/ Major, Problems and Recommendations /

This report by Transparency International Georgia gives user-friendly summaries of the key findings and recommendations provided by the State Audit Office of Georgia (SAO) in its audit reports.

As noted in our first report, since the parliamentary elections in 2012 the State Audit Office has conducted almost double the number of financial, compliance and budget executions audits than in 2011 and 2012 combined. We hope that this will help increase accountability and transparency in public spending. Below we give summaries of the key findings and recommendations in 14 SAO audit reports, including the audit report of Tbilisi Greening Program, the Ministry of Finance and Economy, the Ajara Autonomous Republic, the Audit of highway construction as well as the repair and maintenance  of greening projects in Poti.

1. Financial and compliance audit of the Tbilisi Greening Program.

Problems:

1. custody of assets. In 2008, a new irrigation system worth GEL 3,277.9 million was procured and installed from George Bush street to Tbilisi International Airport. However, the system has not worked since the completion of the works. The irrigation system was not recorded as income on the balance sheet.
   1.  The amount of GEL 68,000 was paid rather than GEL 458,100 under the contract of the installation of the irrigation system in Digomi Park and Texel Public Garden. The irrigation system  has not been used because it has not been completed.
2. public procurement. In 2010, Tbilisi City Hall put out the tender (?)  for the procurement of the reconstruction of a park behind   the buildings of the Tbilisi Center of Music and Culture and the House of Railroad Workers.  A company offering unrealistically low prices was awarded the tender (?). The winner failed to meet deadlines while performing only part of the work valued at GEL 97.000.  The work valued at GEL 248,300, which was offered during the bidding process at unrealistic prices, was not performed.  The contract with the company was terminated.
   1. In 2010, a contract valued at  GEL 199,007 was signed with Kedari Ltd for the installation of pins for plants (?) on the border between George Bush Street and Tbilisi International Airport. The work included embedding poles in concrete and the installation of pins and plants (?).  Control measurements revealed that the scope of the work performed was at variance with that specified by the contract. The documents show that the provider failed to perform works valued at  GEL 89 000.
   2. From 2009-2011, during the procurement of  landscaping services and commodities (?), the actual price levels in  domestic and international markets had not been evaluated.. Under the terms of some (?) 14 agreements signed by the Tbilisi City Hall, the commodity markups ranged from  50-100 per cent. The final markup amounted to GEL 878,008.
3. Costs of tree removal and trimming vary: Comparing data received from various districts, it is revealed that prices paid by the districts sometimes exceed two or three times those paid by the City Hall. From 2009-2011 Tbilisi City Hall ordered the removal of 5,065 trees and the trimming of 4,489 trees. The Tbilisi City Hall was  charged GEL 790,000 for these services. Tbilisi district governments ordered the removal of 13,096 trees and the trimming of 21,403 trees, and was charged GEL 4,376,000.

2. Financial and compliance audit of the Ministry of Finance and Economy, Ajara Autonomous Republic.

Audit period: 1 Jan, 2012 - 31 Dec 2012

The auditor gave a qualified opinion and underlined  the following problems:

1. The amount of GEL 334,100 was spent inappropriately as a result of decisions related to the agreement
2. As of 1 January 2013, the ministry failed to spend EUR 3,000,000 allocated by the European Bank of Reconstruction and Development in 2010 for the project of Ajarian solid waste because of the ineffective work of related government agencies. As a result the amount of  GEL 85,000 was paid as a commitment charge (?) in 2011-2012.
3. Property of the Autonomous Republic valued at  GEL 199,100 was transferred to private ownership without any additional conditions and the amount of GEL 135,100 was  inappropriately spent due to  changes made to the documentation of the project.
4. Due to conditions which were illegally established in the agreement, , the amount of GEL 104,000 failed to be earmarked in the budget in time.
5. In certain cases, there were commitments under sales contracts which were not fulfilled.
6. There were (Facts of unfair definition of qualification data) were discovered in the e-procurement system. .
7. Weaknesses in internal control: The system of internal control within the ministry does not function appropriately. , there are facts of inappropriate control over commitments under the contracts. .

3. Audit of compliance of the roadway construction, repair and maintenance of landscaping projects in the  Self-governing city of Poti

Audit period: January 2009 – December 2011

Problems:

