HDB’s $2 billion dollar deficit – More Questions than Answers
November 5th, 2009 | 
Author: By Damon Yeo, Business Correspondent
HDB’s latest financial report reviewed that the Statutory Board had made a $2bn deficit for the financial year running from 1 April 2008 to 31 March 2009. The deficit had doubled since the previous period.
To fully understand the numbers behind HDB’s financial year, one must first understand that HDB is a statutory board of the Singapore government. Its objectives are clear – to provide affordable homes and create vibrant towns.
Profit-making is not one of the one of objectives. Its activities are historically funded by the government and hence a deficit should not come as a huge surprise.
This is perhaps why in HDB’s 38-page Annual Report, there was no mention of this deficit at all. The report went on to highlight HDB’s newest Build-to-Order (BTO) projects and the Lease Buyback Scheme. An entire page was also dedicated to showcasing a host of awards won by HDB in the aforementioned financial year, some of them handed out by fellow government agencies.
However, it is necessary to note that $2bn is by no means a small amount. Since its inception in 1960, HDB had obtained a cumulative government grant of $19.3bn.
$2bn is almost ten percent of this amount – meaning that this deficit had no doubt been one of the largest in the Board’s history. Also, this $2bn is essentially taxpayer’s money and for the purpose of accountability, financial statements should be examined to identify any inefficiency in the organisation.
First and foremost, on further inspection on the expenses incurred, it is noteworthy that HDB had stepped up on its effort to cut manpower costs over a period of difficult time in terms of the economy.
Overall, salaries and bonus were reduced by nearly 4% across the board. Actual number of employees actually increased over the same period of time, meaning that on the average, every HDB employee took home nearly $6,000 less over the year.
This pain is not just felt by the normal employees. Key management personnel in fact took home almost 10% less than the previous period.
Table 1: Manpower Cost – all
|
2008/09 |
2007/08 |
YoY change |
|
|
|
$’000 |
$’000 |
$’000 |
% |
|
| Salaries and bonus |
374,833 |
388,790 |
(13,957) |
-3.59% |
| CPF contributions |
37,860 |
39,497 |
(1,637) |
-4.14% |
|
412,693 |
428,287 |
(15,594) |
-3.64% |
Table 2: Manpower Cost of key management personnel
|
2008/09 |
2007/08 |
YoY change |
|
|
|
$’000 |
$’000 |
$’000 |
% |
|
| Salaries and bonus |
5,623 |
6,307 |
(684) |
-10.85% |
| CPF contributions |
126 |
130 |
(4) |
-3.08% |
|
5,749 |
6,437 |
(688) |
-10.69% |
That is, unfortunately the only piece of information which is consistent and easily explained by market conditions.
In a media briefing, HDB explained that the deficit was driven by more flats being sold (and these flats were being subsidised by the government), higher construction costs and more upgrading works.
Further scrutiny of the financial statements finds these explanations somewhat puzzling. As disclosed under home ownership segment of the report, we see that HDB sale proceeds from selling of flats had actually decrease by almost 57%.
This poses a few questions, naturally. Firstly, HDB had claimed that they had issued 2,000 more BTO flats in the FY09. This increase in the number of flats sold does not seem to be reflected in the sale proceeds decrease in the year.
Furthermore, since sale proceeds is a product of number of units sold and sale price, the decrease actually indicates a cutback in the number of flats sold by HDB in the year. (We know that prices could not have decreased, as we saw record prices over the period mentioned).
This leads to a bigger question – if HDB knows that house prices are increasing, should they not increase the supply of flats to cool the market and make housing more affordable? (one of their mission statements)
Also, assuming construction costs are all included in cost of sales [cost of sales are defined as costs incurred directly related to the purchase or production of the sales of an entity], it does not appear that they have increased materially.
As a percentage of the sales proceed, cost of sales had actually decreased in terms. Unless construction cost makes up the immaterial portion of cost of sales (unlikely), HDB’s explanation is not in line with the numbers we are seeing.
Table 3: Gross profit of Home Ownership Segment
|
2008/09 |
2007/08 |
YoY change |
|
|
|
$’000 |
$’000 |
$’000 |
% |
|
| Sales proceeds |
1,061 |
2,463 |
(1,402) |
-56.92% |
| Cost of Sales |
(993) |
(2,389) |
1,396 |
-58.43% |
| Gross profit |
68 |
74 |
(6) |
-8.11% |
| Cost of Sales (%) |
93.6% |
97.0% |
Overall, it does appear that the increase in deficit for the year has driven a $972m increase in operating expenses of HDB in the current year. Table 4 sums up the material expenses incurred.
