: an engineer submitted an application for a million dollar change order and BECt approved it the next day. It was highly unusual, and unlikely that proper due diligence was carried out for such a large change order in such a short period of time. It would have been reasonable to expect such a large change order to be rejected pending more back-up information.

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i.

The Permanent Secretary of Tourism and Transport and the Director of TCD ought to have known of these breakdowns in the system of checks and balances required by Financial Instructions, as they relate to the actions of BECLlCCCl. StHI,they continued to push ahead. When questioned about this, the former Cabinet Secretary and Permanent Secretary of MTT referred to a previous overarching decision by Cabinet to have a single vendor for emissions control. i. He was asked why MTT disobeyed a Cabinet Conclusion that required the satellite facilities to be put out to tender. ii. If the two Cabinet decisions were in conflict, why did he not, as PS, recommend to the Minister to take it back to Cabinet for clarification. iii. Even without that clarification, it would have been reasonable to conclude that the most recent decision by Cabinet was its current thinking, notwithstanding a decision it had made in the past. Adding weight to this logic was the fact that the most recent Cabinet decision conformed with standing Financial Instructions. IV. Instead of this line of thinking, the Ministry chose to ignore the most recent Cabinet instruction, and tried to use a previous decision as cover for its actions .. The former Cabinet Secretary and Permanent Secretary of MTT, after pointed questioning from the Committee, eventually admitted that he should have advised the Minister to return to Cabinet for clarification. But that did not happen. This is evidence of the Ministry acting ultra vires to Financial Instructions. RECOMMENDATION Your Committee recommends that Government contracts should be sufficiently clear and unambiguous, and should be designed, so as to ensure that there is an appropriate level of protection for the public purse.

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DISBURSEMENT OF FUNDS a. Despite the attempts to control all aspects of the project within MTT, funds could only be disbursed by the Accountant General, in her treasury function. b. The Accountant General questioned why the project had not been put out to tender according to Financial Instructions. She requested documentary evidence that justified the single vendor strategy, but never received any.

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She was told to "just make it happen" by the Permanent Secretary of MTT, through the MTT controller. c. She was told that expert advice had been given to justify this strategy, but never saw or heard any proof. She attended meetings which were intended to figure out how to make the procurement of the satellite fadlities conform to Financial mstructicns. At some of these meetings a representative from BECL was present; a circumstance which appeared to the Accountant General to be most improper. To satisfy Financial Instructions relative to the vendor selection for the satellite facilities, two cost assessments were produced, which were found not to be acceptable to the Auditor General's Office. An Assistant Accountant General testified that a request for disbursement had come to him using a draft contract as authority for the payment. He refused to authorize the issuance of the cheque and waited for several months until he sighted the signed contract, which he found to be very different from the draft copy that he was originally given. The PS for Works & Engineering had told your Committee during last year's parliamentary session that he had refused a payment request on this project because W&E had no knowledge of it, having been completely circumvented by MTT. Thus, some checks and balances in Government did actually function in this case, but not sufficient to save taxpayers millions.

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8.

OPERATING AGREEMENT a. BECL also had the contract to operate the emissions testing at TCD once the facility was built. This involved several civil servants becoming employees of BECL b. The Operating Agreement and the relationship between BECL and TCD was the responsibility of the Director of TCD. During questioning, it was revealed that the operating contract called for BECL to be reimbursed for certain operating expenses such as rent, depreciation of equipment, property taxes and equipment repairs .. However,the audit showed that these expenses were already being incurred directly by Government Moreover, BECt was not due reimbursement for depreciation because Government, not BECL, owned

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the equipment. Therefore, BECL has been receiving money under the contract that was not properly due to it. d. The Director claimed that when the contract first came to his attention he was concerned that the initial intent was to grant BECl the contract for 10 years. He advised against that term and it was revised to five years plus the option to renew for a further five years. The Director thought that if the testing was done totally by Government, savings of about $1 million per year could be effectuated.

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9.

REMAINING ISSUES a. Your Committee questioned BECl's founder about its role in the project's construction phase. His answers indicated that he had little active knowledge or interest in the details of the project. merely rubber stamping payment requests, although he did say that he thought he should have participated in the "profits of the construction period". We asked the BECL President if the Committee could view the accounting records of his company. as it related to the TCD project, and he willingly agreed to do this. However, this request was effectively vetoed by his accountant, who is supposed to answer to him, but who was also the accountant for CCGL. In this circumstance, your Committee was obliged to conclude that BECL was clearly fulfilling a figurehead role on behalf of CCCL. b. Your Committee has the authority, under section 30 of the Parliament Act 1957, to obtain records of BECL as the primary contractor for the TCD project but, to date, they have not been made available to us. Section 34 of the Parliament Act also empowers your Committee to summon the accounts of CCCl, which we intend to do in furtherance of our investigation. The Committee's position is further supported by the legal opinion on this matter which has been provided to the Auditor General by her Legal Counsel. It is clear that there was a specific intent, at the highest echelons of MTT, to give this contract to BECL, irrespective of what Financial Instructions prescribe. The burning question is why. It is a question squarely in the public interest.

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10.

CONCLUSION

a.

Your Public Accounts Committee will exercise its powers to follow any thread of evidence and follow the money wherever it may lead. Only then will the public have confidence that the public's money is being properly spent and that the public is getting proper value for money. Your Committee would like to acknowledge the invaluable advice and assistance provided by the Auditor General, Mrs. Heather Jacobs Matthews, and her professional staff during our deliberations; as well as the sterling work done on behalf of the Committee by the Deputy Clerk to the Legislature, Mr. Clark W. Somner. We would also like to thank MG Court Reporting & Transcription Services for their support in our public meetings. Your Committee recommends that the Minister of Finance be requested to inform the Honourable House of Assembly of the action to be taken on the points raised in this report.

b.

c.

ALL OF WHICH IS RESPECTFULLY SUBMITTED.

Mr. Everard T Richards, J.P., M.P.-

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Mrs. Patricia J. Gordon Pamplin, J.P., M.P.

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Hon. Walter M. Lister, J.P., M.P. Ms. Lovitta F. Foggo, J.P., M.P. Hon. Wayne L Furbert, J.P., M..

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