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Saturday 19.10.2019 | Name days: Drosma, Drosmis, Elīna

State Audit bashes Latvian municipalities for irresponsible loans and massive projects

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The practice when many Latvian municipalities borrow money from the state budget to finance excessive and unnecessary construction projects demonstrates short-term thinking and irresponsible attitude towards their future costs, as concluded by State Audit’s report on economic justifications of infrastructure projects in 15 municipalities.

SA concluded that the majority of sports and leisure projects will unlikely repay their investments, increasing municipalities’ maintenance costs year after year.

The State Budget Law provides for allocation of EUR 118 million in the form of loans for municipalities. Activity of municipalities with submission of loans is very high and the volume of requested loans also often exceeds the limit outlined in the budget.

SA notes – experience shows that 99% of all loan requests are approved – even if municipalities failed to properly assess the necessity of projects.

As a result, a number of municipalities have ambitious and expensive projects that are unlikely to return investments and will likely create an additional burden for their budgets for decades, the institution notes.

The swimming pool era in Latvia with no future

As an example for irresponsible behaviour of local governments in planning of major projects, State Audit mentioned the construction boom of swimming pools, which is a phenomenon that has been observed in recent years. Municipalities have invested three to 12 million euros in construction of swimming pools and associated infrastructure. However, for them to function, it is necessary to allocate grants. Ten years from now, when it will be necessary to replace machineries and perform necessary investments, municipalities will have spent two to three million euros in maintenance of their swimming pools.

SA mentions the swimming pool in Kuldīga in particular – the project’s effect on the municipality’s budget was not considered prior to the project’s implementation. The project’s costs had exceeded revenue three times in 2018. The swimming pool’s average revenue reaches only EUR 8 000 a month.

Even in municipalities that have performed assessment of revenue and costs prior to implementing projects outlooks are usually more optimistic than actual results, SA notes.

State Audit notes that none of the municipalities included in the audit had considered it worth consulting with Latvian Swimming Pool Federation prior to planning their projects in regards to safe parameters, appropriate equipment and other important topics.

Providing funding without any good reason or clear plan

To borrow money from the State Treasury, requirements of regulations are rather formal, SA concludes. It is relatively simple to borrow money, because municipalities’ applications are not required to justify loan requests. Business plans containing careful calculations are prepared only for co-financing requests from Europe. Only seven out of 15 municipalities included in the audit had performed proper cost estimates before implementing projects. A total of EUR 22.17 million was allocated for priority investment projects in 2017 and 2018.

In relation to economic justifications behind loan requests, it is noted that the section ‘project outline’ should be short – no bigger than one page. For example, Carnikava municipality, when applying for a loan worth EUR 2.61 million for the construction of a kindergarten, had included only one sentence in the aforementioned category, SA notes.

The State Audit that the current order is rather confusing. This is specifically in regards to the fact that the Finance Ministry’s Council – the body that decides on provision of loans – had not a single representative from the Education and Science Ministry even though 16.3% of loans allocated in 2018 were for investment projects of education institutions.

The audit also reveals that neighbouring municipalities usually do not cooperate in planning construction project. This results in a single region having an over-saturation of sports infrastructure, which creates unnecessary competition.

For example, Rugāji municipality had finished construction of Rugāji stadium in 2013, investing nearly EUR 850 000 and providing a stadium fit to receive professional football games. At the same time Balvi municipality, located some 18 km away from Rugāji, which has an old football tradition and a professional football team, has planned to build a stadium since 2011.

State Audit stresses that municipalities should plan their projects more carefully, knowing they are using their residents’ money.

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