1. Poor budget planning and forecasting. The analysis of budget planning and execution has shown that budget allocations were often corrected which suggests incorrect forecasting and planning. The budget totals  for specific programs have been allocated without prior analysis, which increases the risk of economically unjustified procurements, carried out in a non-competitive environment.
2. Tender criteria. The tender Board of the Poti City Hall has incorrectly chosen the evaluation methodology. Higher priority was given to the eligibility requirement of “performance deadlines and work plan”, which  resulted in awarding the tender to a company that  offered higher pricesand wasting GEL 109,000.
3.  Ignoring external factors. When signing the agreement with the winner holding the responsibility of completing the works in 25 days, the entitled unit of Poti City Hall failed to take into consideration the poor condition of the roads in Poti. The works were finalized in 215 days. The main reason for the delay was the reconstruction of a  local water supply network.
4. Threat of concealment of income. In 2010, the City Hall purchased two city buses and a tourist bus, for the amount of GEL 308,000. The tourist bus was transferred to the company Infrastruktura-2008 Ltd., which provides public amenities and does not need a tourist bus. According to the information provided, the bus mileage is 46.800 kilometers through March 6, 2012, however only 15.100 kilometers have been accounted for. There exists the possibility of concealment of income in renting the bus, which may be equal to GEL 15,900 for the mileage of 31,700 kilometers.
5. Damage caused by not considering the local climate. In 2011, the City Hall signed a contract valued at  GEL 150 000 with a landscaping company. The flowers were selected without taking into account the local climate.   The flowers valued at GEL 33.300 and the majority of palm trees valued at  GEL 10.000 were damaged quickly as a result of the local climate.

Recommendations:

1. The local government should ensure proper calculation during the procurement process and keep estimated costs closer to market prices. It will result in a reduction of the wasteful use of public funds.
2. Include realistic deadlines and work quality in the tender documentation.
3. Focus on installing underground utility lines , while planning roadworks (in order not to damage newly paved roads for not to damage newly paved roads.
4. The Poti City Hall should define the purpose of the use of busses and utilize them as intended.
5. When selecting plants, Poti City Hall should take into account the local climate and the soil characteristics of the city.

4. Financial audit of the Ministry of Health and Social Protection, Ajara Autonomous Republic

Audit period: 1 Jan - 30 Jun 2013

The auditor gave a qualified opinion  and underlined the following problems:

1. Public procurements. To purchase digital acoustic devices the ministry announced an invitation of bids for procurement, distribution, and adjustment of at least 200 acoustic devices for the amount of GEL 100,000. Only one company participated in the bidding process.  The documents analyzed showed that  that the ministry indicated that the number of the needed devices was  "at least 200". However, the company was only able to provide a lower number of  devices. The ministry failed to explain why it did not specify the exact number of devices at the initial stage of procurement, which would have enabled it to achieve better results, with low  budget resources. In addition, the adjustment of the devices to the beneficiaries (?) was carried out in significant violation of the timeframes set forth in the agreement.
2. Accounting. The financial statements of the ministry fail to reflect in a complete and appropriate manner the financial state of the ministry and the entities subordinate to it.

5. Audit of Financial Reporting of the Ministry of Agriculture, Ajara Autonomous Republic

Audit period: 1 Jan - 30 Jun 2013

Problems:

The ministry purchased a fruit drier within the frames of a targeted program of providing fruit driers for farmers. It was purchased from Arma-Capital Ltd in a simplified electronic invitation of bids on a 60% prepayment basis. Without checking the compliance of the drier with the conditions of the agreement, the banking guarantee was returned to the bank. Thirteen days after the product was delivered, it turned out to be spoiled. The ministry won two court trials, but had failed to regain the money as of 30 June, 2013. According to the assessment of the audit, this highlights  the weakness in the internal control system.

6. Financial audit of the Ministry of Education, Culture and Sport, Ajara Autonomous Republic

Audit period: 1 Jan 2013 - 30 Jun 2013

The auditor gave a qualified opinion and underlined the following problems:

1. With the agreement made on 29 March 2013, a change was made to the contract on public procurement of the construction of the roof of  Kobuleti public school No 1.. As a result, thecost of the construction increased by 17% which deteriorated the situation of the beneficiary  and violated the Law of Georgian State Procurement.
2. The ministry concluded a contract valued at GEL 13,800 with private entrepreneur Tsiuri Tevdoradze. The ministry did not explain the criteria it relied on in selecting this entrepreneur . In addition, GEL 2,800 of income tax was not paid at the moment of settlement, which is a violation of Article 154 of the Georgian Tax Code.
3. Fuel worth of GEL 7,900 has been issued beyond the limit set for the trips of the ministry personnel. The ministry failed to provide relevant documents during the audit.
4. In regards to 6 months of the year of 2012, wages had grown by GEL 103,700. Significant changes in the growth of wages occurred in  bonus expenses. Wages grew by GEL 54,400 and in total represented  GEL 228,200.
5. The funding amounting to GEL 36,100 received from the reserve fund of the government of Ajara Autonomous Republic is not reflected in the updated  expenditure plan of the  ministry.

Recommendations:

Out of these five problems, the Audit Service issued only one recommendationin connection with the reserve fund, noting that in the accounts for 2013, the ministry should duly reflect funding received from the reserve fund of the government of Ajara Autonomous Republic.

