Source document: https://docs-lawep.s3.us-east-2.amazonaws.com/1697807684669.pdf (Jamaica)
Government of Jamaica Ministry of Transport, Works and Housing Statement By Dr the Hon Omar Davies, MP Minister o/Transport, Works & Housing REPORT ON THE FORENSIC AUDIT OF THE JAMAICA DEVELOPMENT INFRASTRUCTURE PROGRAMME AND THE PALISADOES SHORELINE PROTECTION AND REHABILITATION WORKS PROJECT October 2, 2012 REPORT ON THE FORENSIC AUDIT OF THE JAMAICA DEVELOPMENT INFRASTRUCTURE PROGRAMME AND THE PALISADOES SHORELINE PROTECTION AND REHABILITATION WORKS PROJECT PREAMBLE Members of this Honourable House will recall that as Opposition Spokesman first on Finance and Planning and then on Transport and Works, I had sought to get answers from both the then Ministers of Finance, as well as the Minister of Transport and Works on the implementation of the Jamaica Development Infrastructure Programme (JDIP).
Up to the time of the new Administration taking office, the responses to my specific questions and concerns raised in this House were not forthcoming.

Not onLy was the then Parliamentary Opposition concerned about the project, but there was generaL discontent in the country about the management of the programme.

Members will also recall that the then Prime Minister Bruce Golding himself expressed his concerns about the programme.
ALso, former Prime Minister Andrew Holness had announced that he would be commissioning a Forensic Audit of the programme.

This was 'in addition to the audit that 1 was conducted by the Auditor GeneraL and the commencement of investigation by the Office of the Contractor General.

Notwithstanding the announcement by the former Plime Minister, no action took pLace until the process was initiated under the current administration in January 2012.
1.0 INTRODUCTION 1.1 Today I have tabLed the finaL report from the ConsuLtants engaged to undertake a Forensic Audit of the Jamaica DeveLopment Infrastructure Programme (JDIP) and the PaLisadoes ShoreLine Protection and Rehabilitation Works Project (PaLisadoes Project).

PLease note that copies of the report have aLready been sent to the Auditor General and the Contractor General.
2.0 BACKGROUND 2 2.1 JDIP was developed by the then MInistry of Transport and Works, through the National Works Agency (NWA), to address damage to Jamaica's road network by the many hurricanes and flood rains over the recent past and for maintenance of the road infrastructure.
The (US) $400M Programme was financed through a Preferential Buyers Credit Facility from the People's Republic of China, through the China EXIM Bank, and is being implemented with China Harbour Engineering Company (CHEC) as the main contractor.

2.2 The scope of the forensic audit was broadened to include the Palisadoes Project, which was also being implemented through a contract with CHEC and was being affected by delays.
The (US) $68M Project, which is comprised of a (US) $58M loan through the Preferential Buyers Credit Facility accessed from the Chinese Government through the China EXIM Bank and US$10M contributed by the GOJ, was designed to address the Palisadoes Peninsula which was severely affected by the passage of Hurricane Ivan in 2004.

3 2.3 The contract for the Forensic Audit was awarded to Kroll ConsuLtants Inc., in the sum of (US) $183,542.00 or (..1)$15,861,700.00.
2.4 The Audit commenced on ApriL 24, 2012 with a three-month duration.

There was however, a modification to the contract to 'include Computer Forensics, so as to allow for the preservation of eLectronic data, including email correspondence, at an additionaL cost of (US)$11 ,371.41.
2.5 The contract was extended to August 24, 2012, as the ConsuLtants indicated that it wouLd take greater time than they had anticipated to obtain additionaL 'information from other agencies of Government and to compLete the review of documents.

2.6 The extension will resuLt in a minimaL increase to the cost of the contract as it reLates to reimbursabLe expenses to the ConsuLtants, as per the provisions of the contract.
4 2.7 A draft of the final report was submitted on August 23, 2012 and was the subject of initiaL review by the Ministry and discussion with the ConsuLtants.

Further to those discussions, an updated document was provided to the Ministry and the finaL report, dated August 31, 2012, is now being presented to the House.
3.0 FINDINGS OF THE FORENSIC AUDIT 3.1 The report from the Forensic Auditor reveaLs a host of occurrences which demonstrate compLete disregard for normal, and well established, governance practices, in the impLementation of the JDIP project and, to a lesser extent, of the Palisadoes Shoreline Project.

