The Malta Independent 30 June 2016, Thursday

Government lost over €1m in pre-election Fekruna Bay land deal – IAID report

Sunday, 24 January 2016, 09:00 Last update: about 6 months ago

An independent analysis commissioned by the government’s Internal Audit Investigations Department (IAID) last September and published as part of its report on the Old Mint Street deal this week has revealed that the government had lost over €1 million in a 2013 pre-election land swap deal.

An analysis commissioned out to PricewaterhouseCoopers (PwC) by the IAID found that the government had overvalued two plots of land it expropriated at Fekruna Bay by €875,000 and had undervalued one of two plots it granted in return for the expropriation by €407,417.

On 5 March 2013, just days before the last general election, the Lands Department signed a contract transferring two properties (one in Swieqi, the other in San Gwann) worth €4.3 million jointly as payment for land expropriated at Fekruna Bay, Xemxija.

In its analysis, PwC found that the two plots situated at Fekruna Bay were valued in the contract at €4,972,007; however according to the firm’s valuations the properties were worth €4,097,000 – meaning the government had overvalued the property, and spent €875,000 more than it should have.

As for the plot situated on the outskirts of San Gwann (Ta’ Wied Ghollieqa) with a footprint of 3,012 square metres, it was valued at €2,465,000 in the contract. PwC, however, valued this property at €2,310,000 – meaning that government overestimated the price of the first property it used in the exchange with Mr Vella by €155,000.

But with regard to the second property that was used to pay Mr Vella for the Fekruna plots, a 2,630sq.m plot on the outskirts of Swieqi was valued at €1,806,583, while PwC valued the land at €2,214,000 – meaning that the government had undervalued its own property by €407,417.

According to the IAID report, “Therefore, the Financial Investigations Department noted that, overall, the valuations established by the PwC team had a negative impact of €1,127,424 on public funds.”

The pre-election land swap had been highlighted back in 2013 and involved Raymond Vella, the former owner of the Mare d’Oro restaurant and surrounding land measuring 1,443 square metres in Fekruna Bay.

As part of its investigation, the IAID had requested the Financial Investigations Department (FID) to obtain from the Government Property Department (GPD) a list of all cases over the last 10 years in which payments made by government (in cash or land) to third parties in expropriation deals exceeded the allowable 30 per cent overpayment ceiling.

An administrative shortcoming, IAID finds

The IAID report clearly labels the case an "administrative shortcoming", as opposed to the more recent Old Mint Street expropriation case.  It was one of four cases, the other three of which were far smaller in monetary terms, that were flagged by the IAID for follow up action.

The Fekruna Bay expropriation had formed part of a 2008 Nationalist Party electoral pledge on ensuring public access to sites of scenic value. It also formed part of a process that began back in 1996 after a report by then Ombudsman Joe Sammut recommended that government guarantees access to the foreshore, in the wake of public protests.

Another overriding factor in the case was the fact that the expropriated land at Fekruna Bay was actually developable land. As such, the owner could have validly and legally applied for a massive, view-obstructing development on the site. The 2013 expropriation effectively prevented such an eventuality.

As such, and despite the fact that it later transpired that the government lost out to the tune of over €1 million, it was also a case of expropriation in the public purpose - as evidenced by the current government's embellishment works on the site for public use.

Moreover, the deal was struck after three years of inter-ministerial negotiations between the site's owner and a property negotiation committee comprised of officials from the lands department and the finance ministry.

 

Compensatory properties valued €863,000 cheaper in 2013 than in 2012

Interestingly, according to the IAID report the FID noted that back in 2012 the sites in Swieqi and San Gwann that were awarded to Mr Vella as compensation for the Fekruna bay land had been valued respectively at €2,500,000 and €2,635,000 – a total of €5,135,000. In the final 2013 contract, however, they were valued far lower at a joint €4,271,583 – €863,000 less than the 2012 value.

In all, the GPD expropriated land valued at €4,972,007, and transferred €4,271,583 worth of government land.

The difference, amounting to €700,424 in favour of Mr Vella, was set-off against the amounts due by him to the government in lieu of capital gains tax amounting to €594,640 and the Duty on Documents amounting to €124,902. The total of Capital Gains tax and Duty on Documents (€721,543) exceeds the difference due to Mr Vella by €21,119, thus resulting in an over-payment made by the GPD in favour of Mr Vella (Fekruna Ltd), according to the IAID.

When the FID highlighted this overpayment to PN MP Jason Azzopardi, he said “Obviously I did not know, and could not have known unless my attention was drawn to the situation. The Minister does not carry out the workings of the amount owed himself. It is wrong that this happened, and whoever handled the workings must explain why, on a €5 million transaction, there was a €20,000 discrepancy”.

