Toomas Mattson | 10/26/2016
TALLINN, 26 October 2016 – The National Audit Office is of the opinion that the state’s property reform that started in 2001 has not achieved its important goals, as the management of the state’s developed property is still fragmented, it’s use inefficient and unnecessarily expensive for the state. The main reason of this is the government’s inability to agree, in 15 years, on the state’s common property policy that would help choose the most practical property management model. The initial hope that the necessary buildings can be renovated with the help of Riigi Kinnisvara Aktsiaselts (State Real Estate Ltd.; RKAS) without it having any effect on the budgetary balance and the debut burden did not come true. Also, only 25% of property has been transferred to RKAS, although almost all of it had to transferred by 2003.

The state’s property management reform has developed without any coordination, slowly and unpredictably, depending on the single decisions made by ministries.

It is still unclear how much and what kind of property the state needs for the performance of its functions and where the money required for renovations will be taken from.

Although the state’s property maintenance expenses will almost double in five years according to the forecast prepared by the Ministry of Finance, it is not certain whether this will be enough for the preservation and improvement of the condition of the buildings currently used by the state. It is also unclear where this extra money will come from.

The volume of the necessary works or the ‘renovation debt’ is already an estimated 500 million euros.

Although state agencies as a whole disposed of a number of unnecessary properties after property inventory carried out from 2008-2009, little thought is still given to increasing the efficiency of using space.

In 2001, the Government of the Republic initiated the state’s property reform whose goal was to only leave the buildings required for the performance of public functions in the use of state agencies and to renovate them. Public undertaking Riigi Kinnisvara Aktsiaselts was to become the central manager of the state’s property, as it was founded for this purpose. The objective of the reform was to have all state agencies transfer almost all developed property to RKAS by 2003 and lease the premises required for the performance of their functions back from RKAS on market conditions. One of the main expectations in relation to the reform was to renovate the state’s developed property by borrowing money via RKAS in such a manner that it would not affect the state’s debt burden or budgetary balance, because RKAS was not established as a part of the government sector. The change was also expected to lead to more efficient use of premises and more professional property management, which was to help save money on property maintenance.

It is 2016 and the reform has not been completed and its objectives have not been achieved. Only ca 25% of the premises used by state agencies have been transferred to RKAS. The 11 examples analysed by the National Audit Office revealed that the expected savings have not been achieved. The property expenses of the audited sites increased in the agency’s budget after they entered into lease agreements with RKAS and the two-year transition period expired (when the expenses could not increase according to the government’s resolution) by a little over 2.5 times on average. The main reason of the increase in the expenses related to the audited sites was the change of the property financing model: in addition to the expenses paid by the agencies before, they’ve had to pay RKAS rent that corresponds to market conditions, and the fee for the management service and regular payments for renovation must also be regarded as additional expenses. The expenses have also increased due to the general rise in the costs of property maintenance service, such as technical maintenance, upkeep, etc., on the market and sometimes also due to changes in the content of a service. Since RKAS is a commercial undertaking whose goal is to earn money, then the Minister of Public Administration as the representative of the owner has confirmed 6.6% as the expected minimal return on equity of RKAS in 2016, which is obviously reflected in the price paid by the customers. At the same time, state agencies have had no motivation to save on property expenses and they have not taken any decisive action to increase the efficiency of their use of premises, even though this was expected from the new management model.

The National Audit Office audited the activities of RKAS and found that the activities of the company comply with law and its accounting corresponds to generally accepted accounting principles. The procurement procedure of RKAS is detailed and the procurements organised from 2013-2014 comply with the Public Procurement Act. Although the State Assets Act does not apply to RKAS, the National Audit Office finds that the requirements established by the company for dealing with state assets are equal to those set out in the State Assets Act.

Irrespective of the increase in property expenses, there is no reassurance that the condition of the buildings will improve. The Ministry of Finance is of the opinion that the renovation paid to RKAS at present is probably not going to enough to maintain the condition of the buildings. The ‘renovation debt’ of the state’s property according to the Ministry of Finance is ca 500 million euros. The state’s property expenses will almost double in the next five years according to the state’s Ministry of Finance, but this money will not be enough to renovate and then maintain all of the buildings. The inclusion of RKAS in the government sector in 2008 meant the end of the hopes to borrow money for the quick renovation of the state’s buildings, which was one of the main expectations of the property reform, and the government has not yet made any substantive new decisions on how to cope with property investments in the long term.

The National Audit Office is of the opinion that the main reason of the failure to achieve the goals of the reform is the fact that the government has failed to agree on the uniform and clear activities of state property use in 15 years. The state’s property management reform has developed without any coordination, slowly and unpredictably, depending on the single decisions made by ministries.

Neither does the state have a clear picture of property expenses: whilst RKAS as a competent property manager has an excellent overview of the property transferred to them, then consolidating the data of non-transferred property is complicated and the information is sometimes incomplete.

In the audit, the National Audit Office advised the Government of the Republic to ascertain and decide how much and what kind of property the state needs for the performance of its functions and how to finance the renovation of the necessary buildings. The National Audit Office also advised to approve the common goals of the efficient use of premises and buildings for all areas of government.

Auditor General Alar Karis said the following when commenting on the audit results: “The state’s property reform is an example of something plagues by problems at the initiation, implementation as well as completion of changes. The problems related to the state’s property have been known for a very long time, but there is still no agreement on how to solve them. It is still unclear how much and what kind of property the state needs for the performance of its functions and how the renovation of buildings could be financed. The lack of concordance at the level of government is the reason why the development of the state’s property reform has been uncoordinated, and the understanding and practices of ministries concerning the use of the state’s property are different.

“However, similar to people who must be able to admit their mistakes and learn from them, the state must also be able to recognised shortcomings in the system, rectify them and prevent them from reoccurring. The state’s property reform offers valuable lessons at a time when the government has launched several new reforms and is once again facing important changes that require well-considered decisions.”

Background
According to the most recent consolidated report on the state’s property management, state agencies own 1.6 million hectares of land and 2453 buildings or parts of buildings that have more than 1.5 million m2 of space in total. In addition to this, the agencies use over 200 ha of land and over 0.7 million m2 of building space on the basis of contracts, incl. by renting buildings from public undertaking Riigi Kinnisvara Aktsiaselts. State agencies were renting a quarter of their premises from RKAS at the end of 2015.

RKAS is a public undertaking with a share capital of 202 million euros established in 2001 that operates in the field of property development and management. The Republic of Estonia holds 100% of the company’s shares. The shares are managed by the Ministry of Finance. The assets of RKAS totalled ca 415 million euros as at 31 December 2015, its profit for 2015 was 15.7 million euros and retained earnings total 50 million euros.

Toomas Mattson
Communication Manager of the National Audit Office

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