The Auditor General’s Office recently conducted an audit to determine whether the Cayman Islands Government is adequately managing land use and development to meet its objectives. Mr Swarbrick discussed his findings at a press conference today (Thu July 3).

There are several areas where the Government can improve how it manages lands in the Cayman Islands, says the Auditor General, Alastair Swarbrick, in his report made public today. The most significant concern he raises is the continuing development of land without the benefit of a national development plan, which is required by law and should be used to guide government decision makers.

“I understand the challenges involved in creating a comprehensive development plan for the Cayman Islands,” said Mr. Swarbrick. “However, there is no excuse for continuing to develop properties on such an ad-hoc basis. A development plan would help protect these beautiful islands for future generations.”

The report, “National Land Development and Government Real Property,” looks at how well Government manages both public and private lands in the Cayman Islands. Included are case studies of recent development projects, such as the National Road Authority (NRA) Agreement (building of the West Bay Road extension), South Sound (Adagio) Development and Health City. The audit also looked at management of the land that is covered by water around the islands; it found gaps in responsibility for managing this important resource.

The audit found a number of areas where government has not followed its own laws. For example, on several occasions the Public Management and Finance Law (PMFL) was effectively ignored, and former ministers overreached their roles in the negotiations relating to the NRA Agreement. The audit also identified a number of areas where the framework in place does not provide the level of transparency and accountability the auditors expected to find.

In his report Mr. Swarbrick makes several recommendations for Government to improve how it manages this important public policy area. This would include opening Central Planning Authority (CPA) and Development Control Board (DCB) meetings to the public and providing greater rationale for decisions. He also recommends that these committees have broader representation than just members from the building industry.

“I am concerned about the lack of transparency we found in how the CPA and DCB operate,” said the Auditor General. “I believe that some development decisions might have been different had the information been discussed in a public forum rather than behind closed doors.”

More information regarding this report can be obtained by contacting Martin Ruben at the Office of the Auditor General at (345) 244-3206. A copy of the report is available at www.auditorgeneral.gov.ky
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Excerpt from “National Land Development and Government Real Property”

EXECUTIVE SUMMARY

The management of the development of the Cayman Islands is one of the most important functions of the Government. With significant growth in its population over the last 15 years of over 40%, the Government has had to deal with significant challenges to ensure that development is well managed. Looking ahead, the Government faces a number of significant infrastructure projects using innovative financing in the wake of a scarcity of funds. The ability for Government to play an effective role in this important area will continue to be critical to the future of the Cayman Islands.

The objective of the audit was to determine whether the Cayman Islands Government is adequately managing land use and development to meet government objectives, both for the Cayman Islands in general and also for Crown Lands in particular.

We found that the framework for the management of development and land in the Cayman Islands established in the Development and Planning Law is neither comprehensive nor up-to-date. The Law requires the Central Planning Authority carry out a “fresh survey” every five years and submit a report to the Legislative Assembly with proposals for alterations or additions to the plan. This was last done in 1997. The failure to update the plan has had negative effects:

• initiative for development has passed from the Legislative Assembly to the private sector. The two largest developments undertaken in the last five years – the NRA Agreement and Health City -were not guided by the Development Plan. There is no evidence that the NRA Agreement was ever assessed against the Development Plan. The Central Planning Authority used the Plan in a cursory manner to assess the Health City proposal, but the Department of Environment stated it was obsolete and did not use it. Other responding agencies did not refer to the Plan in their
assessments;

• although the Development Plan 1997 states that environmental protection is a policy objective, actual development decisions have overridden this goal. Sixty-nine percent of the west side Cayman Islands wetlands were lost between 1976 and 20B with 11percent lost between 2004 and 2013. Areas identified as sensitive in the Vision 2008 report have been developed;
• the strategy of the Development Plan 1997 to encourage conservation of fresh water supplies, develop new sources of supply and provide for effective drainage and prevention of pollution has not been fully supported. The Water Authority and the Central Planning Authority do not agree on the allowable depth for quarries, resulting in the override of the judgment of the technical authority. Storm water management is increasingly problematic as wetlands have been eliminated. The National Roads Authority has become involved, but regards storm water management other than for road protection as outside its mandate.

The Development Plan 1997 is further limited by lacking zoning regulations for the Sister Islands. In addition, oceanic and seabed resources are outside the Development and Planning Law. Cabinet is responsible for Coastal Works licenses. This divides responsibility for developments that cross the high water mark and involves the politicians in operational decision making, inconsistent with their policy­ only role defined in the Public Management and Finance Law.