7. Financial audit of the Supreme Council of Ajara Autonomous Republic

Audit period: 1 Jan - 30 Jun 2013

The auditor gave a qualified opinion and underlined the following problems:

1. According to the balance from the  first six months of 2013, the approved and updated budget amounts came to GEL 2,107,200 instead of GEL 2,147,300. In other words, the updated budget has been reduced by GEL 40,000.
2. According to the balance, the cash expenditure for assignments amounted to GEL 44,500, but actual expenditure amounted to GEL 25,900. The remaining GEL 18,500 was issued in advance contrary to the documents approved.
3. One of the personnel of the Supreme Council received an excessive addition to his or her holiday pay amounting to GEL 1,064.51 in accordance with an order of the head of staff. The money has not been returned.

Recommendations:

1. The relevant service of the Supreme Council should correct data on the balance sheet and conduct accounting in accordance with the established rules and instructions.
2. The relevant service should put on the balance sheet the GEL 1,064.51 issued for the unused holiday period and carry out appropriate measures.

8. Financial and compliance audit of the Office of the Government of Achara Autonomous Republic

Audit period: 1 January 2012-June 30 2012

The Auditor expressed qualified opinion regarding  the following shortcomings:

1. Representational expenses: The submitted documents concerning representational expenses of the Office of the Government are incomplete: personal data of the participants was not  collected during the visits. Consequently, the participants cannot be identified, which, does not provide the  opportunity to establish whether the representational expenses were accurate, economical and purpose-specific.

2. Weak internal controls system:

During the period covered by the audit report, fuel for the vehicles owned by the  \ Office was issued without pre-specified quotas and were recognized as expenses in the absence of documents verifying the actual fuel consumption. 

2.2 The representational expenses were not put under adequate control: no record keeping system was used to register delegates who attended / participated in the event.

3. Temporary staff: the work performed by temporary employees during the audit period, was not documented.

9. Audit of the Financial Reporting of the Ministry of Finance and Economy of Ajara Autonomous Republic

Audit period: 1 Jan 2013 - 30 Jun 2013

Problems:

1. Within the frames of a programme implemented by the Ministry of Agriculture of Ajara Autonomous Republic, the amount of GEL 394,900 paid by the participants of the  programme was accounted incorrectly.
2. Under the article of expatriate assignment, GEL 900 was spent inappropriately.

Recommendations:

1. In order to account for budget allocations, amendments should be raised regarding the rules for the improvement of the accounting of the budget performance by the local self-government bodies of Ajara and Abkhaz autonomous republics.
2. Decisions made in the public sector should ensure appropriate, efficient and rational use of budget resources.

10. Compliance audit of the reconstruction of Batumi Education, culture, sports and recreation facilities and of education, culture, sports and youth programs

Audit period: January 2011-December 2012

The auditor expressed qualified opinion regarding  to the following problems:

1. Internal controls and actual problems. Inefficient control has been exercised upon the sums spent from the budget. The approved program costs and requirements are not often followed; the work performed has not been fully accounted for. This demonstrates  the essential weakness of the controls system.

2. Failure to meet deadlines. No penalties were imposed on a supplier (Mizo Ltd) despite significant failure in meeting deadlines while constructing pedestrian and bicycle lines (GEL 3.1 million).

2.1 The deadline for the erection of an architectural monument in Batumi, near Lake Ardagani, was extended without an appropriate reason. The supplier was not penalized GEL 81,575.20. At the same time, the cost of the purchasing and erecting of the monument seems unrealistic. The supplier was not penalized on other occasions as well.

3.Unreasonable  use of the budget. The amount of GEL 740,877.14 was allocated for disassembling and changing the location of a glaciariumin Batumi. It suggests poor  planning and misspending of public funds by the Batumi City Hall.

Recommendations:

1. The respective unit of Batumi City Council should ensure the refund of expenses spent on  unperformed work, and appropriately follow contracts related to  budgetary spending in order  to avoid similar shortcomings.
2. The respective unit of Batumi City Council should carry out appropriate measures for not penalizing the supplier, extend deadline of completion of works in accordance with contract terms and conditions.
3. Construction and installation projects  should be planned and public funds should be spent in accordance with the city development plan.
4. Respective units of Batumi City Council should define at the planning stage the location and approximate construction costs of an object. It will create a foundation for the healthy competition in the field of building and construction.
5. Batumi City Hall leadership should impose control on planning and thorough implementation of programs of various events, as well as spending of public funds in accordance with the law.

11. Audit of Batumi Oil Refinery Ltd.

Audit period: January 1, 2010 – December 31, 2012

The Auditor expressed qualified opinion regarding the following problems:

1. As of January 1, 2010, fixed assets of GEL 25.414,703 were listed on the balance sheet of the Refinery. The incorrect accounting records had depreciated the fixed amount by GEL7,672, 401.
2. In 2010 the assets of GEL 17,342,820 are taken from the nominal capital. This may undermine the proper operation of the refinery.
3. In 2013 the company was penalized GEL 55,192.2 for incomplete recognition of the years 2010-2011 in accounts.

