The management of the building of the Ministry of Agriculture (MoA) (Republikas laukums 2, Riga) is not performed economically and efficiently enough; there are no clear future perspectives and priority actions to be taken in the conditions of insufficient funds. In addition, the management of real estate (RE) does not pursue the state’s interests as the owner. Those are the most important conclusions after the audit performed by the State Audit Office.
Briefly
- State-owned “Zemkopības ministrijas nekustamie īpašumi” Ltd (ZMNĪ), to which the practical management of the Ministry of Agriculture building has been transferred, has not complied with the statutory requirements[1] when determining the rent, has not earned all income due to state property, and has not taken due care in renting unused premises.
- The MoA and its subordinate institutions have covered the expenses that private tenants should bear.
- For a long time, ZMNĪ has attracted one subcontractor for the performance of management works, who also has other obligations regarding the provision of premises to the MoA institutions.
“Ensuring that the property is maintained and meets the needs of the institutions and preserving the value of state capital throughout its service life would be in the interest of the state as the owner. Suppose the improvement of real estate is postponed again. In that case, significantly higher expenses must be expected in the future due to progressive damage to the building and the increase in the costs of building supplies, construction and reconstruction costs. Unfortunately, the Ministry of Agriculture has not set targets for the building management, has not defined a strategic vision for property development and management, and has not performed a detailed analysis of management costs and actual investments needed in the building to ensure its sustainability. Would you allow such actions in managing your property if you were the owner of the building located on the bank of the Daugava River? Most likely not,” assessed Ms Inga Vilka, Council member of the State Audit Office and the Fourth Audit Department Director.
The auditors of the State Audit Office point out several paradoxes in the current management of the MoA building, for instance:
- Although the MoA has established a state-owned enterprise (state-owned “Zemkopības ministrijas nekustamie īpašumi” Ltd- ZMNĪ), which manages the state real estate on behalf of the MoA, six of the nine MoA subordinate institutions ensure the real estate management activities necessary for their Riga offices themselves;
- When determining the rent for premises in real estate located at Republikas laukums 2, Riga, ZMNĪ has not complied with the requirements of laws and regulations. For instance, the calculated real estate tax (RET) on a building applies to all tenants of the premises. However, the premises used by a public entity are not taxed. As a result, in both 2019 and 2020, the MoA and its subordinate institutions have paid the real estate tax compensation included in the rent for buildings of at least 15,663 euros, which private tenants should cover.
- Although the real estate occupancy of the MoA building is not full, several institutions located in the building rent additional premises from an individual in the building nearby;
- Most of the management expenses consist of expenses for maintenance services, which Augstceltne Ltd has performed from the very beginning. Despite the large share of those services, when the contract term ceased in July 2021, the ZMNĪ had not yet started a new procurement procedure but extended the contract until the end of the year;
- The lack of income is compensated by: (1) not carrying out the necessary repairs to the building, thus further deteriorating its condition, (2) generating revenue from the lease of other real estate areas (parking lots, advertising space, conference halls, and roof space). However, the action of ZMNĪ is not sufficiently efficient and economical in those types of the lease either;
- Whereas most of the MoA subordinate institutions manage the real estate themselves and do not use the services of the ZMNĪ, it does not have such a large real estate portfolio that would allow obtaining a sufficient income for real estate management. It fails to create adequate provisions for further real estate development and frequent requests for the state budget funds to answer urgent needs.
Following the compliance/performance audit findings and the conclusions to improve the management of state real estate, the State Audit Office recommends the MoA evaluate the potential prospects for the development of ZMNĪ either by strengthening the real estate portfolio while improving control over the economic activities of the state-owned enterprise or by considering the possibility of transferring real estate management to another manager with higher capacity. The second solution would allow re-evaluating whether ZMNĪ should continue to operate as a state-owned enterprise when performing its main activity, delegated tasks in the field of land reclamation, thus solving the problems identified in the previous audit by the State Audit Office.
The State Audit Office has provided 15 recommendations in total to the Ministry of Agriculture and state-owned “Zemkopības ministrijas nekustamie īpašumi” Ltd, which would eliminate irregularities in the current management model of MoA building, ensure compliance with state real estate management principles and efficient management of state resources, as well as ensure real estate management according to the market situation.
Audit motivation
During the regular annual audit on the accuracy of the MoA annual financial statement for 2020, the State Audit Office paid attention to the MoA expenditure on the repairs of the premises located at Republikas laukums 2, Riga, performed in addition to the rent set by the real estate manager. Such a situation should not arise if the management of national real estate were organised following the established uniform principles of state real estate management[3]. Therefore, the State Audit Office initiated a separate audit to clarify how the MoA building was managed and whether in the interests of the state as the owner.
Additional data