Topics
You are here: Home / Topics / Federal government shareholdings

Document Actions

Federal government shareholdings

2016 Annual report Volume I No. 03 - Weaknesses in federal shareholding monitoring

Federal Government failed to adequately monitor the effectiveness of public shareholdings. Above all, it did not sufficiently urge management bodies to duly perform their duties seeking to achieve the targets set. For example, Federal Government tolerated performance-related remuneration to be paid, even if in cases of underperformance or not measurable performance.

Federal shareholdings in private sector enterprises amount to some €29 billion. Federal shareholdings are contingent upon a public interest in the business objectives of the relevant enterprise. Federal Government needs to monitor whether the enterprise accomplishes its purposes. Therefore, a binding provision is in place to ensure that federal shareholdings are subject to programme evaluation.

However, repeatedly Federal Government has not been able to submit meaningful evaluation results; particularly in cases in which management reports did not allow for a comparison between business planning and actual business results. Various federal bodies did not have a sound notion about their responsibility to do programme evaluations of such shareholdings. Moreover, Federal Government did not take any action when performance-related remuneration agreements were concluded that provided for non-measurable targets, contained bonuses for standard mission performance or had been concluded belatedly. In one case, the result was that an enterprise had to pay a high performance-related remuneration although it became apparent that the manager concerned should be dismissed due to bad performance.

We recommended that the Ministry of Finance develop a standard procedure for due evaluation of shareholdings. Such standard procedure should include clearer guidance for performance-related remuneration of management bodies and ensure that achievement of the targets set can be quantified.

 

2013 Annual report – spring report - No. 04 - Federal Railway Assets Fund pays an inadmissible and excessive lump sum to compensate for personnel costs

By virtue of a flat rate agreement, Deutsche Bahn AG received a total amount of €278 million in compensation for personnel costs. Contrary to applicable legal provisions, it did not have to supply evidence justifying that the conditions for such compensation were met.

The relevant legislation gives rise to compensation claims, if, owing to rationalisation measures, Deutsche Bahn AG (the national railway company) can no longer employ staff taken over by or assigned to it. For this purpose, Deutsche Bahn AG has to prove its claims in detail. In the past, it had not succeeded in doing so. The Federal Transport Ministry and the Federal Finance Ministry concluded an agreement with Deutsche Bahn AG providing for a lump-sum payment to compensate for any arising claims. As a consequence, considerable amounts of compensation were paid for groups of employees not legally eligible for such compensation.

The Federal Transport Ministry and the Federal Finance Ministry regard the regulations as being of little use. They argued that, owing to the lack of insight into strategic company data, it was impossible to verify the claims on the basis of detailed circumstances.

We found that the prescribed detailed determination of the compensation claims is reasonable and therefore mandatory. Deutsche Bahn AG has to give detailed proof that the prerequisites for compensation have been met. Moreover, we recommend amending of legislation to completely abolish such compensation claims.

 

2013 Annual report No. 66 - Shareholding revenues not surrendered to the federal budget

The Federal Ministry for Economic Cooperation and Development promised that it will in future duly remit revenues from shareholdings in and loans to enterprises in developing countries. Furthermore, it intends to state shareholdings and outstanding loans granted correctly in the federal capital account.

The Ministry commissioned a company to acquire shareholdings in enterprises in developing countries or grant loans to these enterprises from federal budget funds. The Ministry received revenues and debt repayments of €20 million from the shareholdings and loans. However it did not surrender these funds to the federal budget but used them for other development purposes. There was no authority under budget law to do so. Parliament was not aware of these off-budget resources which were available for development policy purposes. Therefore, it was unable to decide about the use of these funds. Not being aware of these off-budget funds, it appropriated budget funds for the same purpose.

Furthermore, the Ministry stated the shareholdings and outstanding loans inaccurately in the federal capital account. At year-end 2012, the capital account stated shareholdings and loans in the total amount of €86 million, although they had already been sold or repaid.

 

2013 Annual report No. 54 - Projects of the privatised clothing supplier of the Armed Forces funded

The Federal Defence Ministry has funded several technical projects of the privatised clothing supplier of the Armed Forces with an amount of €5 million. There was no legal basis for doing so. In addition, the Ministry cannot exclude the possibility that its grant towards one of the projects actually exceeded its costs. The Ministry has not acceded to our demand to clarify the circumstances of such funding.