3.2 The report provides numerous exampLes of questionable practices in the implementation of both projects but the discussion in this statement will be restricted to six (6) issues.
(a) Project design (b) Unauthorized use of JDIP funds (Payment for Pre-JDIP work) 5 (c) Non adherence to aLLocations approved by ParLiament and MOF (d) Arbitrary issuance of Variation Orders (VO) (e) Arbitrary seLection of sub-contractors (f) Unprogrammed and arbitrary allocation of funds for InstitutionaL Strengtheni ng (a) Project Design 3.3.1 The JDIP contract was executed by the various parties on August 20, 2009.
The programme of work was scheduLed to be undertaken over a five-year period covering fiscaL years 2010­ 2011 to 2014-2015.

CHEC was the agreed contractor.

3.3.2 It was anticipated that approximateLy (US)$110M wouLd have been allocated to projects undertaken by Jamaican sub­ contractors and the remaining (US)$290M wouLd be undertaken by CHEC directLy.

3.3.3 The contract proposed the undertaking of 19 projects.

However, the number of projects changed dramatically to a 6 list of more than 1,000.
The Road Maintenance Fund (RMF), the institution which is the borrower of the loan from China EX-1M Bank, was not consulted during the development of the Master List of projects.

The Forensic Auditor was unable to obtain any documentation which details the rationale underlying the deveLopment of the Master List.

3.3.4 It must be noted, Mr. Speaker, that the peculiar way in which Loan disbursement was structured, full project expenditure was not included as part of the GOYs Estimates of Expenditure.
Rather, onLy the GOJ's 15% contribution to the projected expenditure for each fiscal year was listed in the Estimates of Expenditure.

As such, there was no opportunity for Parliamentarians to pose, prior to project implementation, salient questions including the manner in which projects were seLected and prioritized, or the way in which funds would be aLLocated from the (US)$400M Loan total.
It wiLL be recaLLed that it was the request that the project be examined during Standing Finance Committee hearings on the 1011/11 Budget 7 that led the Opposition to walk out of the sitting of the Committee.

(b) Payment from JDIP loan for unrelated projects 3.4.1 Tropical Storm Nicole struck Jamaica in September 2010.

No funds were provided in the Capital 'A' budget of the GOJ for repairs of damage resulting from the storm.

Much of the work done was funded by the JDIP project.
This was a deviation from the projects listed in the initial project documents.

3.4.2 In addition to payment for work related to Tropical Storm Nicole, the NWA also used JDIP funds to clear obligations on the Northern Coastal Highway Improvement Project (NCHIP).

In a Letter dated November 10, 2010 from former NWA CEO, Patrick Wong to then Permanent Secretary Dr. ALwin Hales, the matter of transferring work (valued at (J)$144M related to the NCHIP to JDIP was raised.
Expenditure on the NCHIP was over budget and Mr Wong's letter stated "This reallocation of payment would allow Segment 1A project to be implemented within the budgeted amount".

Mr Wong's 8 Letter indicated that the work on the NCHIP wouLd be transferred and paid for under JDIP work order # 1 because both were be'ing undertaken by the same sub-contractor, Surrey Paving.
3.4.3 An important question which has not been answered by the forensic audit is whether CHEC was paid a mark-up on payments made for projects which preceded JDIP e.g.

post Nicole repairs and the Northern CoastaL Highway ImpLementation Project.

(c) Non-adherence to Expenditure Caps 3.5.1 The JDIP contract identified an 'impLementation work pLan over a five-year period.

The plan anticipated annual expenditure of (US)$60M, (US)$100M, (US)$100M, (US)$100M and (US)$40M over the five-year period.
3.5.2 It is instructive to note that in a letter dated November 23, 2010 from the then Permanent Secretary, Dr HaLes to the NWA CEO, Patrick Wong, it was stated, "Under no circumstances 9 should the planned expenditure for this fiscal year exceed the expenditure amount of (US)$60M,as approved by Cabinet".
However, in a letter dated April 19, 2011 from Mr Wong to the Permanent Secretary, it was indicated that the amount certified for payment under JDIP up to March 31, 2011 had been compiled and totalled (US)$76.15M.