12. Audit of Kutaisi landscaping campaign

Audit period: January 1, 2009 – December 31, 2012

Problems:

1. Hasty and flawed arrangement and awarding of tenders. Tender board incorrectly  gave preference points to bidders, and awarded tenders.
2. Mismatch between the works performed and the amount of sums paid. In 2009, the reconstruction cost of Kikvidze Public Garden increased though the scope of the projects decreased (The works performed should have cost GEL 79.300 instead of GEL 87.900).
3. Overpayment. The Kutaisi City Hall paid GEL 622.700 to Elba Ltd instead of GEL 610.900 to build bicycle lanes in David Agmashenebeli Avenue. The City Hall filed a lawsuit to get back the overpaid amount. At first, the overpaid sum was specified as less than GEL 6.700 . Following the audit recommendation, an additional lawsuit was filed to retrieve  the GEL 6.700. Kutaisi City Court ordered the supplier to repay the above mentioned sum.

The Audit Office issued a general recommendation for the City Hall to arrange staff development and training programs and to ensure staff activity compliance with its (?) regulations.

13. Compliance audit of the Kutaisi road infrastructure development program

Audit period: January 2009 – December 2011

Problems:

1. Undefined fair value of services. In 2009-2011 Kutaisi City Hall carried out the procurement of the upgrading and maintenance of traffic lights without counting the real value of services. No cost estimates have been prepared for services to be rendered. Services valued at GEL 180.000 have been rendered during this period.
2. Overpaid sum. Companies responsible for road surface repairs charge high prices.. At the same time, unforeseen expenditures have been required, but have not been elaborated. Consequently some companies have been overpaid GEL 32,900 from the budget e.g. Tskaltubogzaservisi Ltd has been overpaid GEL 30, 400 for road repair works.
3. Weak procurement controls. Procurement control mechanisms in Kutaisi City Hall are insufficient. Consequently, violations take place at almost each stage of the budget cycle – from planning to implementation.
4. Changes in approved budget. The City Hall does not ensure sufficient long-term and short-term planning of projects  for road infrastructure and thus discourages cost estimation.
5. Warranty period.  Contracts signed in 2009-2010 do not indicate construction warranty periods. Consequently, the City Hall is not able to hold suppliers accountable for shortcomings.
6. Undocumented changes in the budget. Functional and conditional classification of urban roadways is not carried out in Kutaisi. Consequently the local budget is frequently and unjustifiably amended because of street reconstruction.  
7. Tenders: criteria of cost-effectiveness. Kutaisi City Hall awarded a tender to a company which offered prices GEL 14.000 higher than another company.
8. Non-application of sanctions. Kutaisi City Hall has not applied sanctions specified by contract for violation of terms and conditions. The City Hall failed to impose financial penalties, which amounted to GEL 24.200 in 2011.
9. Non-existence of examination certificates. The City Hall accepted works performed from a supplier without submitting examination certificates.

14. Audit of compliance of privatization and transfer of property rights by Kutaisi City Hall

Audit period: January 1, 2009 – January 1, 2012

Problems:

1. Problems connected to the privatization of Kutaisi City Hall property: Information on auctions related to the privatization of the Kutaisi City Hall property   was not disseminated properly. As a result, competition took place in 13 auctions out of 127. The City Hall has never conducted online auctions, despite the fact that these auctions have been available since 2011. It resulted in less transparency in the  auctioning process.
   1. Privatization performed via direct sales. An LTD which purchased properties of Kutaisi City Hall, has not fulfilled part of its commitments under the privatization contract. The City Hall has not reacted properly (A written warning has not been sent to the Ltd).
2. Investor’s failure to meet its commitments. In 2008 Kutaisi City Hall sold its property via and auction. According to the contract, the investor should have carried out reconstruction of the purchased building, but did not. The City Hall failed to impose sanctions on the investor.
   1. Private companies failed to fulfil their obligations to make investments, thus violated the terms of the agreement with the City Hall. The latter does not possess information about fulfillment of some other investments.
3. Assets control. The City Hall is unable to control its property. e.g.
   1. The City Hall does not possess information that Tegeta Motors Ltd, which was awarded with the use of a grass-plot in 2002 for ten years, still uses it without paying rentals for the last three years. The City Hall is not aware of a user of a former power substation building. The building is still in the books of the City Hall. This and many other facts show that the City Hall fails to adequately control its property.

3.2The City Hall has not imposed sanctions on any of the 65 contractors for non-payment or delays in payments of rentals.

3.3 The City Hall’s request of tax records from only 38 leases out of 88 results in the failure of timely collecting the rentals.