On behalf of the Federal Government, the Federal Defence Ministry holds 25.1 per cent of the share capital of LH Bekleidungsgesellschaft mbH, a limited liability company established jointly with two private sector companies. Being the sole customer of Bekleidungsgesellschaft, the Armed Forces do not only bear the cost of procuring clothing but also the company’s other expenditure. For this purpose, the Armed Forces and the company annually agree on a fixed price.

In December 2011, the Armed Forces paid €4.13 million to the company for a new IT system. The Ministry’s directorate arranged for payment within a few days on the basis of an inadequate project application and without sufficient back-up documentation. The company intended to commission the IT system as late as in 2013. We hold that this prepayment was inadmissible. Moreover, there was no legal basis for this funding. The decision has been poorly documented and the Ministry cannot exclude that the company took costs of the IT system into account when calculating the fixed price. If this is the case, the Armed Forces would have overpaid the IT system.

For the year 2009, the company offered the Armed Forces to credit them an amount of €913,000. The Ministry’s directorate arranged for most of the credited amount to be spent by the company for technical changes of two high-bay warehouses, “passing by the federal budget”. In our opinion, this infringement of budgetary law is particularly grave since, during decision-making in the Ministry, the directorate had previously not been authorised to fund this measure from the federal budget.

The Ministry has not acceded to our demand to review and comprehensively assess the legal aspects of all decisions concerning the funding of the projects.

 

2013 Annual report No. 24 - Enhancing organisational structure for dealing with government shareholdings in stabilised banks

The Federal Ministry of Finance lacks adequate organisational structures needed to properly manage government shareholdings in banks acquired in connection with financial market stabilisation programmes. Subject matter questions related to stabilisation were assigned to one directorate-general, while another directorate-general was in charge of mentoring and guidance for new members of the relevant banks' supervisory boards.

The Federal Government granted assistance to banking institutions in order to stabilise the financial markets. The shareholdings which it acquired in two of the banks were managed by the Federal Ministry of Finance. One directorate-general provided preparatory training to the Ministry officials who, at the instigation of the Federal Government, had been appointed new members of the supervisory boards. The stabilisation measures and the relevant banks, however, fell within the remit of another directorate-general. We found that information available on the banks in question varied greatly between the two directorates-general.

The Ministry admitted that it was necessary to improve liaison between the organisational units involved. This would help to thoroughly monitor banks that had undergone stabilisation programmes and effective training of supervisory board members appointed from within its staff. The Ministry declared that it had arranged for the necessary steps to be taken and that information exchange had been improved. According to the Ministry, the new arrangements ensured full preparatory training of supervisory board members. The Ministry rejected any further pooling of responsibilities.

We acknowledge that the Ministry has successfully improved communication between the units involved as well as guidance provided to its representatives on the supervisory boards. Nevertheless, the action taken is as yet insufficient to ensure an effective performance of financial market stabilisation by the board. Responsibilities for subject matter questions related to financial market stabilisation and the preparatory training of supervisory board members have still not been pooled in one organisational unit.

We uphold our recommendation to merge the tasks that are currently separated within the directorate-general in charge of stabilisation measures.

 

 

Good Practice Note 04/04: Grants

Circumvention of public grant law: provision of funding through shareholder contributions

Principles

(1) Companies in which the Federal Government is a shareholder may receive various payments from the Federal Government. Such payments can be broadly classified either as such which the Federal Government makes as a shareholder of a company (payments under company law) or as grants within the meaning of Arts. 23 & 44 Federal Budget Code.

(2) A complete and permanent funding of institutions by means of non-controllable (as to amount and timing) shareholder contributions under private law in the form of payments into the capital reserve pursuant to Art. 272.2 item 4 Commercial Code contravenes the requirements for a Federal Government shareholding laid down in Art. 65 Federal Budget Code. Such funding moreover constitutes a circumvention of the law on grants.

Background
In the course of realignment in one area of financial assistance, a line department intended to set up a new limited liability company. The department envisaged permanent and full funding of the company “by means of non-controllable shareholder contributions in the form of a cash payment into the company’s capital reserve pursuant to Art. 272.2 item 4 Commercial Code”. The legal basis for such cash payments was to be a funding agreement to be conducted between the shareholders and the company. The department justified this form of funding with the need for high flexibility and giving the company the necessary leeway as to organisational, human resources and operational planning. The department argued that it was necessary to enable the company to respond flexibly to market conditions and customer needs. To that end, the company should be able to pay salaries comparable to those paid for similar work in the private sector. One of the reasons stated by the department for not providing funds via institutional grants was that the intended shareholder contributions to the company did not constitute payments to a “third party”, i.e. an entity outside the federal administration.

