Added – The State Audit criticizes the management of state real estate

The way in which VAS “Valsts nekustamie išapumi” (VNĪ) manages real estate and provides it to state institutions makes the State Audit Office (VK) doubt whether the interests of the state are valued higher than the interests of the state capital company. In Latvia, the Ministry of Finance (FM) is responsible for the development of the national real estate management policy. VAS “Valsts nekustamie ipsumi” founded by it is the most recognizable, but not the only, state real estate manager in the country, VK informs. In the audit carried out by the State Audit Office, significant deficiencies were found in both policy making and property management. The implementation of the concept of unified administration and management of State real estate, adopted in 2006, has already been completed in 2020, but only a part of what was planned has been achieved. The state owns a large number of real estates with a wide variety of uses, and at the same time, real estate is one of the basic resources needed to perform the functions of state institutions. This time, the focus of the audit conducted by the State Audit Office was the state and real estate properties of the State Audit Office intended for offices under the management of the State Audit Office. The most important tasks of the concept adopted in 2006 were to move towards greater centralization of real estate management within the branches, to optimize the structure of real estate owned by ministries and state institutions, to introduce the principle of market rent, the main task of which was to create savings for planned repairs and construction works, to create a unified property management system information system. Member of the State Audit Council Inga Vilka, commenting on the findings of the audit, states that “it is undeniable that the FM has worked a lot during the implementation of the concept adopted in 2006 – several regulatory acts have been adopted, many real estates have been taken over by the FM from other institutions. The VNĪ has expropriated and continues to expropriate to the state unnecessary properties, took over part of the state properties, built new ones, created the State real estate information system”. “However, upon completion of the audit in February 2023 – 16 years after the adoption of the Concept -, it must be concluded that, in general, the provision of state institutions with the necessary premises is not coordinated, state real estate and the real estate of state capital companies 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 between state institutions, another audit that shows a complete lack of comparative and comprehensive data and analysis,” says Vilka. Already during the development of the concept, without obtaining support from various institutions, deviations from the basic idea were allowed and various exceptions were made, which has led to the fact that the problems mentioned in the concept still exist and have not been solved. The created real estate management system, which is necessary for the implementation of state functions, is fragmented – there are both different real estate managers and different principles for determining rent and management fees. The possibilities and expenses of state institutions for the provision of premises are different. According to the State Audit Office, during the implementation of the concept, a unified approach to determining the rental fee for leasing state real estate to public entities, including state institutions, was created, but the management of real estate owned by a capital company and the determination of the rental fee is the decision of its shareholders and management bodies.

When leasing state property to a state institution, no return is expected, but the rental fee for the state capital company’s property may be higher than the cost-based calculation by agreement. The State Audit Office believes that the real estate of its capital companies is also partially owned by the state. Accordingly, the state property transferred to the management of VNĪ and also the property of the state capital company itself must first of all serve to provide state institutions with appropriate real estate in the most effective and economical way possible. In 2021, the rental and management revenues of VNĪ were 36 million euros, and the largest part, or 87%, is made up of payments by public persons. The transition to the rental fee provided for in the concept took place partially, taking into account the limited funding opportunities of the state budget, thus not all properties are saved 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 the opposite cases – the allocated state budget funds to cover obligations allow VNĪ to earn. About 40% of the rental and management income of VNĪ is obtained from two real estates in Riga – Čiekurkalna 1.linija 1 K-1 and Talejas iela 1, which are mostly leased to public sector institutions. In the audit, the rental calculations provided by the VNĪ did not indicate a profit in any case, but were based only on covering direct and indirect expenses. The audit found that the State Security Agency of the Ministry of the Interior paid an average of 1.9 million euros more per year than the actual expenses for the lease of real estate in the 1st line of Čiekurkalns. This is related to the inclusion of borrowing and interest payments in the rental fee calculation. The profitability calculations of VNĪ show that the profitability of the mentioned complex was 4.2 million in 2020 and 2021, but over 5 million euros per year in the previous two years. The State Audit Office states that such an approach to public housing, when the state authorities do not review and reduce the rent according to the actual costs, is not economical for the country. In a similar way, the bank loan and interest component is also included in the rent in the VNĪ property on Talejas Street, where the main tenant is the State Revenue Service. In this case, the rent includes other payments – the risk of the interest rate increase and the recovery of the investment in VNĐI with interest. According to VNĪ calculations, the profitability of this property in 2020 was 1.1 million euros, in 2021 – 662,000 euros. In previous years, in a situation where bank rates were very low, VNĪ made significant payments to maintain interest rates. But since 2022, when loan rates have started to rise rapidly, interest rates are no longer fixed. This can result either in a significant decrease in the profitability of this property, or in a greater burden on the state budget, if, for the purpose of maintaining profitability, the rental fee of the property will be raised to the state authorities in accordance with the increase in interest payments. The many, although not in all cases significant, errors in the calculation of the rental fee of VNĐI found in the audit lead to the conclusion that VNĐI has a weak internal control environment, as a result of which tenants pay inadequate fees for the premises.

The State Audit Office points out that in order to ensure a unified approach to managing and managing state real estate, it was necessary to create an appropriate information system that would create objective prerequisites for data analysis, comparability and planning of state real estate management. Although FM and VNĪ have ensured the creation of such an information system, the data collected in it is not complete, high-quality and reliable, therefore it is not possible to carry out a full-fledged data analysis and still the necessary information on the issues of state real estate management and management is obtained from the institutions manually through various surveys way.

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Photo source: Db.lv (Publicity photo)