06 May 2013

MND Town Council Review Report — Reflections

Ministry of National Development released its Town Council Review Report on 3 May 2013.

Prime Minister Lee Hsien Loong directed Ministry of National Development on 8 January 2013 to review the sale and leaseback of the town council management software ("TCMS") between the PAP Town Councils and Action Information Management Pte Ltd in 2010.
MND was to review the transaction fully and its context, and satisfy itself that public funds were safeguarded and residents’ interests were not compromised.

The review was originally meant to be completed within two months but was extended till April 2013 as the Members of Parliament involved in the Review and the Review Team were tied up with the March 2013 Committee of Supply debates.

Mr Lee, who has been a cabinet minister for years before becoming the prime minister, would have been aware that MPs and senior civil servants would be involved in the committee of supply debates following the budget statement on 25 February 2013.

The Review Team studied the Town Councils Act and the Town Council Financial Rules, and examined the external audit reports for the FY2010 financial accounts of the 14 PAP TCs.

It is unclear what the Review Team means when it refers to FY2010 financial accounts.

The sale and leaseback transaction took place in or after July 2010, which falls within FY2011 (or FY2010/11 as the TCs and some other organisations call it), not FY2010.  Did the Review Team examine the correct audit reports and financial accounts?

The TCs... decided to explore the service model for the ownership and maintenance of the third generation TCMS software [based on Deloitte & Touche Enterprise Risk Services's recommendation].  However, having each of the TCs hold the intellectual property rights to the software was cumbersome and inefficient.  The vendor would have to deal with all 14 TCs when reviewing or revising the system.  The TCs felt that it would be better for the software rights to be consolidated in a single party who could manage them on behalf of the TCs, and source for vendors to improve the system and address the deficiencies.

The Review Team seems confused.  D&T's recommendation was in respect of the future third-generation TCMS.  The sale and leaseback involved the second-generation TCMS.

The TCs called an open tender to sell the TCMS software, subject to the provision of a leaseback facility for a fixed monthly fee, until... the third generation TCMS was developed.  The vendor would also be required to undertake to secure extensions of the NCS contract at no extra cost to the PAP TCs until the TCs obtained new or enhanced software, and to work with the TCs to understand their redevelopment needs, including looking for a suitable vendor to provide these upgrades.  The TCs sold the IP rights in the old software to the vendor as it was almost obsolete and had limited value.  Such a sale and leaseback arrangement was not uncommon in the industry.  It was also permissible under the Town Council Financial Rules.

The sale and leaseback in 2010 was unnecessary and its basis was illogical and irrational.

The second generation TCMS software was developed in 2003, and subsequently maintained, by National Computer Systems Pte Ltd.

The intellectual property rights were held by the 14 TCs since 2003, without any difficulties.  Why was it necessary to transfer ownership of the TCMS to a third party toward the end of its life?

The 14 TCs were in a better position to negotiate with NCS than AIM.

The 14 TCs were in a better position to understand their own redevelopment needs than AIM.  In addition, there was no need to interpose a third party between the TCs and the future organisation that would be given the task of redeveloping the TCMS, unless that third party could add value to the redevelopment discussions.

AIM could also terminate the contract by giving a shorter notice period of one month in the event of material changes to the membership, or to the scope and duties, such as changes to the boundaries, of the TC.

The PAP TCs felt that such a clause was fair and reasonable as the vendor would have priced its bid on the basis of the existing TC and town boundaries.  However, should this change materially, the vendor could end up providing services to a TC comprising a much larger area and a larger population of residents, but is held to do so at the same fixed price since a key feature of the contract was that there should be no price change to the TCs even for extensions.  The TCs felt that this would be unfair to the prospective vendors, and a clause explicitly addressing such changes would reduce the business risk to the vendor.  This would help fetch a better tender price for the TCs’ old software.

The TCs were concerned that about the situation if any TC and town boundaries were to change materially, because the lease price was fixed.

Did the 14 TCs, each of which had different numbers of residents, pay the same monthly fee to AIM?

What happens if the number of residents in a town increases due to new HDB flats being completed and occupied, for example?

If any town comprised a much larger area or more residents, could the price not be renegotiated?

What happens if town boundaries resulted in any town comprising a much smaller area or fewer residents?

Had PAP not lost (or not contemplated losing) any electoral constituency in GE2011, any changes in town boundaries would have been irrelevant because AIM would continue to serve all 14 TCs.

Any changes to the number of residents within the towns would not have been significant because the lease was intended to be of a short duration and there was to be only one change in electoral boundaries (for GE2011).

