Preventing the Misuse of State-owned Land

YUGO KOSHIMA ASSETS OWNED AND managed by the government are fundamental to the provision of key public services.

They can also become a source of revenue or financing, providing additional resources to the budget. Unfortunately, inefficiency in asset management has proven a headache for many governments.

Worldwide, many cases of the mismanagement of public assets or government shareholdings in state-owned enterprises have been reported.

Non-financial assets comprise a large part of government wealth.

On the average of 15 countries included in the International Monetary Fund’s database, non-financial assets amount to 121% of overall output in those countries, of which land comprises about one fifth.

The privatisation and leasing of government-owned land have been an especially high-risk area and a plentiful source of financial irregularities.

To protect government land from misuse, useful lessons can be learned from the avoidance schemes that are widespread in Moldova – a country in eastern Europe.

In February 2018, the court of accounts published an audit report on the management of government-owned land.

The report estimated that the revenue loss from irregularities and avoidance schemes in the management of local government land was about 1,9% of gross domestic product in 2018. The own revenue of local governments would have been doubled if this land had been properly managed.

Examples of abuse include the following:

• Abusive construction: In Moldova, as well as in many other countries, the owner of a building is granted the right to occupy the land on which the building stands for a long period of time. For the owner, the cost of leasing the land tends to be much cheaper than the price of buying it.

Several lessees in Moldova have taken advantage of these rights. They first obtained construction permits and then built a minor structure such as a fence or shack on the land owned by the local government. Once the construction was completed, the local government had no choice but to lease the land to the developer, who was then able to secure a large amount of rent by using the land and buildings for commercial gain.

• Innocent purchaser: In many countries, there is the legal principle of an ‘innocent purchaser’ which means even if the seller of an asset is not the legal owner, a buyer without knowledge of that fact could still acquire title to the asset.

In Moldova, the auditors reported a privatisation case of local government land that included some irregularities.

The original buyer could not obtain good title to the asset due to these irregularities.

However, the land was subsequently sold multiple times. Because of the ‘innocent purchaser’ principle, the last buyer was able to acquire the title. The audit report revealed that one of the people involved in this chain of transactions was only four years old! This creates a suspicion that these people were not all ‘innocent’.

• Failed concession: The weaknesses of control over concessions or public-private partnerships in Moldova also provide an opportunity for wrongdoers to abuse the law.

The audit report describes the case of a local government that leased to a concessionaire some land adjacent to a park for the construction of a children’s non-profit leisure centre.

However, the concessionaire did not build the leisure centre but instead subleased the land to another company, which in turn built commercial buildings on the site.

This company seems to have acquired the right to use the land based on the concept of abusive construction noted above.

In none of these three cases did local government seem to take any action against the lessees, to take back ownership of the asset concerned, or to enforce the concession agreement and stop the abusive construction.

Indeed, many local governments exercise weak controls over the management of their land, or do not even recognise the land’s existence.

There is no easy solution to preventing misuse of government land.

In Moldova, the central government has recently launched a mass delimitation exercise to measure and register all land in the country by 2023.

In addition, control over the leasing of land exercised by the central government’s Public Property Agency have been strengthened.

However, these controls do not apply to local governments, which have an autonomous status.

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