However, the Forensic Auditor states (page 35) "Our analysis indicated total expenditures of approximately (US)$81.1M or approximately 35% over budget".

3.5.3 Fiscal year 2011/2012 - The JDIP budget for 2011/12 was proposed at (US)$120M although the NWA had requested a budget of US$182M.
Eventually, negotiations between the GOJ and the China EX-1M Bank resulted in an agreed expenditure of (US)$100M to compensate for the (US)$21M over- expenditure in the previous fiscal year (FY 2010/2011).

3.5.4 However, the Forensic Auditor states that they were informed by the former CEO that the NWA proceeded with JDIP projects on the assumption that they would receive approval for 10 additional funding for fiscal year 2011/12.
When this additional funding was not approved, work on several JDIP projects came to a halt in August 2011.

3.5.5 The original financing plan was that the JDIP project would be provided with funding to complete projects over the course of five (5) years with (US)$180M to be spent in the first two years.

At the end of that 2-year period, (March 2012), (US)$232M had been expended and substantially aU of the remaining funds had been committed.
The finding by the Forensic Auditor confirms the statement made by me to Parliament June 26, 2012.

3.5.6 It is impossible to over-emphasize the negative repercussions of unplanned expenditure taking pLace significantLy above budgeted amounts.

The Ministry of Finance, in budgeting its obligations for JDIP (15% of totaL expenditure each fiscal year) made the assumption that the NWA wouLd adhere to the expenditure scheduLe which had been agreed to.
To the extent that unprogrammed amounts were expended, the 11 Ministry of Finance was forced to identify additionaL amounts to meet the GOYs commitment of 15% of overall project cost.

3.5.7 It was the need to meet this unprogrammed commitment which Led to the presentation of third SuppLementary Estimates for FY 2011/12, in March of this year.

This SuppLementary Budget included an additionaL allocation of $2.2 billion to meet outstand'ing amounts owed by the GOJ, in fuLfilLment of its 15% obLigation .
SimilarLy, the Secondary SuppLementary Estimates for FY 2011/12 included an additionaL amount of $520 million for the Palisadoes project.

Failure to clear arrears owed by the GOJ wouLd have precipitated greater deLays in restarting projects which had been haLted.

(d) Variation Orders 3.6.1 In generaL, a variation order provides flexibility to a contract so that unforeseen tasks or events may be addressed.
Within that context, there are clear, expLicit ruLes governing variation orders, including the reLationship between the vaLue 12 of any such order and the vaLue of the originaL contract.

However, 'in the case of "IDIP, variation orders were used not onLy to make changes to sub-contracts, but aLso to add or remove entire sub projects.

3.6.2 An exampLe of the use of variations order is the Cave Valley to SpaLding Road.
In a letter dated September 19, 2011 from the former NWA's CEO to the Permanent Secretary, the CEO sought approval to execute emergency road works in CLarendon totaling $113M.

Included in the list of projects was the Cave Valley to Spalding Road with a value of $34.9M.

However, the rehabilitation of that road was not formally included in the JDIP work orders.
3.6.3 An exampLe of the chaos created by the way the project was managed is that in a Letter dated March 1, 2012 from CHEC (the contractor) to Build Rite Construction, CHEC stated that they had noticed work in progress on the SpaLding to Cave VaLLey Road and wished to know if the work was being 13 undertaken under JDIP and if so, had a formal variation order been issued.
3.6.4 The Forensic Auditor noted (page 27 paragraph 2) that "During the course of our review we also noted instances where a variation order was several times the value of the initial contract".

A specific exampLe given was of contract RW - 003 where the originaL contract sum was $126M but was increased to $543M through the addition of two projects by variation orders.
(e) Sub-contractors 3.7.1 CHEC had an agreement with NWA to select sub-contractors for JDIP projects from the NCC list of Grade 1 contractors.

The Forensic Auditor identified that CHEC employed 17 sub­ contractors for JDIP projects; some of these contractors were grades 2 and 3.
CHEC advised the Forensic Auditor that both the selection of sub-contractors and the contract amounts for JDIP projects to be executed by sub-contractors were NWA decisions, priced according to the NWA basic rates, with the 14 BUls of Quantity prepared by the NWA.

The NWA wouLd then provide CHEC with a contract for each project and instruct them as to which sub-contractor wouLd be undertaking the work.