AHTC believed that AIM would be terminating the TCMS contract under the terms of the termination clause and therefore planned to upscale its own system which it had used for the former Hougang TC.  AHTC wrote to AIM on 10 June 2011 to inform AIM that it was developing a system, and requested to continue to use AIM’s TCMS till 31 August 2011, so as to ascertain the reliability of AHTC’s new system.  AIM, on receipt of AHTC’s 10 June letter, understood it to mean that AHTC was giving notice of its intention to use its own system and not rely on the TCMS, but had sought an extension to enable it more time to install its own system.  AIM subsequently issued a notice of termination on 22 June 2011.

Why was there any need for AIM to issue a notice of termination to AHTC?  As a business, it should have been happy to collect the lease payments for as long as AHTC was using the TCMS.

TCs deliver a public service previously handled solely by HDB...  The persons selected to lead the management of TCs are selected on a political basis.  They are MPs serving the constituents of the wards that have elected them, and an intent of the Town Councils Act was that how they manage and run their TCs will have a bearing on their electoral fortunes at the next election.  Given the political character of the TC’s leadership and the political implications attached to the management of the TC, it is inevitable that the TC’s function is carried out in a competitive politicised context.

The Review Team seems confused.  It refers to the 14 TCs as PAP TCs.  They are PAP-managed TCs, not PAP TCs.

The elected members of a TC are the MPs for any constituency comprised within the town for which the TC is established, but this does not make the TCs a part or an extension of the political party of those MPs.

The political character of a TC's leadership does not make a TC a political organisation.

Furthermore, irrespective of whether a TC is a political organisation, a town is not a political organisation.

A TC and its members are distinct and separate from the town.  A TC is not the town.

An issue that has been raised in public discussions is that of conflict of interest and whether the interests of the TCs were protected, because AIM, a PAP owned company, was contracting with TCs which were headed by PAP MPs.  In considering the issue of conflict of interest, the background to the setting up of TCs and the nature of the TCs... is important.  TCs were set up for, and fulfil a political purpose, and therefore latitude has always been given to TCs to exercise autonomy, where they see fit, in engaging those who share their political agenda or are affiliated to their parties.  The substantive issue is therefore whether a conflict of interest arose in terms of TC members having a pecuniary or direct interest in the transaction, and whether the interests of the TCs’ residents were protected or impaired and whether there was any misuse of public funds.

The review also found that the TCs acted in good faith in the interests of and for the benefit of their residents.

When dealing with matters concerning any town, a TC has a fiduciary duty to the town and its residents, and must comply with such duty to the town and its residents.  Such duty exceeds what typically is acceptable in many other business relationships because a fiduciary is in an enhanced position of trust.  The TC must place the interest of the town and its residents first.

The TCs entered into a sale and leaseback of their TCMS with AIM that gave AIM the right to terminate the lease if there was a material change in the membership of the TC.  How is this in the interest of the residents?

The Review Team found no pecuniary or direct interest on the part of any of the TC members in AIM.  There was also no indirect interest on the part of the TC members in the AIM contract; the TC members did not have a financial or commercial interest in the contract that AIM was awarded.

Is the Review Team saying that there was no indirect interest on the part of the TC members in the AIM contract because the TC members did not have a financial or commercial interest in the contract that AIM was awarded?  Is this the generally accepted interpretation and standard of indirect interest?

The PAP TCs were concerned about the risks of system obsolescence identified by D&T.  At that time, the NCS maintenance contract was also about to expire.  Hence, the PAP TCs wanted to look for a solution which would allow them the opportunity to explore the best redevelopment options, while in the interim continue to enjoy the prevailing maintenance and other services at no extra cost.  Given that system redevelopment would take time, the TCs would need to ensure they could get a further extension (beyond October 2011) from NCS.

The 14 TCs wanted a solution which would allow them to enjoy the prevailing maintenance and other services at no extra cost.  If there were any extra costs, AIM must absorb them on behalf of the TCs.  Why was AIM so generous or charitable?

The Review Team found that the PAP TCs complied with the open tender process under the TCs Act and the TCFR.

The Review Team was silent on the wording of the tender.  According to copies of the purported tender notice circulating on the internet, the project was described as a "contract for the purchase of the developed application software", when it was in fact a sale and leaseback.  The confusion and lack of information might have led to the right organisations not participating in the tender.

The TCs’ decision to award the tender to AIM was based... also on their confidence that AIM would be able to meet the requirements of the contract as they were familiar with AIM’s track record with the TCs in the past.

AIM was not involved with the TCs' second generation TCMS, which was developed by NCS in 2003.  Seven years later in 2010, of what relevance was AIM's track record in the past when the TCs decided to award the sale and leaseback contract to AIM?

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