Decisions regarding land use are not always transparent. The Central Planning Authority and the Development Control Board publish submissions made to them, but their deliberations are not open to the public and objections or recommendations by technical authorities such as the Water Authority are often overruled or ignored without explanation. The NRA Agreement and the Health City Agreement were negotiated outside the normal planning process in secret by Ministers with no public disclosure until after the Government had committed to them.

The Government can improve the management of its own real property portfolio. The Lands and Survey Department undertook its first revaluation of property since 2001in 2012,ensuring that government’s property inventory is complete and accurate. Recently completed financial audits have indicated that the Government has room to improve the completeness and accuracy of elements of its property inventory. We found, moreover, that the Valuation and Estates Office determined that the Government owns 279 properties valued at Cl$60 million not required for operations. The Government has recently put a process in place to review holdings and to dispose of surplus properties.

The governance framework for the Cayman Islands has not been respected in the approval and management of major developments. The governance framework for government expenditure requires that Ministers set objectives and policy, but do not become involved in selection of means or in operational implementation. Moreover, all activity and expenditure must be approved by the Legislative Assembly.

In the case of the NRA Agreement, the contract was negotiated by Ministers without the knowledge or assistance of civil servants and presented to them in a detailed agreement drawn up by Dart Realty (Company) Ltd. (DRCL) which had legal obligations they were required to implement with little time for analysis or revision. The Ministers were acting outside their roles in the governance framework. In addition, although a highway was acquired, land disposed of and extensive tax and duty concessions made, no approval was sought from the Legislative Assembly as required by the PMFL. In the case of Health City, the agreement was negotiated by Ministers. It was presented to Cabinet together with input from the Ministry commenting on the terms of agreement. Although there was input from the civil service, Ministers acted outside their legal roles by becoming involved in the selection of means. Again, no approval from the Legislative Assembly was sought, even though the agreement committed government to hundreds of millions of dollars in tax, duty and fee concessions and contained obligations for infrastructure upgrading and expenditure.

I conclude that in both cases the Government acted unlawfully and without proper authority in signing these agreements.

The Government did not conduct adequate value for money analysis for either the NRA Agreement or the Health City agreement. In the case of the NRA Agreement this has resulted in the Government’s refusal to honour the Hotel Tax Rebate obtained by the developer who now claims the Government is in material breach of the agreement, raising the risk of a suit for damages. In the case of Health City, the Government could come under pressure to provide infrastructure it cannot afford.

These major development projects underline weaknesses in the Government’s framework for the management of Public Private Partnerships (PPP’s). Although the Framework for Fiscal Responsibility provides a basic structure for PPP’s, the Government lacks the detailed policies or procedures for its successful implementation.

As the work conducted on this audit was effectively completed in the fall of 2014,we updated some of the areas reviewed closer to the time of issuance. In reviewing the NRA Agreement, we found that the role of the Minister still needs to be more formalized in light of the legislative framework in place and the roles outlined therein. We also followed up on Government’s management of PPP’s and were informed that they will be creating centralized procurement and major capital project offices. While we didn’t review the extent to which their operations are now in place, we acknowledge that these developments should strengthen the Government’s management of national development in the future.

REVIEW OF RECENT EVENTS

105. This audit fieldwork was conducted between February and August 2014. Since that time there have been government initiatives regarding both the negotiation of a third amendment to the NRA Agreement and to the management of major capital projects.

106. NRA Agreement The Government has determined that it wishes to amend the NRA Agreement to eliminate the Hotel Tax Rebate while continuing to promote tourism and hotel development in the Cayman Islands. It has therefore entered into negotiations with DRCL to complete a third amendment to the NRA Agreement. We reviewed the most recent correspondence and reports related to these negotiations and interviewed officials.

107. We note that the Government has sought advice regarding the terms and conditions of the proposed amendment from both external advisors and from officials in a timely manner. However, we noted the following:

• Ministers are still involved in directing negotiations, rather than confining themselves to providing policy direction to officials and requiring them to negotiate;
• the participation of the governing party caucus in the drafting of the proposed amendment, a process outside the current governance framework, has increased direct political involvement in government operations; and
• the Government remains highly reliant on external advice and has not taken steps to build internal capacity to provide analysis and advice on development.

