The Urban Development Corporation’s (UDC’s) unaudited financial statements for FY2019-20 and FY2020-21 indicate that UDC recorded net losses of $471 million and $798 million, following three consecutive years of net profits.

Of note, net profit reported in FY 2016-17 and FY 2017-18 was mainly driven by an increase in fair value of investment property of $6.2 billion and gain on the sale of shares in an associated company amounting to $672.8 million.

The assessment comes from the latest audit of the development agency by the Office of the Auditor General (AuGen), a report tabled in Parliament last week which lists delayed rental collection and poor management of subsidiaries as among challenges being experienced.

The UDC earns revenue primarily from real estate sales, management fees from project management and property income, which represent 96 per cent of its total income.

The report states that the UDC met the criteria established in the Financial Administration and Audit (FAA) Fiscal Responsibility Framework (Regulations) for financial years 2018-19 to 2020-21, which require the attainment of a current ratio of at least 1.2.

And the AuGen said the UDC made efforts to improve its financial viability over the review period by seeking to recover rental arrears; however, the management of receivables remained a challenge.

It was noted, one of UDC’s strategic objectives is to ‘assure the sustained financial viability and solvency of the Corporation through its initiative of increasing revenue through sales and leases’. UDC initiated legal proceedings to recover outstanding receivables balances from tenants and obtained judgement claim for four accounts from private tenants totalling $11.1 million and US$43,200. In February 2022, UDC collected $179.58 million (net of legal fees) arising from legal proceedings against the commissioner of lands for property occupied by the Ministry of Health.

This is against the background where UDC continued to experience worsening receivables. At June 2022, rental arrears over 120 days totalled $467.49 million (81 per cent) of aged receivables, compared to 76 per cent at May 2012, with Government and non-government entities owing $283.08 million and $184.41 million, respectively.

Overall, as at March 2021, UDC’s asset related to lands held for development ($45.2 billion) and buildings held for investment purposes ($7.7 billion) represented 77 per cent of its total asset base of $68.8 billion. Based on UDC’s records, the value of its land holdings available for development increased by 22 per cent to $45.2 billion in 2020-21 from $37.2 billion in 2015-16, due mainly to revaluation of the real estate portfolio instead of acquisition of lands for future development.

As at March 31, 2021, current assets exceeded current liabilities by $1.09 billion, indicating UDC’s ability to generate adequate cash to cover its short-term obligations.

Property sales generate cash

In order to fund operations over the period, UDC utilised cash generated from the disposal of properties totalling $4 billion and funding from Government of Jamaica of $1 billion in 2020-21, representing part payment for long outstanding receivables due to UDC by the Government of Jamaica. The AuGen report said that this was reflected in UDC’s current ratio, which improved significantly to 1.32 at March 2021 from 0.96 at March 2017. Meanwhile, its cash ratio moved down to 0.32 at March 2021 from 0.39 in March 2017, reflecting the corporation focus on converting inventory of lands and investment properties into development projects. The current ratio measures a company’s ability to pay short-term obligations or those due within one year. On the other hand, a cash ratio shows a company’s ability to cover its short-term obligations using only cash and cash equivalents.

At March 2021, UDC had eight subsidiaries, three joint ventures, and two associate companies valued at $1.47 billion, after adjusting for a permanent decline in the value of the companies (impairment cost) of $1.67 billion. The AuGen recommended that the UDC engage in better monitoring and management of subsidiaries and review the revenue generation strategy for the corporation and its subsidiaries in order to strengthen its resiliency and response to economic and external challenges.

It stated, “The UDC needs to improve its management and monitoring of subsidiaries by conducting ongoing reviews of their financial performance in accordance with agreed targets and KPIs [key performance indices], to aid in timely decision making by management and the board.”

A review of UDC’s audited financial statements revealed that the subsidiaries incurred significant operating losses in most years between FY2012-13 and FY2017-18, despite making negligible operating profits in FY2015-16 and FY2017-18. However, UDC was unable to present information on net losses/profits attributable to subsidiaries for the period 2018-19 to 2020-21.

Dunn’s River revenue

Data provided by Dunn’s River Falls and Park (DRFP), one of UDC’s major revenue earners, revealed that revenue the attraction was $1.33 billion at end FY2019-20, 3 per cent lower relative to $1.37 billion at end FY2018-19 but 6.4 per cent above the $1.25 billion sales at FY2016-2017.

The auditor general’s report stated that a review of UDC’s Revenue Generation Plan for DRFP for the period 2018-19 to 2021-22 revealed 12 proposed strategies for derivation of additional income. The UDC provided a schedule which revealed that it met two targets, increase revenue from merchandising and sale of DRFP branded paraphernalia and approval for increase in visitor fee. However, it was noted, the UDC did not meet targets for three revenue measures and did not measure whether the remaining seven targets were achieved.

The AuGen also recommended improved project management and due diligence regarding divestments and said also that the “UDC must fully adhere to its Estate Management Policy and GOJ’s Divestment Policy, as well as improve its project management practices in order to reduce losses and cost overrun.”

The AuGen’s report observed that contrary to its Estate Management Policy and exemptions outlined in the GOJ’s divestment policy, the UDC divested three properties below market value. Further, it was noted, the corporation experienced cost overruns, losses and additional costs totalling $156.39 million due mainly to “poor planning, lack of adequate monitoring and scoping of contracts”.