During the audit “How are small ports managed?”, irregularities were found in almost every aspect of their management and operation such as strategic management and development planning, financial management and handling of financial resources and assets, introduction and monitoring of the internal control system. In several cases, port authorities do not comply with the statutory requirements binding on them.
BRIEFLY
- Small ports are crucial elements of the logistics chain; contribute to the development of both port area and the entire region. The operation of small ports and businesses related to port services employ local residents, who sometimes work in this industry for generations.
- For a long time, there has been no interest in the operation of small ports on a national scale; local and regional governments as founders of port authorities have not been “up to the task” either.
- A series of violations in the management of small ports were found, including irregularities in the operation of the internal control system and actions inconsistent with the legal framework.
- The financial resources obtained for a long time from the operation of small ports are not enough to ensure the maintenance of their infrastructure in the necessary technical condition and development thereof.
- Small port authorities must improve waste management in accordance with the laws and regulations.
Although the cargo turnover of small ports is small against the background, they are crucial elements of the logistics chain and contribute to the development of both port area and the entire region, as local residents work in small ports and enterprises related to port services. Small ports should be managed in such a way that a local or regional government, its population, and businesses get the maximum benefit from public assets (port water area, territory, and infrastructure).
Until now, there has been no interest in the operation of small ports on the national scale, and local and regional governments as founders of port authorities have not been “up to the task” either.
The role, significance, and future perspectives of small ports are not sufficiently integrated into development planning documents at the national level currently, and state institutions should assess the role of small ports in transport, economy, fisheries, national defence, and any other field in these turbulent geopolitical, social and economic conditions with a “fresh eye”.
In their turn, local and regional governments as owners of small ports have not been properly involved in port development planning, not setting specific goals and achievable indicators, as well as not monitoring and analyzing the results of port management and return of public assets so far. “Taking into account the geographical location of small ports, the sharp changes in the geopolitical situation, the impact of the sanctions imposed on Russia and Belarus in various sectors (especially energy and wood industry), it is time to re-assess the strategic planning and development planning of small ports at both the national and regional levels to elaborate a new, actual situation, forecasts and risks appropriate strategy, as well as a management model capable of functioning in the long term,” explained Oskars Erdmanis, Head of the Third Sector of the Fifth Audit Department of the State Audit Office.
The State Audit Office has called on the Ministry of Transport to continue the integration of small port development issues into national-level development planning documents in cooperation with the Latvian Port, Transit and Logistics Council (LOTLP) and local and regional governments.
Development planning and operational monitoring of small ports do not comply with legal framework and principles neither in port authorities nor in port boards
The audit has concluded that small port authorities, which ensure their operation, often do not manage ports following the laws and regulations. First of all, the most important documents, port development programs and port operating regulations, have not been developed or updated. Procedures for transparent determination of land lease and methodology for determination of fee service price lists have not been drafted. For example, managers do not provide port boards with regular reports on the performance of ports stipulated in the regulations, the indicators of return on assets are not calculated and the results are not analysed, therefore the decision makers, including local and regional governments, have no data to base operational, impartial, and economically justified decisions about the operation and development of ports. Port authorities do not develop a legally prescribed prospective budget for five years and thus do not ensure unified strategic and financial management of port operations.
Financial results and returns show negative trends
The economic activity indicators of port authorities are influenced by several factors, however, carrying out a comprehensive analysis of the performance indicators is impossible because none of the port authorities calculates and controls the prime cost of provided services. One should also mention that annual financial statement of small port authorities for the year 2020 do not reveal information about owned properties worth at least 6,456,407 euros, which, in its turn, prevents the possibility of assessing the economic activity of the port for users of financial statements inter alia local and regional governments, as it is impossible to obtain data on the effectiveness of the used state and municipal assets.
In general, the performance indicators of small ports show a positive increase, however, the financial resources obtained from their operation are not sufficient to ensure the preservation of the port infrastructure in the necessary technical condition and its development, as well as the financial resources are not sufficient to eliminate long-standing problems in the ports, although the port authorities have recognized these problems and needs. Jūrmala Port Authority is the most striking example of such an approach that has emphasized the importance of deepening the Lielupe River in its planning documents, but has not taken any specific actions by mentioning the lack of funding as one of the reasons. The action of the local government and the port authority in not ensuring the depth of the Lielupe River has led to the fact that the access to the Port of Jūrmala is impossible due to shoals in both 2021 and 2022. Therefore, navigation in the mouth of Lielupe and the ship channel was closed already in April 2021. The representatives of sailors and yachtsmen state that many sailors have already left the Lielupe River due to these inactions, which is also reflected in the performance indicators of enterprises located in the port area.
