- State Audit Office of Latvia - http://www.lrvk.gov.lv/en/ -

Local Governments Borrow and Build Recklessly: Ill-considered Projects Place a Huge Burden on the Municipal Budgets in the Future

The practice of many local governments in borrowing state budget funds for the construction of objects that are too large and unsuitable for the realities and needs of the local government is evidence of short-term thinking and irresponsible attitude towards their future expenses.

In 15 local governments, the State Audit Office assessed the existence of a feasibility study for such infrastructure projects, as well as their planning and implementation. The audit revealed a rather sad picture of the future, as most sports and recreation facilities are unlikely to provide a return ever and the maintenance costs that the local governments incur will only increase every year.

The Law on State Budget allocates 118 million euros to municipal loans each year. Local government activity in submitting loan applications is very high, and the amount of borrowings usually requested even exceeds the budget limit. Besides, practice shows that 99% of loan applications are approved even if the local government has not assessed the need for the project carefully. As a result, some local governments have ambitious and expensive assets that are not self-sufficient and impose a heavy financial burden on municipal budgets even for several decades ahead.

“The State Audit Office considers that the government should create opportunities for local governments to borrow funds to develop really high priority projects in their territories, but the Treasury loan system must be significantly improved to ensure financing only for long-term economically viable projects and to provide that municipal and national policies in education, sports, transport, health, social or any other area are consistent and not contradictory,” emphasises Auditor General Elita Krūmiņa.

The era of swimming pools without future prospects in Latvia

A boom in swimming pool construction that has been particularly marked in recent years is a prominent example of municipal negligence in the planning and construction of large facilities. Local governments have invested between 3 and 12 million euros in the construction of swimming pools and sports facilities connected to swimming pools, but they are also in constant need of a municipal grant, which covers most of the facility costs. After 10 years when one will need to replace equipment or make major investments therein, each local government will have spent at least two to three million euros on maintaining the swimming pools. Kuldīga regional swimming pool is one of the examples. Kuldiga Regional Government did not evaluate its impact on the municipal budget before implementing the project. Expenditure on the facility was almost three times more than revenue in 2018, with swimming pool revenues averaging only 8,000 euros per month.

Even in the local governments that had carried out an estimate of revenue and expenditure before the implementation of the project, the projections for the operation of the facility have often been more optimistic than the actual performance. For instance, the actual costs of the Sigulda Sports Centre that the Sigulda Local Government leased to a municipal enterprise differed in several items significantly from the previously planned ones. Although the local government has paid more than one million euros to the municipal enterprise for providing sports activities, the enterprise is not able to pay the rent in full. In its turn, the maintenance costs of the Bauska swimming pool were 18% higher than planned reaching 282,898 euros and the municipal grant for the operation of the swimming pool was twice as high as planned totalling to 252,424 euros.

It is noteworthy that none of the audited local governments also considered it necessary to consult the Latvian Swimming Federation on the suitability of the swimming pool in the planning process or before starting the design of the swimming pool, namely, for swimming be safe and swimming pool parameters and equipment meet the intended use in terms of the pool depth or tile cover.

Lending as much as asked …without strong grounds and a clear plan

The requirements of laws and regulations to borrow money from the Treasury are very formal. It turns out that borrowing is relatively easy, as local governments are not required to justify the need for borrowing and its compliance with the needs of the municipal population comprehensively in their applications. Local governments are preparing a business plan with thorough calculations and feasibility study only if the rules for the receiving the co-financing from the European Union funds require it. Only seven of the 15 local governments included in the audit of the State Audit Office had calculated the maintenance costs of the planned objects before the implementation of the project. In total, 22.17 million euros are allocated to priority investment projects in 2017 and 2018.

As regards the feasibility study for a loan, one states specifically that the ‘description of the project’ section should be short and not exceeding one page. For example, Carnikava Local Government had written just one sentence in its application for a loan of 2.61 million euros to build a kindergarten originally.

Evaluation procedure of applications implemented by the Council established by the Ministry of Finance mainly provides for control of the total amount of local government debt and compliance of the loan with the borrowing conditions specified in the Law on State Budget. The current procedure for granting loans does not require local governments to evaluate the economy and efficiency, and compliance of the project with the development planning documents approved by the local government before receiving the loan.

The current procedure is somewhat paradoxical that the Council at the Ministry of Finance, which decides on granting loans, does not include any representative of the Ministry of Education and Science, although 16.3% of the granted loans were for investment projects of educational institutions in 2018. The example of Bauska Regional Government illustrates the consequences of such a situation. Although a study commissioned by the local government on the optimisation of the school network recommended closure of Mežotne Primary School and preserving only pre-school education in the building, Bauska regional Government has both reconstructed the building by borrowing more than 600,000 euros from the Treasury and prioritised the construction of a two-story gym for this educational institution in 2019.

The practice of cooperating in planning sites is also not common in neighbouring local governments, which often results in an abundance of sports facilities within a short distance in one region creating unnecessary competition and nothing at all elsewhere. For example, in 2013, Rugāji Regional Government completed the construction project of Rugāji Stadium implemented since 2008 having invested almost 850,000 euros and envisaged such stadium parameters that were suitable for organising professional football competitions. Meanwhile, Balvi Region located only 18 kilometres away and has a long-standing tradition of football and a professional football team has planned to build a stadium with the option to organise national competitions already since 2011.

Local governments should plan their major projects more carefully being aware that they are managing the resources of their population. The Council of Europe emphasises that co-operation in the construction and maintenance of infrastructure helps local governments to provide more efficient services to citizens, as well as to address problems caused by limited funding and insufficient capacity. (Council of Europe Toolkit Manual “Inter-municipal Cooperation”, 2010, pp. 9-12. Available: https://rm.coe.int/1680746ec3.)