In Latvia, the Ministry of Finance (FM) is responsible for the development of state real estate management policy. State-owned enterprise “Valsts nekustamie īpašumi” (SOE) founded by it is the most recognizable, but not the only state real estate manager in the country. At the end of the audit, the State Audit Office found significant deficiencies both in the formulation of policy (or in the non-formulation more precisely) and also in property management. The implementation of the unified governance and management concept of state real estate (Concept) adopted in 2006 has already been completed in 2020, but only a part of what was planned has been achieved. The way VAS VNĪ manages real estate and provides state institutions with it makes the State Audit Office of Latvia doubt whether the state's interests are valued higher than the interests of the state-owned enterprise.
The state owns numerous real estate with a wide variety of uses, and real estate is one of the basic resources needed to perform the functions of state institutions at the same time. This time, the audit conducted by the State Audit Office of Latvia was focused on the state real estate and real estate of SJSC “Valsts nekustamie īpašumi” intended for offices under the management of SJSC “Valsts nekustamie īpašumi”.
- Real estate management lacks a unified sectoral policy and systemic approach; centralization of management in sectors is partial and inconsistent.
- There is a lack of a unified approach to determining rent fee. Due to the financial capabilities of state institutions, adequate provisions are not made for property restoration and full-fledged maintenance for some real estate whereas the state has allocated such funds for the lease of SJSC “Valsts nekustamie īpašumi” property for some state institutions that creates significant profitability for the SOE.
- There is a lack of complete, true, up-to-date, and aggregated data.
- The formation of the SOE’s Council does not indicate good governance.
The problems and deficiencies indicated in the Concept still exist
The most important tasks of the Concept adopted in 2006 were to move towards greater centralization of real estate governance within ministries, to optimize the structure of real estate owned by ministries and state institutions, to introduce the principle of market rent, where the main task was to create savings for planned repairs and construction work, to develop a unified information system of real estate management.
Ms Inga Vilka, Council Member of the State Audit Office of Latvia comments audit findings, “It is undeniable that the Ministry of Finance has worked much during the implementation of the Concept adopted in 2006 because a series of various laws and regulations have been adopted, many real estates have been taken over by the Ministry of Finance from other institutions. SJSC “Valsts nekustamie īpašumi” has expropriated and continues to expropriate real estate not needed by the state, taken over part of state real estate, built new ones, introduced the State real estate information system. However, upon completion of the audit in February 2023, which is 16 years after the adoption of the Concept, one must conclude that the provision of state institutions with the necessary premises is not coordinated in general, state real estate and the real estate of state-owned enterprises specially created for real estate management are managed in a fragmented manner and without a vision for the future. This is another audit that shows a lack of or insufficient cooperation among state institutions, another audit that shows a complete lack of comparative and aggregated data and analysis."
Already during the development of the Concept, deviations from the basic idea were allowed and various exceptions were made without obtaining support from various institutions, which has led to the fact that the problems indicated in the Concept still exist and have not been solved. The established real estate management system, which is necessary for the implementation of state functions, is fragmented, as there are different real estate managers and different principles for determining rent fee and management fees. The possibilities and expenses of state institutions for the provision of premises are different.
There is a lack of consistency in the calculation of rent fee; deficiencies in the internal control system
While implementing the Concept, a unified approach to determining rent fee for leasing state real estate to public entities, including state institutions, was elaborated, but the management of real estate owned by a SOE and the determination of the rent fee is the decision of its shareholders and management bodies. When leasing state real estate to a state institution, no return is expected, but the rent fee for the real estate of a state-owned enterprise by agreement might be higher than the cost-based calculation. The State Audit Office of Latvia considers that the state also owns real estate of its SOEs indirectly. Accordingly, the state real estate transferred to the management of SJSC “Valsts nekustamie īpašumi” and its own real must first of all serve to provide state institutions with appropriate real estate in the most effective and economical way possible.
In 2021, rent fee and management revenue of SJSC “Valsts nekustamie īpašumi” was 36 million euros, and the largest part which totalled to 87% consisted of payments by public entities.
The transition to rent fee provided for in the Concept took place partially, taking into account the limited funding opportunities of the state budget, thus not all real estate have savings for the planned repairs. Necessary repairs not carried out on time will result in higher costs for the state budget in the future.
There are also opposite cases when the allocated state budget funds to cover obligations allow SJSC “Valsts nekustamie īpašumi” to profit. About 40% of the rent fee and management income of SJSC “Valsts nekustamie īpašumi” comes from two real estates located at 1 Čiekurkalna 1st Line K-1 and 1 Talejas Street, Riga, which are leased to public sector institutions mostly. The rent fee calculations provided by SJSC “Valsts nekustamie īpašumi” during the audit did not indicate profit in any case but were justified only by covering direct and indirect expenses. The audit has established that the Provision State Agency of the Ministry of the Interior paid an average of 1.9 million per year more than the actual expenses for the lease of real estate located at 1 Čiekurkalna 1st Line K-1 in four years (from 2018). This is related to the inclusion of loan and interest payments in rent fee calculation. The profitability calculations of SJSC “Valsts nekustamie īpašumi” show that the profitability of the said building ensemble was 4.2 million euros in 2020 and 2021, but exceeded 5 million euros per year in the previous two years. The approach of SJSC “Valsts nekustamie īpašumi” implemented in this way when rent fee is not reviewed and reduced for state institutions according to the actual costs is not economical for the state.