CHEC then compLeted the contract with the chosen contractor.
3.7.2 On the other hand, Mr Patrick Wong claimed that the NWA made recommendations to CHEC regarding which sub­ contractor was to be used on each project and it was ultimately CHEC's decision as to who should be employed.

The Forensic Auditor stated "In summary, the NWA and not CHEC made the decision on the selection of sub-contractors and determined the prices which were non-negotiable and according to sub-contractors at a small profit margin".
3.7.3 This approach to project management incurred additional costs to the GOJ as for each of these sub-contracts there was a mark-up for CHEC.

There was no consistency in the LeveL of mark-up.

The draft MOU between the Ministry, NWA and CHEC dated July 24, 2009, 'indicated that CHEC would receive 15 a 20% mark-up for work undertaken by local contractors.
However, in a draft JDIP contract Addendum II, which is undated, it is indicated that CHEC would receive a 15% mark­ up for work undertaken by sub-contractors.

In addition, former CEO, Patrick Wong, indicated that a mark-up of 20% was agreed to with CHEC and approved by Cabinet, but he added that the mark-up was increased to 25% starting with Work Order #5.

He claimed that this change was outlined in a letter to the Prime Minister and his Minister.
However, the Forensic Auditors were unable to locate the correspondence cited by the former CEO.

(f) Institutional Strengthening/Procurement of Professional Services 3.8.1 The question of payments to be made to the NWA by CHEC for professional services was a controversiaL one.

The EX-1M Bank of China opposed a management fee being paid to NWA as part of the loan, as there was no provision for this in the original agreement.
However, the professional services agreement enabLed the NWA to increase the institutionaL 16 strengthening portion of the JDIP contract from (US)$2.5M to (US)$3.7M.

This laxity in controls allowed NWA to procure services without utilizing normaL government tendering processes.

3.8.2 There is no reference to institutionaL strengthening in the JDIP contract and the JDIP Loan agreement.
NonetheLess, in a summary of how JDIP funds wouLd be allocated, produced by the former NWA CEO, there is reference to (US)$2.5M allocated to institutionaL strengthening.

The Forensic Auditor requested documentation on the amounts which were expended on institutionaL strengthening, but none was availabLe from NWA.

The Forensic Auditors were able to re­ construct from CHEC documents expenditures totaLing (J)162M, together with a 20% mark-up for CHEC, resuLting in a totaL cost of (J)$194.5M.
The impLication was that by the methodology chosen by NWA to effect renovations, purchase of vehicles, and purchase of computer equipment, the NWA avoided using normal tendering processes.

However, this implied payment of a mark-up to CHEC (approximateLy 20%) 17 for tasks which could have been carried out by the NWA itself.
The expenditure on institutional strengthening reflects one clear example of the cost of the NWA's decision to avoid normal procurement guidel.ines by routing its expenditures through CHEC.

3.8.3 In addition to the expenditure on institutional strengthening under JDIP, there was also a sum of (U5)$1.5M which was allocated under the Palisadoes project for institutional strengthening.
As such, the combination of expenditure on institutional strengthen'ing under JDIP and the Palisadoes project amounted to (J)$372M.

4.0 CONCLUSION 4.

1 The report from the Forensic Auditor has unearthed wanton disregard for the conventions and procedures established by the Government of Jamaica for project 'implementation, administration and management.
These breaches of existing procurement guidelines have drained precious budgetary 18 4.2 This HonourabLe House is being assured that aLL necessary steps are being taken to restore and rebuild integrity to this aspect of pubLic adm'inistration, which has been severeLy diminished as a resuLt of this episode.

4.3 We are committed towards ensuring there is no recurrence of any infringement under our watch.

To this end, the Ministry has commenced actions to address the findings of the Forensic Audit Report.
A team has been appointed and charged with the responsibility to undertake a fuLL review of the findings and to deveLop a pLan of action to address the weaknesses, inefficiencies and irreguLarities cited.

4.4 Furthermore, the report has been sent to both the Auditor GeneraL and the Contractor GeneraL so that those officers can take whatever action they consider appropriate.

19 OMAR DAVIES, M.P.

MINISTER OF TRANSPORT, WORKS AND HOUSING OCTOBER 2, 2012 20