The State Audit Office of Latvia concluded after the audit that the incentives granted by local and regional governments (e.g. allowances, compensations, discounts, co-financing) were very diverse and costly for local and regional governments. They are often not sufficiently justified, do not achieve the intended goals or are not proportionate to the costs of administration, and it is not always clear whether the specific incentive is really necessary. The Single Information System for Incentives (SISI), which is mandatory for local and regional governments and which the Ministry of Smart Administration and Regional Development (MSARD) intended as a solution for administering incentives and informing population, is currently not fully usable. Its implementation requires technical solutions that require financial investments from local and regional governments, which they currently do not have. In addition, the system is not adapted to the diversity of incentives and different administrative practices.
IN BRIEF
- The incentives granted in local and regional governments are diverse: in the local and regional governments included in the audit sample, 39 unique incentives are available, which cost 66.2 million euros for those local and regional governments, or an average of 5% of the municipal budgets.
- There are shortcomings in determining the costs of administering incentives and the expected results are not clear.
- 2.7 million euros have already been spent on the creation of SISI, and another 2.9 million euros will be invested from the Recovery and Resilience Facility (RRF) funds. At least 460,000 euros will be needed from the state budget annually to maintain the SISI.
- Local and regional governments do not use the SISI due to a lack of technical solutions and funding.
- There are significant risks of state support and competition for the further development of the SISI and the legal and effective use of 2.9 million euros from the RRF funds.
“The various incentives granted can serve as an essential tool for local and regional governments to achieve important goals. Yet, it is important for local and regional governments to act responsibly by clearly defining the purpose of the incentive, assessing whether the administration costs do not exceed the benefits and do not create a bureaucratic burden for the recipients, and verifying periodically whether the specific support still provides the planned public benefit and is in line with the development plans of particular local or regional government. During the audit, we found that the sampled local and regional governments often do not specify what they want to achieve with the specific incentive and why the amount of the incentive is exactly as it is. In addition, local and regional governments lack the prerequisites for responsible incentive planning because funding is often determined based only on the previous year’s performance, and not on the amount of funds actually needed to grant incentive for the current year and changes in the target groups of population,” indicated Mr Oskars Erdmanis, Council member of the State Audit Office of Latvia.
The incentives provided by local and regional governments vary
In total, 39 unique types of incentives are found in the six local and regional governments included in the audit sample (Tukums, Olaine, Ropaži, Bauska Regional Governments, Rēzekne and Jūrmala City Municipalities). For example, travel fares, catering fee reductions; allowances for newborn care, on a significant life anniversary, on national holidays; various fee reductions; discounts for the use of sports infrastructure, and fees for a marriage ceremony.
The diversity of incentives established in the sampled local and regional governments demonstrates the desire to provide various benefits to their communities. However, it requires large financial resources and balancing them with other municipal functions, such as road and infrastructure maintenance.
The audit has found that these local and reginal governments spent a total of 66.2 million euros on 149 incentives from 2022 to 2024, which is an average of 5% of their annual budget. However, only 13 incentives or 9% of them specify the results to be achieved with the respective incentive, for instance, an increase in the declared population, the proportion of the number of students, a reduction in emissions. Moreover, only 51% of the incentives identify the actual size of the target group of beneficiaries, although it is precisely the basis for granting support and planning the necessary funding.
The costs of administering incentives are not calculated
To ensure transparent use of funds, local and regional governments should determine not only an economically justified amount but also assess the administrative costs when providing incentives. However, the audit found that in 124 cases or 83% of the local and regional governments audited, it was not clear why exactly such an amount of incentive had been determined, therefore the local and regional governments are unable to review it in a timely manner in accordance with the economic situation. In their turn, in 147 incentives or 99% thereof, the administrative costs are not identified, and the local and regional governments cannot analyse the proportionality of these costs.
“To determine the costs of administering incentives, we asked local and regional governments to prepare estimates for 23 incentives. When analysing the information submitted, we found that local and regional governments differed significantly in both the number of employees involved in granting incentives and the costs for the same type of incentives. For example, from 4 to 13 employees are involved in administering the allowance for a milestone birthday by generating costs ranging from 58.05 euros per year if a transfer is made to a beneficiary to up to 24,830.66 euros per year if a beneficiary is ceremonially congratulated in person at their place of residence,” revealed Mr Erdmanis.
The SISI is mandatory but unused
The Ministry of Smart Administration and Regional Development established the SISI with the aim of reducing the administrative burden in the administration of state and municipal incentives by improving budget planning and providing an opportunity to analyse how state and municipal policies were being implemented. The system is also intended for residents to be able to manage their incentives in one place. The SISI is directly mentioned in the government action plan, and its implementation is closely linked to several priorities in the field of digital transformation of the Strategy for 2024-2027 of the Ministry of Smart Administration and Regional Development.