In a similar way, a component of bank loan and interest payment is also included in the rent in the audited real estate of SJSC “Valsts nekustamie īpašumi” located at 1 Talejas Street, Riga where the State Revenue Service is the key tenant. In this case, the rent fee includes other payments such as the risk of interest rate increase and the recovery of the SJSC “Valsts nekustamie īpašumi” investment with interest. According to calculations by SJSC “Valsts nekustamie īpašumi”, the profitability of this property was 1.1 million euros in 2020 and 662,000 euros in 2021. In previous years when bank rates were very low, SJSC “Valsts nekustamie īpašumi” made significant payments to maintain interest rates. Yet, when loan rates have started to rise rapidly since 2022, interest rates are no longer fixed. This might result in either a significant decrease in the profitability of this real estate, or a greater burden on the state budget, if, for the purpose of maintaining profitability, SJSC “Valsts nekustamie īpašumi” will increase the rent fee to state institutions according to increased interest payment.
Many (although not in all cases significant) errors in SJSC “Valsts nekustamie īpašumi” rent fee calculations found in the audit lead to the conclusion that SJSC “Valsts nekustamie īpašumi” has a weak internal control environment, as a result of which lessees pay inadequate fees for premises.
Lack of complete, true, and up-to-date data
To ensure a unified approach to state real estate governance and management, one required to introduce an appropriate information system that would create impartial prerequisites for data analysis, comparability and planning of state real estate management. Although the Ministry of Finance and SJSC “Valsts nekustamie īpašumi” have ensured the development of such an information system, the data collected in it is not complete, high-quality and reliable, therefore it is not possible to perform a full-fledged data analysis and necessary information on the issues of state real estate governance and management is still obtained from state institutions manually through various surveys.
Lack of good governance in the formation of the Council of the SOE
Regarding the management of SJSC “Valsts nekustamie īpašumi”, the State Audit Office of Latvia draws attention to the formation and composition of SOE’s Council and to the performance assessment of the Board. The law allows the appointment of Council Members without competition for a temporary period of up to one year. Three out of the four Council Members of SJSC “Valsts nekustamie īpašumi” are appointed for a temporary period. In addition, two of them, including the Chair of the Council, are performing their duties with a temporary status for the fourth year already, as they were appointed only a few days before the Law on temporary term limits took effect. In his turn, the Ministry of Finance as a shareholder re-appointed one Council Member after the expiration of his temporary status, moreover, without holding a job competition despite the reprimands of the Cross-Sectoral Coordination Centre. Although the Ministry of Finance insists on the legality of its actions, the State Audit Office of Latvia assesses such an attitude as legal nihilism. Such a practice weakens public trust in state administration, and it would not be feasible.
In addition, the State Audit Office draws attention to the fact that all three Council Members, who have been appointed for a temporary period, hold leading full-time positions in ministries, i.e., the Chair of the Council of SJSC “Valsts nekustamie īpašumi” is the State Secretary of the Ministry of Defence simultaneously, one of Council Members is Administrative Director of the Ministry of Finance, the other one is both Deputy State Secretary of the Ministry of Finance for budget issues and Board Member in Liepāja Special Economic Zone. The State Audit Office of Latvia has expressed concern about the possibilities of fully combining positions of such high responsibility and workload previously. Until the amendments to the State Administration Remuneration Law, which entered into force in July 2022, this practice served to increase remuneration.
Although the performance evaluation of the Board of SJSC “Valsts nekustamie īpašumi” in 2021 has decreased and is the lowest in the audited period, the Council of SJSC “Valsts nekustamie īpašumi” has allowed the Chair of the Board to combine his position with the position of Chair of the Board in another SOE since 2021.
Past experience should be taken into account when shaping the future
Currently, the Ministry of Finance continues to evaluate the results of the implementation of the previous Concept, in the course of which the State Audit Office of Latvia calls to take into account the audit findings and evaluate impartially whether a state-owned enterprise is the most beneficial way for the state to provide state institutions with the premises they need so that past mistakes can be avoided when shaping a new industry policy.
State Audit Office recommendations #PēcRevīzijas
Based on the audit conclusions, the Ministry of Finance, as the institution responsible for both the planning and implementation of the state real estate policy, and SJSC “Valsts nekustamie īpašumi” as the manager of state-owned real estate and its own real estate, have been given 11 recommendations, implementation of which shall:
- Define the state real estate management policy;
- Establish such a national real estate information system that will contain complete, high-quality, and reliable data;
- Provide an economically justified rent fee for public entities;
- Improve the governance of state-owned capital shares in SJSC “Valsts nekustamie īpašumi” by monitoring the use of the channelled profit share in accordance with the set goals.
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.
100 years of AUDIT STRENGTH
On 16 August 2023, the State Audit Law will turn 100 years old. With the adoption of this Law, the State Audit Office from a formal de facto institution founded on 2 December 1918 became a de jure independent, collegial supreme audit institution of the Republic of Latvia. The State Audit Office is one of the independent state institutions enshrined in the Satversme (Constitution) of Latvia. The Constitution was signed by Roberts Ivanovs as the secretary of the Constitutional Assembly, who was then confirmed as the Auditor General. He worked as the first Auditor General for 12 years. His signature confirmed the text of our Constitution alongside that of Jānis Čakste.
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