More strife over social companies scheme

PROBLEMS just keep bubbling from the pot originally designed to cook up jobs for the country’s long-term unemployed. Of the eight pet projects within Labour Minister Viera Tomanová’s social companies scheme, two have come under the magnifying glass of European Commission auditors after signs of fraud and procurement-rule violations emerged, while another failed to return its revenues to the state, despite being required to do so by the law.

PROBLEMS just keep bubbling from the pot originally designed to cook up jobs for the country’s long-term unemployed. Of the eight pet projects within Labour Minister Viera Tomanová’s social companies scheme, two have come under the magnifying glass of European Commission auditors after signs of fraud and procurement-rule violations emerged, while another failed to return its revenues to the state, despite being required to do so by the law.

After cancelling its contract with Arvik, one of the social companies investigated by the EC, the Labour Ministry has now scrapped its contract with Horehronský Sociálny Podnik (Horehronie Social Enterprise), which had already consumed €1.6 million of public funds. The Sme daily reported that the social company had failed to report some of its revenues from the services it provides.

Social companies are defined as non-profit organisations which receive 95 percent of their funding from the state. Any revenues they generate must be channelled back to the state budget.



“The rules of the EU clearly state that if a project does not have a business character, then all its revenues must be returned to the European budget,” Miroslav Beblavý, a former deputy labour minister who is standing as a candidate for the opposition Slovak Democratic and Christian Union (SDKÚ) in the forthcoming general election, told The Slovak Spectator.

“The ministry and social companies have thus been caught in their own trap,” said Beblavý. “In order to gain 95 percent co-financing, they pretended to be non-business-driven but they were still making money, which is not allowed.”

European Commission auditors carried out a systems audit in November 2009, then checked on the projects in December and, after a January meeting, summarised their findings in a draft report. According to the draft report, signed on March 1, 2010, “the presence of indicators of serious fraud was identified” in Arvik during auditors’ on-the-spot verification of its operations.

Also a potential collusion was detected between the social company and other enterprises in terms of supplies, production facilities, production processes, sales and employees, the draft report suggested.

In another social company, Revúcky Sociálny Podnik (Revúca Social Enterprise), the auditors identified “public procurement deficiencies … in the purchase of assets, as the values of the contracts are above the community thresholds. However, a national procedure called ‘below threshold’ is repeatedly applied where the required level of competition is not sufficiently ensured”.

Although Tomanová last month dismissed the report as “a non-public draft” and accused the opposition and media of being involved in a witch-hunt and of ridiculing social companies, just weeks later her ministry dispatched letters to the social companies advising them to change the subject of their business. The ministry proposes, for example, that they concentrate on crafts, nursing, operating barber shops or providing services which are not provided by any competitors, according to the Etrend.sk portal.

Beblavý says that the move has come too late. According to Sme, the social companies are being advised that the suggested changes are temporary.

Beblavý interprets the letters as a “delayed and ineffective effort to solve problems about which observers were warning long ago”.

“Even if this step helps in the future, which it won’t, it will in no way influence retroactively the legality of the funds spent as illegal state aid,” Beblavý told The Slovak Spectator.

“In my view it is much better to cancel this overpriced project, which is affected by fraud, than invest additional money into it in the probably vain hope that Brussels will reimburse Slovakia for it,” Beblavý said. “This hope is futile because controls by the European Commission or the Finance Ministry in these companies are gradually revealing additional serious problems, so the probability of repayment is anyway low.”

Moreover, according to Beblavý, the pilot social companies are an extremely expensive and ineffective way of solving unemployment, and money might therefore be used in a different way.



The companies themselves suggest that it might now be extremely difficult to change their business focus.

“It would probably not be possible, since the technologies that we have cannot be changed now, as the operation is running,” said the boss of Veľkokrtíšsky Sociálny Podnik (Veľký Krtíš Social Enterprise), Branislav Králik, as quoted by the Hospodárske Noviny financial daily.

As of January 19, 2010, social companies had received €11.3 million in public funds and there is now a danger that the European Commission will not repay Slovakia some of the funds, as was originally intended.

The EC has not said when its final report will be ready. However, Mária Javorová, spokesperson for the European Commissioner for Employment, Social Affairs and Inclusion, told The Slovak Spectator that the act of sending the draft report in the language of the member state to the concerned national authority would open what is known as a contradictory procedure, after which the report would become final.

“It is as well not possible to know at this stage if the final version will differ from the draft report - in any case, the Commission never comments on the contents of draft reports,” Javorová told The Slovak Spectator.

In response to inquiries about the draft EC audit report, the Labour Ministry said that the problems of social companies can be seen “at different levels” one of which, ministry spokesman Michal Stuška suggested to The Slovak Spectator on March 26, is “in the period before the parliamentary elections [and hence] unambiguously political”.

According to Stuška, the publication of internal working materials which are subject to a discussion between Slovak institutions and the European Commission or part of the European Commission is “unethical”.

The Slovak authorities will inspect the problematic findings pertaining to the activities of the social companies but none of the areas of problems that the working version of the EC report opens has been closed, Stuška said in late March.

According to information provided by Stuška, since July 22, 2009, advance payments and refunds have been provided to the following social companies: Spišsko-gemerský Sociálny Podnik, Veľkokrtíšsky Sociálny Podnik, Revúcky Sociálny Podnik, Horehronský Sociálny Podnik, Sociálny Podnik – Mesto Krompachy, Gemerský Sociálny Podnik and Arvik, based in Bardejov.


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