Analysis of the Financial Audit Bureau report – part 3

On 10 November 2016 the annual FAB report was issued, investigating failures in administration procedures in all public sector departments, ranging from cases of poor management to incidences of corruption potentially necessitating criminal action.

All departments are obligated to follow up and address the issues raised, with the most serious cases being referred to the public prosecutor. The report is also submitted to Parliament which each year reviews the issues raised and recommends actions to take.

In its overview of government financial procedures, the FAB report extensively discussed the management of the national debt and concerns of a sharp rise between 2011 and the end of 2015, from BD 3.5bn to 7.2bn, representing approximately 60% of GDP.

The report also looked at project budgets allotted to departments by the Finance Ministry. In many cases ministries had only spent around half of their project budgets, despite certain ministries being overspent in terms of their total budgets. The report evaluated a range of these projects and raised criticisms about the effectiveness of expenditure.

The sovereign wealth fund Mumtalakat; and Edama the real estate arm of Bahrain Mumtalakat Holding Company; were both evaluated in detail, with criticism of bonuses for senior staff and low revenues generated from investments and subsidiary companies.

After meeting with substantial criticisms in the previous annual report, the Health and Education Ministries received rather less attention this year, although both overspent on total budgets and underspent on their project budgets. The Bahrain Polytechnic came in for rather more criticism about a range of financial procedures.

Government projects – Ministry of Finance

Budget expenditure

·         Expenditure for 40% of project budgets did not exceed 50%. For 12% of projects, nothing had been spent. The report found that for several government projects the accreditation was unclear about costs, scope and aims of these projects. Some Finance Ministry projects only spent 1% of the allotted budget because of poor planning. In many cases additional authorization requests were raised for project budgets, without these funds being put to use.

·         BD 101,000 was spent for the National Assembly building, without any construction taking place. There were 427 cases of transferal of accredited budget funds, amounting to BD 291m. BD 5.8m was spent on the Bahrain University engineering faculty building, without it being erected. BD 552,000 was allotted for constructing a new bridge at the airport up until completion; despite only BD 191,000 being requested. 0% of the budget was spent in the case of the King Hamad digital library project.

·         There were 427 cases of approved funds being transferred to other govt projects. The head of dept for the Projects Administration has transferred budget funds, despite this power only being mandated to the minister.

Projects approval

·         The Projects Administration approved project budgets without informing the concerned parties, which delayed the commencement of tendering processes. Annual approval for govt projects exceeded levels of funding approved, and in some cases was submitted without any request being made. BD 499,000 was approved for a Civil Service Bureau project which only required BD 167,000.

·         94% of govt entities fail to submit implementation reports for projects every three months. BD 8m is held in reserve for govt projects, despite only 64% of it being used. The report also criticized the ministry’s failure to properly audit and evaluate its internal operations and activities.

Management of National Debt

·         As of December 2015 the national debt stood at BD 7.2bn – approximately 60% of GDP. The report noted the large increase in debt levels from BD 3.5bn in 2011 – 33% of GDP.

·         The report said that the increase in debt vis-à-vis relative decreases in GDP could imperil the state’s financial position, as well as undermining development projects, particularly as a growing portion of national incomes will have to be used to service the debt. Indeed, much of newly taken on debts is being used to service previous debts.

·         The report warned about the absence of safeguards and legal parameters governing levels of national debt, particularly at a time when Bahrain had been downgraded several times by ratings agencies. 

·         The 2015 report also warned that rising public debt levels could endanger the nation as a result of inability to meet financial obligations to debtors. A high proportion of new debt has been used servicing previous debt. The 2015 report found that Budget allocations to several government departments were “unrealistic”. The report also found other weaknesses in the drafting of the Budget which could adversely impact implementation of key projects. Several departments were found to have significantly overspent their allotted budgets, while others had massively underspent as a result of not implementing planned projects.

Mumtalakat

Board of directors

·         BD 15,000 annual bonuses paid to members of the board of directors, with BD 500 paid for attending each meeting. BD 18m of investment wasn’t included in the budget approved by the board of directors. BD 72m of investment decisions, as well as investments concerning subsidiary companies, were approved without holding formal meetings to study these decisions.

Investment decisions

·         Constructing a hotel in the Southern Governorate, despite studies confirming the lack of infrastructure in the area and its distance from the capital. BD 65m investment in a resort in the Southern Governorate which ceased activity due to decreasing revenues. Mumtalakat increased its investment in the rehabilitation of a hotel which ceased doing business following BD 1.2m losses.

·   BD 453,000 investment losses in a fish farming project in late 2015. BD 754,000 invested in establishing the Bahrain Marketing Company, which failed to achieve profits in 2016.

Financial oversight

·         BD 5.7m recorded for marketing and promotion logged as operational expenditure. BD 210m in loans for subsidiary companies, despite Mumtalakat itself being responsible for these companies’ accreditation. BD 166m in loans to Gulf Air and another of the subsidiary companies, which wasn’t repaid. Paying BD 1m in rent for offices over three years, despite not resubmitting the deal to a tendering process.

Edama

Edama is the real estate arm of Bahrain Mumtalakat Holding Company

·         Failure to produce legal documentation for the transfer of development lands ownership from the Finance Ministry to Edama. 48% of property transferred in this manner was rented under sub-optimal contracts. 14 out of 31 real estate properties in Edama’s possession haven’t been used by the company for investment projects. The Finance Ministry reappropriated 29 properties after formerly transferring them to Edama.

·         Since its inception, Edama has only implemented 2 projects at a cost of BD 185,000. Profits from shares were between 0.001 and 1.26% – compared with 7.9% returns from shares for comparable companies. The company didn’t hold a board of directors meeting during 2015.

·         The company was also criticized for unexplained fluctuations in rental costs for Jazair beach chalets.

Health Ministry

·         Expenditure exceeded what had been approved by BD 33.534m. Only 53% of the project budget has been spent.

·         The report found that expenditures had been broken down into smaller units to avoid the need for tendering processes.

·         In the 2015 FAB report, the Health Ministry was one of the most sharply criticized entities, for a range of failings, including: Overtime paid to employees without following correct procedures; staff found to have taken unacceptable periods of absence; 96% of doctors not receiving required vaccinations; food unfit for consumption served in schools and not systematically inspected by Ministry; large quantities of unused medicines left in warehouses, some of which exceeded its expiry date; and medicines ordered without being required.

Education Ministry

·         Expenditure was BD 18.1m over budget. Only 33% of the project budget has been spent.

·         The report found a failure to provide accommodation for 351 employees of the Bahrain Training Institute after 5 years.

·         In 2015 the Ministry faced criticism for teachers compelled to work unpaid overtime; and the failure of the Ministry to put in place coherent plans for employing new teaching staff.