Upgrading costs did indeed increase by $197m, as explained by HDB to the media. However, as we know, upgrading is not 100% cost-free to homeowner. It may be highly subsidized but the homeowner does pay off part of the costs back to HDB. It is not further explained if these costs below include these payments from homeowners.
Impairments losses have increased more than 100-fold in the current year. A large portion of this is the impairment on the value on leasehold land (almost $100m).
There is no further explanation on this increase in impairment and it again appears odd prima facie. With property prices on the rise, it is thought that the value of freehold land is likely to remain similar in value or be re-valued upwards (though any upward revaluation cannot be taken through profit and loss under accounting rules).
Provisions for foreseeable losses also drove up expenses by almost $0.5bn. This element is likely to be where the increase in government subsidies comes is explained. Similarly, it appears odd to see a 58% increase when sales had fallen by 57%.
Both impairments and provisions are highly judgemental areas where management are required to make best estimates in current market conditions.
Table 4: Summary of material expenses
|
2008/09 |
2007/08 |
YoY Change |
|
|
|
$’000 |
$’000 |
$’000 |
% |
|
| Upgrading, improvements and demolition |
820,248 |
623,033 |
197,215 |
31.65% |
| Impairment losses on properties |
117,806 |
1,067 |
116,739 |
>100% |
| Provision for foreseeable losses |
1,236,944 |
783,757 |
453,187 |
57.82% |
|
2,174,998 |
1,407,857 |
767,141 |
54.49% |
Reading through financial statements had left this writer with more questions than answers. There is no question on the integrity and truthfulness of the numbers as presented publicly, but more explanation and disclosure are required before anyone can examine the state of HDB finances critically.
[All tables taken from HDB Annual Report for Financial Year 2008/09]
Other articles by Damon Yeo:
>> DBS and a series of ‘unfortunate events’
>> Sale of Chartered – An Anatomy
>> 3rd most competitive nation in the world and what it means to the average worker
About the Author:
Damon is a proud graduate of Nanyang Technological University in 2004 with a degree in Accountancy. He is currently working in the finance department of a UK Bank. He is also a regular contributor at redsports.sg.
Posted in 27 Responses to “HDB’s $2 billion dollar deficit – More Questions than Answers”
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$972M increase in operation expenses? How could that be? That is definitely not good management. If upgrading works is so costly, mabe they should reconsider the way it’s done. I had been through a upgrading of my estate. The people appreciate the general upgrading of the estates but we do not like the works to the flat itself. The works created a lot of inconvinience to the family and I believe that is the costly item compared to the general upgrading. If HDB wants to report their accounts for whatever reasons, they should clearly state how the figures were arrived. We should not forget that whatever they had build and upgrade, still belongs to them ultimately. Recently I saw a few old estates taken back by HDB being rented out without any major works done to the estate. And HDB also sold their land to private developer. Are these income noted in the $2b deficit report?
I also see a lot of wastages during the upgrading process. They built pavement and hack it away and rebuit them. They build letter box and hacked it to reubuilt. They built covered walk way, hack it and reubuilt. They built children playyard, hack it and rebuilt it. They build void deck, realised it didn’t look nice and than hack it again. They took days to dig ground, covered it and than dig again. Why can’t these people make up their mind and plan carefully before starting a wasteful projects like these? Afterall, residents also footed part of these costs which could have best employed to help the needy neighbours.
What about the investment losses from the sinking fund?
well done DY on a very good article…HDB if you are reading this there better be some good explanation to the public…there must not be differences in quality of annual reports for public and private sectors…
ever get the feeling that it is so unlike the typical kiasuness of gahmen to go the extend to make it so clear and plain to all about a loss in their business with no honest mistakes explanation. no hiding of numbers becos they want sporean to believe the impossible loss
how can gahmen not know how to make money from sporean when sporean are so gullible and obedient to the same gahmen forever. the followers will never question their master thinking it is alway for their best interest.
i will not be surprised if these provisions for losses and impairments are written back in next year report.
This is typical accounting gimmick to disguise a profit. but over, the long term, accounting must tell the truth.
