TALLINN, 23 November 2005 - In the opinion of the State Audit Office (SAO), the activity of the Ministry of Agriculture in arranging for the management of state-owned buildings and land has not been sufficiently purposeful and systematic, and the Ministry should put more effort into amendment or termination of contracts unfavourable to the government.

Use of property has been granted at unfavourable terms to the state. In previous audits, the SAO has time and again drawn attention to unprofitable leases concluded in the area of administration of the Ministry of Agriculture and the Ministry has always promised to remedy the situation. However, the same shortcomings were identified on current audit.

In most cases, the use of property has been granted at a price significantly below average fair market value, thus violating the requirement of the State Assets Act to obtain revenue from state property transactions at the highest rate possible for the government.

The SAO has repeatedly drawn the Minister’s attention to granting the use of public property for consideration which is unreasonably low, but the Ministry is very tardy in amending the lease contracts in force. There are provisions in several contracts which considerably restrict the possibility of making the contracts more profitable to the state.

The Ministry of Agriculture has taken steps to review and amend the leases concluded at unfavourable terms to the government, but at the same time new unprofitable contracts have been made. For example, 557.5 hectares of land was rented to the private limited company Hiiumaa Agro in 2004 for a charge which is times below the possible income of the lessee from the timber on this land.

The Ministry was unaware of a number of agreements granting the use of public property. For instance, Jäneda Training and Advisory Centre had granted the use of 168.7 hectares of state land to a private company free of charge, although pursuant to the State Assets Act it is prohibited to grant the use of public property to businesses for free.

The Ministry did not have an overview of sublease agreements made by lessees and of the terms of such agreements. Several lessees earn income from subletting of property rented from the government, which is significantly bigger than the rental they pay to the government. For example, the Estonian Chamber of Agriculture and Commerce charges about EEK 70 per square metre from its sub-lessees, but pays only EEK 40 per square metre to the Ministry of Agriculture. The Estonian Dairy Association charges EEK 100 per square metre from its numerous sub-lessees and pays EEK 40 per square metre to the Ministry of Agriculture. The Ministry asserted to the SAO that they were not aware of the described circumstances.

The SAO is of the opinion that non-profit associations should use the revenue generated by subleases only for the improvement of leased premises and a sublease should not constitute a source of extra profit. Collection of sublease charges greatly surpassing the rental fees set forth in contracts proves that the Ministry could have asked higher rentals from the lessees.

The Ministry has failed to ensure that the information in the state assets register about public property within the Ministry’s administration area is correct – the records of the state assets register and the Ministry’s subordinate agencies differed for a number of objects. It has taken the subordinate agencies four years or even longer to notify the Ministry of some contracts. There have been cases of granting the use of real property, which have never been recorded in the state assets register.

The Ministry does not have an action plan for real estate management that would cover the entire area of administration. It has not been determined which part of public property currently in use and for what purposes is needed in the future.

The Minister of Agriculture has concurred with the proposals of the SAO. In her reply she points out that the Ministry has set to eliminating the shortcomings highlighted in the report. According to the Minister, all leases of public property have been registered in the state assets register by today and the review and revision of contracts is to be continued. The Ministry’s Public Property Administration Bureau has started inspection of state property within the area of administration, in the course of which the condition and purpose of assets are determined. The Ministry has planned to dispose, during 2006, of the majority of integral assets encumbered by leases as referred to in the audit report.

The SAO has audited the activity of the Ministry of Agriculture in managing the real property within its area of administration, with the focus mainly on the use of assets unnecessary for the main activity. There are about 250 buildings and structures with different purpose and about 6,600 hectares of state land within the area of administration of the Ministry of Agriculture. Use of public property has been granted by 101 lease contracts.

Examples:

Buildings and land are not leased at fair market value.

In analysing the leases made in the area of administration of the Ministry of Agriculture it appeared that the charges for rent differed significantly from average fair market value, being times below thereof.

In 1999, Helju Jürmanni Õmblusateljee (Helju Jürmann’s Sewing Parlour) had rented, under non-residential lease, 72.5 m2 of basement area in the Ministry’s administrative building in the old town of Tallinn. In 2004, the lessee paid EEK 5 per square metre per month. The average rental fee in this particular district is at least twenty times higher. This lease has been pointed out for several times by the SAO. The Ministry has justified the low rental by the unsatisfactory condition of the premises (dampness, lack of ventilation, etc). Irrespective of the fact that the rent charged from the lessee was tiny, the lesser had in earlier contracts assumed the obligation to do a redecoration of the premises. The Ministry has not completed the repairs; however, the obligation to improve the condition of premises has not been laid on the lessee either, although that would make sense in the light of the tiny rental fee. It was agreed with the lessee in 2005 that she would vacate the premises upon reasonable notice when the renovation works start for bringing the premises into the use of the Ministry.