A number of infringements were found, including deficiencies in the internal control system
The actions of local and regional governments and small port authorities with financial funds does not comply with the funding sources allowed for the operation of port authorities and the procedure established in the laws and regulations, as three port authorities have received financial funds from port businesses. In their turn, Pāvilosta and Skulte Port Authorities have handed over the fixed assets purchased within the framework of EU structural fund projects to businesses for use free of charge disrespecting the statutory requirements. In addition, in Skulte Port Authority, the created infrastructure objects were acquired for the enterprise’s use with less project co-financing (respectively with greater public funding support), i.e., up to 90 percent of the project’s eligible costs (at least 1.74 million euros) by possibly allowing a business to receive support for commercial activity that was not provided for in the laws and regulations.
Not all small port authorities have ensured the effective operation of their internal control system, thus preventing possibility to make sure that all the watercrafts are recorded and that all port fees for the services provided by ports have been received in full, as well as whether the fees have been applied in accordance with the price lists of the port services. “Clear regulation with transparent, fair, and non-discriminatory rules regarding the use of port infrastructure, financing of port services, and the collection of fees is a prerequisite for the development of ports and economic activity with the public assets entrusted to the port,” emphasised O. Erdmanis.
The number of board members needed in the boards of small ports, the criteria for their selection and performance appraisal should be reviewed. During the audit, the Corruption prevention and Combating Bureau imposed administrative penalty on one person and one official is reprimanded.
The auditors consider that the statutory requirements regarding a number of board members in all small port are not justified because it does not depend on the types and scope of port operations currently. A disproportionately large number of board members is currently employed. For instance, three of the 7 small ports, namely, Engure (8 board members), Jūrmala (9 board members) and Pāvilosta (10 board members), do not provide cargo turnover, provide a narrow range of services respectively but the number of board members is the same as in ports that provide a wide range of services.
Currently, neither the legal framework nor the requirements set by local and regional governments set requirements for the education and work experience of board members of ports, and the performance of board members is not appraised contrary to the principles of good governance. Moreover, the process of how a local or regional government selects candidates for the position of board member is not documented that poses a risk that the process is not open and that the criteria do not ensure the selection of the best candidates. Five board members of ports might have been in a situation of conflict of interest because they have participated in decision-making in their own interests. In their turn, several board members in 5 port authorities have not been issued written permits for combining positions by local and regional governments, thus not ensuring the risk management of conflict of interest.
In the opinion of the auditors, the process of appointing board members of ports should be comparable to the procedure for nominating board members and council members in state-owned or municipal enterprises because the duties and responsibilities of a board member of small ports do not differ from the competence of a board member of a state-owned or municipal enterprises of public entity. The OECD has defined the responsibilities of the boards of public enterprises, and these responsibilities could also be applied to the responsibilities of small port boards as a good practice.
Small port authorities do not provide effective waste management
Although sewage disposal is not the main source of pollution in the Baltic Sea, ports must actively work to reduce the negative impact of watercrafts entering and leaving them on the environment especially taking into account experts’ indications that the amount of pollution in sea is increasing and the situation can be assessed as bad.
Small port authorities must ensure the development of waste management plans and waste management following the legal framework, but it is not done in most cases. For example, Engure, Pāvilosta, Roja, and Skulte Port Authorities have not updated plans according to which waste and wastewater management is organized in the port areas for a long time (even more than 10 years). Although small ports have the possibility to transfer ship and other watercraft generated wastewater, sailors do not use it often. It increases the risk of dumping wastewater “directly” into water bodies.
“To prevent the risks of environmental pollution, we have called on port authorities to develop and update waste management plans in accordance with the regulatory framework and to implement appropriate control procedures. It should be mentioned that this is not the first audit in which we find that the responsible institutions do not pay enough attention to environmental issues, including the State Environmental Service that does not execute its supervision function of sufficient quality,” outlined O.Erdmanis.
Recommendations of the State Audit Office
Based on audit findings and conclusions, 10 recommendations were provided to small port authorities and local and regional governments to eliminate irregularities and implement port management and operation in accordance with laws and regulations, and principles of good governance. The deadline for the implementation of the recommendations is July 2023.
Additional materials: audit report
About the State Audit Office
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 (ISSAI) of the International Organization of Supreme Audit Institutions (INTOSAI), 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 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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