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WP needs to get town council act together

If it is to be a credible check on the government, it must show it can manage public resources with prudence and transparency.

Among other things, the AGO said in its critical report that the Opposition-run town council started out with poor processes for assessing S&CC arrears - specifically, through manual counting.

THREE months after this year's general election (GE), the opposition Workers' Party-run Aljunied-Hougang-Punggol East Town Council (AHPETC) has returned to the headlines.

The Court of Appeal on Nov 27 ordered the town council - now known as AHTC after Punggol East constituency fell to the ruling People's Action Party (PAP) in the September GE - to appoint accountants to help the town council rectify contraventions of the Town Councils Act.

AHPETC was also slapped again with the worst banding in service and conservancy charges (S&CC) arrears management and corporate governance for the assessment period April 2014-March 2015 in the latest Town Council Report, released last week.

In fact, given the time needed to address all the problems (as indicated by the town council itself), the issue may still make its mark in the coming months. For the Workers' Party (WP), the issue will continue to define its ability to manage public finances.

The Business Times takes a look here at this long-drawn saga through publicly available numbers - including the Auditor-General's Office (AGO) report on the town council, parliamentary speeches, and the town council's accounts - to highlight the fiscal issues at Singapore's first and only Opposition-led group representation constituency (GRC).

Four years on

The latest AHPETC accounts still raise a question mark over the town council's financial management, despite an AGO report in February that pointed out numerous lapses that would have grave consequences in a corporate setting.

After four years, auditors still cannot give the accounts a clean bill of health. For fiscal 2015, the auditor flagged late quarterly transfers to a sinking fund, and that Neighbourhood Renewal Programme expenses should not have come out of the sinking fund. Certain allowances for receivables in the hundreds of thousands also could not be verified. Consequently, the accounts were qualified.

This leaves open the question whether it will also be negligent over sinking fund transfers in all of fiscal 2016, which started on April 1 this year. As it is, the Ministry of Finance had said AHPETC was late in paying S$4.5 million for the quarter ending July 31, 2015. Another S$4.5 million is due each quarter by October 2015, January 2016 and April 2016. The post-GE entity, AHTC, did not respond to queries on whether it had transferred funds in October.

From money collected from residents by town councils through S&CC, 30-35 per cent must be transferred to the sinking fund every three months. The money is meant for long-term expenditures such as lift upgrading. Problems with sinking fund transfers (and the overall accounts) have been going on ever since the WP took over AHPETC. The AGO report showed AHPETC did not make mandatory transfers to the sinking fund in most of fiscal 2012 and fiscal 2013, or was late in doing so. AHPETC was also late in transferring money to the sinking fund in fiscal 2014, its accounts showed.

The Ministry of National Development (MND) withheld S$14 million in grants to the town council for fiscal 2014 and fiscal 2015, saying that safeguards should be put in place. It was further revealed AHPETC wanted to put all MND grants into the sinking fund, which is against the rules.

MND said that it would disburse the grants if AHPETC gave cashflow information to show it has enough cash to cover its obligations. Grants were not released as AHPETC did not respond sufficiently, according to MND.

Now, the Court of Appeal has ordered AHTC to make good on all outstanding sinking fund transfers within three months. The town council did not respond to queries about the total outstanding amount.

Surplus and deficit

In fiscal 2013, the town council reversed from a surplus position to a deficit. The WP has argued that all town councils run a deficit without government grants. It should be noted, then, that AHPETC was in deficit after taking grants into account in fiscal 2013 and fiscal 2014.

To be clear, AHPETC said it would make a surplus for fiscal 2015, but only after accounting for grants it does not have. In fiscal 2015, the town council raised its S&CC income by 13 per cent from a year ago, while expenditures barely rose.

AHPETC had, in earlier years, spent S$18.6 million on lift upgrading, said the AGO; this came out of the sinking fund, and was wrongly accounted for between 2010 and 2013. Also, in fiscal 2013, its S&CC income fell slightly, but operating expenditure rose by just under 10 per cent. Nearly all expenses rose.

The AGO said the town council started out with poor processes for assessing S&CC arrears - specifically, through manual counting. AHPETC has said that processes have improved; it stands to reason that the better income position today partly reflects chasing of late payments. But this cannot be known for sure: MND said it has not received most of AHPETC's S&CC arrears reports since May 2013. Town councils are supposed to report this monthly.