According to the lease concluded with the private limited company Miku-Manni in 1999, premises with an area of 139 m2 together with the kitchen equipment costing EEK 763,045 have been rented out at 39 Lai St. in Tallinn. The private company pays EEK 7,500 a month for the property. Further, the company uses the cafeteria furniture purchased by the Ministry free of charge. The terms of this lease so unfavourable to the government have been repeatedly pointed out by the SAO in its earlier audits.

The Ministry rents a hotel-bureau-residence to OÜ Maaelu Arengu Keskus (private limited company Rural Life Development Centre ), located in Tartu, with an aggregate area of 3,008 m2, for a rental charge of EEK 17 per square metre, which is five times below the average rental in the district. The contract is effective till 2018. The Ministry has explained that after registration as immovable property and the establishment of apartment ownership the contract will be reviewed and a new rental fee will be imposed.

The Estonian Chamber of Agriculture and Commerce pays EEK 12 per square metre for using a building of 686 m2 under a lease made in 2004. The Estonian Dairy Association was granted premises on even more favourable terms: the Association paid EEK 7,900 for a space of 1,215 m2, i.e. EEK 7 per square metre. From 2005, the rental charged from the Estonian Chamber of Agriculture and Commerce and the Estonian Dairy Association was raised to EEK 40 per square metre, but even so the new rental is 3-4 times below average fair market value in the district. Charging the non-profit agricultural associations a rental which is lower than average fair market value means, in essence, their funding.

According to the contract made with AS Tartu Agro in 2000, 3,089 hectares of state land was rented out, for which a rental of EEK 10,000 a year was requested. The contract stipulates that in addition to the rental fee and land tax, the lessee shall assume other expenses associated with the maintenance and improvement of the object of the contract, including an investment of at least EEK 400,000 a year in the renovation of land improvement systems, a minimum expenditure of EEK 800,000 on plant protection, EEK 1.8 million on mineral fertilizers, EEK 1.3 million on organic fertilizers, EEK 20,000 on liming, etc. The Ministry justifies the symbolic rental fee (EEK 3 per hectare in 2004) charged from the lessee by the contractual commitments described above.

The SAO finds that linking the rental charge and the normal economic activity of the lessee, as done in the lease made with AS Tartu Agro, is unreasonable and does not convince the public that the government makes a profit on the deal. None of the lessee’s commitments set forth in the contract would bring about a significant or permanent increase in land value, i.e. they cannot be treated as conducive to improvement of immovable property. In any case, a lessee must maintain the object of usufruct at his/her own expense and undertake improvements and repairs necessary for normal upkeep of the object. The SAO points out that the company might have applied for state subsidy for the maintenance and renovation of land improvement systems, as well as for liming. From 2005, the rental charge was raised to EEK 80,000 a year.

Profit yielding land with an area of 557.5 hectares, located in Hiiumaa, was rented by AS Promineks (former AS Lacto) prior to 2004. Land rental contract was terminated on 19 February 2004 upon mutual agreement and under the decision of the bankruptcy committee of AS Promineks. On the same day, the Ministry concluded a lease for the use of agricultural land with the private limited company Hiiumaa Agro (for a term lasting until 2023), who was a sub-lessee of AS Promineks. The value of land as stated in the contract is EEK 908,100. Together with the land, land improvements systems with an acquisition price of EEK 210,135 have also been rented out. The lessee is allowed to cut timber (app. 500 cubic metres a year according to the forest management plan), free of dues, in the forest growing on the profit yielding land, with the revenues remaining with the lessee.

The lessee shall pay a rental of EEK 9,500 a year (EEK 17 per hectare) and the land tax for the property in use. The rental income received is small. The lessee’s revenue just from the timber on the land (estimated at EEK 125,000 a year) is several times bigger.

The SAO finds that the Ministry has violated the procedure for granting use of public property with that transaction. Upon termination of the contract with AS Prominex, state property should have been rented out through public tender or disposed of altogether. According to the comments of the Ministry, the said contract was only renewed in 2004, as according to the procedure for granting use of public property, the contract may be renewed in favour of the performer who has duly executed the contract. The SAO is of the opinion that in this particular case one cannot speak of the renewal of contract, because the contract was given a new content and also the land user changed (the former land user went bankrupt and the sub-lessee should not have assumed its place automatically). It appears from the applications submitted to the Ministry that there were other interested bidders: e.g. the private limited company Ari Kaupo agreed to enter into negotiations with the Ministry over the increase of land rental rates.

