Company grown with public money sold without tender

Toronto’s troubled public housing corporation has sold its share of a card-operated laundry business for $4.5 million — without putting it out to public tender.

Instead it sold its 35 per cent share of the business to entrepreneur Maurice Kagan and guaranteed he can operate in public housing buildings across the city until 2020.

The sale comes less than a year after city auditor Jeffrey Griffiths found the Toronto Community Housing Corporation (TCHC) was repeatedly circumventing its own rules that require an “open and competitive tendering process” for contracts over $100,000. Griffiths said all potential suppliers should have “an equal opportunity” to submit a tender.

Competitors in the laundry business say they would have liked the opportunity to bid for the lucrative contract.

“There is no question that we would have been aggressive bidders,” said Stan Saibil, president of Phelps Apartment Laundries Ltd. “Toronto is a very competitive market.”

In interviews, both the TCHC and Kagan describe the move as the best value for the housing corporation. Until the Star pressed the issue, neither side would confirm a deal, reached in August, had been done.

A recent statement from the housing corporation after the Star made inquiries said the people of Toronto are “receiving good value for money as a result of this transaction.”

Kagan said, “For Toronto Housing it has been a fantastic success story.” He said the housing corporation was “interested in generating the best bang for their buck,” and that is what they got by partnering with a private company and selling when they did.

Details of current and past dealings between Sparkle and Kagan have been discussed at the housing corporation’s board and finance committee, but were typically discussed behind closed doors.

At the centre of the story are 4,000 washers and dryers. Using prepaid cards (which have replaced coin-operated machines) tenants are charged up to $2.25 per wash and up to $1.75 cents for 60 minutes drying time. The machines are in public housing units across Toronto.

Back in the early 2000s, ownership of laundry machines was split between the housing corporation and a half dozen laundry companies of varying sizes.

That changed in 2004. According to housing corporation officials a decision was made to streamline and improve services. Some laundry companies (Harco and Coinamatic) met with TCHC to discuss ways to improve service, but all the companies were shown the door once their contracts expired.

The removals were staggered. Some companies removed machines, which were quickly replaced, in 2004. Some were in community housing buildings until 2006.

Norman McIlmurray was a former co-owner of Coin Vend, a company that had machines in 30 TCHC buildings.

When the housing corporation decided to form Sparkle, McIlmurray recalls receiving a letter stating their contracts would not be renewed “and there would be no tendering any more and they didn’t say really why.”

Kagan, an entrepreneur involved in real estate investment trusts and housing projects, said the housing corporation approached him in 2004 to set up a laundry company. Sparkle Solutions Corp. was incorporated in 2005. The officers were Kagan and Ray Helwig, described on Sparkle’s website as a principal in a coin laundry company serving the housing agency before Sparkle was created.

Gordon Chu (at the time the housing corporation’s chief financial officer) was listed as a director, but the housing agency said he did not receive a salary.

There was no tender. Harco’s general manager, Ugo Amendola, said prior to this tendering by the housing corporation was “the norm.”

In forming Sparkle, the publicly funded housing corporation invested $500,000 and provided $590,000 worth of washers and dryers. Kagan structured the deal as an income fund and secured partners, including a large private landlord and a large group of smaller investors. The housing corporation took 35 per cent of the deal. That 35 per cent interest in the fund entitled them to profits from any business conducted by Sparkle, said Kagan.

Kagan told the Star all of Sparkle’s investors made a profit. According to the housing corporation it took in $21 million over the years from revenue generated by the machines, including more than $4.5 million in 2010.

Kagan said Sparkle was also asked to supply fridges and stoves for public housing units. Sparkle also was given the job of renovating laundry rooms, supplying and installing air conditioners and since 2010 has been the sole manager of the housing corporation’s visitor pay parking operations. When asked if the parking deal was tendered the housing corporation described it only as an ongoing pilot project.

Using its work in public housing as a springboard, Sparkle grew and tripled in size, setting up in public and private apartments — some owned by its initial investors — and doing small deals with fire halls, hotels, hospitals, retirement homes and operating a pay parking business. They now have 12,000 machines in 1,150 buildings.

Now, faced with a crushing bill to fix crumbling buildings, the housing corporation has gotten out of the laundry business. For $4.5 million, the corporation has sold its stake in Sparkle to Kagan.

Why no tender?

A housing corporation spokesman said its agreement with Sparkle prevented them from tendering to competitors.

“We took great care to ensure the sale was appropriate and that the price we received was fair and represented market value.” said spokesperson Jeffrey Ferrier in an email. Solaris Capital valuated the interest and they sold it at the “high end,” he said.

The sale didn’t violate any procurement policies, as they apply to goods and services not revenue generating opportunities, said Ferrier. The agency’s policies also allow for extensions to joint venture partners, or if it is determined there was nothing to gain through a public bid, according to documents Ferrier sent to the Star.

Ferrier said that, post sale, the housing corporation will continue to have revenues of about $4 million from the laundry machines each year.

The head of competitor company Phelps said the public should not have to rely on TCHC’s word.

“You still don’t know what the market would have paid you,” said Stan Saibil. “It has the appearance of something improper,” he said.

The sale to Sparkle includes a proviso that Kagan’s company can stay in the public housing units until 2020.

“We said to Toronto Housing there is no way that we can pay you the kind of money that you want with a contract that expires in five years time,” said Kagan. He said he took on $10 million in debt to buy out the TCHC and the rest of his original investors.

Auditor-general Jeffrey Griffiths’ report on the housing corporation detailed $5 million worth of untendered contracts to a Chinese supplier for toilets, sinks, faucets, ceramic tiles, light bulbs and lighting fixtures, all approved by then CFO Gordon Chu.

Another $500,000 sole-source contract with a Chinese supplier described as a “long term friend” of TCHC staff.

Chu, who left the agency in 2010 and is retired, did not respond to a request to speak with the Star.

Kagan said he plans to stay in the laundry business, but could not confirm if he intended to operate Sparkle until 2020.

“Who knows what is going to happen tomorrow,” he said.

Now that the company is private Kagan has the right to sell Sparkle to competitors but said the company needs to start paying off its debt.

“Remember I owe a lot of money,” said Kagan. “I’ll tell you in five or ten-years time whether we did a good deal or not with Toronto Housing. At this point in time Toronto Housing did a fabulous deal.”

Origin
Source: Toronto Star