The population of the Talsi Region cannot be sure that the utilities and property management services they need on a daily basis will be available in the long run. Municipal enterprises providing services and owned by the Talsi Regional Council are operating at a loss, are unable to cover their short-term liabilities fully from current assets, and might face solvency difficulties in the near future. In addition, due to the poor corporate management of the municipal enterprises, the services they provide to the population are of poor quality and expensive. If the Talsi Regional Government does not act urgently, the local population will be forced to pay more and more for services. The State Audit Office has come to such findings by conducting an audit to find out whether the Talsi Regional Government manages municipal enterprises in compliance with the principles of the rule of law and best management practices.
The Talsi Regional Government, which has already invested 5.4 million euros in the share capital of municipal enterprises, is 100% shareholder of “Talsu namsaimnieks” Ltd, “Talsu ūdens” Ltd, and “Talsu televīzija” Ltd. In its turn, in “Atkritumu apsaimniekošanas sabiedrība “PIEJŪRA”” (Waste Management Company) and the North Kurzeme Regional Hospital, it owns 23.22% and 10.4% of the capital shares. During the analysis of the financial statements, the audit revealed a particularly unfavourable financial situation of “Talsu namsaimnieks” Ltd and “Talsu ūdens” Ltd. In the opinion of the State Audit Office, those municipal enterprises are subject to long-term operational risks.
Improper spending of the money of population, distortion of competition, unfulfilled promises, incorrect tariff calculations, and rising costs
The house management services that “Talsu namsaimnieks” Ltd provides are of poor quality; significant deficiencies have also been identified in the inspection of the technical condition of buildings. The auditors revealed that as of 30 December 2019, “Talsu namsaimnieks” Ltd had received 860 335 euros more from the apartment owners for the management of residential houses than it had spent on the maintenance and management of the owner-occupied houses. When explaining the use of those funds, the municipal enterprises disclosed that the money of the population was not spent on the management of the buildings owned by the population, but on the property of the regional government itself, that is, boiler houses and district heating networks. By infringing the framework specified in the municipal delegation agreement, “Talsu namsaimnieks” Ltd also provides management services to the owners of residential houses and, aiming to gain additional income to improve the unfavourable financial situation, also offers services beyond the scope of house management. For instance, SIA “Talsu namsaimnieks” provides such paid services as private economic operators by engaging in the sale of funeral accessories (coffins, towels, candlesticks, etc.), renting vehicles and drones, performing repair work, or providing landscaping services (mowing the lawn, planting trees) to individuals. The regional government has not assessed the impact of such activities of the municipal enterprise on other market participants.
In their turn, the water losses detected in the water supply networks managed by “Talsu ūdens” Ltd reached 29% in 2018, which was almost twice as much as the national average in the water supply sector (16%) and which in some areas of the region reached even 80%. As the cost of water loss alone already accounts for 14% of the water supply service tariff, the municipal enterprise urgently needs to identify the causes of water loss comprehensively and develop a plan to improve the situation so that the residents who use the services provided by “Talsu ūdens” Ltd and pay bills in good faith would not overpay for ever-increasing water losses.
In its turn, “Atkritumu apsaimniekošanas sabiedrība “PIEJŪRA”” has not fulfilled its target of ensuring separate waste collection, which would reduce the service costs for the population, as certain types of sorted waste must be removed free of charge.
In a situation when several municipal enterprises of the region operate at a loss and require additional financial resources to ensure their operation, alcoholic beverages and employee leisure activities are purchased at the expense of the municipal enterprises, such as boat trips. So, “Talsu ūdens” Ltd presents gifts to municipal employees, but “Talsu namsaimnieks” Ltd has not even established a procedure for controlling representation expenses.
So that citizens would receive unbiased and fact-based information, the mass media must be able to be independent of external influences. However, “Talsu televīzija” Ltd operates in conditions that create a risk of bias in the television coverage it produces about the activities of the regional government. The Talsi Regional Government owns all the shares of that company, it places orders to the municipal enterprise for producing specific coverages, and settlement of accounts is provided for specific coverages, instead of allocating the funding for independent coverage production.
When assessing the tariffs for water management services provided by “Talsu ūdens” Ltd, a problem regarding the costs to be included in the tariff calculation for the water management infrastructure established within the framework of European Union fund projects has been identified that is probably topical in many Latvian local and regional governments. Depending on whether this infrastructure is on the balance sheet of a local or regional government or on the balance sheet of the municipal enterprise, the tariffs for services provided to the population and, accordingly, the amount of money received from the population may differ significantly. For example, in the case of the Talsi Region, the difference would be 63,316 euros for water supply services and 82,161 euros for sewerage services within a year.
The State Audit Office will call on the Ministry of Environmental Protection and Regional Development, the Ministry of Economics, and the Public Utilities Commission to find a solution to this issue as soon as possible. This is particularly crucial in the context of the forthcoming local and regional government reform, when one can expect the mergers of water service providers and the infrastructure at their disposal.
Improper corporate management and accounting cause many misfortunes
The State Audit Office concludes in the audit that the critical situation of the municipal enterprises of the region is the result of poor financial management and the lack of modern, result-oriented governance. The recommendations provided by the internal auditor on the improvement of accounting and economically reasonable pricing for services have not been implemented in municipal enterprises for a long time. Without knowing exactly how much the service provided to the population costs, it is impossible to identify the increase in costs in due time, assess their impact on the operations of municipal enterprises, and look for solutions to problems. The lack of economically substantiated data also prevents the councillors of the regional council from assessing the efficiency of municipal enterprises, setting goals for municipal enterprises based on the needs of the population, and deciding on setting service fees corresponding to the solvency of the population. The audit has established that the decisions made are often detached from the reality of the activities of municipal enterprises.
Only by improving the accounting and delegation agreements concluded with municipal enterprises for the provision of various services arising from the municipal functions, the regional government could make significant savings. The audit calculated that, for example, one could have spent at least 132,484 euros less from the municipal budget for the management of cemeteries and the management of real estate owned by the regional government during the two audited years (2018, 2019) and continue saving at least 62,204 euros annually hereafter.
However, the streamlining of financial accounting is only part of best corporate management practices. It is no less important to ensure the transparency of the activities of municipal enterprises by providing information about their activities and maintaining a constant dialogue with the population to find out their opinion as recipients of services on the quality of services.
Unfortunately, the websites of local and regional governments and municipal enterprises do not publish complete information required by law, thus depriving citizens and businesses of the opportunity to ascertain the integrity of local and regional governments and municipal enterprises in making decisions concerning competition, performance, costs, and impact of the municipal enterprises on service prices and tariffs. The current approach to ascertaining the satisfaction of service recipients and residents in both municipal administration and municipal enterprises has also been rather formal, as neither the satisfaction of residents with services nor the problems in the availability and quality of services have been identified. Submissions and complaints received from residents are not collected and reviewed systematically.