108. Officials expressed the opinion that when matters of national importance are being negotiated, individual transactions take on policy significance and it is not practical to exclude Ministers from them, regardless of the governance framework of the CIG. They also pointed out that Cabinet and possibly Governor’s approval is required for the disposal of Crown land, making complete delegation to the civil service not possible.

109.In our opinion, although the Government has been heavily engaged in the NRA Agreement file, there has been little that would affect the previous findings or recommendations of this report. However, we believe that processes for the involvement of Ministers should be formalized as they are elsewhere to ensure integrity and transparency.

110.As there is no third amendment in place, we are not in a position to assess whether the Government will achieve value-for-money from the NRA Agreement.

111. Major procurements: Officials told us that the Government has already taken steps to improve the procurement process. They informed us that a Director of Procurement has been recruited with a view to establishing a procurement office. They also informed us that Ministry of Planning, Lands, Agriculture, Housing and Infrastructure (PLAHI) has taken steps to establish a major projects office. We believe these are welcome developments and represent the first steps in responding to the related findings of this audit. We will review the operations of these initiatives in future audits.

CONCLUSION

112. Our audit of development and land management has raised fundamental issues, both for the management of land and also for the management of government expenditure.

113. Development and land management are critical responsibilities of the Government that affect everyone living in the Cayman Islands. The Cayman Islands Constitution Order 2009, the Development Plan 1997 and Vision 2008 all made preservation of the environment an important government objective. The Constitution Order 2009 perhaps sums it up best in saying,

18.-{1) Government shall, in all its decisions, have due regard to the need to foster and protect an environment that is not harmful to the health or well-being of present and future generations, while promoting justifiable economic and social development.

(2) To this end government should adopt reasonable and other measures to protect the heritage and wildlife and the land and sea biodiversity of the Cayman Islands that –

(a) limit pollution and ecological degradation;
{b) promote conservation and biodiversity; and,
(c) secure ecologically sustainable development and use of natural resources.

114. We have noted that between 1976 and 2008 that two-thirds the wetlands on the western part of Grand Cayman have been lost with no protection for eastern wetlands in place. We have noted many other specific instances where environmental concerns have been overridden without explanation or preservation goals were unmet. Large-scale, investor-driven development such as the NRA Agreement and the Health City development is accelerating the pace of development. The Legislative Assembly needs to determine whether these trends should be allowed to continue or whether a comprehensive development plan should be developed by the Government and put before it as required in the Development and Planning Law.

115. We also found considerable problems related to the Government complying with its own governance framework for managing public expenditure. We highlighted examples where there has been a lack of respect for the segregation of roles demanded by the PMFL. Under the PMFL, Ministers are to set policy and have limited means of influencing program delivery, Chief Officers are to craft plans to deliver the outcomes, and to oversee implementation, and the Legislative Assembly is to approve all expenditure. In the two cases we studied, assets were acquired and long-term tax concessions made by Cabinet without any form of approval being sought from the Legislative Assembly. In our opinion, these actions were unlawful and are serious deviations from the process in place to protect the people of the Cayman Islands from possible corruption by public officials.

116. Other parts of the governance framework have not been put into place, even though laws have been passed by the Legislative Assembly. The Public Sector Investment Committee in the PMFL, the Standards in Public Life Law, and the National Conservation Law have all been enacted and given Royal assent, but are not yet fully in force.

117. Finally, our audit shows that much remains to be done to create a framework for the management of Public Private Partnerships (PPP’s). The increased use for such vehicles was anticipated when the Framework for Fiscal Responsibility was signed and indeed, it appears that future major development of infrastructure will not necessarily be government-led or completely government­ financed. The FFR, which is now embedded in the PMFL, provided an outline of the principles that are used to manage PPP’s, but detailed policies and procedures are still required to ensure that the Government receives value for money. Examples of such policies and procedures exist and have been used for a considerable period of time in other jurisdictions and it should not be difficult to adopt and customize the required! framework for the Cayman Islands. A framework and transparent process would assist the Government in attracting high quality institutional investors as they are now diversifying into infrastructure PPP’s.

118. The creation of a procurement office and a major capital projects office should strengthen the Government’s management framework and result in more effective management of PPP’s and major capital projects in the future.

Alastair Swarbrick MA (Hons),CPFA Auditor General
George Town, Grand Cayman, Cayman Islands
16 June 2015