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Housing fee protected contracted workers, documents reveal

A $5,000 contingency fee levied against low-cost homeowners’ mortgages in 2005 was a “calculated and deliberate” move to safeguard the income of “contracted workers” while putting homeowners at a disadvantage, according to a special brief included in Department of Housing documents obtained by The Nassau Guardian.

The documents are part of a dossier examining construction costs, including a contingency fee that was added to the cost of units being built by the Ministry of Housing, and passed on to Bahamas Mortgage Corporation (BMC) mortgagees, beginning in May 2005.

The confusion and concern was so great over the contingency fee – who determined it should be instated, specifically what it was for, where and how it was spent and if or how it had been reconciled – that an investigation was ordered by cabinet.  The results of that investigation have not been made public.

In the meantime, the already cash-strapped BMC has had to come up with $2.6 million to reimburse 822 homeowners for contingency fees that officials said they have not been able to reconcile.  It is part of a much larger financial problem faced by BMC, which, according to its chairman, Senator Dr. Duane Sands, was on the verge of bankruptcy when the Free National Movement (FNM) came to office in 2007.

The documents present a confusing state of affairs and raise a wide range of questions related to transparency of processes within the government’s housing program, financial management, and why years passed without financial audits being conducted, a requirement by law and financial regulations.

Special mention is made of the status of funds deposited in the corporation sole account — controlled specifically by the then minister of housing and his team — and a number of memos from housing officials providing senior officials and investigators with various explanations for the initiation of the fee as part of the unit cost, and how it was arrived at.

According to an unsigned and undated brief, entitled “Update on Contingency”, initial inquiries revealed that the fee was to cover unexpected surface defects during the housing construction projects.  It was also noted that housing officials were concerned that extra land fillings and foundation footings would have been necessary.

However, further investigations uncovered something different, according to the brief.

“Further investigations now reveal that during an administration meeting that included former Minister Shane Gibson, then Permanent Secretary Leila Green, Technical Director Gordon Major and consultant Anthony Farrington, part of the agenda included discussion on a contingency fee for the new housing project.

“Mr. Major was responsible for submitting the eventual unit cost for the homes.  He indicated that he was present when the $5,000 figure was derived at and agreed to be used as a source of funding to pay contracted workers.

“Mr. Major added that at the time he did not advance or object to the $5,000 figure being applied to the homeowner’s loan,” according to the brief.

No written account could be found for this administration meeting, said officials.

The brief explained that before the fee was added to the unit cost, the Bahamas Mortgage Corporation, which facilitated the mortgages, would advance the contingency funding to the corporation sole account (controlled specifically by the Ministry of Housing) but this process “evidently” was not “as proficient as intended” because BMC would only move funding upon closure of any particular subdivision.

“The intent then may have been to secure future monetary resources for the sole account as security for contracted workers’ salary,” said the brief.

“A sense of insecurity may have taken hold when housing executives realized that the sole account was nearly exhausted when in June 2002 the account balance was $2.8 million, while the cash book was at $493,720.10 as of June 30, 2003.  As of April 30, 2007, the sole account remained in steady decline, as it stood at $89,465.31.”

According to sources with intimate knowledge of the situation, officials have not been able to determine how the money in the sole account was used and what it was used for.

“These accounting figures would suggest and support the notion that the high contingency cost was a calculated and deliberate act solely to safeguard the income of contracted workers while putting homeowners at a disadvantage.”

Former Minister Gibson told The Nassau Guardian at the weekend that a contingency fee was a normal part of any construction project.  He said the Department of Housing often had to cover extra expenses when building homes, and needed additional staff/consultants and other factors to meet the needs of the projects.

He said a contingency fee would have helped the department fund these necessities.  However, Gibson would not directly comment on the origin of, or specifically what, the $5,000 fee would have been used for.

Gibson also refused to comment on the contents of the special brief because it was not signed and dated.  Asked to comment on the administrative meeting with the PS and technical director, Gibson said he would have to see the minutes of that meeting.

Last week, when asked about the contingency fee that BMC could not reconcile,  Gibson told this newspaper that a fee was used to landscape homes in new government subdivisions.

Again, he dismissed the questions raised over the contingency fee as “political mischief”.  And he pointed to the 1,000-plus homes built during the Perry Christie-led administration.

According to the housing documents, a revised costing for new home construction was released in February 2005.  The new cost included the $5,000 contingency fee.

Three months later, technical director Major, in a letter to then BMC managing director Rory Higgs and copied to Gibson, said he had been instructed to ask about the reimbursement of contingency sums for nine different government housing subdivisions.  The contingency fees were included in more than $1.3 million worth of projects.

An explanation for the increase from Major noted that the true cost of the house at $60 per square ft. represented the base price that was used to award the contract.

“The $5,000 contingency fee allowance that was to be assigned to each house was only to be used to address any unforeseen additions to the contracts that can be incurred as a result of the topography of the land, depressions in the foundation and etc.  In some cases a part of the allowance may have been used and in other cases the allowance may not have been used at all,” Major said.

When the FNM came to office in 2007, then Housing Minister Kenneth Russell questioned the contingency fee and brought it the attention of cabinet.

A revised formula detailing fees associated with the selling price for a house and listed justifiable cost and over-runs was developed in July 2008.

It is unclear at this point if the apparent lack of transparency seen in the management of the contingency fee affected other areas of the government’s housing program.  It is also unclear how long oversight and reporting issues have existed within the Ministry of Housing.

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