(1) Payments under company law include the subscription of shares (acquisition of shareholdings within the meaning of Art. 65 Federal Budget Code) or additional payments made by the Federal Government into a company’s equity capital. The capital can take the form of a Federal Government payment into the company’s capital reserve (Art. 272.2 item 4 Commercial Code), e.g. to avert insolvency or to ensure higher credit lines. However, payments made by the Federal Government as a shareholder to compensate for a materialised or expected deficit or for certain expenditure cannot be recognised as a contribution to the capital reserve. This applies the more so where such payments regularly made as “income subsidies” which do not serve to increase share capital but are consumed by the company’s current losses. The arrangement envisaged by the department does in fact contravene Art. 65.1 item 2 Federal Budget Code. Art. 65.1 item 2 requires that the Federal Government’s obligation to make payments to the company is limited to a specified amount. It is true that the proposed arrangement with the company does not constitute an “obligation” in the legal sense. Factually, however, the company’s financial capacity to act – and thus its ability to perform the task which is a major concern of the Federal Government – can only be ensured by annual income subsidies from the Federal Government.

(2) Apart from contravening the requirements for a Federal Government shareholding laid down in Art. 65 Federal Budget Code, full and permanent funding of the company by means of income subsidies also circumvents the law on grants. In the present case, the arrangement had the typical characteristics of institutional grant funding pursuant to Arts. 23 & 44 Federal Budget Code.

The concerns raised as to an impediment to the company’s ability to act flexibly are unfounded. The provisions of the law on grants give discretionary scope for responding to special situations. As to salary structures, Art. 8.2 of the annual Budget Act and administrative regulation No. 15.1 on Art. 44 Federal Budget Code give an option, in exceptional cases, to permit, in agreement with the Federal Ministry of Finance, salaries higher than those laid down in the collective agreement for the public service and other employee benefits even outside the stipulations in the collective agreement.

Contrary to the opinion of the line department, a “third-party relationship” exists between the Federal Government and the company, since the company is an entity outside the federal administration. Apart from this, the funding of companies within which the Federal Government is a shareholder by means of institutional grants is a practice justified by administrative regulation No. 15.5 on Art. 44 Federal Budget Code.

Notes
We summarised our opinion in a report submitted to the line department and the Federal Ministry of Finance pursuant to Art. 88.2 Federal Budget Code. The Federal Ministry of Finance eventually accepted our arguments, classified the entity in question as a recipient of institutional grants and, on this basis, budgeted the payments in question accordingly.

 

2012 Annual report No. 80 - Banks that receive Government support refund administrative expenditure of €5 million retroactively

Following our recommendation, the Financial Market Stabilisation Agency (FMSA) for the first time charged banks which receive Government support fees for the monitoring of guarantees and capital assistance. The banks refunded €5 million retroactively. The FMSA therefore did not need funds from the federal budget for the year 2011.

The Federal Government grants to banking institutions guarantees and capital assistance in order to stabilise the financial markets. These resources are provided via the Financial Market Stabilisation Fund which the Federal Government set up at year-end 2008. FMSA monitors the banks’ compliance with the conditions subject to which the guarantees and capital assistance were granted.

The by-laws of FMSA promulgated by the Federal Finance Ministry stipulate that part of its funding is to be raised from fees to be paid by banks. These fees are to cover the administrative costs incurred for financial support and the periods during which the support measures are in place. Where FMSA’s own revenues are not sufficient, it receives funds from the federal budget.

We found that FMSA did not charge fees from the banks in receipt of Government support for continuously monitoring financial assistance already granted.

We demanded that FMSA claim the reimbursement of costs for continuous monitoring from the banks in accordance with the by-laws.

FMSA has taken up our demand. The banks reimbursed administrative costs of the continuous monitoring of financial assistance in the amount of €5 million retroactively for the years 2010 and 2011. Therefore, FMSA did not need funding from the federal budget for 2011.

 

2012 Annual report No. 58 - Federal Defence Ministry manages a federal shareholding inadequately

The Federal Defence Ministry failed to take action to obtain proof of the efficiency of capital expenditure in the range of millions of euros incurred by an enterprise majority-owned by the Federal Government.

