Macau Investment and Development Limited (hereinafter referred to as “MID”) is a public capital enterprise that enjoys advantages in policies, capital and corporate regime. As at 31 December 2020, after six capital injections, the capital of MID was 9.285 billion patacas, and the total amount spent on investment was 8.964 billion patacas, of which 8.074 billion patacas was invested in Industrial Park project in Hengqin and 890 million patacas was invested in Zhongshan project. In the performance audit report “Management of Macao Investment and Development Limited” released in December 2020, the Commission of Audit (CA) disclosed that the Industrial Park project had had noticeable problems in management and decision-making. In order to further investigate the major investments made by the Macao SAR Government in neighboring areas, CA conducted an audit on the Zhongshan project thereafter and then completed the performance audit report “Management of Macao Investment and Development Limited” (II), discovering that Parafuturo de Macau Investment and Development Limited (hereinafter referred to as “Parafuturo de Macau”), which is a subsidiary of MID, failed to carry out the preliminary study properly when it made decision on major investments, ignoring the potential risks.
The audit report pointed out that in order to build the Guangdong-Macao Youth Innovation Entrepreneurship Base, the headquarter of Parafuturo de Macau in Zhongshan, the training and exchange center for young entrepreneurs from Mainland China, Taiwan, Hong Kong and Macao, the product distribution center for Portuguese-speaking countries and the exhibition center for Macao’s distinctive products, Parafuturo de Macau recommended to purchase the Zhongshan Torch International Conference Center in October 2016 even though it was aware that the property ownership certificate had not been issued. Afterwards, Parafuturo de Macau adopted the strategy of “rent before buy” and officially signed a 18-year lease contract with the property owner (including a one-year rental exemption period) to rent the four-storey Center in July 2018, without conducting due diligence in relation to the operation of the Center and its legal consequences. Due to the lack of the property ownership certificate of the Center, Parafuturo de Macau did not utilize the first to third floors of the Center to start its business as originally planned and only renovated the first floor for trial operation; however, it failed to conduct the fire safety inspection and acceptance procedure after the completion of the renovation works on the first floor. Under this circumstance, the insurer can reject claims for fire or other related accidents on the ground of lack of the fire safety inspection. If fire or related serious accident occurs, managers and other persons directly responsible for the property may be subject to criminal liability according to the law.
The report also revealed that in addition to the targets mentioned above, Parafuturo de Macau also participated in the special financial services. In 2017, it invested 18 million patacas in a financial institution to become a shareholder, holding 15% of the shares. This institution is to provide a trading platform for mainland companies with overseas assets and to issue bond for small and medium-sized enterprises in Macao. Before making this important investment decision, Parafuturo de Macau neither conducted thorough and holistic analyses of its own conditions and the external situation, nor did a comprehensive due diligence on these new services in Macao. Besides, when the management submitted the proposal, it also failed to explain clearly the crucial factors that would influence the decision-making to the Board of Directors, such as the advantages and disadvantages of the project, the risks and the prerequisites. After the project had been run for one year, due to the money lost on the project reaching almost half of the capital and the need to inject capital in the next few years to ensure the continued operation, a capital increase plan was proposed. According to the proposal of Parafuturo de Macau in October 2019, taking into account the requirements of Macao’s financial regulation, the current status and difficulties in the operation of institution, the capital was increased in proportion to the shares held by the shareholders, so Parafuturo de Macau had to invest another 30 million patacas in accordance with the shares it held. In August 2020, Parafuturo de Macau was advised by MID that it could use the balance of company for the capital increase.
Currently, there is no a specific and complete regulatory regime for the trading of financial assets in the existing legislation of Macao, and the SAR Government only set some restrictions on the identity and operation of the related institutions. However, the most crucial thing in financial infrastructure is legislation; at present, there is no relevant legislation, especially to regulate the exchange or the platform of financial assets. Owing to the lack of comprehensive regulation, the financial institution must act prudently in a bid to minimize the risk of having deficit. Moreover, Parafuturo de Macau was originally responsible for regional cooperation between Macao and Zhongshan, but it participated in the operation of special financial services, which was not appropriate in practice.
CA stated in the general comments that Parafuturo de Macau still decided to sign the relevant Framework Agreement without solving the problem of property ownership certificate, and arranged the government officials to witness the signing ceremony. However, after the initial enthusiasm, the risk was still existed and since the follow-up work was ineffective, Parafuturo de Macau missed the best opportunity to solve the problems timely or review the plan. It should be noted that the main goals of Parafuturo de Macau are to create the Youth Innovation Entrepreneurship Base in both cities, promote the products from Macao, Zhongshan and Portuguese-speaking countries, develop their industries and enterprises, etc., rather than acquire certain property or land. Once the management confuse the goals of enterprises, they will be easy to put the cart before the horse and even neglect some problems, which is the situation that the management need to pay particular attention to when implementing policies. As an enterprise whose main responsibility is to implement the aforementioned policies, Parafuturo de Macau should strive to do the best in negotiating, researching, formulating plans, analyzing and giving suggestions, making decisions, and supervising and coordinating projects, in order to draw up the most cost-effective investment proposal for the SAR Government, rather than getting the project in a state of uncertainty for a long time.
As emphasized by MID, the intention of the Central Government and the SAR Government has always been to promote the adequate diversification of Macao’s economy and to develop the distinctive financial services. Therefore, with the important responsibility and significance, MID should coordinate the work properly before launching the project to ensure that the expected results can be achieved, instead of implementing the project without careful consideration. Pre-analysis is not a formal procedure; on the contrary, it has practical and crucial control function. This control function largely depends on the professional knowledge of the management, and it cannot be fulfilled only through the due diligence conducted by the third party. The audit result revealed that the management of Parafuturo de Macau was careless in the decision to make major investment, which was difficult to ensure the proper use of public funds invested by the SAR Government.
The audit report emphasizes that public capital enterprises, with their crucial role, key function and high flexibility, are an important force for the SAR Government to seek development in different fields. Therefore, in order to achieve the tasks assigned to them initially, it is necessary to continuously improve and develop their management system, rationalize their rights and obligations when making important decisions, optimize their structure, promote the efficiency of supervision, prevent the waste or outflow of capital, strictly enforce accountability and realize their healthy development, with a view to achieving the expected effect of maintaining and increasing the value of business and assets funded and operated by the SAR Government.
The report was previously submitted to the Chief Executive and it can be downloaded from the Commission of Audit’s website (http://www.ca.gov.mo), also it is freely available at the Commission of Audit Office from today during office hours.