The described transaction with Hiiumaa Agro was endorsed by Tiit Tammsaar, the then Minister of Agriculture, who in his letter to the trustee in bankruptcy of AS Promineks claimed that Hiiumaa Agro was the only certified breeding farm in Hiiumaa.

The SAO does not regard the said contract as reasonable, because the government has entered into unfavourable arrangements. Today the government is not in the position of disposing of this land profitably, because in conformity with the contract there is an entry in the land register that upon the change of a landowner, the private limited company retains the right to use the land under contractual terms during the next 20 years.

The SAO has repeatedly drawn the Minister’s attention to granting the use of public property for consideration which is unreasonably low, but the Ministry is very tardy in amending the leases in effect. There are provisions in several contracts which considerably restrict the possibility of making the contracts more profitable to the government.

Examples:

Use of state lands has been granted for no consideration.

For instance, Jäneda Training and Advisory Centre granted the free use of 168.7 hectares of land in its ownership to the private limited company Aravete Agro since 2001, recording the transactions year by year as annexes to the cooperation contract made on 2 May 2000. According to the same contract, the Training Centre has entrusted to Aravete Agro other assets (agricultural equipment) with the consumption value of EEK 231,600 as set forth in the contract.

According to the explanations of Jäneda Training and Advisory Centre, the described assets were not needed for the main activity of the entity and the use of land was granted in order to retain its agricultural value. Under the same contract, Jäneda Training and Advisory Centre has assumed an obligation to provide services to Aravete Agro for cost price.

Although the parties refer to the contract as a cooperation contract, the content of the transaction does not change. The SAO finds that with this transaction the Director of Jäneda Training and Advisory Centre has severely violated § 18 of the State Assets Act, which prohibits to grant the use of public property to private companies for no consideration. There is no excuse to granting the use of land without announcement of public tender. According to estimates, the government might have sought revenue of EEK 30,000 in 2004 alone from granting the use of this land.

In the course of audit, the Director of Jäneda Training and Advisory Centre informed the SAO that he counted the said contract as terminated from 1 October 2005.

Toomas Mattson
Communication Manager of National Audit Office
Telephone: 6400 777
Mob: 51 34900
E-mail: [email protected]

Additional information

Background information:

According to the data of the state assets register, public property within the area of administration of the Ministry consisted of:

• 211 buildings or parts of buildings, accounting for about 3 percent of all buildings or parts of buildings owned by the government, with a value of about EEK 120 million;
• 60 structures valued at about EEK 4 million;
• about 6,600 hectares of land with a value of about EEK 35 million.
  
  Of these mentioned, the Ministry itself managed 22 buildings or parts of buildings (10 percent of buildings within the area of administration) with a value of about EEK 12 million, 3 structures with a value of about EEK 0.2 million, and 5,257 hectares of land valued at about EEK 25 million.
  
  The buildings within the area of administration comprise usable area of about 125,000 m2, of which the usable area of the buildings managed by the Ministry makes about 16,000 m2 (incl. residential space of about 2,400 m2), and the usable area managed by the authorized entities is about 108,000 m2 (of which residential space makes ca 4,000 m2).
  
  State property is used for public purposes, exercise of public authority and generation of revenue. Unless state property is needed for public purposes or exercise of public authority, it may be used for generating revenue (leasing or disposing) or granting free use of it in the manner provided by law.
  
  The use of buildings and lands within the area of administration of the Ministry of Agriculture has been granted by 101 leases, and 5 building lease contracts have been concluded.
  
  As concerns residential space, an aggregate area of 695 m2 has been rented out (excl. the space of 180 m2 given to the disposal of the minister for free), of which the Ministry has granted use of 146 m2 and the authorized entities have granted use of 549 m2. According to the data of the state assets register, the proceeds from renting should make EEK 217,000 a year.
  
  According to the data of the state assets register, the total area of rented non-residential space makes 18,514 m2, of which 9,185 m2 has been rented out by the Ministry and 9,329 m2 has been rented out by authorized entities. The estimated rental income from this space is about EEK 1.4 million a year.
  
  According to the data of the state assets register, the Ministry of Agriculture has rented out about 5,200 hectares of land, of which profit yielding land accounts for 4,300 hectares and land as immovable property together with the structures thereon makes about 900 hectares. The estimated rental income for profit yielding land is EEK 150,000 a year and for immovable property about EEK 730,000 a year.
  
  The inquired subordinate agencies of the Ministry have about 14,500 m2 of space (10 percent of usable space within the area of administration) standing without use.

• Posted: 11/23/2005 12:00 AM
• Last Update: 9/22/2015 7:52 AM
• Last Review: 9/22/2015 7:52 AM