The Federal Defence Ministry is the majority shareholder of a company incorporated under private law that almost exclusively works under contracts from the Armed Forces. The objective of this shareholding is to obtain better value for money in performing certain Armed Forces functions. The company receives payments from the federal budget for the services it provides. The Ministry has representatives on various governing bodies of the company who, apart from other functions, are to monitor the efficiency of management decisions. The company carried out an investment appraisal to identify ways how to renew its software. The new software was to be based on standard software. For this project, the company only compared various alternative options available from a single IT provider. Our audit revealed that the investment appraisal carried out by the company was incomplete and flawed.

The Ministry was not able either to assess the validity of the company’s investment appraisal for the IT project. However, the Ministry considered the company’s decision proposal for the implementation of the standard software as plausible. The Ministry’s representatives used the company’s investment appraisal as basis for their decision on the IT project.

In our opinion, the Ministry should have taken greater regard to the interests of the Federal Government. However, it failed to instruct its representatives to object more insistently to the weaknesses in the investment appraisal made by the company. This would have been the only way in which to alert the company of the need to base its decision on a sound foundation.

We consider this as an example of the problems that can emerge when Armed Forces functions are discharged by companies in which the Federal Government is a major or the sole shareholder. We have reported on the financial impact of such problems on the federal budget before. In particular, we pointed out that by establishing companies and being a shareholder in them, the Ministry incurs considerable long-term financial commitments. This is one of the reasons why the Ministry should thoroughly prepare its representatives so as to enable them to pursue the special interests of the Federal Government.

 

2012 Annual report No. 38 - Due to inadequate control, the Federal Transport Ministry has paid €3.6 million too much in remuneration for a promotional programme

The KfW Banking Group received €3.6 million too much in remunerations from the Federal Transport Ministry. It has promised to return this amount plus interest. It also promised that, in future, it would calculate its remunerations according to the method agreed with the Federal Transport Ministry. In turn, the latter has announced that it will examine the future remuneration calculations of KfW Banking Group more thoroughly.

Since the end of 2007, the Federal Transport Ministry has awarded grants towards the procurement of particularly low-emission utility vehicles. It commissioned KfW to take charge of technical and administrative programme implementation. The details of programme delivery were laid down in a contract between the Ministry and KfW. This contract includes a provision governing the calculation of KfW’s remuneration. The calculation will be based on the purchasing costs of the vehicles for which KfW has paid out the grants. This means: the higher the purchasing costs, the larger KfW’s remuneration. KfW calculated its remuneration on a quarterly basis and invoiced it to the Ministry. The latter did not thoroughly examine KfW’s remuneration invoices but limited its review to plausibility checks.

We found that KfW had not calculated its remuneration in accordance with the method stipulated in the contract. KfW based its calculation on the expected aggregate purchasing costs for the low-emission utility vehicles. However, for various reasons, the applicants for grants bought a smaller number of vehicles than originally planned. The calculation of the remuneration on the basis of expected rather than actual purchasing costs resulted in excess payments to KfW of €3.6 million during a period of slightly more than two years.

KfW acknowledged the excess payment identified through our audit. The Ministry informed KfW that it would set off the excess payments of €3.6 million plus interest against outstanding remuneration claims. Moreover, it announced that, in future, it would review the remuneration invoices more thoroughly.

 

2012 Annual report No. 19 - Loss-making consulting company wound up

The discontinuation of the business activities of a loss-making consulting company avoids further losses of share capital at the Federal Government’s expense.

The federally owned company Lausitzer und Mitteldeutsche Bergbau-VerwaltungsgesellschaftmbH (LMBV) maintained a subsidiary under the name of LMBV international GmbH (LMBV-i) in order to market its expertise in the re-cultivation of mining areas. LMBV-i continuously incurred losses. It increasingly failed to achieve its objective to make up for these losses by 2012. Instead, it consumed more than €300,000 equivalent to more than one third of its equity capital at inception.

We advised the Federal Finance Ministry that LMBV-i cannot profitably market the special expertise because there is hardly any demand for it and that, therefore, there was no federal interest that would justify maintaining the consulting company. We recommended that the Federal Finance Ministry decide immediately about the company’s future rather than continuing to wait for a compensation of past losses. Instead, the Ministry should initiate the winding up of LMBV-i, if the latter’s company data show a threat of further losses.

The Federal Finance Ministry followed our recommendation. It arranged for the winding-up of LMBV-i. The company’s business activities have meanwhile been discontinued, thus avoiding further losses of its share capital.

© 2019 Bundesrechnungshof