The Ministry of Smart Administration and Regional Development has already invested 2.7 million euros in the development of the SISI but local and regional governments are not actually using it. At least 460,000 euros will be required from the state budget to maintain the SISI annually.
“The use of SISI is not a voluntary choice of local and regional governments. According to the SISI Law, it is a mandatory obligation from 1 November 2024. The Ministry of Smart Administration and Regional Development has not taken the necessary actions and coordinated cooperation sufficiently with local and regional governments on the development and implementation of the SISI so that they could start using the system in a timely, convenient and without large financial investments. Only the Liepāja City Municipality has started using the SISI for one benefit since January 2025 but it took the municipality more than two years. One should note that even half a year after the mandatory deadline for starting using the SISI, a roadmap for local and regional governments had not been developed, namely what local and regional governments should do to start using SISI. A unified technical solution for integrating municipal benefits into the SISI has also not been created,” emphasised Oskars Erdmanis.
The audit has established that it is not clearly defined for which municipal benefits it is mandatory to use the SISI. Therefore, in the opinion of the State Audit Office of Latvia, only after all incentives have been identified, evaluated, prioritized, administrative processes have been standardised and costs have been identified would the requirement for mandatory use of the SISI be justified and useful.
Currently, the implementation support offered by the state to local and regional governments, 2.9 million euros from the RRF funds, is not enough, as only 12 local and regional government applications account for 96% of this amount. In addition, local and regional governments will have to cover significant additional costs to integrate into the SISI contrary to the initially expected savings, as the integration of one incentive can cost up to 478,000 euros per local or regional government.
Taking into account that the implementation of the SISI is currently actively continuing and contracts for the use of RRF funding are being concluded, the State Audit Office of Latvia draws the attention of the Ministry of Smart Administration and Regional Development to the fact that, following the conditions of RRF support, control must be ensured over the development of such an integration solution, the delivery of the solution code and its transfer for use to other local and regional governments, which would promote its reuse for the integration of new local and regional governments with the SISI.
Without significant changes in the implementation of the SISI and support mechanisms, there will be a high risk that future investments will also be unsuccessful and neither the planned savings of 4.6 million euros in 2024 and 2025 nor the long-term savings of 30.4 million euros over 10 years will be achieved. Since the implementation of the SISI is currently actively continuing, the State Audit Office of Latvia will monitor the regularity and efficiency of current and future investments.
Mr Erdmanis draws attention, “The successful operation of SISI is not only the responsibility of the Ministry of Smart Administration and Rural Development. It is a shared responsibility, in which local and regional governments, the State Digital Development Agency, participating businesses and other institutions also play a significant role. Only coordinated action, clearly defined goals, mutual understanding and trust will allow us to achieve the basic goal of establishing SISI, that is, to provide citizens with an accessible, understandable and effective system of incentives while using both state and municipal resources optimally.”
Recommendations of the State Audit Office of Latvia #PēcRevīzijas
The audit has provided two recommendations, implementation of which will result in: (1) when determining incentives, local and regional governments shall evaluate the justification for granting them to a specific target group of residents so that the use of financial resources for incentives is targeted, with a clear and understandable impact on the goals of the local or regional government, as well as identify incentives whose granting can be standardized and administered in the SISI; (2) The Ministry of Smart Administration and Regional Development shall develop a long-term development plan for the SISI in cooperation with local and regional governments by setting specific deadlines for the full use of the system, as well as sources of funding for the implementation, maintenance and improvement of the system operations so that local and regional governments can manage incentives effectively, and residents can easily find out what they are entitled to and receive it without unnecessary bureaucracy.
Additional reading: audit report summary
About the State Audit Office of Latvia
The State Audit Office of the Republic of Latvia is an independent, collegial supreme audit institution. The purpose of its activity is to find out whether the actions with the financial means and property of a public entity are legal, correct, useful and in line with public interests, as well as to provide recommendations for the elimination of discovered irregularities. The State Audit Office conducts audits in accordance with International Standards of Supreme Audit Institutions of the International Organization of Supreme Audit Institutions INTOSAI (ISSAI), whose recognition in Latvia is determined by the Auditor General. Upon discovering deficiencies, the State Audit Office of Latvia provides recommendations for their elimination, but it informs law enforcement authorities about potential infringements of the law.
Additional information
Ms Gunta Krevica
Head of Communication Division
Ph. 23282332 | E-mail: Gunta.Krevica@lrvk.gov.lv