As buffett says:”skim milk often masquerades as cream”
In HDB’s case “cream is masquerading as skim milk”
After the old blocks of one room flat in taman ho swee were given the end bloc notice, hdb started work on constructing annexe side staircases to the blocks. Why start constructing fire escapes stairs when the residents were given notice to move out and the blocks were destined to be knock down soon?
Obviously the devil is in the details. I would suggest the following be disclosed:
Breakdown of Cost of Sales by project, including land price charged by SLA on per project basis, and construction costs. Land price is a left to right pocket transfer between the government agencies. Presumably SLA could set the transfer price of the HDB land plots as if they were for mass market condominium projects (which is the opportunity cost to SLA) instead of public housing. This will result in the high COGS.
Impairment losses and provisions of foreseeable losses were also baffling given the surge in residential prices. More information is needed.
The salary bands of the top 10 percentile of the HDB officers should be disclosed in a manner similar to director’s remuneration in annual report for listed companies.
@ong on Thu, 5th Nov 2009 1:46 pm
[[After the old blocks of one room flat in taman ho swee were given the end bloc notice, hdb started work on constructing annexe side staircases to the blocks. Why start constructing fire escapes stairs when the residents were given notice to move out and the blocks were destined to be knock down soon?]]
The simple answer is, en bloc does not mean a block is to be knock down. I read from a blog that a Jurong site was en bloc and the entire HDB flat cluster was refurbished to be rented out. To whom, I do not know.
It is all creative accounting that imagination can bring. In major housing projects like HDB,physical land, access roads, recreational parks nearby, drainage, power lines, sewage pipes and relevant land development ( BUT NOT CONSTRUCTION COSTS OF HOMES) can be “expense” off or “capitalised” as asset.
If it is expense off like wages, salaries in any normal business, it will be added up as “costs” of production. If it is “capitalised”, then the costs is part of the asset accumulation just like a van in a retail business and recorded as asset item – an investment in the business. When capitalised as asset, it is NOT treated for accounting purpose as “costs” of production and therefore a higher profit is reported or a lower loss is reported ( if the business is unprofitable).
What the reported deficit (loss) or surplus ( profit ) depends on the accounting methods used.
It is meaningless, really.
@creative accounting
I agree that accounting rules provide leeway for management to make decisions on certain issues. But to brand them as meaningless is harsh. HDB’s financial statements are audited and vetted by many trained accountants/auditors before being published.
Like mentioned in the article, there is no question abt the integrity of the numbers – it is just that more information is needed.
Damon Yeo on Thu, 5th Nov 2009 9:23 pm
Accounting policy are methodology INTERNALLY decided by management. The external auditors merely verify that the accounts “comply” with these accounting policy so decided and in commercial entities certainly accounting standards (again elephant spread occurs) overlay and sometimes disputed between management and auditors. I believe the words “true and fair” views are a minomer.
I remember a US stock called Waste Management Inc – its share price has only one direction, SKYWARDS because as the scale of business expand, so the profit. ALL THEIR WASTE DUMPS ARE CAPITALISED UNTIL NO MORE SPACE TO DUMP AND THEN THE WHOLE CAPITALISED AMOUNT IS WRITTEN OFF IN ONE YEAR OF EXPENSE AND FANTASTIC LOSS. The share price which climbed for years up the escalator CAME DOWN BY THE LIFT. Those shareholders dependent on auditors’ assurance that Waste Management Inc accounting reflect the “true and fair” view were stripped naked. The auditors are international top grade auditors.
Then there is the mark-to-market accounting for derivative thinly traded. How do you value them – ARBITRARY ALMOST. In HDB, land prices acquired by SLA at near pathetic costs of the 1970s valuation, how are they treated in accounting costing when it is not freely traded? Mark to market of private condo development and call this land costs?? The land costs is NOT in HDB’s book but in Singapore Land Authority – separate entity. How do external auditor challenge valuation in HDB accounts that the accounting of land costs is in Singapore Land Authority’s books?
And infrastructural costs like sewage tunnelling, drainage, access road, car parking, recreational parks etc are they one-off charge or amortise over the life of HDB leases since car parks generates revenue as well? There is a whole gamut of accounting items up for PLAY which auditors have no basis of arguing legitimacy since HDB is a monopoly and no market reference.
