SUPREME AUDIT OFFICE CZECH REPUBLIC Audit no. 05/15

1. 13th Annual Meeting of the INTOSAI Working Group on the Audit of Privatisation, London, 26 – 28 September 2006 1 SUPREME AUDIT OFFICE CZECH REPUBLIC Audit no. 05/15 Management of state assets by Railway Infrastructure Administration,the state organization

2. 13th Annual Meeting of the INTOSAI Working Group on the Audit of Privatisation, London, 26 – 28 September 2006 2 Audit no. 05/15 • Audit was carried out by SAO, Czech Republic from May to November 2005 • Auditees: Ministry of Transport (MT) and Railway Infrastructure Administration, the state organization (RIA) • Other entities: Czech Railways, the state organization; Czech Railways, the joint company and National Property Fund (NPF)

3. 13th Annual Meeting of the INTOSAI Working Group on the Audit of Privatisation, London, 26 – 28 September 2006 3 Aim of audit no. 05/15 • This audit was focused on the management of the state excessive assets determined for privatisation • It encompassed an audit of the privatisation procedure for excessive assets of MT and RIA later

4. 13th Annual Meeting of the INTOSAI Working Group on the Audit of Privatisation, London, 26 – 28 September 2006 4 Excessive and useless state property • Privatisation and sale of excessive and useless state assets is an interesting area of privatisation in the Czech Republic • This property can be divided into two different groups: • lucrative and readily marketable assets, consisting mainly of buildings and properties in cities or recreation centres • assets that are difficult to sell, neglected and environmentally polluted

5. 13th Annual Meeting of the INTOSAI Working Group on the Audit of Privatisation, London, 26 – 28 September 2006 5 The law • In January 1999, the Government of the Czech Republic decided on transformation of  the Czech Railways • On February 5, 2002, the Chamber of Deputies approved Act No. 77/2002 Coll. (Transformation Act) for implementation of the transformation; this Act came into effect on the date of promulgation, March 1, 2002 • Subsequently MT was responsible for preparation and control of the progress of the transformation

6. 13th Annual Meeting of the INTOSAI Working Group on the Audit of Privatisation, London, 26 – 28 September 2006 6 Successor organizations • Pursuant to the new Act, the Czech Railways ceased to exist on December 31, 2002 • On January 1, 2003, MT founded two successor organizations : • Czech Railways, joint stock company • the state organization Railway Infrastructure Administration

7. 13th Annual Meeting of the INTOSAI Working Group on the Audit of Privatisation, London, 26 – 28 September 2006 7 Discretions and duties • Czech Railways joint-stock company operates railway transport • RIA manages state assets constituting the railway routes and technical facilities • The rights and obligations following from the liabilities and claims of the former Czech Railways passed to RIA • MT is a founder of the successor organizations • The competence to manage the excessive assets of theCzech Railways passed to MT

8. 13th Annual Meeting of the INTOSAI Working Group on the Audit of Privatisation, London, 26 – 28 September 2006 8 The excessive and uselessstate assetsof the Czech Railways • The excessive and uselessassets of the Czech Railways were specifically defined in an annex to the Act no. 77/2002 Coll. • 79 asset units were listed there, with a total acquisition price of CZK 2 993 million (approx. €95 million) • These consisted of properties and buildings (including apartment units) in Prague and other large cities, hospitals and health centres in Prague and regional cities and recreation centres throughout the Czech Republic

9. 13th Annual Meeting of the INTOSAI Working Group on the Audit of Privatisation, London, 26 – 28 September 2006 9 Objectives of the audit • transparency and definiteness of the transfer of assets pursuant to the annex to the Act 77/2002 Coll.: • if the methodology of the transfer of assets was exactly specified by MT, what were the means of verification of the actual conditions of these assets • how MT ensured the proper transfer of assets • creation of preconditions for proper documentary and physical delivery and acceptance of the assets, including verification of their actual condition at the time of the transfer

10. 13th Annual Meeting of the INTOSAI Working Group on the Audit of Privatisation, London, 26 – 28 September 2006 10 Objectives of the audit • compliance with basic obligations in administration of assets; these duties are specified in the Act on the Property of the Czech Republic: • how MT and later RIA secured the property from destruction • how MT and later RIA repaired, maintained and used the property • how MT and later RIA ensured the economicuse of the property

