1.1 Audit findings and opinions
1.1.1 Final selection of development model
For the Guangdong - Macao Traditional Chinese Medicine Science and Technology Industrial Park (hereinafter referred to as “Industrial Park”), there are various types of common development models that can be considered, mainly: transmission of the right of using land, lease of land, build-operate-transfer (BOT), joint construction, self-financed construction - leasing facilities to enterprises, and self-financed construction - operating on its own. Therefore, for the development of the Industrial Park, Guangdong - Macao Traditional Chinese Medicine Technology Industrial Park Development Co., Ltd. collected the intention of enterprises from different regions and made an analysis. The result found that the majority of enterprises tended to choose the development model of leasing the land and constructing on their own, followed by the model of leasing the facilities in the Park and the model of joint construction. However, Macao Investment and Development Limited (hereinafter referred to as “MID”) finally decided to choose the model of self-financed construction for all of the lands that already had development plans. In fact, when MID estimated the development costs in 2016, it considered that the entire Park would be developed in the model of self-financed construction, and took this estimates as reference for the application for future annual funding from SAR Government. Therefore, the self-financed construction model chosen to develop the entire Park has already become the main direction of the work of MID, and each subsequent plan was also implemented under this model. However, the self-financed construction is the model that requires the largest amount of funds. The reason why MID chose this model was based on the principle of “lease only and not for sale”, and although under this condition, in the “Proposal on the application of the separation of asset-light and asset-heavy” put forward in April 2016, MID still pointed out that the viable development models could be lease of land, joint construction and self-financed construction; however, MID explained later that due to the principle of “lease only and not for sale”, some development models would have technical difficulties in actual operation, influencing their feasibility; therefore, MID finally chose the model of self-financed construction to develop the subsequent projects, reflecting the analyses and the justifications put forward during the decision-making were far more optimistic than actual.
In addition, before MID decided to adopt the development model of self-financed construction, there was no analysis of the pros and cons of each development model, no cost estimate between different models, and no explanation on how it made the decision and its justifications, reflecting that MID lacked comprehensive and in-depth consideration, which caused MID to face a situation of lack of real “choice”. If MID had made a comprehensive analysis and comparison previously, the decision maker would have been aware of the pros and cons as well as the cost of each development model. The decision to adopt the principle of “lease only and not for sale” is most likely to cause the SAR Government to invest billions or even tens of billions of renminbi in financing the construction, while the other models would save up to a maximum of billions or even tens of billions of renminbi.
On the other hand, MID adopted the most expensive development model – self-financed construction – mainly because of the principle of “not selling land”, but at the same time, some strategies and measures formulated by MID were to prepare for the land sale in the future, showing that MID made contradictory analyses and judgments in it decisions.
In 2019, MID revised the estimate according to the 2018 version of new planning, which was prepared by the consultancy based on the optimization of the health industry. At that time, MID only mentioned that the related optimization had comparative advantages; as for costs, it stated that there was no discrepancy in the amount of investment. In fact, according to the estimate in 2019, the total amount of investment in the Industrial Park reached to 16.353 billion renminbi, increasing around 2.6 billion renminbi compared to the estimate of 13.768 billion renminbi made in 2014 based on the original planning, showing that the analyses and the justifications put forward during the decision-making were far more optimistic than actual.
For the increase of more than 2 billion renminbi, MID did not clearly indicate that how much specific benefits this changes could bring, reflecting that it lacked a clear expectation of the results it would achieve as well as a clear explanation for the analysis. The result to be achieved is a basic element for measuring the economic benefits when making decisions, and also is an indicator for measuring the actual performance in the future. If MID do not specifically describe the expected results of the projects, and only focuses on whether it is in accordance with the established direction, it is easy to ignore the increasing costs.
So far, it is confirmed that MID would need to invest 6.501 billion renminbi for the self-financed construction projects, and if it continues to adopt this development model for the other land, its shareholders would need to invest an additional 8.262 billion renminbi.
1.1.2 Option for management
Under the condition of adopting self-financed construction, there are two main options for management: operated by MID, or operated by the enterprises which will be established in the Park through leasing the facilities from MID. Regarding the Ruilian Wellness (Hengqin) Resort comprehensive project, CA found that MID had never considered and compared the pros and cons of operating the hotel by itself and by the enterprises which will be established in the Park. On the contrary, it had the predetermined attitude of operating on its own at the beginning. In regard to this choice, MID provided additional information to explain the relevant factors and the justifications that led to this decision, but CA found that it had inconsistent attitude to the same factor. In fact, MID can look for a suitable enterprise to operate the hotel after the hotel is built, and through the conditions of contract, regulate the position of the hotel: the provision of healthcare experience based on traditional Chinese medicine; or MID can build the hotel according to the needs of the enterprise that will be established in the Park by signing a long-term lease. However, MID did not mention the above choices in the decision document or any other document, not to mention analyzing or considering it.
One of the crucial considerations in the decision to setting up the hotel project in 2017 was that the consultancy estimated that the internal rate of return was 8.3% based on a 10-year operating period, but MID failed to provide the relevant analysis document or work record on the review of the rate of return, and even did not obtain the formal study report. In 2020, the original consultancy and the newly-hired consultancy reached the conclusion that the internal rate of return was adjusted to 6.2% based on a 20-year operating period. The fact is that MID lacked experience in the fields of traditional Chinese medicine and hotel management, but even so, it decided to invest a large amount of funds without conducting any in-depth study previously, only based on the result of the consultancy’s analysis. Since MID did not analyze the consultancy’s rate of return, nor did it obtain the formal consultancy report, it is difficult to determine whether the original estimate was too optimistic or the development of the project was not progressed according to plan.
1.2 Audit suggestions
Taking into account the above problems of MID, it is reflected that in the process of making important decision, MID should identify the intended results and make comprehensive and in-depth analyses, so the decision maker can know about each plan, such as its feasibility, pros and cons as well as costs, and make the best decision according to the actual economic benefits.