Bottomline is – HDB’s surplus or deficit on year to year will fluctuate according to what CREATIVE ACCOUNTING rules allow them to stretch or shrink. And there is nothing that auditors can say it is right or wrong without comparable benchmarking same as some industries in the commercial sector.
Put it this way, we won’t know the real and whole story without accurate real data and baseline for comparison. But my only wish is that for all those real people out there who needs a home will get one in the end minus the run around and waiting for queue numbers.
You wrote…
“Put it this way, we won’t know the real and whole story without accurate real data and baseline for comparison. But my only wish is that for all those real people out there who needs a home will get one in the end minus the run around and waiting for queue numbers.”… And…
“Budget Tai Tai Tabitha Wang” lives in Hong Kong island (NOT The New Territories on Mainland China) and which Is a Mountainous island about A 3rd of Singapore’s size! You can read at todayonline.com what She wrote on Friday Nov 6, 2009, TODAY newspaper Voices pg 44 … comparing HK’s Property Prices with Singapore’s
She said…
“so you end up paying not just for
the area you live in but also for the hallway,
lobby, lifts, car park, gym and pool.”…
Note that she DID NOT in her first two paragraphs mention about Rental Properties and so it naturally read as she’s referring to SALES Properties. Thus in question…
Q: Is she so naïve that flats/other unit types are being sold without including the costs of common areas in the Sale Price???… meaning in Singapore for like HDB and Private Condos!!!…
Web page repeated for convenience…
http://www.todayonline.com/PrintEdition/NF
For the past few years, I have noticed that any upgrading or minor construction project done in HDB estates does not indicate an estimated completion date. Also there seems to be no QC involved in the works. I have seen pavements done for easy access for elderly residents built only to discover the leveling has not been done properly resulting water pooling on the pavements, hence endangering those it was meant to help. Does HDB send any one to check on the contruction job done? The most recent case is the HDB is doing soil survey for LUP and the notices was pasted at odd walls on a plain piece of paper without letterhead from the relevant authority. Is this part of the cost saving? I find it interesting to have the need to do soil survey at ground a few meters from the building itself. I worry my block is surrounded by less then suitable soil.
Do you know that the purchase of a Home IS the LARGEST single purchase in a Lifetime for most people???…
And you want it EASY as in not having to running around and waiting for queue numbers???… SO…
You ARE EXACTLY the very kind of voters the MIW loves… ones like you who ARE still like BABIES Still Being BREAST-FED by ‘MIW” – HO HO HO By Men!!! – And has never grown up!!!…
And as regards the “real data” for HDB’s huge “Loss” of $2 Billion…do YOU think that the government SHOULD Provide THE DATA???… Or ARE you also still SLEEPING like a BABY After having been BREAST-FED By MIW???… And so won’t be able to understand any Figures they may give YOU and us???!!!
YOU… ARE… Just one NAIVE supporter who needs a long long time to GROW UP!!!
I am quite surprised about the amount of provisions…
I thought a company cannot do general provision these days i.e. provisions need to be specific (at least if it’s refering to accounts receivables etc)…
If so, what are the specific provisions that HDB is preparing for…
And to Zone Trooper again…. on Fri, 6th Nov 2009 2:10 pm
And the solution to that – bring in FREEDOM OF INFORMATION LEGISLATION so we can dig in and find out what those $2 billion alleged deficit is in the future.
Did HDB invest in Temasek and/or GIC and were these investments disguised as expenses after losses were incurred?
@Damon Yeo: If the xxx can influence the independence of the judiciary I am sure they are more than capable of ensuring that the auditors they use similarly follow orders.
“@Damon Yeo: If the xxx can influence the independence of the judiciary I am sure they are more than capable of ensuring that the auditors they use similarly follow orders.”
If there is kangaroo law in place, anything goes. Auditor could as well follow order higher up without questioning just like those polices who arrest SDP members for flyer distribution.
“HDB’s financial statements are audited and vetted by many trained accountants/auditors before being published.”
Accounting can only so far to make number tally. If it is not accounting at fault, it is the item under which figure is derived that is questionable.
Do the auditors bother to find out about “item which just register itself as a unknown loss” that are classified by the kangaroos themselves ?
eg
Build House $30,000
Material $12,000
Unknown expense $24,000
============================
Total expense/loss = $66,000
From the above accounting is right, but what is the unknown expense that cannot be divulged ? This is what accounting cannot show.
