National Audit Office: according to users, state real estate management is rigid and costly

Priit Simson | 8/25/2021 | 12:00 AM

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TALLINN, 25 August 2021 – Even though the development of state real estate is rigid and costly according to the users, the current national real estate policy fails to motivate finding cheaper or more flexible solutions. Use of the services of the virtually monopolistic State Real Estate Ltd-(Riigi Kinnisvara Aktsiaselts  - RKAS) should not be an automatic choice. 

“In the preparation of the overview, we increasingly realised that the expectations that were associated with delegating the implementation of the state’s real estate policy to RKAS have not been fulfilled,“ Auditor General Janar Holm said. “Rather, the management of the state's real estate is plagued by troubles arising from the company's virtual monopoly. This is not something to reproach RKAS for because it is operating according to the rules of the government, more specifically, the Ministry of Finance, and, being a company, it must meet the expectations of the owner.” According to the eight ministries using the services of RKAS and surveyed to prepare the overview, the company is indeed technically competent, but rigid and feels too expensive as a partner.

Ministries feel that the goal of the state-owned company is to make a profit rather than offer more flexible and affordable solutions. Therefore, the goals that RKAS would make a profit and at the same time be an advisor and centre of excellence for the public sector are conflicting.

Also, the current real estate policy does not encourage state agencies to seek rental spaces or maintenance services for better prices with the support of the private sector. The expenses related to RKAS, and the price increases, have been paid from the state budget by default. However, if private partners raise their prices, the money should be found from the internal funds of the agency. The money “won” by finding a better-priced solution in the private sector is generally removed from the agency's budget. RKAS has pointed out that finding premises from the private sector may not be easy as the needs of the public sector are often specific and buildings have special purpose.

The state-owned real estate company does not support the flexible use of buildings when the needs and tasks of the agencies change. In addition, the savings from RKAS's joint procurements are questionable due to the small size of the market, and according to the Ministry of Finance, the price for which RKAS procures construction services from the market should be analysed.

The original idea of establishing RKAS was to assemble the necessary competence in state real estate management, but the problem now is that ministries, according to themselves, are unable to be the so-called smart customers with enough specialist knowledge to negotiate the conditions with RKAS on a higher level and critically evaluate the price formation at the company. In the preparation of the overview, the ministries pointed out that the institutions managing more special-purpose property (for example, related to internal security, transport, educational infrastructure, etc.) have partially maintained their capacity, so the real estate competence has been maintained unevenly in the state.

“We are in a situation where the newly approved “State real estate policy principles” are insufficient as a development plan, both in the opinion of their developers and in the opinion of the main implementer,” Auditor General Janar Holm said. The fact that the development plan approved by the Government of the Republic in April this year is unable to solve the main issues, has been admitted by both RKAS and the ministries that use the services of the company.

In its reply to the National Audit Office, RKAS noted that the government / Ministry of Finance must provide precise guidelines on what RKAS can rely on in its daily decisions on real estate development and repairs, and what the acceptable condition of the buildings and the “level” of repairs are. RKAS stated that, as a company, they are required to minimise financial risks, but stressed that economical solutions start from a well-reasoned initial investment in the building, taking into account the lifetime costs, and a realistic and accurate description of the needs of the public authorities.

Instead, the Ministry of Finance, whose task is to submit proposals to the government for the improvement of real estate management, is expecting a clear position from the government on the changes that should be made in the state’s real estate management. However, the state’s real estate reform has been ongoing for 20 years already. The main bottlenecks of the field are known, but the solutions have been progressing very slowly.

In discussion with the National Audit Office, the ministries generally found that the issue with government-level decisions is their obscurity and, in case of the RKAS funding measure, the time-consuming process. The situation where the reasons for which the government chose the objects to be supported are often not clear and the investment funded by RKAS takes years, while working hours are spent, prices rise and the actual need for space changes, makes the (long-term) planning of real estate needs also less credible, according to the ministries.

The National Audit Office recommends funding real estate expenditures from the state budget in such a way that it would facilitate renting the premises for state agencies and buying real estate maintenance services from the best provider, not from RKAS regardless of the conditions.

The National Audit Office also recommends requiring that state agencies make critical and forward-looking assessments of their real estate needs and encouraging this through the implementation of transparent funding decisions and other appropriate measures.

According to the National Audit Office, the Minister of Public Administration should prepare and submit to the Government of the Republic an updated development plan of the state’s real estate policy, which describes the goals aimed at making real estate management more efficient and using the funds more rationally, and outlines the specific activities together with time schedules, cost forecast and the persons responsible.

Background

Approved by the government, the state real estate policy 2021 mainly involves state agencies (2.2 million sq m of premises), with the real estate management expenses of approximately 150 million euros in 2019 and investments into the buildings amounting to approximately 100 million euros. According to the Ministry of Finance, the expenses have increased by a half over five years. The National Audit Office emphasises that it analysed the state’s real estate management in the context of principles of the state real estate policy that was completed in 2021. This means that the overview mainly focuses on what is related to the real estate of the central government and some foundations and on situations where Riigi Kinnisvara Aktsiaselts is one of the parties. The overview does not cover the real estate of local governments and other parts of the public and general government sector, nor the unimproved real estate of the state, including forest land.

The National Audit Office has previously published the following reports on state real estate:
25 May 2018 – Energy efficiency of public buildings
18 October 2016 – Activities of the state in the centralisation of state real estate management

 

Priit Simson
Head of Communications of the National Audit Office of Estonia
+372 640 0102
+372 5615 0280
priit.simson@riigikontroll.ee
press@riigikontroll.ee
http://www.riigikontroll.ee/

  • Posted: 8/25/2021 12:00 AM
  • Last Update: 8/24/2021 11:35 PM
  • Last Review: 8/24/2021 11:35 PM

The goals that RKAS would make a profit and at the same time be an advisor and centre of excellence for the public sector are conflicting.

National Audit Office

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