National Audit Office: Privatization of state-owned real estate management has failed

Riigi Kinnisvara AS building. (Postimees/Scanpix)
10/30/2016 9:01 AM
Source: BNS
Category: Business

The National Audit Office is of the opinion that the government’s failure to agree on coherent policy has led to badly managed real estate properties, which will cost some 500 million euros to renovate now already. In the 15 years since the establishment of a private company to deal with the state’s real estate, the government had been unable to agree on a common approach.

Auditor General Alar Karis wrote in a statement published on Wednesday that the state property reform had been plagued by problems at every stage since its beginnings. “The problems related to state property have been known for a very long time, but there is still no agreement on how to solve them,” Karis said, commenting on the work of state-owned Riigi Kinnisvara AS as the provider of property services to the state.

According to Karis, 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 will be financed. The lack of agreement in the government was the reason why the development of the state’s property reform had been uncoordinated, and the understanding and practices of ministries concerning the use of the state’s property were different, Karis said.

In 2001 the government initiated the state property reform, the goal of which was to leave only the buildings in state use required for its performance and services, and to have them renovated. A newly founded state-owned public limited company, Riigi Kinnisvara Aktsiaselts (RKAS), was to become the central manager of the state’s property.

The objective of the reform was to have all state agencies transfer almost all their 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, and to do this in such a manner that it would not affect the state’s debt burden or budgetary balance, as RKAS was not established as a part of the government sector. The change was also expected to lead to a more efficient use of the premises, and to more professional property management, which again was to help save money on property maintenance.

According to the National Audit Office, by 2016 the reform had not been completed, and its objectives not achieved. Only around 25% of the premises used by state agencies had been transferred to RKAS.

An assessment of 11 properties revealed that the expected savings had not been achieved either. Property expenses of the audited sites had increased in the according state agency’s budget after it entered into lease agreements with RKAS.

The main reason for this, according to the National Audit Office, was a change of the property financing model. In addition to the expenses paid by the state agencies before, they now had to pay RKAS rent that corresponded to market conditions, as well as a fee for the management of the properties and regular payments for renovation.

The main reason why the state property reform had not achieved its goals in 15 years was the government’s inability to agree on a common property policy that would help choose the most practical property management model. The reform had been undertaken without any coordination, and had been slow and unpredictable, depending on single decisions made by ministries.

The state didn’t have a clear idea what it was spending on its real estate either, the National Audit Office pointed out. While RKAS as a professional property manager had an excellent overview of the property transferred to them, consolidating the data of real estate still in the state’s possession was complicated, and the available information sometimes incomplete.

The National Audit Office advised the government to define 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 office also suggested that common goals for the efficient use of premises and buildings for all areas of government should be defined.

According to the most recent consolidated report on the state’s property management, state agencies own 1.6 million hectares of land as well as 2,453 buildings or parts of buildings that have more than 1.5 million square meters of space in total.

Editor: Aili Vahtla

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