It is a know practice in accounting that if there is nothing that can explain of the loss convincingly, just place it those under “other expenses” just to tally the account statement. And don’t tell me it is bullshit, I should known coming from the industry I’m from.
My comments and clarifications after what you wrote…
“eg
Build House $30,000
Material $12,000
Unknown expense $24,000
============================
Total expense/loss = $66,000
From the above accounting is right, but what is the unknown expense that cannot be divulged ? This is what accounting cannot show.
It is a know practice in accounting that if there is nothing that can explain of the loss convincingly, just place it those under “other expenses” just to tally the account statement. And don’t tell me it is bullshit, I should known coming from the industry I’m from.”…
1. “This is what accounting cannot show.”…
Q/C. “cannot” or CAN”T SHOW… BY the client’s ‘inverted intructions’???…
2. “And don’t tell me it is bullshit, I should known coming from the industry I’m from.”…
Q/C. This one hinges on my Q/C in Item 1 above. Because you said not to tell you “it is bullshit”…
My point is… What IS the OFFICIAL Accountiong Conduct EXPECTED By LAW and ALSo By the association of accountants???
THIS IS THE IMPORTANT to know… If both Authorities ARE TRUE True GOVERNING AND “Watchdog” ONES!!!
You can buy a 150 000 RM terraced house in M’sia. How could the construction costs in Sgp be several times higher than that in M’sia?
maybe the losses went into the ineffective management and administration. too many unnecessary people taking up the wages.
as if what accountants say is really true.
Look at what happened to NKF.
ITs accounts have been vetted by auditors for years before the mess exploded.
fpc on Sat, 7th Nov 2009 8:00 pm
You are right to doubt the accounting numbers.
Accounting figures are just accounting figures. It is not foolproof of all season and circumstances. It can be as creative as the accountant wants it to be. Look at the real world example below.
Just look at this significant accounting policy for General Moly, for example at page 53. It reads
Mineral Exploration and Development Costs
All exploration expenditures are expensed as incurred. Significant property acquisition payments for active
exploration properties are capitalized. If no economic ore body is discovered, previously capitalized costs are expensed in the period the property is abandoned.
http://generalmoly.com/images/stories/2008_10k.pdf
Reported net loss was $14.4m (at page 44) comprising mainly of
Exploration and evaluation . . . . . . . . . . . . 5,670
General and administrative expense. . . . ……. 10,436
Included in the balance sheet (page 43 ) under assets
Mining properties, land and water rights . . . . . . . . . . . . . . . . . . . . . . 79,292
Most of this is tied up in a project called Mt Hope with proven molybdenum mineralisation BUT IN REALIY UNECONOMIC OF PRODUCTION.
The bankable feasibility study proved that.. (page 5)
http://generalmoly.com/images/stories/financial/mount-hope-vol1-executive-summary-synopsis.pdf
IDAHO GENERAL MINES, INC. VOLUME I – EXECUTIVE SUMMARY
MOUNT HOPE FEASIBILITY STUDY
M3-PN06236 1-10 M3 Engineering & Technology Corporation
August 29, 2007
Table 1.3-1
Base Case Molybdenum Pricing (per pound)
Year 1 $28.00
Year 2 $24.00
Year 3 $22.00
Year 4 $19.50
Year 5 $16.00
Year 6 $14.50
Years 7 to 44 $13.50
Since the lowest price to develop this mine is $13.50 per lbs of molydenum and current price is under $8 per lbs, GENERAL MOLY EITHER WRITE OFF THE ENTIRE AMOUNT OF $79.2 MILLION as abandoned mine or wait indefinitely for molydenum prices to rise to more than $28 per lbs – unlikely.
If they write off this Mt Hope project, their loss for 2008 would be a lot more than $14.4 million . It could be $13.4 million plus another $79 million or roughly $93 million.
What a BIG DIFFERENCE BETWEEN A LOSS OF $14.4 MILLION AND A LOSS OF $93 MILLION.
Their auditors certified that 2008 accounts is correct.
THIS IS WHAT CAN BE CALLED CREATIVE ACCOUNTING.
“1. “This is what accounting cannot show.”…
Q/C. “cannot” or CAN”T SHOW… BY the client’s ‘inverted intructions’???…”
That is why I say accounting cannot explain the reason, it only show tallied number. The reason whether kangaroo or not is up to whatever kangaroo instruction given. This is how creative accounting is been made.