11. 13th Annual Meeting of the INTOSAI Working Group on the Audit of Privatisation, London, 26 – 28 September 2006 11 Objectives of the audit • preparation and implementation of property sale: • how MT and later RIA evaluated assets prior to sale (methods used for price setting) • the right timing of the sale (analysis of uncompleted sale) • the sales methods

12. 13th Annual Meeting of the INTOSAI Working Group on the Audit of Privatisation, London, 26 – 28 September 2006 12 Results 1.Transfer of assets from the Czech Railways to MT as of January 1, 2003 was not adequately prepared or performed : • In the first phase, the transfer was performed only formally on the basis of a list of assets that had not been verified by an inventory • The assets were not accepted physically, but only by transfer to the accounts of MT on the basis of a delivery protocol • Subsequent inventory was not performed independently and objectively

13. 13th Annual Meeting of the INTOSAI Working Group on the Audit of Privatisation, London, 26 – 28 September 2006 13 Results 2. For 2003, MT had already planned income of CZK 2 billion from useless assets : • Because of obscurities in the Act no. 77/2002 Coll., MT did not sell any property, it only enforced an amendment to the Transformation Act • MT had no incomes from the sale in the period January 1, 2003 – July 1, 2004 • MT only commenced preparation of the terms of reference for commercial tender procedures for sale of selected items of the assets

14. 13th Annual Meeting of the INTOSAI Working Group on the Audit of Privatisation, London, 26 – 28 September 2006 14 Results • The first financial means were obtained in May of 2004 (i.e. almost 17 months after the transformation). These consisted of income from lease of residential and non-residential space. MT obtained a total of CZK 222 million • On the other hand, MT spent CZK 24 million on repair, maintenance and security of these assets

15. 13th Annual Meeting of the INTOSAI Working Group on the Audit of Privatisation, London, 26 – 28 September 2006 15 Results 3. 20 asset units (with an acquisition price of approx. CZK 304.2 million) of the 79 assets units constituted assets that had not been maintained, had been destroyed and or had not been used for a long time. • Maintenance have not been carried out on these assets for a long time and necessary repairs to prevent deterioration were not carried out on these assets even at the time when they were managed by the Czech Railways. • Their conditions also did not improve when they were managed by MT and then by RIA.

16. 13th Annual Meeting of the INTOSAI Working Group on the Audit of Privatisation, London, 26 – 28 September 2006 16 Results 4. Privatisation of two asset items had been completed prior to the legal force of the Transformation Act and the buildings were included in the annex erroneously

17. 13th Annual Meeting of the INTOSAI Working Group on the Audit of Privatisation, London, 26 – 28 September 2006 17 Results 5. National Property Fund (NPF) completed privatisation with the value of CZK 227 mil. after the Act 77/2002 Coll. came into force • RIA repeatedly requested so that NPF transferred the revenue from the completed privatisation in its favour • CZK 227 mil. could not be used for the settlement of the Czech Railways liabilities

18. 13th Annual Meeting of the INTOSAI Working Group on the Audit of Privatisation, London, 26 – 28 September 2006 18 Results 6.Sales through commercial tender procedures do not bring expected revenue • Assets are still for sale, sales prices are not commercially interesting • Only four sales were completed for a total price of CZK 15 million

19. 13th Annual Meeting of the INTOSAI Working Group on the Audit of Privatisation, London, 26 – 28 September 2006 19 Summary • Management of the assets was negatively affected by legislative inadequacies (enforced amendment to the Transformation Act) and inadequate preparation of its transfer. • A number of buildings represents a property that has not been maintained, has been destroyed and has not been used for a long time. • Retardation of the process of transfer and sale of the assets and the delayed sale resulted in further devaluation and reduction of the market price. • There is no great interest in the property; • of 14 commercial tender procedures announced by RIA for the sale of these assets, 8 had to be terminated without announcement of a winner

20. 13th Annual Meeting of the INTOSAI Working Group on the Audit of Privatisation, London, 26 – 28 September 2006 20 Conclusion The determined state of affairs demonstrated thatrevenues from the sale of excessive assets of theCzech Railways included in the annex of the Transformation Act were greatly overestimated andcannot be • a significant source for payment of liabilities left by the Czech Railways and transferred to RIA or • a resource for addressing the negative impact of transformation of the Czech Railways on the state budget

21. 13th Annual Meeting of the INTOSAI Working Group on the Audit of Privatisation, London, 26 – 28 September 2006 21 Thank you for your attention Hana Hykšová hana.hyksova@nku.cz www.nku.cz