Part 1 Summary

The Commission of Audit (CA) has been monitoring since 2010 the preparatory works of the construction of the light rail transit system (LRT) which are coordinated by the Transportation Infrastructure Office (GIT, according to its Portuguese short form). The monitorization is conducted through a continuous audit approach, under which the execution of the project is divided into periods and CA examines the works concluded in each of them successively and presents the respective audit opinions. The audit herein reported covers the works carried out by GIT up to 31 December 2011 in the areas of “financial management” and “quality and costs control”, with special focus on financial control and contract management. This report also covers issues and suggestions presented in the first audit report that up to the aforesaid date have not registered improvements or - according to GIT - can hardly be improved.

1.1. Audit findings and opinions

1.1.1. Estimation on LRT’s total investment

As a result of the audit findings presented in the first audit report, GIT added the expenses with the preliminary studies to the total investment on the first phase of the LRT and, at the same time, updated its amount to 1 106.7 million patacas. However, the revised amount was based on a static investment approach i.e. it was calculated on the current prices at the moment of the calculation, excluding any price variation during the remaining period up to the conclusion of the approved project. In other words, GIT didn’t apply the dynamic investment approach that would take into account factors that would influence the price along the construction period. In fact, the estimates presented by GIT were systematically lower than the eventual contract prices. For example, by the end of 2011, two “civil engineering” projects were awarded at prices 32% and 45% higher than the estimated amounts (489 million to 372 million patacas and 386 million to 266 million patacas). It’s true that the dynamic investment approach must consider a wider range of variables, but it can be done as shown by the Consortium A, which used the price indexes of the previous years to project the dynamic investments.

1.1.2. Effectiveness of the performance appraisal

Due to the results disclosed in the first audit report, GIT established a mechanism to assess Consortium A’s performance. Under the mechanism, the appointed members of the assessment committee should issue a judgement on whether similar consultancy services could be awarded to Consortium A in the future. However, the mechanism was hampered by the lack of rules the members should follow to formulate their judgement and, at the same time, GIT didn’t define how the judgements would be integrated into future processes of awarding similar services. For the reasons referred, the assessing mechanism became ineffective in raising the service quality of Consortium A.

1.1.3. Monitoring the execution of the contract

Supplier B requested and was authorized by GIT to submit the monthly reports beyond the term fixed in the contract. No document has been found proving that GIT has analyzed the possible effects of an authorization. On the other hand, GIT has no powers, of its own or delegated, to authorize the request, since it was contrary to what both parts had agreed on, nor has GIT presented any explanation or legal basis to substantiate the authorization. What happened reveals the management and oversight on contract execution exercised by GIT still have room to improve and the uncertainty of GIT on its own powers poses risks to the legal execution of the contract.

1.1.4. Instructions for costs control

GIT does not consider necessary to prepare written instructions to guide the implementation of costs controls in the projects for which it’s directly responsible. GIT referred that the staff has been verbally advised to consider the terms on costs controls contained in the management plans applied by Consortium A, but it was not clear how the staff should apply them and to what extent. Moreover, there was no document, which could make the staff comply with the recommendation. The circumstances may lead to execution risks and create difficulties to the management.

1.2. Audit suggestions

1. GIT should scientifically estimate all financial resources needed to the conclusion of the LRT project, according to the exact conditions and specifications under which it was approved. The total amount estimated should also be the budgetary ceiling for the project, within which the project should be managed according to the real needs and to the principle of economy.

2. GIT should define and guarantee the application of the performance appraisal results in future contracts awarding as a mechanism to raise the quality of the service currently provided.

3. GIT should set up an oversight mechanism that timely registers and notifies on any deviations during the contract execution, which should be solved by GIT within its remit.

4. GIT should lay down rules and instructions for costs control.