Another issue highlighted in the IAID report was that the procedure used in this instance was different from that in other expropriation deals. “In other expropriation processes reviewed by FID, the Directorate notes that any government department and/or ministry makes a formal request to the GPD to expropriate a particular land for any public purpose, the GPD obtains a valuation of the said property and publishes the expropriation notice in the Government Gazette, without the need to know who the property owners are. Eventually, the owner of the property shows up at the GPD and once he proves title of ownership and is satisfied with the compensation value established by the GPD, the owner can either accept a cash consideration, an exchange with any government land of his choice, or a combination of both. In case of disagreement with the compensation value, the matter would be referred to the Land Arbitration Board.”

In this particular case, however, the then Director General of the GPD Fred Bezzina informed the owner of the property in question, Mr Vella, that the government was considering expropriating the properties. In the same letter, he informed Mr Vella that the GPD wished to reach some form of agreement, and established a committee to do so. The letter requested Mr Vella to indicate which properties belonged to him and property prices. He also indicated that the government’s preferred form of payment was through a land transfer.

The report conclusions also highlight that Mr Vella was able not only to value his own property, but also government’s properties.

Mr Vella originally valued the Fekruna Bay property at €6,750,000. On 6 April 2010, Mr Bezzina replied, asking him to present his architect’s valuation to the GPD. The requested information was presented on 9 June, 2010, in which Mr Vella stated: “In my opinion, taking into consideration the location, the area, layout plan, the potential of the site according to the North West Local Plan policy and present market value, I estimate the said premises to range between €6.75 million and €7.5 million”.

A report by a GPD architect dated 18 June 2010, analysing the report prepared by Mr Vella’s architect, highlighted that the valuation would result in an overall estimate of €4.9 million. Another GPD architect valued it at €5 million on 10 July, 2010 and another report on 27 July, 2010 by yet another architect, valued the property at €5.1 million. The land was then valued at approximately €5 million.

When asked why the GPD did not follow procedure in the Fekruna Bay expropriation procedure, former PN Finance Minister Tonio Fenech said that according to the IAID report: “This was a different situation. In the electoral programme, we promised that government would set up a fund to buy back properties that were in environmentally sensitive areas and would be in the public interest to buy and return the land to its original state. Since the fund would create a deficit pressure on national public finances, as a government we decided to go through a land exchange so as not to impact public finances. This necessitated that such arrangements would be made through amicable negotiations, as we could not risk an LAB decision for a cash compensation if property exchange was refused by the third party, and therefore would be forced to buy back the land at a higher price, paid in cash, with the consequence of this having an impact on the deficit. The most important thing to note is that the process was transparent, and not who initiated the expropriation process. An Independent board was set up to review the valuations. Obviously, the third party presented its valuations, but to my knowledge, government had based its decision on the board’s valuation”.

Dr Jason Azzopardi, who had been responsible for lands, was also questioned by the IAID, and said, “I don’t see anything wrong in trying to arrive at an amicable solution with the owners of the expropriated land. We wanted to pre-empt by reaching a consensus on the price. We didn’t want to expropriate this land and end up in front of the Lands Arbitration Board, risking paying a very high price. Moreover, the law was not broken and all the set procedures were followed in his case”.

Dr Azzopardi also said the fact that the government chose to negotiate through a property evaluation committee instead of just expropriating the land as it could have by law, “we were speaking about land worth millions, and the difference (as I was informed by the GPD) was substantial. Thus if government just expropriated the land, and the private individual went to court requesting compensation, there would be a risk that the Court would order government to pay more. If through negotiations an agreement is made, then good. If not, then it’s not the end of the world. If there is an agreement, however, it implies that the individual cannot take government to court and request more.”

When asked whether the principle of sound financial management was followed in this expropriation process, given that the contract was signed just a few days prior to the election, Dr Azzopardi said, “I would have felt irresponsible had I not concluded the deal before the election. It was in the electoral manifesto and I wanted to fulfil that promise. Moreover, it was a process which had started long before my term in office. The present government continued with the embellishment process of the expropriated land when it was in a position to rescind the contract if they felt that there was something wrong.”

Mr Fenech, along similar lines, told the IAID that the expropriation started in 2010, arguing that a process that started should not just stop because of an election. “Our Constitution does not speak of a government that has fewer powers once an election is announced and therefore the matter is not an issue of sound financial management, but of fairness.”

Dr Azzopardi declared that he neither had any conflict of interest nor met the third party involved in the case. Mr Fenech said: “I was not involved in the process as I was not the Minister responsible”.

In its conclusions, given the different valuations by the original architects and PwC, the FID recommended that the top management at the GPD reworks the way the department carries out its property valuations and the negotiation process of the said valuations, in order to be in a better position to safeguard public funds.

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