The town council said this month there are plans to buy a new management software system, which should be operational in 18-24 months. It said the existing system's "inherent limitations" contributed to "some management and reporting challenges associated with S&CC arrears management and corporate governance".

Critically, given the many gaps, the true size of AHTC's sinking fund is also not fully certain. What can be established are the following: money for its extensive lift upgrading programme was from the sinking fund; it has a history of wrongly taking money from the sinking fund to pay for operating expenses; it is often late with sinking fund transfers; and it wrongly expected to put all grant money into the sinking fund.

Punggol East's true fiscal position was also a matter of debate at the eleventh hour of the GE2015 campaign. On Dec 1, the ward was handed to the PAP. Charles Chong, now the Member of Parliament (MP) of that ward, said he was waiting for the external auditor's report on Punggol East.

Profiteering and politicking

Then there is the charge from MND of gross profiteering by FMSS, AHPETC's former managing agent.

MND relied on public records to show FMSS posted a post-tax profit of S$2.04 million in fiscal 2014. Its profit roughly quadrupled from the same period a year ago, and it had a profit margin of 23 per cent.

EM Services (which has a 60 per cent market share of the town council business) had a profit margin of 7 per cent in fiscal 2014, and made a post-tax profit of S$7.53 million, BT's check showed. EM Services is a unit of HDB formed about the time that town councils were implemented.

In this light, the charge that FMSS was profiting excessively from its only client, AHPETC, is not without merit, though the town council has said it had no control over FMSS's profitability. It further maintained that FMSS, which was the only bidder in an open tender, charged rates that followed "strict reasoning", using available market information in 2012.

AHPETC said it was disputing certain payment claims made by FMSS for services in the period April-July 14 this year. The total amount is allegedly S$3.5 million, which are mainly for project fees. These would also come from the sinking fund, WP said. Substantial payment has been made, it added. WP would not give details on the projects due to a mediation process. AHPETC stopped working with FMSS in July.

AHPETC's fiscal 2015 report showed an S$811,375 project fee charged by FMSS - more than doubling from a year ago. The S$3.5 million claim is reportedly for three months and, if claimed, will be accounted for in fiscal 2016, WP has said.

Against this is the problem of a conflict of interest. FMSS was mainly run by the late secretary and general manager of the town council. "The same person both certifies work done, and also issues the approval for AHPETC to make payment," showed the PwC report produced co-currently with the AGO report. AHPETC has stressed that payments are signed off by the chairman or vice-chairman. But PwC said they were not given evidence to prove verification.

WP has said it is a "price taker", given the lack of competition for job tenders. Indeed, it was recorded in Parliament that PAP-run town councils enjoy economies of scale. For one thing, they had jointly called a tender to offer 24-hour emergency maintenance services to residents. AHPETC's managing agent's expense was the highest among all the town councils in fiscal 2014, BT's check showed.

Still, AHPETC could have been more astute in assessing contract values. AHPETC was charged about 40 per cent more than the previous town council management for essential maintenance and lift rescue services for nearly a year, AGO said. But AHPETC told AGO that the fee payable was assessed to be "about the same".

On potential bias against an Opposition-led ward, it should be noted that FMSS was first hired without a tender 10 days before the old contract was up, though the AGO said AHPETC had three months' notice. AGO found no evidence the handover process was stymied by the former managing agent of the PAP-run ward. Parliamentary records also showed the town council had been assigned a comparable number of renewal projects by MND.

And in May this year, HDB's EM Services bid, and won, a tender to handle AHPETC's maintenance works for three years, tender results show.

There is no doubt a need to relook the functioning of town councils to safeguard the interests of residents when wards change hands. A 2013 MND town council review in turn recommended a strategic review by the government on the issue. "The team observed that the party political nature of TCs operating in a competitive context raises a constant risk of politicising town council administration," the MND review noted.

But the problems that dogged AHPETC appear to have deeper roots in fiscal mismanagement and poor governance, whether through a lack of preparedness or experience.

While the WP may seek to challenge the system, it is not above it. It made history in 2011 by winning a GRC - and retained it by a wafer-thin margin this year. If it is to be a credible check on the government, it must show it can manage public resources with prudence and transparency. As WP continues to call for accountability from the ruling party, it should recognise that, by virtue of its own legitimacy, the same is required of it, too.

For more of BT's year-in-review stories: