REIMBURSABLE ADVISORY SERVICES FOR THE IMPLEMENTATION OF THE PRINCIPLE OF SHARED SERVICES IN THE ORGANIZATION AND THE FUNCTIONING OF THE CENTRAL ADMINISTRATION OF THE REPUBLIC OF BULGARIA PROPERTY MANAGEMENT Report May 2018 Project â„–BG05SFOP001-2.001-0009: Implementation of the Principle of the Shared Services in the Organization and Functioning of the Central Administration, funded by Operational Program Good Governance, co-funded by the European Union through the European Social Fund 1 www.eufunds.bg ABBREVIATIONS AND ACRONYMS COM Council of Ministers GOB Government of Bulgaria IFIs International Financial Institutions MAFF Ministry of Agriculture, Food and Forests MCMRA Military Clubs and Military Recreation Activities MEW Ministry of Environment and Waters MFA Ministry of Foreign Affairs MLSP Ministry of Labor and Social Policy MOC Ministry of Culture MOD Ministry of Defense MOF Ministry of Finance MOI Ministry of Interior MOH Ministry of Health MOES Ministry of Education and Science MOJ Ministry of Justice MLSP Ministry of Labor and Social Policy MRDPW Ministry of Regional Development and Public Works MTICT Ministry of Transport Information and Communication Technology NSI National Statistical Institute OPGG Operational Program “Good Governanceâ€? PM Property Management RAS Reimbursable Advisory Services SPA State Property Act WB World Bank 2 www.eufunds.bg DISCLAIMERS This report is a product of the International Bank for Reconstruction and Development / the World Bank. The findings, interpretation, and conclusions expressed in this paper do not necessarily reflect the views of the Executive Directors of the World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. This report does not necessarily represent the position of the European Union or the Bulgarian Government. ACKNOWLEDGEMENTS This report was produced by a core team led by Ismail Radwan (Task Team Leader), comprised of Christian Filipov (Component Lead), Elena Gabriela Ardelean (Operations Analyst), Svetozara Petkova (Consultant), Dobrina Gogova (Consultant), and Hannah Messerli (Consultant). The team was supported locally by Adela Delcheva (Operations Assistant). The report was drafted under the careful guidance of Antony Thompson (Country Manager) and Roby Senderowitsch (Practice Manager ECA Governance). 3 www.eufunds.bg Table of Contents EXECUTIVE SUMMARY ............................................................................................................ 8 1 INTRODUCTION ................................................................................................................ 16 1.1 Project overview and objective ..................................................................................... 16 1.2 Scope and limitations of the assessment ....................................................................... 16 1.3 Methodology ................................................................................................................. 18 1.4 Historical context .......................................................................................................... 19 1.5 Legal classification of state-owned properties .............................................................. 20 1.6 Managing state-owned properties ................................................................................. 23 1.7 Rules applicable to representational and social properties ........................................... 23 2 CURRENT STATUS ............................................................................................................ 25 2.1 Representational and social properties supply and demand ......................................... 25 2.2 Survey of recreational services demand ....................................................................... 30 3 KEY FINDINGS ................................................................................................................... 32 3.1 Financials ...................................................................................................................... 32 Lack of effective financial management principles and practices ........................................ 32 Services for government clients are offered free of charge .................................................. 33 Pricing: Accommodation rates are set extremely low .......................................................... 34 3.2 Utilization ..................................................................................................................... 38 The utilization of the facilities is varied ............................................................................... 38 Most properties are not well marketed.................................................................................. 42 Properties that accommodate external visitors generate additional revenue ........................ 42 3.3 Management/Operating Model ..................................................................................... 44 The property management model impacts operating results ................................................ 44 The current funding model incentivizes property managers to not increase revenues ......... 46 4 ROADMAP – RECOMMENDED ACTIONS and FUTURE CONSIDERATIONS for the BULGARIAN GOVERNMENT .................................................................................................. 48 4.1 Identify strategic priorities ............................................................................................ 52 Develop property management strategy and framework ...................................................... 52 Review and amend legislation regulating state-owned properties ........................................ 53 Staffing and capacity building .............................................................................................. 53 4 www.eufunds.bg Paradigm shift and cultural progression ............................................................................... 54 4.2 Adopt shared services principle .................................................................................... 54 Introduce a single, real-time reservation system................................................................... 54 Adopt revenue management ................................................................................................. 56 Adopt uniform efficiency and facility management standards ............................................. 56 4.3 Define property management operating model............................................................. 57 Identify operating model that allows profit retention ........................................................... 57 Centralizing property management ....................................................................................... 57 4.4 Partnering with the private sector ................................................................................. 60 Outsourcing models: concessions, lease, procurement ......................................................... 61 4.5 Issues and considerations for the future ........................................................................ 63 Annex 1: Country Case Studies - Finland, the Czech Republic, the Netherlands, Germany and France ............................................................................................................................................ 64 Annex 2: Operation Overviews by Ministry System, Visited Facility Profiles and Recommendations ......................................................................................................................... 78 1. Introduction ....................................................................................................................... 78 2. Key Findings ..................................................................................................................... 79 3. Review by System............................................................................................................. 84 Facilities operated by the Ministry of Agriculture .................................................................... 84 Facilities operated by the Ministry of Foreign Affairs ............................................................. 95 Facilities operated by the Ministry of Environment and Water ................................................ 98 Facilities operated by the Ministry of Interior ........................................................................ 101 Facilities operated by the Ministry of Defense ....................................................................... 110 Facilities operated by the Ministry of Labor and Social Policy.............................................. 118 3. Inventory Matrix ............................................................................................................. 121 Annex 3: Strategic Considerations.............................................................................................. 124 Annex 4: Legal Options and Considerations .............................................................................. 129 Annex 5: Outsourcing Models .................................................................................................... 132 Annex 6: Approaches to Managing Lodging Facilities .............................................................. 135 5 www.eufunds.bg List of boxes Box 1:Developing hospitality and tourism education standards in Croatia .................................. 53 Box 2: Issues and considerations for the Bulgarian Government – Looking towards a new property management reform ........................................................................................................ 63 List of figures Figure 1: Number of facilities reported by respondents (%) ........................................................ 25 Figure 2: Number of facilities reported by administrative system ............................................... 27 Figure 3: Have you outsourced the overall management/operation of any facilities to a different legal entity? ................................................................................................................................... 28 Figure 4: Have you outsourced parts of any facilities (e.g. coffee shops, tennis courts, etc.,) to a different legal entity? .................................................................................................................... 28 Figure 5: Recreation facilities collecting customer feedback ....................................................... 29 Figure 6: Do you support the social service vacation benefit at a recreational facility owned by your administration? ..................................................................................................................... 30 Figure 7: Reasons to spend family vacation at government recreational facilities....................... 30 Figure 8: Do you support the introduction of an electronic reservation system? ......................... 31 Figure 9: Financial results by administrative system .................................................................... 34 Figure 10: Pricing ......................................................................................................................... 36 Figure 11: Difference in pricing for staff and external visitors of recreational facilities ............. 37 Figure 12: Comparison of facilities that produce operating surpluses versus deficits ................. 40 Figure 13: Marketing and advertising of the facility .................................................................... 42 Figure 14: Financial results by administrative system .................................................................. 43 Figure 15: Financial results by location and type of facility (Recreational only) ........................ 44 Figure 16: Financial results by location and type of facility (Recreational only) ........................ 44 Figure 17: Results by ministry system and operating model ........................................................ 46 Figure 18: Staff levels versus financial performance of select facilities ...................................... 46 Figure 19: Recommended actions towards a new property operating model ............................... 49 Figure 20: Recommended decision tree for government facilities ............................................... 52 6 www.eufunds.bg List of tables Table 1: Differences between Public State Property and Private State Property ......................... 21 Table 2: Number of facilities reported by administrative system ................................................. 26 Table 3: Accommodation capacity by administrative system ...................................................... 28 Table 4: Occupancy and Pricing by Administration ..................................................................... 38 Table 5: Operating surplus/deficit based on bed capacity and location........................................ 41 Table 6: High-level implementation roadmap .............................................................................. 50 Table 7: Inventory Matrix for thirteen selected properties ......................................................... 122 7 www.eufunds.bg EXECUTIVE SUMMARY 1. This document is an output under the Shared Services Reimbursable Advisory Services (RAS) conducted by the World Bank in partnership with the Government of Bulgaria (GOB).1 The World Bank (WB) team is supporting the Government in introducing the principle of shared services in the organization and work of the central administration through six key activities.2 This report corresponds to the deliverable for Activity 6. 2. The Bulgarian Government is committed to improving the effectiveness and efficiency of its properties. In this sense, the WB team has been tasked with: (i) preparing a standalone general review of 1153 representative and social function properties owned by Bulgaria’s central administration, including an in-depth review of 13 recreational and training facilities4, and (ii) a roadmap for improving property management. Approach 3. The report’s main objective is to identify opportunities for improving the current property operational model, and underline key reform issues which would require enhanced attention from the GOB in the future. Through primary and secondary research, this report includes information on the status, assessment and approaches for sustainable and efficient property operation beneficial to the people of Bulgaria. 1 It is financed under the Operational Program Good Governance 2014-2020 with co-financing by the European Union and European Structural and Investment funds. The RAS Agreement between the GOB and the WB was signed in May 2017 and ratified by the National Assembly in July 2017. 2 (i) Preparation, baseline analysis and framework design; (ii) Pilot in centralized administrations for the provision of shared services, (iii Developing a framework for management of shared services, (iv) Developing a methodological framework for monitoring and evaluation; (v) Developing a methodological framework for change management; (vi) Government property management assessment 3 For the purpose of this activity, the WB team collected data for 160 government run facilities 4 The Report does not review or present information on public properties owned and operated by other public bodies such as municipalities, universities, schools, public enterprises, hospitals etc. 8 www.eufunds.bg 4. It is to be noted that the team has not conducted a due diligence assessment on any of the recreational facilities. Additional policy analysis would be necessary to guide the government in defining new property management policy options for Bulgaria, assessing the impact, and implementing a potential reform. However, the report addresses issues related to Government’s role in operating these facilities, budget practices and facility utilization. 5. Despite diverse leisure options today, there remains a strong sense of attachment to government-owned recreational facilities and subsidized vacation benefits among public administration staff. Government-run recreational facilities were developed when there were few private sector vacation options. The development of the modern tourism sector over the past two decades produced private sector accommodation in popular destinations providing many alternative vacation options. Facility offerings and operations have become a financial drain and inefficient. 6. The analysis is also directed at property management personnel charged with the management of government properties and delivering the social service. This group of stakeholders include property management personnel at the ministry and agency level, as well as facility managers, charged with taking care of the day-to-day maintenance, upgrades, and management of government facilities. 7. The report presents an analysis of 115 government properties and a roadmap. It is based on research including: (i) a structured on-line survey of facilities, (ii) focus groups and a demand-side survey of the attitudes of public administration staff towards government-sponsored recreation, (iii) interviews with and a survey of public officials tasked with the management of government-owned properties, and (iv) site visits to 13 facilities selected for in-depth review. Based on these findings, case studies of selected EU Member States and other relevant countries is included to highlight international practice. Situation 8. Constrained by limited resources, the GOB facilities face tremendous maintenance and operational challenges resulting in continued losses to the state budget and, for some facilities, a collapse into an inoperative state. The situation creates several challenges for the Bulgarian Government including: â—? Strategic: There is a lack of a comprehensive Government policy or vision for the management of the facilities. â—? Financial: The facilities generate large fiscal losses to the state budget. â—? Economic: By charging less than market rates, the facilities present a competition challenge for privately run tourism facilities. â—? Managerial: The facilities are run by civil servants without specialist knowledge or skills in property management and tourism. â—? Social: As recreational facilities are operated by individual ministries, there is a lack of equal opportunities for all public employees to benefit from the facilities. 9 www.eufunds.bg â—? Transparency: Comparable operational information is not available as the facilities do not follow widely-accepted accounting practices and do not publish annual reports. Findings Providing services at less than cost results in large losses 9. Government-run facilities are not required to follow full cost accounting and report only their operating surplus or loss. This method of accounting ignores the largest costs of providing the service reflected in the depreciation of assets. Further, it hinders comparison of operations between comparable facilities. 10. The current focus is on providing a social service and operating within an annual budget limit defined by the parent ministry. Facilities receive three major revenue streams: (i) income from paying guests, (ii) annual budget from the ministry, and (iii) additional subsidies from the social, housing and cultural activities fund (i.e. SBKO fund). Facilities’ managers focus on breaking even on operating costs. They are not incentivized to generate additional revenues as all revenues collected are directly transferred to the Ministry of Finance. Managers are not focused on financial management to foster sustainability and productive operations over the long term. 11. Many facilities are open to external visitors (i.e. non-staff guests) who pay a premium of 15% - 100% above the standard staff rate. This allows the facility to generate additional revenues. However, despite the higher price paid by external guests, it remains less than typical costs or the market price and, therefore, the government is effectively subsidizing those guests. 12. All income collected from guests (whether internal or external) for accommodation, food or other sundry items is not available for the facility to use. This results in a situation where the facility has no incentive to increase revenues from paying guests such as charging for parking or providing other additional services. Attracting more external guests simply incurs additional expenses since revenues do not accrue to the facility but are instead transferred directly to the Ministry of Finance. 13. Training and representational properties often provide services for free or at rates well below the cost of providing the service thereby generating losses by default. The average loss rate of properties with recreational functions is substantially lower than those with training or representational functions. Many services are not charged back to the users or parent ministries and the costs of providing these services are accounted for as operating costs. This practice is followed in all the facilities visited and does not represent good practice. This creates a potentially unlimited demand and no incentive for the operators to provide training efficiently. Marketing of the facilities is limited and prices are set extremely low 14. Marketing and advertising of Government recreational facilities is very limited and basic in form. Many of the facilities are only advertised through rudimentary official circulars, emails/newsletters to staff, bulletin board notifications, and word-of-mouth. 10 www.eufunds.bg 15. Facilities that are marketed more progressively report smaller losses. Properties which do not advertise through a website, attractive pamphlet, colorful brochure or other means, on average generate double the loss, compared to facilities which are advertised and promoted. 16. Accommodation rates charged are extremely low and far below the cost of operation. The lowest reported rates are charged by the Ministry of Regional Development and Public Works (MRDPW) at BGN 5 per person per night and the MOI with average accommodation rates of BGN 7.5 per person per night. On the opposite end of the spectrum is Residence Euxinograde which is the most expensive government property reviewed. The Residence charges BGN 180 per room per night for accommodation in a double room. This rate is charged for both staff and external visitors alike. 17. Rates are set within staff affordability limits rather than market rates and are not increased on a regular basis. All facilities operate within spending limits, commonly referred to as “budgetsâ€?, which lump-in all the costs associated with the facility (i.e., operational expenses as well as maintenance costs). Rate setting follows the budgetary spending considerations of the primary budget holder. The amount of the funds budgeted by the ministry that manages the facility determines both the accommodation rates and the annual operating period for the recreational facilities.5 18. Budgetary constraints in effect define the size of temporary staff remuneration and limit the annual operational period of the facility. Facilities are not provided with sufficient budget to pay staff over a longer season, regardless of opportunities to increase the low season operational period such as April-June and September-October for summer resorts. Utilization levels vary 19. The occupancy of the facilities varies considerably with the most successful operating at full capacity while others operate as low as 40% of capacity. Reservations are typically made through a voucher distribution system which is designed with the objective of serving staff. Packages are limited with a primary focus on families. Special packages or services for different types of guests are even fewer due in part to there not being incentive to build occupancies or revenues. 20. Facilities that generate an operating surplus have higher average occupancy rates, receive a higher number of external visitors and charge higher rates for both staff and external visitors. These recreational facilities also tend to operate more efficiently with a higher bed capacity with fewer staff. Facilities that generate losses typically host fewer external visitors, charge lower accommodation rates and have a higher staff to guest ratio. Loss-making facilities tend to also be smaller in terms of number of beds, conference rooms and restaurant seats. Centralized operating models generate better results 21. Most ministries manage their recreational facilities independently of each other as standalone properties. There are often many different management models within the same 5 The annual number of days of operation for each facility is determined by budget practicalities, weather conditions and availability for leisure stays y ministry employees. 11 www.eufunds.bg ministry. The varied operating models generate different operating results and do not enable important system-wide economies of scale. 22. Facilities managed centrally by a government agency, specially tasked with property management, achieve better financial results. The MOD has entrusted the management of all properties assigned to the ministry to a special executive agency. Military Clubs and Military Recreation Activities (MCMRA) operates all MOD recreational properties and is tasked with the entire property management cycle (i.e., planning, budgeting, marketing, reservations, maintenance, upgrades, staffing, etc.). 23. The facility operated as a commercial state owned enterprise (SOE) under a larger property management structure has positive financial results and provides an instructive model. The recreational facility ADIS Holiday Inn is part of the property portfolio managed by ADIS LTD., a property management company under the MFA. This management model allows the facility to retain generated revenues and incentivize the most efficient operation of the facility while delivering high-quality recreational services at affordable prices. Recommended actions, issues and considerations for the future 24. The Government’s approach begins with strategic clarity and commitment that defines priorities and guides policies. Our recommendation is that government gradually exit from managing state-owned recreational facilities. This is a medium-term objective. In the immediate and short-term government can put in place a number of measures to improve the management and operation of the facilities. Our recommendations are therefore presented as a roadmap of immediate, short, and medium-term stages. It should be noted that decisions made in each stage will require further evaluation and will define subsequent actions. However, each stage of the recommended actions is consistent with the overall vision and builds upon the preceding results. Recommended Actions 12 www.eufunds.bg 25. As an immediate step, the Government needs to define and formulate its vision in a comprehensive Property Management strategy and framework through identifying strategic principles. The framework will serve as an overarching set of principles, standards and objectives guiding any reform effort. The strategy is a critical first step in the process of transforming Property Management practices in the Government of Bulgaria. 26. Further, the Government can better manage the facilities by adopting shared services principles around the marketing, reservation, maintenance, payment and procurement functions. As well as accounting for amortization, the Government could set a minimum regular maintenance budget to ensure that physical assets are conserved and protected. Increasing rates would help to stem some losses without diminishing effective demand. Providing more incentives to retain revenues is fundamental to operational sustainability. Further, providing management with more autonomy could also result in longer annual operational periods and additional revenues. Finally, following standardized accounting practices can incentivize creativity and the offering of additional value-added services to guests and visitors. This will enable greater options for the GOB to achieve their defined goals. 27. A central shared-services system for reservations, billing, marketing, maintenance and procurement of basic goods could achieve significant efficiency gains. Introducing a system-wide property management function would have the following advantages: (i) it could capture economies of scale through a centralized maintenance team, (ii) encourage a career stream for property managers and attract more professional managers to operate the facilities, and (iii) take advantage of economies of scale in procurement (e.g., where several different ministries run facilities in proximity such as in a seaside town or mountain resort area). By pooling management and sharing services, lower prices for catering, supplies and outsourced services could be negotiated. This would also enable government to have better and timelier information on the size and utilization of the assets as well as set discerning rates for varied segments using revenue management approaches. 28. In the short-term, the Government may consider options for centralizing the management of government properties. Such options include: (i) Reassigning the operational management of poorly managed facilities to other public property management bodies; (ii) Creating a government property management agency; (iii) Registering facilities as commercial companies; (iv) Creating a state-owned property management enterprise or a wholly or partially state-owned property management company. The Government already has a successful example in this respect, the ADIS Ltd., that could be replicated. 29. In the medium-term, the Government’s goal should be stewarding a private sector based hospitality industry, and gradually exiting from operating hospitality facilities. International experience presented in Annex 1 indicates that government’s involvement in managing recreational facilities has gradually been phased out around the world. However, it is a common and viable practice to run government facilities under public/private arrangements such as outsourcing, concession or lease agreements which enable continued public-sector benefits while taking advantage of private sector know-how. 13 www.eufunds.bg 30. These recommended actions are outlined in this implementation roadmap. It is important to emphasize that the road to success will not be a linear process; a future transformation will rather involve additional evaluation and testing of policy options. Implementation Roadmap Measures Steps Current challenges Strategic Develop and implement property Identify strategic priorities mgmt. strategic vision Review and amend legislation There is a lack of a Ensure paradigm shift and regulating state-owned properties comprehensive Government cultural progression towards exit Consult with stakeholders policy or vision for the Allow profit retention Engage with the private sector management of the facilities Adopt shared services principles Communicate Conduct change mgmt. activities Financial Adopt revenue mgmt. Calculate the true costs of facilities Adopt uniform efficiency & Review pricing practices The facilities generate large facility mgmt. standards Formulate new prices (external vs. fiscal losses to the state Adopt uniform financial internal) budget management principles including Introduce service quality standards full cost accounting Ensure regular reporting Economic Introduce market prices for Conduct market research external guests Establish system to benchmark By charging less than market prices to the private sector rates, the facilities present a Define pricing approach (BAR, competition challenge for BAR by LOS, Open Pricing, privately run tourism Seasonal etc.)6 facilities Monitor and Evaluate Partner with tour operators Managerial Build staff capacity Evaluate staff capacity Introduce single real-time Develop and deliver training The facilities are run by civil reservation system modules servants without specialist Adopt revenue mgmt. Develop system specifications knowledge or skills in Procure the system property management and Ensure system maintenance tourism Ensure regular monitoring Monitor customer satisfaction Evaluate staff performance 6 BAR – Best Available Rate; BAR by LOS – Best Available Rate by Length of Stay 14 www.eufunds.bg Social Open facilities to all civil Initiate dialogue with all ministries servants Create a platform to share As recreational facilities are information operated by individual Mandate opening of all facilities to ministries, there is a lack of all civil servants. equal opportunities for all Introduce real-time centralized public employees to benefit reservation system with clear rules from the facilities for precedence (i.e. ministry staff first, then other civil servants and then the general public). Communicate the benefits Monitor satisfaction Transparency Introduce single real-time Review existing market solutions reservation system including outsourcing e.g. through Comparable operational booking.com of equivalent. Select information is not available and procure optimal system and as the facilities do not follow enforce through appropriate widely-accepted accounting legislation Collect & Analyze data practices and do not publish Publish annual reports annual reports Communicate survey results (customer satisfaction) Introduce a rating system 15 www.eufunds.bg 1 INTRODUCTION 1.1 Project overview and objective 1. This document is an output under the Shared Services Program conducted by the World Bank in partnership with the Government of Bulgaria.7 It is financed under the Operational Program Good Governance 2014-2020 with co-financing by the European Union and European Structural and Investment funds. The Reimbursable Advisory Services (RAS) Agreement between the Government of Bulgaria and the World Bank was signed in May 2017 and ratified by the National Assembly in July 2017. This engagement includes the following activities: I. Preparation, baseline analysis and framework design II. Pilot in centralized administrations for the provision of shared services III. Developing a framework for management of shared services IV. Developing a methodological framework for monitoring and evaluation V. Developing a methodological framework for change management VI. Government property management assessment 2. The Bulgarian Government is committed to improving the effectiveness and efficiency of its properties, and this report corresponds to the assessment deliverable for Activity 6. 3. The GOB has engaged the World Bank to provide recommendations for improving the property management model for recreational and training facilities, including presenting current management trends, such as the principle of shared services for public property management. The Government of Bulgaria owns and operates a significant number of properties with recreational, representative, training and social functions. For the most part, the facilities are not efficiently managed and the operation of the facilities is subsidized by the Government. Under Activity 6 of the current RAS, the WB team has been tasked with preparing a standalone review of over 100 representative and social function properties, owned by Bulgaria’s central administration and an in-depth review of at least 10 of these properties. The list of these facilities is presented in Annex 1. 1.2 Scope and limitations of the assessment 4. This report’s main objective is to identify challenges, opportunities and actions for socially and economically productive operations for the GOBs recreational, representational and training facilities. It includes information on the status, assessment and approaches for sustainable and efficient property operation beneficial to the people of Bulgaria. It provides recommended actions for achieving socially and economically productive operations. The report addresses issues related to Government’s role in operating these facilities, budget practices and facility utilization. It also includes examples of international practice providing guidance for decision making. 7 Under the Shared Services Program, the World Bank (WB) team is supporting the Government in introducing the principle of shared services in the organization and work of the central administration. 16 www.eufunds.bg 5. The recommendations presented in this report focus on improving the current management model and increasing the efficiency, sustainability and quality of services. The recommendations are based on analysis of primary and secondary research gathered on properties and leveraging international best practice trends in public property asset management. Recommended actions can inform the discussions of Council for Administrative Reform in defining a comprehensive vision for the efficient management of properties with representative and social functions. 6. Limitations of the assessment. This assessment does not review or present information on public properties owned and operated by other public bodies such as municipalities, universities, schools, public enterprises and hospitals. It does not provide a single model or business plan for improving the management of state-owned properties. The team has not conducted a due diligence assessment on any of the recreational facilities. Also, it is to be noted that further policy analysis would be necessary to guide the government in defining and assessing new property management policy options for Bulgaria, and implementing the reform. 7. The Bulgarian government continues to own at least 115 recreational and training facilities around the country8 and their ownership and operation is entrusted to separate line ministries and agencies. For the most part the facilities were established in socialist times with only a few established more recently in the early transition years through the initiative of individual ministries. 8. In most cases, government recreational facilities are not operated efficiently nor at their full potential. They are established to provide a service rather than generate a profit, yet their management models, incentive schemes, marketing and sales efforts remain far from a service-oriented model. Rates are set below market prices. Resources for operations and maintenance are limited. Most facilities operate well-below capacity, as there are no incentives for maximizing the economic value of the real estate assets. Since the financial crisis and the subsequent fiscal consolidation, capital budgets have also been reduced, leading many facilities to fall into a state of disrepair and making some inoperative. 9. The rapid development of the tourism sector over the past two decades produced an abundance of private sector accommodation in popular vacation destinations, which eroded the rationale for employer-provided recreational services. Yet, among public administration staff, there remains a strong sense of entitlement to government-owned recreational facilities.9 This creates a number of challenges for the Bulgarian Government including: â—? Strategic: There is no comprehensive Government policy or vision for the management of such facilities. 8 The total number is far greater as this figure does not include a large number of facilities owned and operated by the National Insurance Institute, recreational facilities of universities, research institutes, schools, public enterprises, hospitals and other facilities in the public sector. 9 Surveyed public administration staff – both those that use recreational facilities and those that do not – are supportive of government recreation facilities and view these as a social benefit linked to public service. 17 www.eufunds.bg â—? Financial: The facilities generate large financial losses to the state budget. If the full costs of building and maintaining the facilities were considered, the losses would be much more significant than the currently reported operating losses.10 â—? Economic: By charging less than market rates, the facilities distort the marketplace and present a challenge for privately run tourism facilities. They may also discourage private sector investors and property developers in the vicinity as many of the facilities occupy prime tourism locations. â—? Managerial: The facilities are run by rank and file civil servants without specialist knowledge or skills in property management, hospitality and the delivery of tourism services. There are no established financial models for investment, operation, pricing, promotion, etc. and no incentives to achieve a meaningful return on the use of the assets or to increase occupancy. â—? Social: As recreational facilities are operated by individual ministries, there is a lack of equal opportunities for all public employees to benefit from the facilities. The facilities may also create a perception of discrimination as ordinary citizens either do not have access at all or are sometimes granted access at a higher rate. â—? Transparency: Information is not available as the facilities are not run transparently; are not subject to standard accounting rules for the tourism sector; and do not publish annual operational reports. The lack of comparative accounting and ministry defined reporting, as well as Government and/or public scrutiny opens possibilities for abuse. 10. This report provides guidance on these challenges and aims to give current model a chance to improve, elevate impact, and enable sustainability. The path towards adopting a new policy reform would not be linear, it will rather require continuous testing, evaluation and reconsideration of the new policy. 1.3 Methodology 11. The World Bank team, in close collaboration with the Administration of the Council of Ministers, performed a diagnostic analysis of 115 government properties. The review is based on specifically gathered information including: (i) a structured on-line survey of facilities, (ii) interviews with public officials tasked with the management of government-owned properties, (iii) site visits to 13 facilities selected by the Administration of the Council of Ministers and (iv) focus groups and a demand-side survey of on the attitudes of public administration staff towards government-sponsored recreation. â—? An online survey of over 160 facilities11 was used to gather data on the number and capacity of government properties, through a structured questionnaire. The questionnaire captured information related to the function, bed capacity, 10 Government facilities do not follow the standard accounting rules for the tourism sector, but accounting procedures that provide a distorted picture of their financial performance. This type of standards would be more suitable for facilities run for hospitality or recreational purposes. 11 Out of which, 115 were selected for the diagnostic analysis. 18 www.eufunds.bg pricing, quality and occupancy of government properties. Further, questions also related to the practice of outsourcing specific functions or the overall management of properties. â—? The supply-side survey was initiated on June 5, 2017 and was open for responses for a period of three weeks. A web-based link was sent to respondents from all central government entities. The invitation was accompanied by an official letter from the Council of Ministers, detailing the scope and timeline of the survey. â—? The survey of the facilities was followed by analysis of staff demand for recreation services. This assessment included organizing three focus groups with 10 public administration staff each. Findings from these groups informed the content of an online staff demand survey. This was completed by 407 staff from 12 ministries during October-November 2017. â—? The experience of other EU Member States and other relevant countries was also examined to highlight international best practice. This review focused on ways to improve the financial performance of administrative functions by introducing standardized practices in property asset management. 1.4 Historical context 12. The Soviet-style vacation, and correspondingly the institution of the recreation facility (i.e., the “почивна Ñ?танциÑ?â€?), was introduced to Bulgaria after World War II together with the Marxist ideology.12 Similar to the Soviet model, access to any of these facilities required the procurement of a vacation voucher, or “карта за почивкаâ€?, allocated by the central authorities through state-owned enterprises or trade unions. The facilities were heavily subsidized by the state, and staff covered only a fraction of the actual value of the vacation voucher. This practice continues today. 13. In Bulgaria, the state began establishing recreation facilities in the early 1950s and over the next three decades the development of the network of recreation facilities (intended for Bulgarians) and hotels (intended for foreigners) fueled the emergence of Bulgaria’s vacation destinations. The seaside resorts of Sveti Konstantin and Elena, Golden Sands and Sunny Beach, and the mountain resorts of Borovets and Pamporovo are the most prominent of such destinations. By the 1980s, towards the end of the socialist period, the state subsidized the vacations of about 3 million Bulgarians on an annual basis.13 12 Recreational facilities are instruments for implementing Marxist labor policies - recreation and reproductive rest are necessary conditions for productive labor. Such facilities were established in the mid-1920s by the Soviet state, so that workers and peasants could recuperate from productive labor. Initially, recreational facilities provided primarily therapeutic benefits and visitors were supposed to spend their vacations alone; the use of the facilities for family-centered vacations emerged at a later stage -- solitary vacations served the productive interests of the Soviet state, while a vacation as a family experience is underpinned by a consumer service approach. For a detailed discussion see: Koenker, Diane P.: “The Right to Rest: Postwar Vacations in the Soviet Unionâ€?; University of Illinois at Urbana- Champaign (2008) 13 Department of Tourism, Sofia University 2013 19 www.eufunds.bg 14. The establishment of recreation facilities in Bulgaria coincided with the emergence of the national tourism industry. All the way through the early transition years, state recreation facilities were the predominant vacation alternative for most Bulgarians. During the early transition years many of the hotels and tourism assets owned by the state were privatized. Numerous recreational facilities were also privatized, most notably those belonging to former state-owned enterprises, but also some facilities owned by public bodies. The privatization of the property assets located in vacation destinations enabled the growth and rapid development of the private sector in the tourism industry. 15. The recreational facilities owned by the central administration survived the demise of socialism despite an abundance of private sector accommodation. Some new facilities were even established during the early transition years to provide subsidized vacations to public administration staff and their families and to serve as training facilities of the various public administration bodies. The core focus of government recreational facilities today is to provide subsidized vacations as a social benefit to public administration staff and their families. With very few exceptions, all government-owned recreational facilities are technically open to external guests; however, attracting and accommodating external guests is a low priority. 16. Subsidizing government facilities to deliver an inexpensive tourism product continues to be a government policy. In addition to serving as a means to deliver social benefits to public administration staff, some policy-makers view recreational facilities as a venue where civil servants and their families can vacation together, build social cohesion, improve morale and strengthen social bonds. While this can be a benefit of the current model, it is difficult to measure. However, GOB recreational, representational and training facilities have suffered over the past three decades from limited funding. Many government facilities are in poor condition, their management is fragmented, and budgets are insufficient to halt the deterioration of the assets or to cover the proper operation of the facilities. 1.5 Legal classification of state-owned properties 17. GOB recreational facilities operate in a complex legal context guided by public state property and private state property classifications. These legal classifications specify how properties can be used, funding streams and transfer guidelines. There are limitations on the use of state-owned properties depending on their legal classification. Bulgarian law divides state- owned properties into two major groups: (i) properties part of the “public domainâ€?, which implies that such properties cannot be disposed of and have limitations on their use and management arrangements; (ii) those classified as “public state propertyâ€?; and (ii) “private state propertyâ€? belonging to the “private domainâ€? which are regulated similarly to privately-owned property. 18. There is no uniform classification of Government recreational facilities with some classified as public state property and others as private state property. The classification criteria are defined in the State Property Act (SPA). Classified as “private state propertyâ€? are all properties owned by the state that are not specifically designated as “public state propertyâ€?, as well as all income generated in the utilization of public state property (Art. 2 (3) SPA). Classified as public state property are: 20 www.eufunds.bg 1. Property assets defined as exclusive state property in the Constitution such as natural resources, beaches, waters, forests and parks of national significance, natural and archaeological reserves; 2. Land sites, real estate and moveable property designated as public state property by law or with an administrative act of the Council of Ministers; 3. Properties assigned to administrative bodies for the performance of their official government functions; 4. Properties designated by the Council of Ministers as properties of national significance, properties required for meeting permanent societal needs of national significance through common usage; and 5. Land, designated for border access points and the buildings on it. 19. There is no uniform explanation as to why a particular recreational property has been designated as public or private state property. These designations appear to be entirely based on historical circumstances. In principle, properties no longer required by the government to fulfill official or social functions should no longer be designated as public state property. However, under Bulgarian law, the fact that a particular property is no longer used for the functions for which it was classified as public state property, does not automatically affect its classification. For such properties to be re-designated as private state property requires an act of the Council of Ministers (Art. 6 (1) SPA). In the absence of such an act, the property in question remains public state property. Currently, there is no practice to regularly examine the legal classification of public state properties to ascertain whether their classification as “public state propertyâ€? is still justified. The public body, which is responsible for issuing methodological guidance on the management of state property is the Minister of Regional Development and Public Works. 20. The legal classification of public property has very specific implications in terms of the level of legal protection, as well as the manner and purpose for which the property could be used. In terms of legally allowed actions, private state property offers the Government more flexibility Table 1: Differences between Public State Property and Private State Property Public state property Private state property May not be disposed of. (Art. 7 SPA) May be disposed of. Sales of private state property with a tax evaluation of more than BGN 10 000 shall be carried out pursuant to the procedure set out in the Act on Privatization and Post-Privatization Control (APPC) unless the property has been assigned to the Ministry of Defense, to political parties, to state-owned companies (Art. 1, APPC) May be the object of a concession for use contract May not be the object of a concession for use contract May not be acquired based on adverse possession. May be acquired based on adverse possession. (Art. 7 SPA) 21 www.eufunds.bg Limited real rights on such property (e.g. building n/a rights) can only be granted in exceptional circumstances and based on a decision by the Council of Ministers. (Art. 7 (5) SPA). Buildings that are public state property should be n/a insured for risks enumerated in an ordinance. (Art. 12 SPA) The management of such property can be assigned to The management of such property can be assigned to ministries, agencies or municipalities with an act of ministries, agencies or municipalities with an act of the the Council of Ministers. Ministries/agencies can re- district governor. Ministries/agencies can re-assign the assign the management of such properties to their management of such properties to their territorial units territorial units or other SLBUs under them. (Art. 15 or other SLBUs under them. (Art. 15 SPA) SPA) Public state property may not be used for purposes n/a other than the designated ones and cannot be assigned to third parties except in circumstances explicitly provided in the law (Art. 16 SPA). Public state properties may be leased through a tender Private state property may be leased through a tender procedure for a period of up to 10 years, provided procedure (Art. 19 (1) SPA) for a period of up to 10 that they are used in accordance with their purpose years. The tender shall be held in accordance with the and the lease does not impede the performance of the Rules for the Application of SPA. activities for which they were assigned to a particular state body (Art. 16 (2) SPA). The tender shall be held in accordance with the Rules for the Application of SPA. Individual properties or parts of properties - public Private state property may be leased without a tender to state property, may be leased for up to 10 years, foreign diplomatic or consular representatives, as well as without a tender, to international organizations where to international organizations by the minister, the district this is necessary for the performance of obligations governor or the Head of the administration to whom the under an international treaty by the Minister, Head of management of the property had been assigned (Art 19 administration or the district governor to whom the (6) SPA). property has been assigned for management following a procedure specified in the Rules for the Application of SPA. The rental price shall be determined in accordance with the Rules for the Application of SPA. n/a Private state property may be leased without a tender for health, education or humanitarian purposes to meet the relevant needs of the population. Private state property may also be leased without a tender to non-profit legal entities for public benefit. In these cases, the lease contract shall be entered into by the Minister, the district governor or the Head of the administration to whom the interested parties shall make a reasoned request (Art. 19 (3) (5) SPA. n/a Private state property may be leased to political parties or to trade unions under a procedure determined by the Council of Ministers (Art. 20 SPA) 22 www.eufunds.bg 1.6 Managing state-owned properties 21. Ministers and heads of agencies manage the state-owned properties assigned to them for only the specific purpose for which these were assigned (Art. 14 SPA). State-owned property is assigned to the public bodies free of charge and the assignment allows the particular administration to act as the owner of the property. First level budget holders may re-assign properties assigned to them to their secondary, tertiary, etc. budget holders. However, if the administration managing the property uses it in a manner that does not correspond to the assigned purpose or if the state property is no longer needed by the respective administration, the assignment could be revoked following a complex process.14 22. The individual administrations are responsible for the maintenance and upkeep of the assigned property. By law, all maintenance, repair and upgrade works are to be carried out by the administration to which the property has been assigned using dedicated funds under their respective budgets (Art. 25 SPA); however, if the property is leased, then the responsibility for the maintenance and upkeep transfers to the lessee. The lease contract may determine that the lessee is also responsible for corresponding construction works and capital repairs (Art. 26 SPA). 1.7 Rules applicable to representational and social properties 23. The Tourism Act defines the term “recreational facilityâ€?, but does not adequately capture the concept of properties with representational and social functions owned and managed by the state. The popular term recreational facility (почивна Ñ?танциÑ?) is often used for properties of representational and social nature, defined in the Tourism Act as “an independent accommodation facility with predominantly social functions and with an infrastructure that offers health, spa, sports and other services.â€? (§ 1, point 26 TA). 24. Even though state-owned property in Bulgaria is regulated in multiple pieces of general legislation, specific rules on operating government recreational facilities are minimal. The term “properties of representational and social functionsâ€? is routinely used to describe these properties. However, Bulgarian legislation does not define the term, nor does it provide for any special regulation on such properties. The only instances where the law mentions the existence of recreational properties owned and managed by the state is with respect to those dedicated to military personnel, which regulate the right of certain categories of persons to have subsidized vacations at such facilities. 25. Only a few administrations have specific laws regarding maintaining recreational facilities. For example, the Law on Defense and Armed Forces of the Republic of Bulgaria and the Law on Disabled or Harmed Military Personnel detail responsibility for recreational facilities. The Government may assign properties with representational and social functions to other administrations, but it has no legal obligation to do so. 14 The assignment of public state property is revoked with a decision of the Council of Ministers, acting upon a proposal of the Minister of Regional Development and Public Works, after reviewing the opinion of the minister/head of the administration, to which the property has been assigned, on the issue. The assignment of private state property is revoked with an order of the Regional Governor after reviewing the opinion of the minister/head of the administration, to which the property has been assigned. (Art. 17 SPA). 23 www.eufunds.bg â—? Under the Law on Defense and Armed Forces of the Republic of Bulgaria (Art. 202a), upon returning from an operation or a mission abroad, the soldier and the members of his/her family are entitled to a 7-day free holiday in the recreational facilities of the Ministry of Defense or a 7-day free recovery in the hospitals for long-term treatment and rehabilitation of the Military Medical Academy. The funds necessary to finance the free holiday or recovery are earmarked in the budget of the operation or the mission. â—? Under the Law on Disabled or Harmed Military Personnel (Art. 16) and the Rules for Implementation of the Law on Disabled or Harmed Military Personnel (Art. 3), military personnel that had been disabled or hurt is entitled to up to 15-day holiday, once a year, in the recreational facilities of the Ministry of Defense, Ministry of Interior, Ministry of Health and state-owned company “Prophylactics, Rehabilitation and Recreationâ€? EAD (PRO EAD). Under this mandate, eligible staff pay only 25% of the fees charged for accommodation and food service. The remaining cost is covered by the state budget and the corresponding funds are transferred to the first-level budget holder that operates the respective facility. 26. By law15 all properties in Bulgaria that provide hotel-type accommodation or restaurant services need to be categorized and registered with the National Tourist Registry. The certificate of categorization is valid for 5 years16 and is intended to assure their guests that hospitality establishments adhere to certain service quality, hygiene and customer safety requirements. The Consumer Protection Commission is authorized to control whether the facilities offering accommodation and food comply with the requirements of the Tourism Act. 27. Some of the Government recreational facilities are operating without current categorization certificates. Review by the project team,17 indicates that some of the recreational properties of the Bulgarian state have the required categorization, while the categorization certificate of other facilities has expired. Yet others appear not to be categorized at all. It is not clear how vigorously the Consumer Protection Commission exercises its control functions of governmental facilities that offer accommodation and food. 15 Legal requirements on categorization of hospitality establishments are defined under the Tourism Act and the Regulation on the Requirements to the Facilities Providing Accommodation and the Facilities Offering Food and Recreation and the Procedure for their Categorization, Refusal, Demotion, Suspension and Termination 16 While hotels are categorized by the Minister of Tourism based upon a proposal by the Expert Committee on Categorization and Certification of Tourist Facilities, recreational facilities (почивни Ñ?танции) are categorized by the Mayor of the municipality where these are located upon a proposal by the respective Municipal Committee on Categorization of Tourist Facilities. 17 Verification of the categorization of the recreational facilities within the online Registry of the Facilities Providing Accommodation and the Facilities Offering Food and Recreation, part of the National Tourist Registry 24 www.eufunds.bg 2 CURRENT STATUS 2.1 Representational and social properties supply and demand 28. Government properties were assessed with the aid of two surveys to gauge supply and demand-side issues: â—? Supply-side survey: sent to all central administrations, gathered detailed information on 160 properties owned and operated by the Government. A subset of 13 of these properties was reviewed in detail, including site visits and structured interviews with management teams. â—? Demand-side focus groups and survey: three focus group discussions composed of members of staff that have recently used recreational facilities of the state administration – assessed the attitudes of public administration staff towards recreational facilities. These focus groups informed the context of a separate survey, completed by 407 staff, providing insights to staff attitudes on pricing, quality of services and social cohesion through the recreational experience. 29. The supply-side survey collected complete responses from 137 administrations: 71 administrations responded that they owned/managed properties (54 percent). Most administrations operate only one facility, while only two administrations operate more than eight facilities. The distribution of facilities is presented in Figure 1 below. Figure 1: Number of facilities reported by respondents (%) 1 54 2 16 3 4 4 12 5 3 6 1 Number of Facilities 7 0 8 6 9 0 10 1 11 0 12 0 13 0 14 0 15 1 0 10 20 30 40 50 60 25 www.eufunds.bg 30. The analysis is structured by the system of a given ministry (Table 2). Five ministries reported having no facilities: Ministry of Economy, Ministry of Energy, Ministry of Tourism, Ministry of Transport, Information and Communication Technology, and the Ministry of the Bulgarian Presidency of the EU. Table 2: Number of facilities reported by administrative system Administrative System Number of facilities 1. Council of Ministers 17 2. Ministry of Foreign Affairs 1 3. Ministry of Interior 43 4. Ministry of Health 4 5. Ministry of Agriculture, Food and Forests 32 6. Ministry of Culture 2 7. Ministry of Education and Science 2 8. Ministry of Environment and Water 18 9. Ministry of Defense 52 10. Ministry of Justice 8 11. Ministry of Regional Development and Public Works 4 12. Ministry of the Labor and Social Policy 1 13. Ministry of Finance 20 14. Ministry of Youth and Sports 2 Note: Based on data reported by survey respondents 31. The largest property owners, by number of facilities, are the Ministry of Defense (MOD), Ministry of Interior (MOI) and Ministry of Agriculture, Food and Forests (MAFF). The MOD operates 52 properties, among which are military clubs, hotels and one representational property (i.e., Residence Lozenetz). A special Executive Agency, the Military Clubs and Military Recreation Activities (MCMRA) is tasked with the management of these properties. The MOI operates 43 facilities, including rehabilitation and training facilities for police and fire department personnel, as well as recreational facilities for ministry staff and their families. The MOI has 12 non-operational facilities. The MAFF has 32 recreational facilities; however, 10 of these facilities are non-operational. Most of the non-operational facilities were closed down due to their poor physical condition and the lack of funding for renovation. Others are not in operation because of problems with property titles and other legal issues while some of the facilities operated by MAFF served specific functions, such as veterinary clinics and agriculture cooperatives which were dissolved during the transition period (Figure 2). 26 www.eufunds.bg Figure 2: Number of facilities reported by administrative system FA C I L I T I E S B Y A D M I N I S T R AT I V E S Y S T E M ( 2 0 1 7 ) # of Operational Facilities # of Non-operational Facilities 60 50 40 30 20 10 0 t se e ce icy re ce s re irs ior er lth en er tic tu en tu at an ien ffa ol ea is t er m us W ul ul ef lP t Fin fH nA lop Sc in In fJ r ic fC fD nd cia fM o d yo of e of eig Ag yo o ta an ev ry So lo ry ry isr r ry of str is t lD en Fo n nd ist ist i is t in ti o nc i ry in na nm in in of eM ra in in ou M ist ca eM M gio M M ry iro bo du in eC he th e of st e Re La nv M th th fE ft th th ini of m fE e of of o e of o of M th of te em th m o ry ry em em ys m of em of of te ry is t st is t .S te st ys st is t em Sy em ry st in in ys 17 Sy Sy .S M is t in M Sy 4. st st .S M 13 9. 3. Sy in he 1. Sy e 12 M th e 2. ft 5. th of e o of th m m of m te te te ys ys m ys .S te .S 10 .S ys 14 11 .S 16 32. Of all ministries engaged in managing and operating recreational facilities, MOI has the highest bed capacity (3,976) and the highest headcount of staff engaged in operating their facilities (598). The MOD has the second highest capacity with 2,757 beds, 452 staffers and the highest number of conference and restaurant seats. The Ministry of Foreign Affairs (MFA) and the Ministry of Justice (MOJ) have the highest ratio in terms of number of beds per employee: for each MFA employee fully engaged in managing and operating a facility there are 70 beds, while for each MOJ employee there are 34 beds. The administrations with the lowest bed to employee ratio are the Council of Ministers (4 beds per employee) and the MOD (5 beds per employee). Private sector accommodation establishments use this ratio as an indication of service quality, rather than a measurement of the efficiency of operation. 33. The Ministry of Foreign Affairs has only one recreational facility, the ADIS Holiday Inn managed by ADIS Ltd, a state-owned property management company under the MFA. The Ministry of Justice, through its Agency of Execution of Penalties operates facilities which are not open to external visitors and serve employees from the prison system. The MOJ facilities are situated on state prison territory and are free of charge for employees. The maintenance cost of these facilities is low because the Agency of Execution of Penalties engages prisoners under voluntary renovation and construction work programs. MOJs operating staff is minimal because visitors are responsible for preparation of their own food and cleaning the properties. 27 www.eufunds.bg Table 3: Accommodation capacity by administrative system Bed capacity Conference facilities Restaurant facilities Staff count Admin. Av. # Total Av. # of Total # of Av. # of Total # of Av. # Total System of # of conference conference restaurant restaurant of # of beds Beds seats seats seats seats staff staff MOI 120 3974 20 644 46 1506 18 598 MOD 95 2757 151 4236 133 2267 16 452 COM 100 1406 65 913 83 1164 26 370 MAFF 60 714 0 0 16 194 5 60 MOF 33 589 30 533 12 210 4 79 MOJ 30 238 6 50 0 0 1 7 MOH 49 194 0 0 0 0 4 17 MRDPW 45 179 11 45 39 155 4 15 MLSP 160 160 100 100 100 100 17 17 MEW 16 147 12 110 0 0 2 14 MFA 140 140 140 140 100 100 2 2 MOC 6 12 0 0 0 0 3 5 MES 0 0 6 12 n.a n.a 1 1 34. Outsourcing all or part of property management is not a common practice among participating administrations. Only 5 percent of respondents (i.e., specifically from the Ministry of Agriculture, Food and Forests and the Ministry of Environment and Water) indicate that they have outsourced the full management of facilities to a different legal entity. The outsourcing of parts of facilities such as coffee shops, restaurants, sports facilities, etc. is on average more common among administrations, as indicated by 11 percent of respondents to the survey. Figure 3: Have you outsourced the overall Figure 4: Have you outsourced parts of any management/operation of any facilities to a facilities (e.g. coffee shops, tennis courts, etc.,) different legal entity? to a different legal entity? 28 www.eufunds.bg 35. Only a third of the surveyed administrations collect and analyze customer satisfaction data. The Executive Agency Military Clubs and Military Recreation Activities, under the MOD, is among the administrations that routinely collect feedback via visitor surveys. Most of the facilities MCMRA operates are categorized as hotels under the Law on Tourism and have a corresponding star rating ranging from one to three stars. The Ministry of Labor and Social Policy (MLSP) also regularly collects feedback from individuals undergoing training at their Center for Human Resources Development and Regional Initiatives in Kremikovtsi. Further, ADIS Holiday Inn, the MAF facility located in the Black Sea resort Golden Sands, collects customer satisfaction feedback as a regular practice. In addition, ADIS Holiday Inn is listed on most of the major internet booking sites and has high independent customer reviews. 36. All ministries, which collect feedback, value the information while nearly two thirds of those not collecting customer feedback noted such information would be useful . When asked whether collecting customer satisfaction feedback would be useful, 65% of administrations that do not collect such feedback responded “Yesâ€?. All of the administrations, which indicated that they collect customer feedback, also shared that they receive positive feedback. Figure 5: Recreation facilities collecting customer feedback % PROPERTIES COLLECTING CUSTOMER SATISFACTION SURVEYS BY ADMINISTATIVE SYSTEM 120 60 Yes, collecting feedback 100 100 100 would be useful 100 50 Number of properties 80 40 % 60 30 38 36 40 33 20 25 25 20 13 10 0 0 0 0 0 0 0 % Properties collecting customer satiscation surveys (Left Axis) # of Properties managed by Administrative System (Right Axis) 29 www.eufunds.bg 2.2 Survey of recreational services demand 37. In October-November 2017, the World Bank team analyzed the attitudes of public administration staff associated with recreational facilities. This included conducting focus groups of 30 public administration staff and surveying 407 staff from 12 ministries (all of whom had used state-run recreational facilities in the past year) to assess their attitudes towards recreational facilities, reasons for choosing this type of vacation, views on quality, price-quality ratio, the system for distributing vacation vouchers, and attitudes towards price increases. 38. The majority of surveyed public administration staff – almost 95% – are in favor of the recreational facilities operated by their ministries and view subsidized vacations as an integral part of the social package provided to civil servants. Figure 6: Do you support the social service vacation benefit at a recreational facility owned by your administration? 39. Government recreational facilities are popular among staff because of the low prices they charge and their excellent location. The chart below notes that the affordable prices charged by the state-owned recreational facilities and their location are the factors which influence staff choice most. Only 13.2% of respondents expressed “known environment/colleaguesâ€? as a reason for utilizing government recreational facilities. Figure 7: Reasons to spend family vacation at government recreational facilities 30 www.eufunds.bg 40. Overwhelmingly, 96% of respondents stated that they are satisfied with the recreational facilities despite the poor physical state of many properties. This confirms the views expressed during the focus group discussions that because of the low prices there can be no claims as to service quality and comfort (i.e., a critical issue for staff is the balance of price and quality). 41. The capacity of the recreational facilities is often insufficient to satisfy staff demand for the service. This is particularly visible in the case of the MOI and the MOD. To ensure a fair access to recreational services, most ministries have introduced complex mechanisms for the distribution of vacation vouchers. Reportedly these mechanisms are cumbersome and 94.3% of the respondents support the introduction of an electronic reservation system. Figure 8: Do you support the introduction of an electronic reservation system? 42. The demand-side survey clarified the attitudes of staff towards rate increases: Nearly three quarters of the respondents would accept a price increase if it is accompanied by improvements in the physical condition of the facilities and better service quality. Over a third of the respondents would accept rate increases of up to BGN 5 per day while a larger percentage of surveyed staff – over 40% – would support a price increase of up to BGN 10 per day and 25% of the surveyed staff would support increasing the price of accommodation at recreational facilities with BGN 15 per day or more. 31 www.eufunds.bg 3 KEY FINDINGS 3.1 Financials Lack of effective financial management principles and practices 43. Facilities are not focused on prudent financial management and are not incentivized to generate additional revenues. Currently the management of government-owned recreational facilities is focused on providing a social service and operating within an annual budget limit defined by the ministry that is entrusted with their operation. All revenues collected are directly transferred to the Ministry of Finance.18 44. The facilities are not required to follow full-cost accounting and report only their operating surplus or loss. This method of accounting ignores the largest costs of providing the service reflected in the depreciation of assets. Despite ignoring those costs, the facilities as a whole report operating loss. 45. Even those that report an operating surplus are, in fact, making major losses if the real costs of providing the service are considered. The facilities were generally built decades ago and the assets are treated as if they were fully depreciated. Sporadic renovations and emergency repairs are undertaken on an ad hoc basis and the costs are not fully reflected in day- to-day accounting. In effect, the facilities are allowing guests to stay as long as they cover some of the utility bills and service charges, while the ministry “pays the rentâ€?. Facilities that report an operating surplus are actually making significant losses but these losses are not currently recognized within the Bulgarian administration due to the current financial reporting practices. 46. Sustainable operation requires following standardized accounting and financial reporting which is not the current practice. Due to the unique characteristics of lodging operations such as seasonality, the daily perishability of lodging room inventories and the many consumable goods a lodging operation sells, systematic accounting and financial reporting is a priority. Such reporting is the basis for determining depreciation and reflecting an accurate financial profile necessary for sustaining operations. The Uniform System of Accounts for lodging and hospitality operations is the standardized tool for tracking lodging operations financial data such as departmental expenses, income before fixed charges, and general administration. Further, the Uniform System of Accounts enables accounting for the asset’s depreciation. Adoption of the Uniform System of Accounts is not only useful for internal tracking of revenues and expenses, but also enables comparisons with similar operations within and across portfolios through creating standardized profit and loss statements. 18 The spending limits of the facilities are aligned with the budget of the administrative structure to whom the facility is assigned. In this context, the facilities do not have separate accounts from that of the administration to whom there are assigned, neither does the administrative structure – they use the transitional account that feed directly in the budget. Correspondingly all income generated by the facilities are transferred to the state budget. Art. 15 and Art 154 (5) Public Finances Act 32 www.eufunds.bg Services for government clients are offered free of charge 47. Training and representational properties often provide services for free or at rates well below the cost of providing the service. In comparison, the average loss of properties with recreational functions is substantially lower.19 The facilities with the largest operating losses are managed by the Ministry of Interior and the Council of Ministers (Figure 9). The top loss generating facilities are the MOI Academy and the Boyana Residence. 48. Residence Euxinograde, under the Council of Ministers reports an annual loss of nearly BGN 700,000. Similarly, the MOI recreational facility Lazur in Nessebar reported a loss of nearly BGN 600,000 in 2016. While the losses of MOI properties with recreational functions, can be tracked directly to the very modest accommodation rates charged, the losses generated by government training and representational properties can be attributed to the major difference between the generated revenue and operating costs. Many services are not charged back to the users or parent ministries and the costs of providing these services are simply accounted for as operating costs. The practice of not charging back for such services was noted in all the facilities visited and is not good practice. 49. Charging back for services rendered between one part of government and another is a practice that can also distort demand. Without charging back, the training and representative functions are effectively being offered free of charge to potential users. This creates a potentially unlimited demand and no incentive for the users to provide training efficiently. It also means that it is impossible to accurately assess the government’s training budget and monitor it over time for spending and outcomes. 19 In the case of the Ministry of Interior that number drops from approximately BGN -800,000 per facility to approximately BGN -200,000 for 2016. 33 www.eufunds.bg Figure 9: Financial results by administrative system 50. Only three administrations report an operating surplus: The Ministry of Defense20, the Ministry of Foreign Affairs and the Ministry of Health (Figure 9). The Post Graduate Qualification Center under the Ministry of Health’s National Center of Public Health and Analysis has reported an operating surplus for the last three years, while the Central Military Club in Sofia, under the MOD, reported the largest operating surplus in 2016 of over half a million BGN. 51. About half of the properties managed by the executive agency Military Clubs and Military Recreational Activities, report an operating surplus. The seaside properties situated in the summer resort St. St. Konstantin & Elena and the town of Nessebar have the best results, while properties located in winter resorts, as well the Residence Lozenetz in Sofia, generate losses. Pricing: Accommodation rates are set extremely low 52. Accommodation rates charged are extremely low and do not account for the cost of operation. The lowest reported prices are charged by the Ministry of Regional Development and Public Works (MRDPW) at BGN 5 per person per night and the MOI with an average accommodation rate of BGN 7.50 per person per night. On the opposite end of the spectrum is Residence Euxinograde is the most expensive government property at BGN 150 per night for accommodation in a small apartment, for both staff and external visitors. The ADIS facility of the MFA charges the second highest rates in the administration: BGN 48 per night for staff versus BGN 62 for external visitors. 20 Excludes the 36 Military Clubs throughout the country due to unreported data; The Central Military Club in Sofia is part of the analysis 34 www.eufunds.bg 53. Rates have not been increased for several years despite requests to do so by some of the facility managers. It is a common practice among most administrations to set rates at break- even reflecting staff affordability rather than market rates. However, the primary factor for rates is the budgetary spending considerations of the primary budget holder rather than actual study and analysis of staff affordability.21 54. In many instances, the recreational facilities are located in popular tourist areas, where demand for accommodation - especially in the peak months - is high. The prices available to administration staff and their families is, in the majority of cases, much lower than the market prices for comparable facilities. 55. The amount of the funds set aside by the ministry that manages the facility determines both the accommodation rates and the annual operating period of facilities.22 All facilities operate within spending limits, commonly referred to as “budgetsâ€?, which lump together all the costs associated with the facility (i.e., operational and maintenance costs). Budgetary constraints thus define the level of temporary staff remuneration and the operational period of the facility. 56. Facilities are not provided with sufficient budget to stay open or pay staff through a longer season, regardless of opportunities to extend the operational period (e.g., such as operating April-June and September-October for summer resorts).23 Due to such constraints, visited facilities operate only 4-5 months during the summer season. In comparison, private sector hotels operate 6-7 months in the same areas. Not only are they then able to capture economies of scale, they are also more attractive to seasonal/temporary personnel. 57. Prices for external visitors are, on average, nearly 50% higher than prices for staff. The average price per night for a double room for staff in the peak season is BGN 21 and BGN 31 for external visitors. In terms of price differentials, the greatest differences between prices for staff and for external visitors are reported by the MOI at 121%; followed by the Ministry of Finance at 101% and the Ministry of Environment and Water at 80%. According to 61% of the facilities reporting, staff pay rates below the market rate for similar facilities. According to the survey, close to 50% of the facilities report that they charge external guests prices comparable to the market rates in the locality (Figure 10). However, even with a mark-up, rates for external visitors are often set too low. As rates for staff are often so low, the prices for external visitors, even when set at double the staff rates, are still lower than market rates and not sufficient to generate the operating surplus needed to make these recreational facilities self-sustainable. 21 In this context, the “budgetâ€? (i.e., spending limits) for operating a particular recreation facility is determined by the primary budget holder at its sole discretion, while the process does not necessarily account for actual expenses required to operate the facility or the facility’s capital investment needs. 22 For example, accommodation rates at MOI recreational facilities are derived by dividing the total budget by the number of available capacity (beds), where staff cash contributions cover the difference of the cost of providing the accommodation. Since the capacity of MOI recreational facilities is constant and is limited, in effect accommodation rates decrease as the budget increases and vice versa. In this manner for example, the accommodation rates for 2016 were higher, as the MOI had a larger budget for social and recreational activities. 23 For example, some of the visited facilities have very desirable locations and the facility capacity could be utilized in periods of lower staff demand by hosting public service retirees and children camps, events and trainings. Interviewed facility managers believe that increasing the season i.e., the period for operating the facility, will help address challenges with temporary staff attraction and retention, as well would contribute to revenue generation, provided that proper revenue generation incentive are provided. 35 www.eufunds.bg Figure 10: Pricing Note: Category “Otherâ€? includes facilities which fully subsidize the stay of their employees, carry out training and rehabilitation functions 58. The operation of recreational facilities is sponsored by staff contributions. The MOI, MOD and MOJ use staff allowances for social, housing and cultural activities (SBKO in Bulgarian) to partially or even fully subsidize the operation of their recreational facilities. Under this practice, staff eligible for SBKO allowances subsidize the vacations of staff that is not eligible to receive SBKO. 59. Prices for external visitors are higher than staff rates, but generally well-below market rates. In terms of price differentials, the greatest differences between prices for staff and for external visitors are reported by the MOI at 121%; followed by the Ministry of Finance at 101% and the Ministry of Environment and Water at 80%. Even with this mark-up, rates for external visitors are set too low. The large difference is a result of the rates charged by these administrations, which are way below the sample average of BGN 20 per overnight and well below the rates charged by comparable private establishments. Because the rates for staff are so low, the prices for external visitors, even when set at double the staff rates, are still not sufficient to generate the operating surplus needed to make these recreational facilities self-sustainable. 36 www.eufunds.bg Figure 11: Difference in pricing for staff and external visitors of recreational facilities 70 140 Price during peak season for a double room Price differencial Internal vs External (%) 60 120 50 100 40 80 30 60 20 40 10 20 0 0 se e ce ce t y r s er h ir s re en l ic r io er ur alt at en lt u an sti fa ist Po pm ult te He W Af ef in Ju Cu in In ri c i al fF elo fD d ign of fM of of an of Ag oc o o ev ry t ry re ry il o ry t ry dS nt t ry of nis .D Fo ist s t e s nis ini c n s ry ini g m un i in ini a eM of Re eM ist i on eM M or M Co eM ry in of vir th ab he of st th e eM th th ry ini eL of En th ft m of of st of M te of o th th m of m ini m m ys ste of m of m of te ry eM ste ste .S te te ys m st Sy m ry ys 17 s Sy ini Sy te .S ste th st Sy 4. .S s eM ini 13 9. 3. of Sy Sy 1. 12 eM m 2. 5. th te th of ys of m .S te m 14 ys te .S ys 11 .S 16 Price per night for staff of the given administration during peak season for a double room Price per night for outside guests during peak season for a double room Price differencial Internal vs External (%) Right Axis 60. The Ministry of Foreign Affairs and the Council of Ministers charge the highest prices for both staff and external visitors. These administrations show a divergent trend in the average occupancy rate. The MFA enjoys a significantly higher occupancy rate of 71%, while the Council of Ministers reports an occupancy rate of only 27%. The Ministry of Health and the Ministry of Agriculture, Food and Forests receive the highest number of external visitors: 50% of all visitors using the properties of the Ministry of Health are not part of the administration and 40% of all visitors staying at MAFF properties are external to the administration. 61. The administrations charging the lowest prices accommodate fewer external visitors. Reportedly, only 1.2% of all guests of MOI recreational facilities were external to the administration, while this percentage in the case of the MRDPW is 4%. In comparison, the Ministry of Finance receives a greater number of external visitors: 20%. 37 www.eufunds.bg Table 4: Occupancy and Pricing by Administration Type of visitors Price Ministry System Number Average Average Percent Percent Average Average of number occupancy internal external rate for rate for Facilities* of beds rate (%) visitors visitors internal external (%) (%) visitors visitors (BGN) (BGN) MLSP (Training 1 160 90 9 n.a 15 25 Facility) MFA 1 140 71 82 18 42 62 MRDPW 4 45 52 83 4 5 5 MOI 31 159 50 69 1 8 17 MOD 52 161 46 72 26 35 51 MEW 17 18 36 56 29 12 22 MAFF 23 52 35 57 40 17 23 MOC 1 6 32 n.a n.a 15 n.a MOH 2 61 31 50 50 22 36 MOF 18 33 27 75 20 10 20 COM 14 117 27 46 13 48 62 MOJ 8 30 10 100 0 20 n.a Note: As reported by survey respondents; Number of facilities reflects operational facilities only 3.2 Utilization The utilization of the facilities is varied 62. The occupancy of the facilities varies considerably with the most successful operating at near full capacity while others operate as low as 40% of capacity. All recreational facilities offer vacation packages geared towards families, regardless of the location or the prevalent tourist offering in the immediate area. Marketing and promoting to customer interests, is very limited. There is minimal consideration for tailoring packages and facility offerings to market segments (e.g., cultural/heritage tourism, active recreation, etc.), even if the location areas are particularly attractive to specific market segments. 63. Under the current rate schemes, administrations subsidize the visits of external guests. Rates charged to external guests do not cover operational costs. Also, rates charged to external guests are significantly lower than the rates charged by adjacent comparable private sector hospitality operations. 38 www.eufunds.bg 64. Often accounted as “external visitorsâ€? are persons eligible to stay at the facility who could not obtain a vacation voucher.24 Although all facilities are open to “external visitorsâ€? (i.e. persons that are not staff of the relevant administration), few of the visited facilities report hosting external visitors on a regular basis. “Externalâ€? guests are most often former staff of the administration managing the facility and members of their extended families who are not eligible to obtain a vacation voucher to stay at the facility.25 For the most part this is not intentional, but a consequence of the vacation voucher system for the facilities, which is inadequate to efficiently balance staff demand and the available capacity. 65. The voucher distribution system is designed with the objective of serving only staff entitled to the benefit. It is not intended or functional as a reservation system for external guests. The facilities are designed to accommodate eligible staff with vacation vouchers; accommodating external guests is an added task. As a general rule, external visitors reserve and pay for accommodation through the same administration unit which is in charge of distributing vacation vouchers (typically the finance or accounting departments). 66. Facilities that generate an operating surplus have higher average occupancy rates, receive a higher number of external visitors and charge higher prices for both staff and external visitors. These recreational facilities also tend to achieve a higher occupancy percentage with a lower staff to bed ratio. In comparison, facilities that generate losses typically host less external visitors, charge lower accommodation rates and have a higher ratio of staff to the number of beds. Loss-making facilities tend to also be smaller in terms of bed, conference room and restaurant capacities. 24 For example, the MOI facility Lazur hosts Slovak police staff under a holiday exchange program. Through this program, Bulgarian and Slovak police officers cross pay for each other’s holidays: the accommodation of Slovak police officers and their families visiting the Lazur facility is paid by the Bulgarian police officers on holidays at Slovak recreational facilities and vice versa. Slovak police officers who are guests of the facility outside of the exchange program, are accounted as “external visitors.â€? 25 Exception in this respect are the MAFF facilities, which have a dedicated number of rooms for external guests. Even then, most of the external guests are MAFF staff or their friends and families. 39 www.eufunds.bg Figure 12: Comparison of facilities that produce operating surpluses versus deficits 67. Besides annual number of operational days, bed capacity and location of the property are key factors influencing financial performance. Table 5 details the results of recreational facilities based on their bed capacity and location. There are five groups of facilities based on bed capacity ranging from 0-50 rooms to facilities with capacity over 250 rooms in locations such as (i) city, (ii) nature, (iii) seaside, (iv) seaside resort, and (v) winter resort. The table reveals that smaller facilities on average generate greater losses than larger facilities. Among the largest loss generating properties are facilities situated in seaside locales with an average number of rooms over 100, whereas facilities situated in seaside reports with an average bed capacity of 50 to 250 rooms are one of few facility categories to report financial surplus. 40 www.eufunds.bg Table 5: Operating surplus/deficit based on bed capacity and location Number of Average Average Average Average Beds Location Surplus in Surplus in Surplus in Number of 2014 2015 2016 Beds City (2,739) (4,490) (9,781) 19 Nature (27,986) (32,429) (38,589) 23 0-50 Seaside (6,767) (11,353) (10,469) 22 Seaside resort (9,700) (7,883) (8,216) 22 Winter resort (55,971) (52,848) (50,653) 21 City (247,136) (195,124) (185,319) 58 Nature 7,199 (139,897) (523,772) 96 51-100 Seaside (32,078) (53,810) (74,255) 73 Seaside resort 17,155 18,915 (556) 64 Winter resort (426,721) (528,654) (333,731) 86 Nature (598,851) (731,286) (474,519) 124 Seaside 4,280 (28,646) 20,699 111 101-170 Seaside resort 131,312 129,706 127,791 149 Winter resort (353,599) (249,099) (276,315) 135 Seaside (1,100,000) (931,770) (685,995) 218 171-250 Seaside resort 42,382 95,240 124,123 218 Seaside (457,087) (452,534) (495,910) 306 251-800 Seaside resort (232,034) (312,423) (224,180) 409 Winter resort (305,043) 78,196 (62,710) 294 Note: The distinction between locations, including seaside resorts and seaside locales, comes from the national classification of resorts as reported by the National Statistical Institute (NSI). 68. Given that many of the costs of operating a recreational/lodging facility are fixed, facilities that run higher occupancy rates will typically be more efficient and generate a lower percentage of costs compared to revenues. Occupancy of the facilities visited varied from 40% - 100%. Facilities operated by ministries with a large number of staff (e.g., MOI facilities) tend to have full occupancy during the high season. The additional revenue that comes from having greater numbers of visitors is directly transferred to state budget. In most cases facility managers view external visitors only as a cost burden and are concerned with exhausting the allocated budgets. 69. There is opportunity to increase the efficiency of the facilities as a whole by rebalancing the existing excess demand from certain ministries with the unused supply of other ministries. Not all staff have regular access to recreational facilities and, thus, eligible vacation periods (vacation shifts) are shortened to accommodate staff demand. For example, by limiting the stay of staff at their facilities to a week, it is possible for the MOI to ensure that each 41 www.eufunds.bg eligible staff member has access to a facility once every three years. Other ministries’ facilities, with largely similar characteristics and rates, have lower levels of demand. Balancing demand and supply across ministries is an opportunity for higher utilization of assets while delivering social benefit. Most properties are not well marketed 70. Marketing and advertising of Government recreational facilities is very limited and generally outdated. Many of the facilities are only advertised through official circulars or emails to staff and/ or a notification on bulletin boards or ministry newsletter. A large number of administrations feel discouraged from launching marketing and advertising campaigns because they do not want to exceed their allocated budgets. The debate about marketing and advertising of government-owned facilities is further complicated by the inability of administrations to retain any operating surplus. Facilities are required to transfer any revenue or operating surplus back to the state budget. Figure 13: Marketing and advertising of the facility 71. Marketed facilities report smaller losses. Properties which do not advertise through a website, pamphlet, brochure or other means, on average generate twice the loss of advertised facilities. Advertised facilities make an annual loss of approximately BGN 130,000 per property, while non-advertised properties record a loss, on average, of BGN 230,000 per property. Approximately only 2 of the surveyed facilities advertise their properties on a website. Properties that accommodate external visitors generate additional revenue 72. Properties that are open to external visitors (without requiring special permission) outperform the others (Figure 14). In 2016, the properties open to external visitors were on average close to operational breakeven. This is, in part, because external visitors often pay a premium of 15% - 100% above staff rates. 42 www.eufunds.bg Figure 14: Financial results by administrative system 73. The largest loss makers are facilities which allow external visitors only with special permission and those open only to public administration staff. These include facilities with representative functions, such as Residence Boyana, Residence Lozenetz and Residence Euxinograde, as well as training and rehabilitation centers managed by the Ministry of Interior, the MOI Academy and regional directorates. An exception to this rule are the facilities under the Ministry of Justice operated by its Agency for the Execution of Penalties. These accommodate only prison staff and their case is very specific; these are located on the territory of state prisons and do not report losses as they benefit from operational savings due to their association with the prison system.26 74. Given that rates do not cover all costs of providing services, external visitors are heavily subsidized. Subsidizing external visitors’ costs results in subsidizing the vacations of private citizens or, in many cases, foreign nationals. Instituting standardized accounting practices would enable improved tracking, greater awareness, and opportunities to address this. 75. Seaside resort facilities, including year-round properties and those operating only during the summer season, are the only group which almost broke-even in 2016. Hotel Flagman managed by MCMRA, the only hotel in the sample to operate year-round at the seaside, generated a surplus of BGN 250,000 in 2016. The resorts of St. Sveti Konstantin & Elena and 26 MOJ facilities, due to their location, have smaller operational costs. They are self-catering, renovations and upgrade works are implemented at very low cost by prisoners under a reduced penalty work program, and the facilities do not require security guards. 43 www.eufunds.bg Albena have the best performing properties, while the properties located in resorts south of Burgas are less efficient financially. Figure 15: Financial results by location and Figure 16: Financial results by location and type of facility (Recreational only) type of facility (Recreational only) 76. Recreational facilities operating year-round generate losses. Winter resort facilities generated on average BGN 150,000 loss per property in 2016. In the same period the average loss reported by facilities located near natural parks27 was approximately BGN 100,000 per property, while seaside locale facilities that operate year-round have reported on average a loss of BGN 200,000 per property. The analysis of the operating results of the reviewed government properties by location and operational model is based on the categorization of the National Statistical Institute (NSI) which differentiates between facilities in seaside resorts and seaside locales.28 3.3 Management/Operating Model The property management model impacts operating results 77. Most ministries manage their recreational facilities independently of each other as standalone properties. Often one ministry has several properties that are operated using different 27 This includes facilities located in protected areas or areas of rural, natural or historic character, as well as in areas with balneological and natural healing characteristics 28 The distinction between seaside resorts and seaside locales comes from the national classification of resorts as reported by the National Statistical Institute (NSI). 44 www.eufunds.bg management models. The different operating models appear to generate different operating results; the decentralized/fragmented operating model is associated with larger operating losses. 78. Facilities managed centrally by a government agency specially tasked with property management have better financial results. Centralized property management allows for economies of scale, pooling of resources, more efficient utilization of the government’s property assets, monitoring the performance of the individual properties and implementing measures to improve the results of the facilities. The MOD, for example, has entrusted the MCMRA with management of all properties assigned to the ministry and is tasked with the entire property management cycle (i.e., planning, budgeting, marketing, reservations, maintenance, upgrades, staffing, etc.). 79. Facilities can be operated as a commercial company under a larger property management structure. An example is the recreational facility ADIS Holiday Inn, part of the portfolio of properties managed by ADIS LTD., a property management company under the under the MFA. This management model allows the facility to retain generated revenues and incentivize the most efficient operation of the facility while delivering high-quality recreational services at affordable rates. 80. Centralized management of a portfolio of properties generates more revenue on average. The MCMRA under the MOD and ADIS under the MFA operate the facilities assigned to them as a portfolio of properties and have better financial results compared to other administrations that are managing multiple properties in a decentralized manner, such as the Council of Ministers and the Ministry of Interior. While all of the properties assigned to the COM and MOI generate operating loss, the properties under the MOD and MFA are revenue generating. In Figure 17 below, the operating results of the four administrations are presented, while Figure 18 depicts the relationship between the number of staff managing the property and the financial results of that property across different ministry systems. 45 www.eufunds.bg Figure 17: Results by ministry system and operating model Figure 18: Staff levels versus financial performance of select facilities The current funding model incentivizes property managers to not increase revenues 81. There is no incentive to generate revenue or operate facilities more cost efficiently because individual facilities and their related administrations cannot retain generated revenues; any financial surplus generated by the facility is transferred back to the Ministry of 46 www.eufunds.bg Finance at the end of the fiscal year. The operations and maintenance of most government recreational facilities are subsidized by the state budget and the main objective of the facility management is to stay within the spending limits (i.e. “budgetâ€? allocated to them).29 82. Administrations could retain revenues generated by facilities that are operated as commercial entities.30 Revenues generated from such properties, as well as the respective losses, stay within the commercial entity. Examples of such state-owned commercial companies are the Agency for Diplomatic Properties in the Country (ADIS Ltd.) under the MFA and the company Prophylactics, Rehabilitation and Recreation EAD under the National Social Security Institute. 83. Several administrations use staff allowances to partially finance the operation of recreational facilities under their management. Some public administration staff are eligible to receive an allowance for social, housing and cultural services (SBKO in Bulgarian).31 The size of the SBKO allowance is set in the corresponding Decree for the Execution of the State Budget of the Republic of Bulgaria: the SBKO allowance for 2017 32 was up to 3% of the salaries of staff appointed under a labor contract. Eligible activities include, in addition to recreational services, the provision of food, tourism, sport and transportation services, as well as cultural activities. The Labor Code specifically prohibits the use of SBKO funds for other purposes. For military and law enforcement agencies, the head of the administrative body decides how SBKO funds are to be spent. The manner of spending SBKO funds in all other administrations is defined by the General Assembly of the staff. 84. As a general rule, only staff hired under a labor contract are eligible for SBKO allowances, while civil servants do not receive this allowance. Exceptions are the explicitly specified categories of civil servants in the military and law enforcement.33 Correspondingly, using SBKO funds to sustain the operation of recreational facilities results in the staff under a labor contract subsidizing the vacation of civil servant staff. Staff employed by the MOD and MOI under a labor contract and operational staff hired under the special laws for these ministries subsidize through their SBKO allowances, the civil servants that are not entitled to such allowances. 29 All of the interviewed facility managers noted that the facilities could generate additional revenues provided that they could use them to finance rehabilitation and upgrade works or to improve service quality. 30 However, vesting the properties in a commercial entity is applicable only to private state property. It would not be possible for properties classified as public except by virtue of a law 31 SBKO allowances are regulated in Chapter 14 of the Labor Code. 32 Art. 40 of Decree for the Execution of the State Budget of the Republic of Bulgaria for 2017. 33 Public administration staff employed under the provisions of the Law on the Defense and Armed Forces, the Law on State Agency “National Securityâ€?, the Law on the Ministry of Interior, the Law on the “National Guard Serviceâ€? and the Law on the “National Intelligence Agency 47 www.eufunds.bg 4 ROADMAP – RECOMMENDED ACTIONS and FUTURE CONSIDERATIONS for the BULGARIAN GOVERNMENT 85. This section outlines proposed actions to help improve the current property management system and define a strategic vision. Although it does not include detailed legal, budgetary or organizational ramifications of such a strategic vision – since that would be beyond the scope of this engagement – this section provides several options that the Government should consider in the future. The path towards the formulation and implementation of such comprehensive vision is a process consisting of different phases – immediate, short and medium-term – which are further elaborated in this chapter. Each stage in the process builds upon the achievements resulting from preceding stages. 86. Recommended actions are designed to enable the GOB to: (i) strengthen property management processes and practices across the Government of Bulgaria; (ii) ensure that recreational facilities are run in a financially sustainable manner; and (iii) enable improved service quality provided by state-owned properties. The recommendations are grouped into the following phases, complementary and consistent to an overall strategic vision: â—? Identify strategic priorities and adopt shared services principles; â—? Define property management operating model; and â—? Focus on shaping tourism policy and gradually minimize Government’s involvement in hospitality management. 87. These actionable phases serve as basis for the implementation of the roadmap. It is important to note that the road to success will not be a linear process; the change will rather involve additional evaluation, testing and resources. The diagram below outlines the high-level task/activities within each recommendation phase for the immediate-term (0-1 year), short-term (1-3 years), and medium-term (3 -5 years). A more detailed action table responding to the key issues identified in the report is presented in Table 6. As per the analysis, the key findings are grouped into six categories as follows: strategic, financial, economic, managerial, social and transparency. 48 www.eufunds.bg Figure 19: Recommended actions towards a new property operating model 88. As an immediate next step, the Government needs to create a comprehensive Property Management strategy and policy framework. The strategy will serve as an overarching set of principles, standards and objectives guiding the reform effort. The strategy combined with a framework is a critical first step in the process of transforming Property Management practices in the Government of Bulgaria. Key policy considerations to be clearly addressed are outlined in section 4.1. 89. Further, the Government can better manage facilities by adopting shared services principles around the marketing, reservation, maintenance and payment functions. The Government can also set a minimum regular maintenance budget to ensure that the physical assets are protected. Increasing rates would help to stem losses without diminishing effective demand since most of the facilities are oversubscribed particularly in peak periods. Creating incentives to retain and benefit from revenues, and providing management with more autonomy, could result in longer annual operational periods and the offering of additional value-added services to facility guests and external visitors. 90. In the short-term, the Government may consider options for centralizing the management of government properties. Such options include: â—? Reassigning the operational management of poorly managed facilities to other public property management bodies; â—? Creating a government property management agency; â—? Registering facilities as commercial companies; and â—? Creating a state-owned property management enterprise. 91. Following the Finnish approach – as illustrated in Annex 1, the Government of Bulgaria could create a wholly or partially state-owned property management company. The GOB already has a successful example of this approach, the ADIS Ltd. Holiday Inn and could 49 www.eufunds.bg replicate that. The World Bank team visited facilities that had been split between a ministry and a private operator or that have been sold to private investors. These approaches could also be more widely adopted under carefully defined policies. 92. In the medium-term, the government can focus on formulating and implementing tourism policies without being directly involved in managing such facilities. Adopting a gradual approach, an option could be outsourcing the management of selected recreational facilities to the private sector. International experience shows that it is a common and viable practice for a private sector partner to run government facilities as a PPP (public/private partnership) under a concession, a lease agreement or performance-based management contract. In response to market demand the private sector can maintain assets, improve service quality and provide additional services drawing upon best practice. These models are presented in Annex 5. 93. Privatization can always be an option for facilities from which the government wishes to divest, and international practice shows that under economic constraints, many countries actually opt for this approach. The maintenance of recreational facilities, especially loss- generating facilities by the state, is an outdated concept and there is little rationale for continuing the practice. However, divesting is not recommended in the short-run due to the complexity of the social service benefit system and weak market conditions. Divesture of selected properties has potential to drop the size of facilities available to ministry staff as a benefit. However, this can be addressed through the government negotiating with the private sector for blocks of accommodation at discounted rates. 94. Each of these phases involves distinct, yet integrated actions as presented below in the high – level implementation roadmap. Table 6 illustrates an overview of main reform challenges formulated in the analysis while identifying appropriate measures to tackle these. It is important to be noted that some of the measures cover two or more focus areas due to a broader spectrum of impact. Table 6: High-level implementation roadmap Measures Steps Current challenges Strategic Develop and implement property Identify strategic priorities mgmt. strategic vision Review and amend legislation There is a lack of a Ensure paradigm shift and regulating state-owned properties comprehensive Government cultural progression towards exit Consult with stakeholders policy or vision for the Allow profit retention Engage with the private sector management of the facilities Adopt shared services principles Communicate Conduct change mgmt. activities Financial Adopt revenue mgmt. Calculate the true costs of facilities Adopt uniform efficiency & Review pricing practices The facilities generate large facility mgmt. standards Formulate new prices (external vs. fiscal losses to the state Adopt uniform financial internal) budget management principles including Introduce service quality standards full cost accounting Ensure regular reporting 50 www.eufunds.bg Economic Introduce market prices for Conduct market research external guests Establish system to benchmark By charging less than market prices to the private sector rates, the facilities present a Define pricing approach (BAR, competition challenge for BAR by LOS, Open Pricing, privately run tourism Seasonal etc.)34 facilities Monitor and Evaluate Partner with tour operators Managerial Build staff capacity Evaluate staff capacity Introduce single real-time Develop and deliver training The facilities are run by civil reservation system modules servants without specialist Adopt revenue mgmt. Develop system specifications knowledge or skills in Procure the system property management and Ensure system maintenance tourism Ensure regular monitoring Monitor customer satisfaction Evaluate staff performance Social Open facilities to all civil Initiate dialogue with all ministries servants Create a platform to share As recreational facilities are information operated by individual Mandate opening of all facilities to ministries, there is a lack of all civil servants. equal opportunities for all Introduce real-time centralized public employees to benefit reservation system with clear rules from the facilities for precedence (i.e. ministry staff first, then other civil servants and then the general public). Communicate the benefits Monitor satisfaction Transparency Introduce single real-time Review existing market solutions reservation system including outsourcing e.g. through Comparable operational booking.com of equivalent. Select information is not available and procure optimal system and as the facilities do not follow enforce through appropriate widely-accepted accounting legislation Collect & Analyze data practices and do not publish Publish annual reports annual reports Communicate survey results (customer satisfaction) Introduce a rating system 34 BAR – Best Available Rate; BAR by LOS – Best Available Rate by Length of Stay 51 www.eufunds.bg 4.1 Identify strategic priorities 95. Making actionable recommendations requires a clear understanding of the Government’s objectives by all stakeholders. Specifically, questions that require debate and reflection to proceed successfully include: 1. What are the true costs of providing recreational services? 2. Can the Government improve the facilities under the current ownership model? 3. Is the Government well-positioned to operate recreational facilities more efficiently? 4. How long does the Government plan to continue providing recreational services as a social benefit to public sector employees? 5. Does the Government want to incorporate the private sector in the provision of recreational services to public sector employees? 96. To address these questions, Figure 20 presents a decision tree for government facilities. A detailed review of the strategic choices is presented in Appendix 4. Figure 20: Recommended decision tree for government facilities Develop property management strategy and framework 97. The Government should craft a solid and inclusive property management strategic vision. The vision can be incorporated into a strategy based on best practices from national and international models informed by data. The collection and effective use of data are important drivers in optimizing Government’s property portfolio. At the central level, internal process for 52 www.eufunds.bg data collection should be formalized so that simple questions related to the actual value of the property, occupancy rate, and financial performance can be answered in an efficient, standardized manner. This will enhance coordination and collaboration among institutions, and allow verifications in real time. The strategy development process should include all decision-makers to result in a more comprehensive property management strategy and lead to better coordination between different institutions’ management facilities. As part of the property management strategy, performance targets should be defined for various tasks, especially for those that deal with external stakeholders. Consistent achievement of these targets will decrease the perceived risk of dealing with government entities. Review and amend legislation regulating state-owned properties 98. Developing a strategy and framework requires review of the relative legislation concerning Property Management which also collectively create and regulate opportunities for engagement with the private sector. Such legislation includes the Procurement Act, the Concessions Act and the State Property Act (that regulates leases). Current legal arrangements are a challenge for effective property management. The current public finance law is too rigid to ensure profitable management for state-owned property. Alongside the development of a strategy for property management, the Government should consider revising the legislation in question and ensure effective property management. Staffing and capacity building 99. The staff of the visited facilities lack professional hospitality industry experience. While some managers have hospitality-related experience, most lack formal training or a strong services, operations or property management background. Building human capacity through training and professional development at all levels is pressing as operational complexities expand and guests have higher expectations. Training and certification is fundamental to creating financially viable and agile operations capable of delivering consistently. A sample of education and certification schemes is presented in Annex 5. 100. Effective operation of the properties requires managers who have the appropriate level of specific knowledge on diverse operational issues. Facility managers should be able to read financial and operational reports in order to make strategic decisions; market to target segments; and develop human capital. Acquiring such skills is well beyond the current practice of “on-the-jobâ€? learning and perpetuation of out-of-date practices. Also, adequately trained staff is integral to efficient and productive operations. Developing appropriate training modules would address immediate and medium-term concerns. As the experience of Croatia indicates, an important starting point is clarity of the required standards (see Box 1 below). Box 1:Developing hospitality and tourism education standards in Croatia The Hospitality and Tourism sector was failing to keep pace with other industries in terms of education and training in the Republic of Croatia. Therefore, the Association of Employers in the Croatian Hospitality (UPUHH) in conjunction with the Croatian Culinary Federation (HKS), Croatian Sommelier Club (HSK), and the Faculty of Tourism and Hospitality Management decided to develop educational programs. All of them were also supported by the Ministry of Tourism of the Republic of Croatia. The following prerequisites were specified: 53 www.eufunds.bg • Define minimum tourist content that must be included in the regular curricula at all education levels; • Improve teaching and communicating methods modelled upon the best methods in the world; • Set criteria for the evaluation of public and private, education and scientific institutions important f or the development of tourism; • Create legal basis for the certification and licensing of knowledge based on uniform criteria for the profession; • Ensure conditions for conducting practical classes and practical work, and enable other opportunities for acquiring experience and linking theory and best practices; • Develop organizational forms and channels for providing consultancy services to personnel in tourism; • Propose system of tax policy measures, incentives and exemptions to improve the system and ensure different financing sources The Republic of Croatia recognized the importance of industry-specific workforce development and, therefore, invested in its education. This resulted not only in better service quality and satisfied guests but also in workforce satisfaction. Source: Perman L, & Mikinac K. (2014). Effectiveness of education processes in tourism and hospitality in the Republic of Croatia. Retrieved from https://bib.irb.hr/datoteka/855441.THI_May2014_616to630.pdf Paradigm shift and cultural progression 101. A clear government policy decision on which benefits and services they wish to continue, and for how long, is the foundation to implementation effectiveness. This is crucial in two key aspects. First, any significant changes will require extensive and consistent communication of the government’s commitment to an updated paradigm. Communicating the what, why and how of policies across and within Ministries is integral to successful change. Second, a paradigm shift regarding the funding, operation and maintenance of government assets requires cultural change at all levels of the government. Following the recommended sequence of the implementation roadmap (Figures 19 and 20) commences with identifying strategic priorities followed by adopting shared services principles; implementing an updated property operating model; and partnering with the private sector. Each of these requires commitment and communication of progressive changes. 4.2 Adopt shared services principle 102. A number of steps can be taken in the immediate term in order to improve the financial and operational performance of government recreational facilities. A large part of the inefficiency of the system arises from individual agencies or ministries operating facilities in an insulated, singular manner limiting economy of scale benefits. As each ministry operates its own facilities, benefits of a system-wide approach are not utilized. Introduce a single, real-time reservation system 103. Occupancy of the facilities varies dramatically, despite relative similarities in offerings and rates. Several facility managers suggested that their facilities remain under-utilized due, in part, to the untimely provision of occupancy information from the parent ministry. As 54 www.eufunds.bg utilization is handled by the parent ministry through the process of assigning and distributing vacation vouchers, facility managers do not timely information on projected occupancy and available capacity. Moving to a centralized electronic system for monitoring reservations and occupancy, as typically used in other lodging and facility portfolios, would provide reliable information on reservations and available room capacity to the parent ministry, public administration staff and to facility managers. This would also enable matching excess staff demand from certain ministries to facilities that are currently under-utilized. 104. The design, implementation and maintenance of such a system entails upfront costs to be budgeted for from operational or capital expenditures. The champion of the new system would be expected to work with the State Agency for E-Government (SEGA) in order to review existing practices and agree on a standard approach for the Government. Another option is to review possible external providers. There are examples within the sample of government recreational facilities that already take advantage of commercial reservation platforms.35 Advantages Considerations •Provides an end-to-end solution including taking •Some ministries ring-fence their facilities for care of payment, cancellations, promotions and their own employees (MOI and MOJ). This even price benchmarking to ensure that the would need to be accommodated through Government receives maximum revenues providing eligible staff with a booking code accommodating external guests. used to pre-book facilities before they were •Allows for major efficiency savings considering made open to staff from other ministries. the limitations of the current system of distributing vacation vouchers and collecting payments from facility guests. 105. The single reservation system should be developed to support the reform’s objectives and enhance the shared services concept. The expected outcomes and benefits from its implementation can be achieved through the following main functionalities: (i) access to facilities availability in real time for all civil servants, (ii) online payment, (iii) guests feedback, (iv) online booking for all facilities, (v) storage of customer data in the cloud, rather than on a single hard drive, (vi) manage seasons rental duration and prices, (vii) manage rental objects, (viii) paperless confirmation to guests, and (ix) notification to system administrators. 106. The reservation system should include a scale of priorities allowing the state administration and the political leadership to use the properties for various meetings, seminars, conferences, discussions, forums, and other events. The administration should avoid spending additional resources on renting hotel venues and conference centers. Having a single booking and reservations system for both the accommodation and the conference facilities in the properties can greatly contribute to this objective. 35 The “ADIS Holiday Innâ€? facility under the MFA is already mark eted on booking.com and enjoys very high customer ratings. 55 www.eufunds.bg Adopt revenue management 107. A review of pricing practices in tandem with the introduction of real-time inventory management can enable greater efficiencies and increase revenue per available room. Similar to seats on airplanes, recreational facilities and services are perishable—a room not occupied tonight represents lost, non-recoverable revenue. This provides an opportunity for revenue management. Revenue management techniques can enable offering facilities to targeted populations at preferential rates while simultaneously charging increased rates to external visitors. The Government may wish to consider introducing a market-oriented mechanism for setting accommodation rates. Small increases in rates will not affect demand since prices are currently so low. For example, many of the visited facilities on the seaside sell a room for less than the price of a sunbed and umbrella on the beach. The demand side survey revealed that staff would support price increases provided these are associated with improvements of the infrastructure and service quality. Rate increases could help to offset operating costs. As for external visitors, market prices comparable to the prices in similar properties of the same category should be introduced in order to avoid subsidizing the holidays of external visitors. Adopt uniform efficiency and facility management standards 108. Quality control of recreational services is fundamental to financially viable operations. Carefully defined service quality standards and regular monitoring of achieving these standards, contributes to evaluating actual performance and eases comparison of properties within a portfolio or market area. While most major hotel chains define their own standards, governments also assign hotel grade classifications. It is the combination of these which highlights facility offerings and delivery record. International best practice is inclusion of quality of service standards in the service level agreement between the owner and the operator for a property under a performance-based property management agreement. The standards should be applicable to any operator – public or private. Examples of such standards are room cleanliness paired with how this is to be measured and controlled. In contrast, customer satisfaction is measured by visitor ratings and feedback. Adoption of standards also enables efficiencies in training and the capacity of workers to be productive in multiple properties. Adopt uniform financial management principles including full cost accounting 109. The Uniform System of Accounts for Lodging and Hospitality operations is the standardized tool for tracking lodging operations’ financial data such as departmental expenses, income before fixed charges, and general administration. Further, the standardized uniform system of accounts enables accounting for asset depreciation. Adoption of the Uniform System of Accounts is not only useful for internal tracking revenues and expenses, but also enables comparisons with similar operations within a portfolio and across portfolios through unit-based 56 www.eufunds.bg profit and loss statements.36 This best informs maintenance, upgrading and expansion investment decisions as well as providing the basis for accurate valuation of facilities. 4.3 Define property management operating model Identify operating model that allows profit retention 110. Identifying and implementing an operating model that allows for profit retention would support higher utilization of assets, enable viability and foster integrated maintenance. In countries where property management is not centralized, as in Bulgaria, property management is fragmented with the control of various public properties assigned to separate administrative structures. With this approach, various classes of properties are managed by the responsible administrative body according to their own rules and practices, rather than based on an assessment of what type of management is appropriate in the market where each property is located. This fragmented approach minimizes identifying beneficial strategic opportunities and system-wide advantages. 111. Introducing a centralized, government-wide property management function would have many advantages. These include: (i) capturing economies of scale for instance through a centralized maintenance team; (ii) encouraging a career stream for property managers that would help attract professional managers to operate government facilities; (iii) taking advantage of economies of scale in procurement opportunities enabling the advantages of lower prices for catering, supplies and outsourced services among other expenses. 112. There are several options for centralizing the management of government properties. Given the strategic options and diversity of properties it is anticipated that GOB will need to adopt, to differing degrees, aspects of each of the following: a) Reassigning the operational management of poorly managed facilities to other public property management bodies; b) Creating a government property management agency; c) Registering facilities as commercial companies; and d) Creating a state-owned property management enterprise. Centralizing property management 113. Administrations with units fully dedicated to property management have the best financial track record. Centrally managed facilities are capable of competing with private sector establishments not only on price, but also on service quality. The property management model that is most aligned with a market-oriented approach is that of ADIS Ltd., under the Ministry of Foreign Affairs. An example of a fully centralized property management model is the Executive Agency Military Clubs and Military Recreational Activities under the Ministry of Defense, whose mandate is to take care of all facilities, hotels and military clubs and other real property assigned 36 For valuation of properties, investors and lenders typically require and use financial performance stated following the uniform system of accounts. 57 www.eufunds.bg to the Ministry of Defense. A similar model is applied by the Ministry of Interior, whose property management directorate is in charge of all recreational, representational and training properties assigned to the ministry. a) Reassigning the operational management of poorly managed facilities to other public property management bodies 114. The Government may wish to consider the property management capacities of the individual administrations and their willingness to transfer property management functions -- without relinquishing responsibility and decision-making -- to other administrations. Under the current legal framework, the only manner in which the property management function could be transferred from one administration to another is by transferring the property itself. However, if the provisions of Article 5a, paragraphs 6 and 7 of the Administration Act are amended in a manner that unequivocally allows for the introduction of the principle of shared services in state administration, such re-assignment of the property management function without re-assigning the property would be possible.37 Once the principle of shared services is introduced fully in Bulgarian legislation, the sharing of the property management function among administrations or the transfer of this function to a shared services center, would require careful assessment of the individual properties and the manner in which they are managed by particular administrations. Shared services in property management need not be introduced across the board; they may be implemented with regard to administrations that demonstrate lower capacity in the area of property management while retaining the current arrangements of administrations presently doing a good job. b) Creating a government property management agency 115. Centralized management of the facilities under one agency or a shared services center would allow for more transparency in the operation of recreational facilities; achieve economies of scale and support upgrading of human capital. Central management of state- owned real estate is the path taken by many EU Member States in the wake of the 2008 financial crisis, including Spain, Portugal, France, Germany, Czech Republic, and Greece. Centralization is a viable solution for addressing the noted shortcomings in Bulgaria including the high degree of fragmentation of responsibility, uncoordinated efforts, and each government facility pursuing its own individual objectives proximate to other government properties Advantages Considerations • Increases transparency of operations • Creates more bureaucracy • Allows for a more effective utilization of the real • May create opportunities for state capture and estate assets possible crowding out of the private sector in areas • Optimizing operational costs based on economies of where state facilities are in direct competition with scale. private sector establishments. c) Registering facilities as commercial companies 37 Corresponding legal amendments are recommended within the scope of the current program, in a separate deliverable. 58 www.eufunds.bg 116. Many of the individual properties require significant capital investments to be able to deliver recreational services to a basic standard. Most facilities have the potential to increase revenue generation and offer recreational services on par with private sector establishments in the same locality, but have no incentive to do so as all income generated in the course of operation is transferred to the state budget. As long as the facilities operate within the budgetary support framework, they cannot retain generated revenues; however, if the individual facilities are registered as state-owned commercial companies, they could invest generated profits in upgrading the facilities, improving services, offering performance-based financial incentives to the facility management and staff. 117. Recreational facilities could be registered as state-owned commercial companies and operate within the tourism market on par with private sector establishments. As a commercial company, recreational facilities could operate outside of the budget framework and could invest generated profits in upgrading the facilities, improving service quality by hiring professional management, training seasonal staff in hospitality service provision, and increase the facilities’ public visibility through marketing and customer targeting efforts. 118. This is the model currently applied by ADIS Ltd. and PRO EAD and may be suitable for existing facilities that require very little capital investment and have a location which gives the facility a distinct market advantage. Registering facilities as commercial companies is generally only applicable for facilities classified as private state property. Public state properties may be assigned to fully owned state companies or to state enterprises only by virtue of a law, through a lease contract of up to 10 years (assuming they are used in accordance with their pre- assigned function) or by a concession.38 119. Reclassifying public state properties as private state property would be a cumbersome process, and may be counterproductive since the classification of government properties as private state property status would open the properties to title disputes and restitution claims. Advantages Considerations • Helps the Government introduce market principles • May not be a universally applicable solution. The in operating recreational facilities. viability of this option may depend on the specific • Allows for financial independence. The facilities location of the property and correspondingly the would not rely on the budgetary funding cycle capability to generate profit. • The managers of the facilities would also have • Financial viability is driven by consumer demand at more operational flexibility that particular location. • The managers of the state-owned commercial companies would have greater incentives to improve financial performance 120. Converting facilities with representational functions into state-owned commercial companies is not a viable option. Representational properties have a more nuanced focus due to their specific role as protocol and official events venues. Even if they could generate meaningful revenue, it would likely be insufficient to cover operational costs. These facilities can, however, increase their revenue generating capabilities. While representational properties could not be 38 Article 16 of SPA. 59 www.eufunds.bg benchmarked against the private sector, they would could introduce services typically offered by luxury private sector establishments and use the generated revenues to offset some of the cost associated with the provision of representational and protocol functions. d) Creating a state-owned property management enterprise 121. An alternative path to centralized property management is establishing by law a state-owned company that manages all government properties. Such a property management model is applied in Finland and Holland. The Finnish government transformed its real estate agency into an unincorporated state-owned enterprise, Senate Properties, which manages land use issues, construction and repair works, as well as matters related to renting government premises. The state property enterprise operates as a commercial company, but compared to incorporated companies it has limited decision making over its activities.39 It is not supported by the budget, however, all important decisions made by the Finnish Parliament in the annual budgeting process and the company follows the financial and operating targets set by the Ministry of Finance. The state enterprise also leads the Finnish government’s property investments program and is responsible for the sale of state property that is no longer required. 122. Following the Finnish and Dutch models, the Government of Bulgaria may establish a state-owned property management enterprise, which could outsource property development, construction and maintenance services to external providers following standard performance- based service agreements. Advantages Considerations • Could serve as the vehicle for implementing • The establishment of a state real estate enterprise government policies, for providing social services would be cumbersome process. and operating state-owned real estate assets in the • It could involve legislative changes, the drafting of interest of the general public a dedicated law, as well as re-assigning properties • Opportunity to introduce efficiency gains through that are currently managed by individual ministries economies of scale to the newly established state enterprise. • It can be established by law as a legal entity that is • The process of re-assigning could be met with objections by the administrations that currently not a trader in the context of the Commercial Act.40 manage these properties. 4.4 Partnering with the private sector 123. Properties no longer needed by the Government to implement strategic objectives or social policies should be converted to “investmentâ€? or “income-producingâ€? properties or disposed of.41 The options for transforming the facilities no longer required by the Government into “income producing propertiesâ€? also fall in two groups: (i) increasing revenue generation by drastically improving public property management or partnering with the private sector in 39 Senate Properties operates under a special law - the Unincorporated State Enterprise Act of 2002; however, Senate Properties is also governed by various government decrees issued in the course of implementing the State Real Estate Strategy and the Government Premises Strategy of the Finish Government 40 In Bulgarian държавно предприÑ?тие under Art 62 (3) of the Commercial Act. 41 For detailed discussion see: Kask, Kaia: “Public sector real estate asset management models and their evaluationâ€?; University of Tartu Press, Estonia (2014) 60 www.eufunds.bg managing and (ii) operating government-owned assets under various lease and concession arrangements. The disposition path includes privatization of the recreational facilities or assigning the properties to serve a different social function, such as social housing, educational facilities or other role depending on the particular case. In many EU Member States such as Finland, the Czech Republic, Germany, France, and Holland,42 the public authorities tasked with managing government properties regularly assess their real estate portfolio and sell the properties that are no longer needed by their governments. 124. While the GOB has full discretion with respect to privatizing unwanted properties, it needs to consider that, at least in the short term, the sale of properties will face certain challenges. Many of the public properties are located within oversaturated real estate markets, which could impact the sales price. Government also needs to consider the pool of potential buyers, realizing that investors may acquire the assets for speculative purposes rather than to use the facilities to develop a competitive tourism offering. 125. A number of legal options for partnering with the private sector are available to the administrations that operate recreational facilities. The choice of an option depends on several of factors, including the legal classification of the particular property, whether the Government intends to continue to provide recreational services as a social benefit to public sector employees through these properties, on the facilities’ physical condition, on the availability of funding available to maintain and upgrade the property assets and increase the quality of the service offering, and most importantly on the interest of the private sector to operate the particular facility. Specific of legal options and considerations are discussed in Annex 3. Outsourcing models: concessions, lease, procurement 126. Concessions, as defined under the recently adopted Concession Act, are legal tools specifically designed to enable partnerships with the private sector. The Concessions Act, which entered into force on 1 January 2018, expands the choice options available to public bodies for incorporating the private sector in the management and operation of state-owned resources. The new framework introduces more flexible terms, specifically designed to encourage public- private partnerships and outsourcing the management and operation of state resources under concession arrangements, especially in vastly underutilized area of construction and building works. 127. Outsourcing property management under one of the concession mechanisms of the new act is particularly appropriate for improving service quality and attracting private investment in state-owned property, which may be leading concerns with respect to some of the government facilities experiencing chronic lack of public funding for repairs and upgrades. Concession considerations are presented in Annex 4. 128. Partnering with the private sector in outsourcing construction works or the provision of services is possible also under a procurement process. The choice of taking advantage of concession instruments or following standard public procurement procedure is depends on the 42 For Details see Annex 61 www.eufunds.bg desired level of flexibility with respect payments between the parties. The main differences between these two mechanisms are: Procurement Concession for works/services • Operational risk43 is borne by the state • Operational risk is borne by the concessionaire. • Public procurement for periodic or continuous • Concessions for building works or services could be services can only be awarded for a period of up to 5 awarded for up to 35 years. years (Art. 113, Public Procurement Act) • The process for awarding procurement is simpler. • The process for awarding concession is more complex and entails additional costs. 129. The use of a concession instrument is applicable only to public state property, where the private concessionaire is granted the right to use a public property against compensation under an obligation to implement an investment program, which would ensure the maintenance of the property’s operational fitness. The concessionaire bears all operational risks and may not destroy or materially alter the property granted under the concession arrangement. The concession for use can be entered into for a period of up to 25 years. 130. Such a concession is very similar to a lease agreement; however, there are some key differences. Therefore, the administration is advised to consider the differences between the two instruments on a case-by-case basis in order to make a choice as to the more suitable option for the particular property. The main differences between these two mechanisms are outlined below. Lease of public state property Use of a concession • Maximum period of 10 years • Maximum period of 25 years • Property needs to be used in accordance with the • No limitation on the purpose of use purpose it has been assigned for. • The main obligation of the lessee is to pay the rent. • The main obligation of the lessee is to maintain the property in good condition through implementing an investment program. • The process for awarding a lease is simpler. • The process for awarding a concession is more complex. 131. The new framework decentralizes the process of awarding concessions. Concessions may be granted by individual Ministers regardless of whether the state property in question has been assigned to the first level budget holders or to lower level budget holders within the same administrative system. Under the previous framework, concessions were awarded by the Council of Ministers. Apart from making the process more flexible, this decentralization empowers 43 According to the Concessions Act, the term “operational riskâ€? shall mean the risk of exposure to market fluctuations related to supply/demand of the concession object/services. The risks related to poor management, violation of contractual obligation by the private entity or force majeure shall not be considered operational risk. The operational risk is considered borne by the concessionaire when under normal operational conditions of the concession, there is no guarantee that the concessionaire’s investment would be recuperated. 62 www.eufunds.bg individual administrations to take advantage of the concession instrument to address some of the more pressing issues associated with managing the recreational facilities, as well to attract private funding for their renovation and upgrading. 4.5 Issues and considerations for the future 132. The decision-making process requires comprehensive understanding of all policy related aspects, such as effectiveness, efficiency, impact and sustainability. The Government of Bulgaria’s recreational, representational and training facilities assets are numerous and diverse. The hold great value to the people of Bulgaria. This report has provided a review of these facilities; an assessment of their challenges and recommended actions for improved operation and value enabling greater social and economic returns. The box below illustrates key aspects and further reflections, which cannot be covered through this engagement, and which the Bulgarian Government should consider and analyze in its policy decision-making process. Box 2: Issues and considerations for the Bulgarian Government – Looking towards a new property management reform ➢ Should the Government provide subsidies? Subsidies are not necessarily bad. Governments all over the world as well as international cooperation have found justifications for social protection and social-oriented subsidies. If the government and the beneficiaries of the --implicit and explicit-- subsidy policy for recreation, training and representation of government personnel are persuaded subsidies are a priority need, external evaluators should probably start by discussing subsidy relevance vis a vis other potential uses of public resources as well as other ways to secure those public services. The Government could develop a comparison of such subsidies with financing other priority needs currently under-financed or not financed at all. A subsidy can be evaluated in terms of social welfare, public policy or fiscal costs. Both the welfare economics approach and the public policy approach to measuring benefits and costs should incorporate expenditure externalities such as citizens´ trust in public institutions and opportunities for corruption. ➢ The path towards policy reform The policy cycle includes planning, approval, financing, implementation and evaluation. Beside the implementation, the Government should consider testing and evaluation of the new policy as well as a different reform path. In addition to change management and communication strategies, the Government should develop activities for testing and evaluation of policy prototypes, with limited resources and strict deadlines to assess the pros and cons of the new paradigm. The efficiency and the feasibility of the identified policy should be further elaborated along with identification of new risks, risk-mitigation, governance structures and shared services, distribution of services among the universe of eligible beneficiaries and transition costs. 63 www.eufunds.bg Annex 1: Country Case Studies - Finland, the Czech Republic, the Netherlands, Germany and France Introduction 1. This annex provides insights into government property management models identified in five different EU member states. The countries discussed in this analysis are Finland, the Czech Republic, the Netherlands, Germany and France. 2. Generally, public sector behavior toward real estate assets can be characterized as rather passive and reactive. However, the global financial crisis of 2008 urged many governments across Europe to look for new potential saving areas. Research shows that under economically difficult conditions, governments recognized the value of more strategic asset management. Very quickly property management became a hot policy topic for improving government efficiency. The year 2009 registered in Europe sales of government property amounting to EUR 800 million. According to a recent Deloitte study44, the United Kingdom introduced better control measures over lease renewals which allowed the government to save more than GBP 190 million. 3. Similar to the UK, the Greek government looked into selling some of its state-owned assets and considered establishing a real estate investment trust. A large number of government’s real estate holdings were transferred to the trust. Other countries, such as France in 2010, set a selling target of 6% of its total buildings stock over the next three years. Spain, Portugal or Ireland also tackled this issue and begun selling off parts of state assets. At a first glance, one could say that this trend is predominant representing significant cost savings, and a shift in mindset around state property management. But in reality, the savings only illustrate the scale of the challenge. For instance, the GBP 190 million the UK government saved represents in fact only a small portion of the GBP 25 billion state assets cost per year. Nevertheless, austerity measures and other reductions related to state property are important international lessons on rethinking real estate in difficult economic times. 4. Globally, governments are working to improve and rethink the way public sector assets are managed and distributed. The case studies illustrated in this section should provide an insight on how European countries redeveloped their respective state property management systems. Although each government faces its own challenges in improving state property management, a 2013 Deloitte research study identified five critical success factors which can be summarized as follows: i. Prioritize real estate management and empower asset managers accordingly; ii. Join up corporate services; iii. Collaborate more efficiently with the private sector; iv. Work together to improve property data collection and use; v. Build an integrated strategy across agencies. 44 Improving public sector property management, Deloitte 2013 64 www.eufunds.bg FINLAND | Senate Properties – Finnish state-owned enterprise 5. This case study discusses Senate Properties (SP) 45, a fully state-owned enterprise which manages real estate assets owned by the Finnish government. It provides information about the creation of SP, operating and governance model, challenges and lessons learned. Background 6. The Finnish government has solid Senate Properties’ vision statement experience in managing state property. It dates back to 1811 when the Office of the Intendant – a “Vision for the future: the state of government agency – was established with the goal Finland is at the leading edge in new to supervise the planning of government buildings. ways of working and new work During the years, this agency changed its name environments.â€? several times – for instance, in 1995 into State Real Property Agency – but its purpose remained constant, namely property management. The year 1999 was a turning point for State Real Property Agency because of its transformation, from being a government agency into being a state-owned enterprise. Following that transformation, in year 2001 the name of the State Real Property Agency was changed to Senate Properties. The name- change involved changes in the law46 and it served as medium for a new corporate image, reflecting both traditions and modern business philosophy. Legal framework 7. Senate Properties is an unincorporated state-owned enterprise. This means that Senate Properties is not a legal person separate from the State, and compared to incorporated companies, the structure has limited jurisdiction over its activities. The main piece of law governing this type of organizations in Finland is The Unincorporated State Enterprise Act of 2002.47 The operations of Senate Properties are also governed by various decrees, the State Real Estate Strategy48, the Government Premises Strategy49, and State Real Estate Strategy (2010). 45 https://www.senaatti.fi/en/about-us/ (accessed on October 30, 2017) 46 State Real Property Agency was a state enterprise under Finish public law, and such entities could not change their name via registration as in the private sector 47 http://www.finlex.fi/en/ (accessed on October 31, 2017 48 http://vm.fi/documents/10623/1169930/Vn+periaatep%C3%A4%C3%A4t%C3%B6s+toimitilastrategiaksi+EN.pd f/a2ca1d38-e391-4565-8360-6fcff96fb596 49 http://vm.fi/documents/10623/1107144/Toimitilastrategia+2020+EN.pdf/73a36a76-a47a-4f9e-b238-378adf47987e 65 www.eufunds.bg Operating model 8. Senate Properties operates like a private business. The enterprise provides a large package of services mainly for the central government covering the following sectors: (i) the management of state property, (ii) the rental of premises, and (iii) government partner in work environment and premises matters. By being a work environment partner, Senate Properties supports the Finnish government in several areas, such as the improvement of digital skills, of methods and performance, and change management support and training. It also acts as main repository for all data about property50 and information about the State’s use of facilities, including the costs, are made publicly available twice a year in the facilities management system. 9. The value of the real estate assets owned by the Finnish government is approximatively EUR 4.4 billion. This represents more than 10.000 buildings which is around 6.2 million square meters of premises. One fourth of the total floor area are offices, the rest consists in other premises such as courtrooms, museums, police department, laboratories and storage facilities. 10. State Properties covers three separate portfolios and employs 270 staff to manage the business. These three business areas are responsible for generating income and they are: (i) ministries, universities, and special properties, (ii) defense and security, (iii) and offices. The portfolios have centralized responsibility for client relationships as well as issues related to their specific facilities, such as building project, acquisition of properties, strategic planning and matters relating to land use. The Finnish Defense Forces occupies the largest section of government premises and has therefore a dedicated business area. According to the Finnish Ministry of Finance, about 500 of the total number of State’s premises have a protected status and fall under the first portfolio category for special properties.51 These are properties classed as prestigious, protected buildings and facilities that have been specially designed for research institutes. 11. Most of property’s design, development and maintenance services are purchased from external service providers. In order to ensure high-quality service delivery, Senate Properties has developed a program of 40 service agreements through which enterprise experts consult with departments and agencies to review accommodation requirements for cluster of public sector businesses such as court services, police, and transport hubs. The company also pays a central role in in electricity trading between departments. 12. Senate Properties also leads the Finnish government’s investments and asset disposal program. As a trading company, SP is encouraged to make a profit through rents and returns on investment. The state-owned enterprise is also responsible for the sale and development of facilities no longer used by the government. In 2016, Senate Properties registered a turnover of EUR 599 million, which based on Ministry of Finance analysis, this represents a decrease of 4% compared to year 2015. For 2016, the results show that the enterprise invested EUR 258 million in assets, and completed sales for EUR 201 million. The overall results for 2016 show that State Properties generated annual savings of over EUR 25 million on premises costs. 50 The website of the Finnish Ministry of Finance http://vm.fi/en/governance-policy/corporate-services-for- government/state-properties 51 http://vm.fi/documents/10623/1169930/Valtion+palveluntarjoajat+_kuva_EN.pdf/99fdff05-8edd-4d18-9d04- 862aaa6ed6bc 66 www.eufunds.bg 13. The rents for public institutions tenants of Senate Properties are determined on a cost price basis. In 2016, Finland adopted a new central government leasing mechanism for rental calculations. Compared to previous systems, the new mechanism offers increased flexibility of lease agreements. This makes it easier for government agencies and public bodies to withdraw from state-owned facilities that are not needed. Senate Properties is the only premises procurement unit within the central government which manages facilities leasing within state-owned premises or premises of an external lessor. This arrangement offers effective and tailored solutions for the use of the premises, including the possibility of selling space not needed by the government. The property sold consists mainly of assets no longer needed. 14. Senate Properties is primarily governed by Government Premises Strategy (2014). The strategy stipulates that state’s workplace surfaces should be improved so that they support productive activity and reduce costs of premises. Particular attention is paid towards ensuring the overall interests of central government and including social responsibility considerations. The acquisition of premises follows the Government Premises Strategy and the Government Decree on the Acquisition, Leasing, Possession and Management of State Real Estate Assets. 15. Senate Properties’ operations are self-financed. As an unincorporated state enterprise, SP is not part of the government’s on-budget entities. Important decisions relating to unincorporated state enterprises’ development are made annually by the Finnish Parliament in connection with the budget. 16. The state enterprise follows financial and operating targets set by the Ministry of Finance. In addition to Parliament’s decisions, each year the Ministry of Finance defines detailed targets for Senate Properties’ operations. SP’s working program includes several environment development projects which are incorporated into the Government Premises Strategy. The goal is to achieve an annual saving of EUR 100 million in eight years. 17. Senate Properties is spread out throughout Finland. The enterprise has offices in 11 locations in different parts of Finland. The headquarters are in Helsinki. At a strategic level, the business areas are responsible for their client relationships. At operational level, the Operating Unit covers four property regions and is responsible for client relationships and the network of suppliers. The property regions cover customer service, letting of properties, constructions management and matters related to construction maintenance. 18. The Ministry of Finance nominates the Senate Properties’ Board of Directors. The CEO is supported by the Executive Committee in the decision-making process. The Committee also addresses issues decided upon by the Board involving business or other matters introduced by involved parties. The CEO is the chairman of the Executive Committee. 67 www.eufunds.bg CZECH REPUBLIC | Two central structures under Ministry of Finance supervision 19. This case study discusses the operating model for managing state-owned property in the Czech Republic. It provides information about two central structures in charge of property management which function under the Ministry of Finance. The organization is illustrated in the figure below. Figure 1: Public core bodies in charge of property management in the Czech Republic Ministry of Finance Office for Government State Property Representation in Management Department Property Affairs Background 20. The central government hires around 69.000 staff and occupies almost 1.9 million meters of office space. This represents around 5.000 buildings across the whole country. Out of these, the central government owns 3.500 assets with total costs for their operation of EUR 88.4 million, and total value estimated at EUR 2.00 billion. Operating model 21. The government property management in the Czech Republic is based on two structures supervised by the Ministry of Finance. These two structures are the State Property Management Department (SPMD) and the Office for Government Representation in Property Affairs (OGRPA). The links and ways in which these two organizations cooperate are further illustrated in this annex. 68 www.eufunds.bg 22. Through its strategic approach to state property management, the Czech government plans to tackle the law efficiency rate of government property. Compared to other Central and Western European governments where space per employee runs at about 12 to 14 meters, at around 27 meters per employee (up to 43 in some units), the efficiency rate of the Czech government property is significantly low. 23. The State Property Management Department is a central administrative authority in the area of state property management. This department operates under the Ministry of Finance and fulfils the role of supervising and coordination all legal matters related to state’s assets. The SPMD is structured into four units: (i) Property Unit, (ii) Methodological Supervision of State Property Management Unit, (iii) Transfer of State Property to Third Parties and Privatization Approval Process Unit, and (iv) Approval of State Property Disposal Unit.52 Within the scope of its competences the department drafts laws, implementing legislation, and state’s financial policy in state property management. It also provides coordination and guidance for the uniform exercise of the state’s ownership rights. 24. In relation to the OGRPA, the SPMD ensures a coordination and supervision role. In addition to this, the SPMD acts as an information center for Ministry’s needs and exercise professional supervision over OGRPA activities. This type of assistance offered to the OGRPA includes methodological support and monitoring of several tasks which are relevant for the Ministry. Further, the department prepares and approves transfers of state assets to other entities, and deals with issues relating to EU rules governing the provision of public aid in transfers of state assets to other entities. 25. The Office for Government Representation in Property Affairs came as a response to the need to modernize the property portfolio. The OGRPA is a governmental structure established on 1 July 2002 which is supervised by the Ministry of Finance. The main objective of the Office is to improve legal services of the state and to ensure efficient management of state- owned property.53 The OGRPA is often commissioned by the police authorities, prosecutors or judges to administrate the property in penal proceedings. The figure below represents the OGRPA’s main domains of activity: 52 The website of the Czech Ministry of Finance 53 The website of the Office for Government Representation in Property Affairs http://www.uzsvm.cz/en/mainpage- 391-0-87/ 69 www.eufunds.bg Figure 2: Main activities covered by the OGRPA Source: OGRPA, Basic Profile 2011 26. The office’s activities are spread out throughout the country structured in eight regional and 45 district offices. The headquarters office is in Prague. The OGRPA employs approximately 1800 staff across the whole territory. Figure 3: OGRPA offices around the country Source: OGRPA, Basic Profile 2011 70 www.eufunds.bg 27. The structure of the OGRPA follows that of the judicial system in the country. The arrangements are such that solicitors dealing with legal proceedings and advisory lawyers are seated in Prague. Therefore, the regional departments’ staff are in charge of legal services and property management and administration. 28. The Ministry of Finance plays a key role in the decision-making process. The General Director of the Office is appointed by the Minister of Finance. The OGRPA’s budget represents a section of the budgetary chapter of the Ministry of Finance. 29. The OGRPA’s work program is based on the following legislation: • Act No. 219/2000 Coll., Act on the Property of the Czech Republic and its representation in legal relations. • Act No. 201/2002 Coll., Act on the Office of the Government Representation in Property Affairs. • Act No. 320/2002 Coll., Act on the Modification and the Termination of Some Acts Related to the Termination of District Authorities (public administration reform). • Act No. 279/2003 Coll., Act on execution of securing of the property and things during the criminal proceedings. 30. In 2016 the Office achieved substantial financial results. In terms of income, the OGRPA submitted to the state budget approximately EUR 40 million. The revenue was mainly from the sale and lease of property. Moreover, in 2016, the Office registered the lowest expenditure since its foundation, namely about EUR 52 million. The Office manages over 365,000 properties for a total value of ca. EUR 690 million. Its property portfolio includes real estate and other assets, while the real estate represents half of the total assets with a value of approximately EUR 434 million. In 2016, the OGRPA sold 3,479 properties and over 17,000 were transferred free of charge. 31. The OGRPA uses effective asset management software to improve data collection and use. High-quality data has the potential to enable centralized dashboards and wider use of predictive analytics in property management. The Office’s asset management system is connected to other parts of the internal IT system and to other external data sources. For instance, the OGRPA’s system is connected to the Central Registry of Administrative Buildings (CRAB), and its information is used for the analysis of potential savings. The figure below represents the architecture for the asset management system. 71 www.eufunds.bg Figure 3: Structure of the OGRPA's asset management system Source: Source: OGRPA, Basic Profile 2011 NETHERLANDS | Central Government Real Estate Agency 32. This case study discusses the Central Government Real Estate Agency – a government agency which manages and maintains a large portion of the Dutch state property. It provides an overview of the real estate operating model in the Netherlands. Background 33. On July 1, 2014, the Dutch government decided to merge four government institutions to form a single organization called the Central Government Real Estate Agency (CGRE). The four structures which merges were the Defence Infrastructure Agency, the State Property and Development Agency, the Government Real Estate Directory, and the Government Buildings Agency. The new formed organization benefits therefore from extensive accumulated experience in real estate. 72 www.eufunds.bg Operating model 34. The Central Government Real Estate Agency is part of the Dutch Ministry of the Interior and Kingdom Relations. The Agency is responsible for the management of various types of public real estate from buildings to military training areas. Its portfolio includes prisons, court buildings, airports, ministerial offices, listed buildings and historical monuments, museum and palaces. 54 35. The Central Government Real Estate Agency operates based on an income and expenditure system. In 2016, the Agency become is an official agency. Its legal status enables the structure to have an operating model based on an income and expenditure mechanism. As such, the Central Government Real Estate Agency falls within the scope of Chapter XVIII on Housing and Central Government of the Dutch government budget. The Central Government Real Estate Agency is registered in the Trade Register of the Chamber of Commerce. 55 36. Agency’s priorities are captured in the Central Government Property Portfolio Strategy. The Strategy is implemented in the context of central government downsize. This impacts the Agency’s property portfolio and reduces the number of assets to be managed. The current context challenges the structure in determining what measures of property development should be used. The Central Government Property Portfolio Strategy describes the property development process, offers a response to current real estate issue in the government and defines the next strategic steps. 37. The Agency’s objective is to meet the property needs of central government. Aligned with government’s objectives, the Agency develops strategies and policies which enables coordinate and direction of the overall activity in the state property field. The aim of the work is to ensure effective real estate management through improved sustainability, reduced costs, while providing productive spaces. 38. The Central Government Real Estate Agency has a significant impact on the real estate and construction market. The Agency represents the commercial market’s biggest client, and acts as the link between central government and the commercial market. Aware of its important role and responsibility, the Agency is mitigating the impact by joining other commissioning bodies in central government in participating actively in professional and trade networks in the construction industry. 39. The Agency has a large and diverse business portfolio. Agency’s staff supervise the management and maintenance, purchase and sale, construction, remodelling and renovation, and development and redevelopment of properties in their portfolio. In 2016, the Agency employed 1885 full-time equivalent staff, managed 12.4 million square meters of gross floor space buildings, and handled over 94.000 hectares of land. 40. The Central Government Real Estate Agency wants to contribute to a sustainable society. The Agency considers only the most effective solutions for actual implementation. The 54 The website of the Central Government Real Estate Agency https://english.rijksvastgoedbedrijf.nl/ 55 The website of the Central Government Real Estate Agency https://english.rijksvastgoedbedrijf.nl/about- us/organisation 73 www.eufunds.bg decision-making process is guided by the state’s objectives. However, it also considers the surroundings together with the interest of the society as very important factors. 41. The Agency enjoys flexibility in its decision-making about buildings and land. For instance, when it comes to alienation of property, the Agency follows the State Portfolio Strategy and checks whether properties fit to its purpose or not. In cases where assets’ use diverges from the strategic purposes, the CGREA can redesign and/or transform the property so that it will attract more buyers. If the property cannot be alienated, then for a period of time, the Agency will manage it as part of its portfolio. The Agency is alone responsible in implementing decisions and existing procedures seem to be clearer to apply and follow than in other governments. 42. Similar to other countries, the Dutch government increased investments in modern platforms for optimal real estate management. In 2011, the government was challenged by the National Audit Office to provide a better oversight of its property (land, buildings and infrastructure). That event determined the state to establish a Building Information Modelling system (BIM) to access in real time concrete and reliable data about the premises under its management. BIM is a digital 3D model integrating all data related to the design, build and management processes. Some of the key benefits for this type of system are: (i) increased utilization of sites, (ii) improved planning to save costs, (iii) and better and complete overview of real estate for the decision-making actors. GERMANY | Institute for Federal Real Estate (BImA )56 43. This annex presents the Institute for Federal Real Estate, which is a government Agency in Germany managing state-owned property. It discusses important information related to the Agency’s operating model. Background 44. The Institute for Federal Real Estate was established via law in 2005 and is preceding another Agency, the Federal Property Administration. The tasks and staff were transferred from the Federal Property Administration to BImA. Over the last years the property of Federal Republic´s Real Estate has been transferred progressively into the ownership of BImA. Legal status 45. The Institute is a legal entity of the type i.e. Public-Law Institute which is subordinated to the Ministry of Finance. 56 In German Bundesanstalt für Immobilienaufgaben, abbreviated BImA 74 www.eufunds.bg Operating model 46. The Institute for Federal Real Estate is a government agency which provides real estate services to federal government entities. The objective of BImA’s establishment was to develop a standardized inter-ministry system of real estate management for public property which will enhance its efficient use. BImA employs approximately 5,800 staff and is spread out across the country in 120 locations. The BImA manages approximately 54 million square meters floor space which represents ca. 38.000 state-owned assets. 47. BImA operates under the legal and control of the Federal Ministry of Finance. The top management is represented by the board of directors formed by three members. The board of directors is assisted by the board of governors, which in turn, is formed by ten advisory-members. The facility management department ensures successful procurement, management and disposal of real estate to government entities. The figure below illustrates the organization of the Institute. Figure 4: Structure of the Institute for Federal Real Estate in Germany Source: Institute for Federal Real Estate (2008) 48. BImA is one of the Germany’s “big playersâ€? in real estate. During the years, the German government has built up a very large and diversified real estate portfolio. Due to property transfer started in 2005, the Institute itself owns now a major portion of the state-property under its managemnt. This makes BImA one of the largest owners of real estate in Germany. In 2005, the book value of the government real estate stock owned by the BImA was approximately EUR 10 billion. 49. The Institute functions as a commercial business model for managing government real estate. It covers a diverse portfolio of services, such as facility management, sales, portfolio management, federal forests and real estate development. These constitute the Institute’s main activities which are provided by five out of the nine department presented above. The portfolio management department analyzes the property assets of the Institute, and is also responsible for economic evaluations. Further, the sales department is responsible for the commercial sale of real 75 www.eufunds.bg estate no longer needed by the government. Its aim is to dispose about 30,000 properties by selling early ca. 3,000. The revenue generated from sales accounts for around 50% of the total revenue generated. FRANCE | Real Estate Directorate (DIE) 57 50. This case study discusses the Real Estate Directorate, which is the French government department in charge of supervising state-owned property. Information and details related to the operating model are further presented in this section. Background 51. The Real Estate Directorate was created in 2016, and is preceding the Service France Domaine, which functioned as a service within the Ministry of Economy. The creation of the Directorate is part of the government’s policy efforts to bring a new dynamic into the real estate sector. Operational model 52. The Real Estate Directorate’s objective is to create a clear understanding about the real estate situation in France, and support the government in formulating appropriate state- owned policies. In this sense, the Directorate helps the government to investigate on the current status of its assets, and decide upon the selling of significantly valuable properties. 53. The Directorate operates under the supervision of the Ministry of Economy. Aligned with government’s vision for the real estate sector, the Directorate’s activity crystalizes around three main domains: (i) ensuring successful implementation of the state property reform, (ii) drafting legislation missions related to the use and management of state property, (iii) and ensures evaluation missions. 54. The Directorate’s activities are aligned with the government’s Strategy for State- owned Estate. The strategy was formed in 2005 with the main goal to reduce government debt. It was considered that selling state-owned real estate on the market would be the best option for tackling the debt issue. As a result, in 2005 sales generated EUR 635 million, and almost EUR 800 million in 2006. However, only a small percentage went into reducing the public debt, large amounts were used as an economic incentive to economies on real estate holdings, by being returned to the ministries that previously occupied the property. 55. The DIE acts as the owner of the state real estate. In addition, the Directorate plays a key role in advising different public administrations in defining activities related to real estate. For this, the Directorate is best positioned to help various ministries coordinate the real estate strategy. As the “ownerâ€? of the state property, its aim is to ensure effective management and increased 57 In French : Direction immobilière de l’Etat (DIE) 76 www.eufunds.bg quality of public services. It also works toward reducing costs and improving the working environment for government employees. 56. All ministries in the central administration pay internal rent to the Real Estate Directorate. Since 2007, the former Service France Domaine started collecting rent from all ministries in the central administration for their use of state-owned real estate. The internal rent is a form of transfer pricing (which presents some advantages such as: not treating the space as a free good, and by charging an asset rent the “holdingâ€? department can determine the performance of its real estate holdings. 57. The Directorate covers a large portfolio of activities. Its domain of activities includes purchasing, selling, renting and developing the state property. These property management activities are performed by the Directorate in close collaboration with other 150 regional and local treasury offices under the Public treasury (Tresor Public). In particular, the Real Estate Directorate has the mission to alienate property that is no longer used by the French government, especially if this became too costly or outdated to maintain. 58. The French state is the largest owner of real property in France. Data is not very clear on this, but recent state property valuations show that in 2008, the French state assets were approximately EUR 45 billion. The government real estate stock represents circa 150 million square meters of floor space, half of which seems to be offices. The remaining surface is covered by warehouses, archival buildings and circa 300,000 residential buildings, and 80% of this state property is occupied by government ministries and public administrative institutions. 77 www.eufunds.bg Annex 2: Operation Overviews by Ministry System, Visited Facility Profiles and Recommendations 1. Introduction 1. This Annex presents a detailed assessment of property management practices in 6 ministry systems, takes inventory of the recreational facilities managed by these ministries and provides a detailed description of 13 facilities visited by the RAS team in the summer of 2017. The review is based on survey data collected as part of the project, site visits and management interviews conducted in the period of June-August 2017. The work provides an overview of the current state of development of property management practices across line ministries and their recreational facilities and sets out the outline for specific recommendations for each of the visited properties. A detailed report on the site visits as well as detailed description of properties by parent ministry are also presented in this annex. 2. The structure of the Annex is as follows: I. The analysis starts with an overview of the key findings identified as a result of the data collection process, management interviews and site visits. The analysis takes into consideration existing property management practices applied by line ministries, the physical condition of properties, current human resource management practices, existing operational processes across marketing, booking, customer feedback, pricing and others. II. Next, the Annex provides a property management snapshot for each of the 6 ministry systems - of which the 13 visited facilities were selected, including the Ministry of Interior, Ministry of Agriculture, Ministry of Foreign Affairs, Ministry of Defense, Ministry of Labor and Social Policy, Ministry of Environment and Waters; Within each system the Annex presents a data snapshot of the systems’ property inventory, followed by an assessment of operational capacity and existing property management practices. III. Further, the Annex presents a detailed profile of all 13 visited facilities, including a description of existing operations and practices, as well as provides specific recommendations for the future development of these facilities. Table 1. List of 13 visited facilities Property Location Principal Ministry of Agriculture, Food Recreation Facility Zora Kranevo, Dobrich Region and Forests Recreation Facility ADIS- Resort “Golden Sandsâ€? Varna Ministry of Foreign Affairs Holiday Inn Region Bulgarian Food Safety Agency, Recreation Facility Morsko Shkorpilovtsi, Varna Region under the Ministry of Konche Agriculture, Food and Forests Ministry of Environment and Recreation Facility Kamchiya Bliznatsi, Varna Region Water 78 www.eufunds.bg Recreation Facility Lazur Nessebar, Burgas Region Ministry of Interior Facility Izgrev Sozopol, Burgas Region Ministry of Interior Facility Zelenika Kiten, Burgas Region Ministry of Interior Recreation Facility Morsko Utro Kiten, Burgas Region Ministry of Agriculture, Food and Forests Hotel Shipka Sofia city Executive Agency “Military Clubs and Military Recreation Activitiesâ€? under the Ministry of Defense Recreation Facility Ribaritsa Ribaritsa, Lovech Region Executive Agency “Military Clubs and Military Recreation Activitiesâ€? under the Ministry of Defense Residence Lozenets Sofia city Executive Agency “Military Clubs and Military Recreation Activitiesâ€? under the Ministry of Defense Recreation Facility Vedra Vitosha mountain, Sofia Region Ministry of Agriculture, Food and Forests Training Center for Human Kremikovtsi, Sofia region Ministry of Labor and Social Resources and Regional Policy Initiatives IV. The Annex concludes with an Inventory Matrix covering the 13 visited facilities in the period July-August, 2017. The matrix provides a categorization of the facilities based on their characteristics, including occupancy, booking system, operational model, property ownership information, and other relevant elements. 2. Key Findings Pricing and financial management needs to be reviewed 3. All facilities open to the public operate a two-tariff regime. Government-owned facilities open to external guests have two sets of accommodation rates. External guests pay more than ministry staff. The idea is that the extra revenue generated from external guests could be used to offset some of the costs associated with the subsidized rate charged to staff. 4. Government recreational facilities on budget support cannot retain and reinvest generated revenues. The most obvious route to the financial self-sustainability of recreational facilities would be to first increase the subsidized prices for staff and then increase the share of external guests that are paying higher rates. Yet, all visited facilities make no attempts to attract external guests nor target their services to various guest segments – water sports, active tourism, and families with small children. 79 www.eufunds.bg 5. Accommodation prices for external guests are not aligned with prices charged by comparable private sector establishments located in the same area.58 Current price setting for both staff and external guests does not follow market principles. Without taking either side of the argument on the topic of operating under different price schedules, it is understandable that a parent ministry would consider subsidizing the vacations of its own staff and their families i.e., the persons eligible to obtain a vacation voucher; but it is very surprising to see that even the rates for external guests are well-below market rates. In this manner, the central administration is subsidizing the vacations of external guests (which sometimes includes foreigners) as well. 6. There is an excessive level of subsidization of the prices. For instance, MOI facility rates are set centrally. The MOI facility Izgrev in Sozopol charges only BGN 7.30 for overnight, which is comparable only to the rates charged per person to set up a tent in the nearby camping site.59 The survey of staff demand for recreational services indicates that even significant price increases from these very low rates would not dampen demand.60 7. Food service is provided at cost or at loss. As the government provides recreational services as a social benefit it is also understandable that the food service offered at government facilities has a subsidy element, however, it is often provided at cost or at loss. Not charging a reasonable overhead, apart from foregoing a potential revenue source does not allow increasing the quality of the food service. Lack of strategy for property management 8. Ministries lack strategic direction and vision for the management of their properties. Except for Adis Holiday Inn, none of the visited facilities develop and implement business plans. Main documents presented to the World Bank team reflected rather accounting aspects such as balance sheets, tracking expenditure and revenue etc. None of these documents incorporated any vision elements or strategic thinking related to the management of the state-owned property. For the future development of these facilities, the Government could formulate a strategy with an action plan that would display the tasks over the next coming years to improve the management system for its properties. 9. Current legal arrangements are a challenge for effective property management. The current public finance law is too rigid to ensure profitable management for state-owned property. Public institutions which have properties under their management must return all revenue back to 58 For example, the accommodation prices for external guest of the MAFF facility Zora in Kranevo, are twice lower than the prices charged by nearby establishments. An excellent price benchmark, at least in the case of the MAFF facility Zora, are the prices charged by Hotel Zora operated in the same building by a privatized state-owned enterprise Birds and Eggs - the MAFF facility charges external guests BGN 30 for accommodation in a double room, while Hotel Zora charges BGN 60 for the same accommodation. 59 Camping Zlatna Ribka charges BGN 30 per overnight to set up a tent accommodating 4 people; even then the price per person is BGN 0.20 higher – it comes to BGN 7.50 per overnight for a person. http://www.zlatna- ribka.com 60 Responses of the demand survey indicate that staff would accept price increases in the amount of BGN 5-15 per overnight, which in effect would result in price increases between 75-200% on the current rates charged by MOI facilities. 80 www.eufunds.bg the Ministry of Finance. This wouldn’t be an issue if the budget allocations were based on a mechanism which would align budget with performance. As such, there are no real incentives for institutions to perform better. Alongside with the development of a strategy for property management, the Government should consider revising the legislation in question and ensure effective property management. 10. Properties with consolidated management perform better. Among the two facilities included in category A, Adis Holiday Inn is outstanding. It seems that both, guests and management, benefit from having a centralized and transparent booking system61. The facility is managed by ADIS which is a state-owned company operating under the umbrella of the MFA. Therefore, costly services such as maintenance, renovations or procurement are centrally provided by ADIS. Another important aspect to be considered is the legal status of ADIS. As a State-Owned Enterprise (SOE), ADIS can retain revenue and reinvest where needed, in renovation works for instance. 11. Marketing matters. ADIS is aware of the importance of marketing when managing recreational facilities. It has therefore entered partnership with international hotel operators and varying websites promoting hotel facilities on the Bulgarian sea cost. The results show that this facility is performing better and over the years, it managed to increased occupancy and generate profit. Lack of strategic customer targeting 12. There is no clear customer targeting. It is difficult to ensure efficient customer targeting when vision and direction are weak. The main objective of the visited ministries is to provide affordable vacation for its staff. Except for ADIS, none of these facilities track customer satisfaction, and more importantly, only a low percent of staff can benefit of vouchers and access these recreational facilities. 13. Efforts in coordinating inventory demand could be improved. A significant number of facilities seem to have good locations and attract external guests. However, planning room availability ahead is often very difficult for the managers since the current systems centralize vouchers allocation offering little visibility, and do not allow online bookings. Unfortunately, this leads to unoccupied rooms and uncovered costs. The government should consider developing a system to better coordinate the inventory demand for external guests which represents an important source of revenue. Significant budget constraints 14. The budget has a restrictive impact on the operational duration of facilities. The length of the seasons is determined as a function of the available budget allocated to each Ministry and facility. In terms of performance, there is no difference between winter and summer season facilities. However, the duration of the summer season seems to be too short for effective 61 See also Table 2: Comparative table for property management arrangements for the visited facilities 81 www.eufunds.bg operation. Many of the visited facilities consider the duration of the summer season to ensure readiness for the high season. According to the management, the low season could be extended to a few more weeks which would give more time for preparation, hiring and training staff. In addition, this would allow the facility to accommodate other guests, such as retirees and other external visitors. 15. Management faces difficulties in hiring seasonal staff. This is partially due to the salaries paid which are lower than relevant wages in the private sector. However, there is another reason to be considered and this is the duration of the season. Private sector hotels offer six to seven months’ contracts, whereas the visited facilities are constraint to four months. This definitely impacts the recruitment process and the quality of services provided. 16. The poor condition of facilities increases the operational maintenance and upkeep costs. Although the ministries have conducted renovation works for some of the facilities, there are still a number of features to be improved. Moreover, this is also one of the main causes for the low occupancy. For instance, in the case of Shkorpilovtsi expenses are six times higher than income and emergency renovations additionally hike-up the operating costs. Ministries complain that it is very difficult to obtain important funds for renovations or upgrades. Lack of data and systems 17. The analysis results show that institutions lack data. During both phases, survey and site visits, it was highlighted that at both levels, central and regional, institutions lack accurate data. There is no uniform system for collection of property management data. In some cases, there are discrepancies between the information provided at the central and regional level. The availability of accurate data is crucial for decision making and should be integrated in the property management process. 18. Only two out of six visited institutions use hospitality computer systems. These two Ministries are MFA and MOD. These two institutions register relatively better financial performance of their facilities than the rest of administrative systems. The use of such systems facilitates efficiency improvements and reduces the risk of errors. Complex arrangements for pricing, booking and food provision 19. Accommodation rates are extremely low.62 Table 2 below illustrates in a very simplified way the logic behind the price setting process. Except for ADIS, none of the visited facilities consider market research when determining the price or the duration of packages. The price is centrally determined and established through a Ministerial order. All institutions apply this procedure and most of them use the SBKO contributions as a basis for the price definition. This method has not been revised recently, moreover, the management believes that increasing the prices by 10-20 percent will not impact the demand side. 62 For more detail see Annex 1 82 www.eufunds.bg Table 2: Comparative table for property management arrangements for the visited facilities satisfaction PM Model allocation Accomm- Objective Packages customer Provides Booking training (# days) odation Tracks service Food rates MAFF PM SKBO Central 7 or 9 Pre-orders No Provide No Directorate affordable vacation to Ministry ’s staff MOI PM SBKO Regional 7 Pre-orders No Provide No Directorate A la carte affordable vacation to Ministry ’s staff MOD Ministerial SBKO Central 7 Pre-orders No Provide No Agency A la carte affordable vacation to Ministry ’s staff MFA SOE Market First 7 Pre-orders No Provide Yes oriented came, first A la carte affordable served vacation to Ministry ’s staff MEW Territor-ial SBKO Regional 10 no No Provide low cost No unit accommodation to Ministry ’s staff MLSP PM n/a Central n/a A la carte n/a Design and No Directorate deliver training to staff 20. The system for voucher allocation is fragmented. Voucher allocation is determined at the central level, very often by the director of the property management department or the finance director. However, the criteria on which the allocation is conducted remains unclear. Moreover, some institutions have a second allocation process at the regional level which complicates the procedure and hinders coordination. Very often facilities managed by the same institution and in the same region lack coordination and perform differently. Some facilities operate at full capacity and have to send guests away, while others struggle to attract to attract enough visitors. Lack of formal training 21. None of the visited facilities provides no formal training. There is lack of adequate training to staff involved in property management or hospitality. None of the staff managing the visited facilities received training before occupying the position nor afterwards. 83 www.eufunds.bg 3. Review by System Facilities operated by the Ministry of Agriculture Data Summary 84 www.eufunds.bg Assessment of Operations The Ministry of Agriculture, Food and Forests (MAFF) has a dedicated property management directorate that oversees the operations of the facilities. However, the operating model is fragmented and the facilities are managed by staff with minimal tourism industry or property management experience. MAFF properties appear clean and welcoming. The visited MAFF facilities have a prime location in resort areas. However, the facilities charge accommodation rates and provide food service at prices well-below market rates. The facility managers interviewed believe that raising prices would not dampen demand.63 Some of the facilities are in poor condition such as the facility in Shkorpilovtsi. Others are recently renovated such as the Zora facility in Kranevo and the Vedra facility near Sofia. The Morsko Utro facility in Kiten has been partially renovated, but still requires significant upgrades. MAFF facilities have dedicated capacity for accommodating external guests, but the efforts to cater to external guests are not coordinated. In the case of the Zora facility in Kranevo, the capacity set aside for external guest is used to serve MAFF staff demand, in the case of the Morsko Utro facility the capacity set aside for external guests is insufficient to generate any meaningful revenue. The Vedra facility was not operational at the time of the site visit in August 2017, but its accommodation capacity is small. It is unlikely that the facility could cater to both MAFF staff and external guests in periods of high demand (i.e., weekends and holidays). Due to its location, however, Vedra has the potential to generate significant revenues from selling food and beverages to external guests. There are cultural issues associated with the MAFF recreational facility model – facilities are viewed as our property and staff of other public administration bodies and the general public are considered outsiders. For example, so far the only external guests of the Vedra facility was reported to be friends and family of MAFF staff.64 Marketing and targeting efforts are not coordinated. The Vedra and Morsko Utro facilities have functioning websites used to attract external guests and respond to their reservation requests, while the marketing efforts of the Zora facility are rather rudimentary and the Morsko Konche facility in Shkorpilovtsi is not advertised at all. Facilities are not targeted to specific or different customer segment groups. All facilities offer inexpensive accommodation, food service and parking. Efforts to provide additional services to specific customer groups are incidental. Facilities host families with small children, but only a few have amenities geared towards children such as playgrounds, etc. Customer targeting in the case of Morsko Konche in Shkorpilovtsi may be an appropriate avenue to increase occupancy levels. As a tourist destination, Shkorpilovtsi is a quieter, less developed, low budget vacation destination that is frequented by families with small children, but also and attracts the more upscale tourist 63 For example, the management of Morsko Utro believes that accommodation rates for MAFF staff could be increased and that the facility could charge at least a 30% overhead on the provided food service without impacting the social objective of providing the recreation services 64 During the interview, MAFF representatives noted their concerns associated with opening the facility or the restaurant to external guests as MAFF staff may feel uncomfortable. That being said, considering small accommodation capacity and the proximity to Sofia, it is possible that Vedra could operate at full capacity serving only MAFF staff. 85 www.eufunds.bg segment, such as people engaged in water sports (e.g., diving, wind and kite surfing) This indicates an opportunity for the Morsko Konche facility in Shkorpilovtsi to target staff and external guests engaged in such sports. Budgetary constraints lead to shorter operational periods, which as a general rule is an inefficient utilization of the real estate assets. The recreational facilities under MAFF, as well as most government recreation facilities on the at the Black Sea coast, face a common operational challenge: temporary staff attraction and retention due, in part, to short operational periods.65 In addition, the short operational period does not allow the facility managers to take advantage of obvious opportunities to increase occupancy levels.66 The mechanism for assigning vacation vouchers leads to inefficiencies and MAFF is considering eliminating vacation vouchers for all MAFF facilities as the process is too cumbersome. In this regard, it is planned that the most recently renovated MAFF facility – Vedra, will not operate under the vacation voucher system. Marketing efforts are far below hospitality industry standards. The management of the Shkorpilovtsi facility indicates that MAFF staff that are not based in Sofia are not aware of the existence of the facility. The manager of the Morsko Utro in Kiten noted that the system for assigning vacation vouchers is unpredictable and is confident that the occupancy levels of the facility could be increased to 80%, provided the management receives advance notice of occupancy levels for MAFF staff, so the free capacity can be used to accommodate external visitors. 65 For example, on July 27, 2017 i.e., the peak of the summer season; the Morsko Utro facility was still struggling to fill multiple temporary positions: chambermaids and kitchen personnel; as it pays low salaries and offer shorter term seasonal contracts than other hospitality employers in the area 66 In the case of the Zora facility in Kranevo the management believes that the facility could operate off-season as an event center and overflow capacity facility for athletes using the adjacent sports and training facilities operated by Russian investors. The managers of the MAFF facilities in Shkorpilovtsi and in Kiten are confident that the financial results of the facilities could be improved by organizing children’s camps during the summer low season: June-July. The management of Morsko Utro also believes that there is sufficient demand by MAFF staff and retirees to stay at the facility – even in during the low summer season; however, the reservation process is cumbersome and MAFF staff based in regional offices have no information and access to obtain vacation vouchers 86 www.eufunds.bg Selected Facilities Profile: Recreational Facility Zora, Kranevo, Dobrich Region The Zora facility is operated by the Ministry of Agriculture Food and Forests (MAFF). The facility is housed in a modest 8 floor building with a total constructed space of 6,200 m2. It has a complex ownership structure: the building is constructed on a 1,500 m2 plot of land, designated as government property, entrusted to MAFF, while 200 m2 of the plot is designated as property of the Governor of the Dobrich Region. The building where the facility is located is owned only in part by the MAFF – a 56.18% share; while the owner of the remaining 43.82% of the building is a privatized former state- owned enterprise Eggs & Birds, Donchevo, Dobrich Region. The Zora facility is in very good condition: it was renovated recently - in 2016 all rooms were renovated and refurbished, replaced doors/windows, bathrooms, and water and sewage system. The remaining immediate investment needs include: façade, corridors, electric system, kitchen equipment, water drainage of the property etc. The facility provides cafeteria-style food service to its guests, based on day ahead pre-orders: menu for the next day is displayed at the reception desk and guests prepay. Food is sold at cost, with no overhead - breakfast is served at a flat rate of BGN 3 per person and lunch/dinner at a flat rate of BGN 5 per person. These prices are much lower than the prices charged by food establishments in the general area. The objective of the Zora recreational facility is to provide affordable vacations to MAFF staff, who purchase vacation vouchers for 9-day holiday packages – same day turnaround: no extra day between shifts. There is no formal tracking of customer satisfaction, apart from maintaining a Recommendations and Complaints journal,67 a regulatory requirement. The cost of operating the facility exceeds its income and the operational subsidy that it receives from the MAFF. In 2016, MAFF set the budget or spending limit of the Zora facility at BGN 266,255. During this year the facility generated BGN 70,892 in income, while spending BGN 303,834. The income of the facility is on a growth trend – in 2014 its income was BGN 56,738, 67 The World Bank team reviewed the entries in the journal in July 2015: all entries in the journal were dated recently and were positive. There were no complaints. 87 www.eufunds.bg while in 2015 the facility generated BGN 61,645 in income. Such a growth trend is evident also with respect to the facility costs: BGN 172,810 in 2015, while the cost of operating the facility in 2014 were BGN 164,560. It is very likely that the financial results are driven by renovation and upkeep costs, as these are lumped in with the operational costs, however, it also indicates a suboptimal pricing of the services. Opportunities and Recommendation Property, Location, Principal Opportunities and Recommendation Outsource operational management under a Service Concession. The facility is in good condition and does not require major renovation or upgrading. MAFF could outsource the operational management to a private hotel operator in the same location under a Services Concession for a term that allows the private investor to recuperate his/her investment. This would provide an opportunity for improved service Facility Zora quality and targeted offerings/amenities that could contribute to increased revenues. Kranevo, Dobrich Region A possible candidate could be the operator of the hotel located in the Ministry of Agriculture, Food and same building. Operating the facility under a Services Concession could Forests be awarded in exchange for blocking a certain room capacity to accommodate public administration staff at rates specified by MAFF during the active summer season. After expiration of the concession agreement, the Government could sell the property and use the income to subsidize social benefit to public sector employees, unless the property could be used to deliver another social benefit. 88 www.eufunds.bg Recreational Facility Morsko Konche, Shkorpilovtsi, Varna Region The facility Morsko Konche is operated by Ministry of Agriculture Food and Forests (MAFF). The property is on a slope facing the sea, has a premier location in the Shkorpilovtsi vacation area and direct access to the beach. There are some property issues with respect to the land, on which the facility is constructed. The process of securing the required documentation to establish clear property title on the land68 is still ongoing; the property rights with respect to the facility’s buildings are shared by two separate administrative bodies under the MAFF: the Bulgarian Food Safety Agency (BFSA) and the Central Laboratory for Veterinary Expertise and Ecology. As of 2015 the facility operates both facility segments: bungalows and hotel-style accommodation; part as a joint facility; however, bookings for both segments are still made separately through the two administrative bodies. The facility is in very poor condition. The investment needs are severe. Management believes that taking care of urgent maintenance needs would require BGN 300,000, while a full renovation would require BGN 1 million. Management also does not believe that a renovated facility would be able to attract more guests. The MAFF facility operates the cafeteria, and its food service is outsourced to a catering company. The facility operating costs are almost 5 times higher than the revenue generated in providing the recreational service. The facility’s “budgetâ€? i.e., spending limit for 2016 is BGN 130,000; in the same year the total costs of the facility were BGN 123,420, with only BGN 27,002 generated as income. The financial results for 2015 follow the same trend – the costs were BGN 96,818, while income was BGN 24,139. The largest part of the operating budget is the salaries of the staff. They pay the minimum wage of BGN 460 per month for guards (who are also offered free accommodation on-site). 68 Reportedly the title to the land has been transferred from the forest fund, and the buildings have been “inheritedâ€? from public sector organizations that have been either privatized or no longer in existence. 89 www.eufunds.bg Opportunities and Recommendation Property, Location, Principal Opportunities and Recommendation Outsource operational management under a Works Concession. The facility has an excellent location but is in an exceptionally poor condition and requires significant renovation and upgrading. BFSA/MAFF could consider capital repair or demolishing the current bungalows and stand-alone building and constructing a new facility on the current lot in partnership with a private investor under Works Concession agreement where private investor agrees to complete all construction and upgrade works at no cost to MAFF in exchange for taking on the operational management of the property Facility Morsko Konche after completing construction works. Shkorpilovtsi, Varna Region The concession agreement would define the construction and Bulgarian Food Safety Agency, building works to be completed by the private investor, the under the Ministry of Agriculture, performance standards with respect to service quality after the Food and Forests facility resumes operations and the amount of rooms set aside for MAFF and other public administration staff and their families during the active tourist season. The Works Concession should have the maximum term (35 years) so that the private operator has sufficient time to recuperate his/her investment while at the same time deliver recreational services to public employees at reduced rates. The Government could sell the property after the expiration of the concession agreement and use the sales proceeds to subsidize the provision of social benefits to public employees. 90 www.eufunds.bg Recreational Facility Morsko Utro, Kiten, Burgas Region The Morsko Utro recreational is operated by the Ministry of Agriculture Food and Forests (MAFF). The facility is located in a wooded area with immediate beach access and has a prime location in the tourist town of Kiten. The facility is composed of several large 5 story buildings. MAFF has clear tittle to the buildings and the land, on which these are constructed. The average annual occupancy of the facility is about 40%. The total capacity of the facility is 370 beds: 120 rooms and 20 apartments. The facility has a dedicated block of 40 rooms for external visitors and capacity set aside for MAFF staff: 80 rooms and the apartments. The condition of the facility is acceptable. Morsko Utro was partially renovated in 2009 when BGN 600,000 were spent for capital improvements. The facility operates one café and a canteen-style restaurant; it has outsourced one other café on the premises to a private operator; laundry service is outsourced as well. The “budgetâ€? (i.e., spending limit) for 2016 was 266,000 BGN. During the same year the Morsko Utro facility generated 13,216 overnights -- based on paid tourist tax for reported guests; of which 5,364 external visitors. The actual income of the facility in 2016 was BGN 312,369, of which BGN 171,000 from accommodation. In 2016 the accounted income from accommodation with a half- board arrangement for staff with vacation vouchers was BGN 135,129; income generated from external guests was BGN 85,924; and income from food service BGN 69,050 income from operating the cafe.69 It pays regularly property tax and garbage collection tax to the Kiten municipality - about BGN 30,000 annually. Morsko Utro has a website, and most external visitors make reservations using the provided contact information – email and phone. 69 There is a discrepancy between the financial information provided by Mr. Bozhkov and Ms. Todorova during the site visit in July 2017, and the information provided in the survey completed in June 2017. According to the survey data, Morsko Utro generated BGN 171,018 in income and BGN 266,255 in cost during 2016; reported financial results for 2015 are: BGN 184,197 in income and BGN 274,548 in costs; correspondingly for 2014, Morsko Utro generated 164,379 BGN in income and 225,965BGN in costs. 91 www.eufunds.bg Opportunities and Recommendation Property, Location, Principal Opportunities and Recommendation Facility “Morsko Utroâ€? Outsource operational management under Services Concession. Kiten, Burgas Region The facility has an excellent location and the current buildings are Ministry of Agriculture, Food and partially renovated. Overall the condition is acceptable. MAFF may Forests consider outsourcing operational management of the facility to a private operator under a Service Concession. The performance of the private operator would be monitored by a representative of the MAFF property management directorate. The concession agreement should define the building upgrading works to be completed by the private investor, the performance standards with respect to service quality and the amount of rooms set aside for MAFF and other public administration staff and their families during the active tourist season. The Services Concession should have the maximum term (35 years) to encourage the private operator to provide recreational services to public employees at reduced rates. The Government could sell the property after the expiration of the concession agreement and use the sales proceeds to subsidize the provision of social benefits to public employees. 92 www.eufunds.bg Recreational Facility Vedra, Vitosha, Sofia Region The Vedra facility is operated by the Ministry of Agriculture, Food and Forests (MAFF). The facility was built in 1957 as a mountain hut; it was renovated in 2016 with the intent to accommodate MAFF staff and external guests alike; however, at least for the moment the use of the facility is restricted to staff part of the MAFF administrative structures. The facility is located at the end of Vitoshko Lale – the premier slope of the Vitosha ski area. It is a small facility – it has only 16 rooms and one apartment - and the management believes that it can be financially self-sustainable. It is designed to operate as a hotel-style recreational facility, rather than accommodating staff with vacation vouchers. The facility restaurant offers a good opportunity for generating additional income dues to its location near the Vitoshko Lale ski slope and the lack of food establishments in the immediate area. The facility has not yet operated during the winter season. Current data on occupancy levels is based on accommodating incidental guests – the facility operates at full capacity on weekends and during the week about 2-3 of the 16 rooms are occupied. Prices were set based on comparative benchmarking of private sector offerings in the region - based on online search, not a marketing survey; taking account the cost to provide the services. Vedra plans to operate a restaurant open to facility guests and the general public alike. Food is sold at cost plus small overhead – 20-30% on top of cost. Prices are lower than these charged by private sector food establishments in the ski area, which is an opportunity to attract external visitors to the restaurant and generate income. The facility has its own website, including online reservation system developed by the staff of the facility found at http://www.pbvedra-vitosha.com. There are no other hotels in the immediate area, as the Vitosha Mountain is a national park and development is severely restricted. The rates of Vedra are on par with the rates of small accommodation establishments in the outskirts of Sofia in immediate proximity to the foothills of Vitosha. 93 www.eufunds.bg Opportunities and Recommendation Property, Location, Principal Opportunities and Recommendation Recreation Facility Vedra Outsource operational management under a Services Concession. Vitosha mountain, Sofia Region The facility is very small and is located directly at the foot of a premier ski Ministry of Agriculture, Food and slope and has significant revenue generation potential, mostly from food Forests and beverage services. The facility is intended to provide recreational services on par with private sector establishments and could be operated on a commercial basis. In the short term, MAFF may consider outsourcing the management of the facility to a private operator under a Services Concession. Under the arrangement the private party would operate the property in exchange for providing recreational services to public administration staff at rates specified by MAFF. In the long term the Government should sell the property. 94 www.eufunds.bg Facilities operated by the Ministry of Foreign Affairs Data Summary 95 www.eufunds.bg Assessment of Operations The Ministry of Foreign Affairs has a dedicated property management company - ADIS LTD, which operates a number of diplomatic properties, as well as the recreational facility ADIS Holiday Inn in the resort Golden Sands. The management of the ADIS Holiday Inn facility is in charge of day-to-day operations, while the ADIS central office in Sofia has full management authority. The communication between the facility management and the ADIS central office is regular and functions well. The recreational services are on par with these of comparable private sector establishments and the facility generates a small surplus. As the MFA recreation facility is part of the ADIS portfolio of properties, it benefits from the parent company’s extensive property management experience, financing to cover upgrade and maintenance costs, and the availability of an in-house maintenance and renovation teams handle all major works. The facility could generate additional revenue by hosting events in the low segments of the summer season. ADIS Holiday Inn has a conference room with a seating capacity of about 50 persons and the facility management is confident that during the summer low season (i.e., May- June and September), the facility could host events, team buildings, and corporate gatherings. The facility could host children camps, as it has in the past. Selected Facilities Profile: Recreational Facility ADIS Holiday Inn, Resort Golden Sands, Varna Region The ADIS facility is operated by ADIS Ltd., a property management company under the Ministry of Foreign Affairs. The facility is located on an 11,000 m2, wooded plot in a very desirable location – immediately adjacent to a luxury resort, Riviera, in the Golden Sands resort. There is direct access to an organized beach through the property and guests of ADIS Holiday Inn70 can get an umbrella and two chaise-lounges for BGN 8 per day, while not guests of the facility pay BGN 24 for the same service. The facility’s total capacity is 106 beds: 56 rooms and 6 apartments. The recreation facility is very well maintained and accommodating. The accommodation rates are well below the rates charged by private sector hotels in the area; however, comparisons with adjacent hospitality establishments 96 www.eufunds.bg would not be appropriate as the ADIS Holiday Inn is comparable to a modest 2 or 3-star private hotel, while most accommodation in the general area is in the upper-scale market segment. Customer satisfaction is tracked regularly. The ADIS central office sends customer satisfaction surveys to all MFA staff after their visit to the facility and informs the facility management of the reported shortcomings. The marketing efforts of the facility are on par with these of a private sector hospitality establishment of the same size and capacity. ADIS-Holiday Inn has a website and reservations can be made through the site or via the Booking.com reservation system. The Booking.com rating of ADIS- Holiday-Inn for 2016 is 8.4. No efforts are dedicated to targeting the facility to a particular visitor segment as most of guests, both the MFA staff and external guests, are repeat visitors. The facility generates a modest operating surplus and most activities are done in-house: the only outsourced activity is the laundry service. Opportunities and Recommendation Property, Location, Principal Opportunities and Recommendation Continued operation under the current model. The facility has an excellent location. Currently it provides recreational Facility ADIS-Holiday Inn services on par with private sector establishments to both public employees Resort “Golden Sandsâ€? Varna and external guests. In the short term, ADIS may consider developing the Region property as an event center during the low segments of the summer season Ministry of Foreign Affairs and if possible during the off season. In the medium-long term, ADIS could consider upgrading the facility and operating it as an upscale vacation property or small luxury hotel. 97 www.eufunds.bg Facilities operated by the Ministry of Environment and Water Data Summary 98 www.eufunds.bg Assessment of Operations The visited facility is small, offers self-catering accommodation and its service offering is comparable to that of the adjacent private sector establishments; however, it rates are much lower. The visited facility is in very good condition – it has been completely renovated in 2012; maintenance and upkeep activities are funded regularly. The facility is operated by the Regional Environmental and Water Inspectorate, (REWI) in Varna, a MEW secondary budget holder.71 The area where the facility is located is an area at the sea coast that is geared more towards lower-income families. The area also has a significant number of competitive private sector offerings – in the immediate vicinity there is a very large, Russian-owned tourist complex, which hosts a large number of Russian tourists during the summer high season, Russian children’s camps during the summer low season: May, June; and serves as training facility for Russian athletes in the off season. The MEW facility performs quite well, considering the competition. Selected Facilities Profile: Recreational Facility Kamchiya, Bliznatsi, Varna Region The Kamchiya facility is managed by the Ministry of Environment and Waters (MEW), which transferred operational management to its regional environmental and water inspectorate (REWI) in Varna. The facility located on a small wooded lot near the Kamchiya River and is composed of 12 free standing bungalows, designed to accommodate 4 persons. Both the land and buildings are property of the MEW. The facility is full during the high summer season: July and August; and operates at 70% capacity during the summer low season - early June; and at 50% capacity in September. The bungalows do not have direct beach access – the beach is a10 minute walk away, on a wooded path. The facility is in very good condition- the bungalows have been completely renovated in 2012; maintenance and upkeep activities are funded regularly. The housekeeper develops a report with maintenance and investment needs and sends it to the REWI Varna - reportedly 100% of requested maintenance and investment requests are approved. 71 The overall management of the recreation facility – bookings, approving maintenance and upkeep costs, scheduling maintenance and construction works etc., is provided by the Chief Accountant and the Administrative Director of the REWI in Varna. 99 www.eufunds.bg No food service is provided – the bungalows are intended as self-catering accommodation. Previously the facility operated a small café, which was closed due to low demand. There are many private food establishments in the immediate area and it is unlikely that the facility could provide any food service. The laundry service is outsourced. The facility is closed during the off season: September-May; while the housekeeper couple lives on the property to guard the assets. The overall management of the recreation facility – bookings, approving maintenance and upkeep costs, scheduling maintenance and construction works etc., is provided by the Chief Accountant and the Administrative Director of the REWI in Varna. The area where the facility is located is an area at the sea coast that is geared more towards lower- income families. The whole area is wooded, protected natural area. In the vicinity, there is a very large, Russian-owned hospitality facility, which hosts a large number of Russian tourists during the summer high season, Russian children’s camps during the summer low season: May, June; and serves as training facility for Russian athletes in the off season. Opportunities and Recommendation Property, Location, Principal Opportunities and Recommendation Outsource operational management under a Services or a Works Concession. The facility provides recreational services on par with private sector establishments in the same location. MEW may consider outsourcing the management of the facility to a private operator under a Services Facility “Kamchiyaâ€? Concession for the duration of the operational life of the bungalows Bliznatsi, Varna Region Ministry of constructed on the property or awarding a Works Concession that would Environment and Water allow the capital repair of the facility. Awarding a concession could require the provision of recreational services to public administration staff at rates specified by MEW during the active summer season. After expiration of the concession agreement, the bungalows would likely be fully depreciated and the Government may construct a new building on same lot, change the purpose of the property or sell it. 100 www.eufunds.bg Facilities operated by the Ministry of Interior Data Summary 101 www.eufunds.bg Assessment of Operations The recreational facilities under the MOI are designated as emergency facilities during war times and in crisis situations and could be used to accommodate displaced populations and refugees. MOI recreational facilities, including the three visited facilities on the Black Sea coast, host police and military exercises – in 2016 the “Lazurâ€? facility in Nessebar hosted a surprise antiterrorism training (handling a hostage situation at a beach resort); while the “Izgrevâ€? facility in Sozopol hosts the regular trainings of police divers at the beginning or the end of the summer season. Their main objective however, is social function – offering affordable vacations to MOI staff and their families. Accommodation rates at all MOI recreation facilities are exceptionally modest – about 9 BGN per bed/overnight. For 2017, the accommodation rates for all MOI facilities were set centrally at 6.80 BGN per bed/overnight during the low segment of the summer season, and 9.50 BGN per bed/overnight during the high segment of the summer season. Accommodation rates for all MOI facilities are set by the MOI property management department under a complex procedure. 72 The operational budget of the facilities is formed by MOI staff contributions - the special allowance for social, housing and cultural activities (SBKO in Bulgarian), which is provided on top of salaries to MOI operational staff.73 The annual budget for operating all MOI recreational facilities is the sum of all SBKO allowances of the eligible MOI operational staff.74 In 2016, the total budget for all MOI facilities and other social services (formed by SBKO contributions) was 5.2 million BGN. The overall budget shrank to 4.16 million BGN in 2017 with the reduction of the number of MOI staff eligible to receive SBKO contributions.75 This resulted in reduced allowances for temporary staff salaries, maintenance and shorter facility operational period The amount of the annual budget determines both the accommodation prices and the operational period of the facilities. The budget is formed by pooling the SBKO contributions of MOI staff and prices increase if the budget, i.e., total amount of the SBKO contributions is higher and vice versa.76 In effect, the larger the MOI staff, the larger the pool of staff that contributes to the SBKO fund, correspondingly the larger the MOI recreational facility budget. 72 The guiding factor in price setting is staff affordability, which allows the facility to offer a one-week vacation package, including accommodation and food service, to a family of four - 2 adults and 2 children; at about 350 BGN. There is no base for comparison of these prices with private sector offerings in the resort areas where the MOI facilities are located– even the most humble accommodation in is priced much higher. 73 SBKO is a 3% allowance on top of salary; this allowance is not paid to MOI staff, but dedicated to subsidize the operations of MOI recreation facilities and other social benefits. 74 Civil servants employed by the MOI are not eligible for the SBKO allowance; however, can benefit from MOI recreational facilities at the same rates. In effect, police operational staff (eligible for SBKO) subsidize the vacations of their colleagues that hold civil servant status. 75 Only MOI operational staff (i.e., hired under the MOI law) is eligible for SBKO contributions; in 2017, a number of the MOI personnel not directly engaged in police and security work were transitioned to civil servant status, i.e., the sum of SBKO contributions for that year was lower. 76 Accommodation rates are derived by dividing the total budget by the number of available capacity, i.e., beds, where staff cash contributions cover the difference in the cost of providing the accommodation. Since the capacity of MOI recreational facilities is constant and limited, in effect accommodation rates decrease as the budget increases 102 www.eufunds.bg The management of the facilities is not consulted on prices for accommodation, and all of the interviewed managers believe that accommodation rates could be increased to at least BGN 10-12 per overnight, without impacting the affordability factor i.e., the facilities’ social function. In the case of the three MOI properties on the Black Sea coast, due to the very high staff demand and the significant number of generated overnights, even a symbolic price increase would generate significant revenue.77 The available budget defines also the period during which MOI facilities operate during the active tourist season. For the most part, the salaries of the seasonal staff follow monthly minimum wage benchmarks and cannot be cut, so the reduced budgets in effect decrease the duration of the engagement of temporary staff at the facilities. As all facilities rely on temporary/seasonal staff, reducing the budget leads to a reduced operational period. For this reason, MOI facilities on the Black Sea coast operate only 5 months during the summer season - in comparison private sector hotels and operate 6-7 months, and are more attractive to seasonal/temporary personnel. None of the visited facilities are effectively marketed or targeted. This may be due to the fact that the MOI facilities are exceptionally popular with staff and attracting external guests is not a focal point for the managers. MOI facilities are open to external guests, however, in practice the external guests are usually persons affiliated somehow with MOI who use the facilities without a vacation voucher. Because of their desirable locations, all MOI facilities could attract both MOI staff and external guests during the low season segments of the summer season (i.e., April-June and September-October) and generate additional revenue, but the facilities do not operate during the lower season segments. All of the interviewed MOI facility managers are confident that the capacity of the entrusted facilities could be utilized in these periods of lower demand by hosting MOI retirees and children camps, MOI events and trainings. Increasing the season i.e., the period for operating the facility, will help address challenges with temporary staff attraction and retention, as well would contribute to revenue generation Shortened operational periods not only deprive the facilities of the opportunity to generate revenue from external guests, but also have longer-term impacts. The budget cuts in 2017 did not impact service quality even though the many of the facilities operated with a smaller staff, working for smaller salaries and under shorter seasonal contracts; however, this may impact the capability of the facilities to attract seasonal staff in the years to come.78 and vice versa. In this manner for example, the accommodation rates for 2016 were higher, as the MOI had a larger SBKO budget. 77 In illustration, an increase of accommodation prices only by 1 BGN in 2016, would have allowed the Lazur facility in Nessebar to generate BGN 41,500 in additional revenues. Under the same assumption, the Izgrev facility in Sozopol could have generated BGN 40,718 in additional revenue in 2016; while Zelenika in Kiten would have generated additional BGN 29,682. Similarly, if the MOI facilities charged their guests only BGN 1 per day for parking, the Lazur facility alone could have generated additional BGN 120,000 in 2016. However, there is no incentive to do so since none of the facilities could retain and reinvest the generated revenues – all revenues are transferred directly to the transitional account of the Ministry of Finance. 78 In 2017, Zelenika lost 30% of its regular temporary staff, reportedly the better and more capable workers as it offered its seasonal staff 4 month contracts – by comparison private accommodation and other recreational facilities offer 6 month contracts. The facility attempted to hire students at the minimum wage BGN 480 per month but were 103 www.eufunds.bg MOI has an exceptionally burdensome mechanism for assigning vacation vouchers. As the demand for vacation vouchers among MOI staff is higher than the supply i.e., the capacity of all three MOI recreation facilities at the Black Sea coast, a set number of vacation vouchers are designated by the MOI property management directorate to each of the MOI’s regional directorates, which in turn distributes the vouchers to their individual staff members based on committee decision. Then the individual MOI facility managers travel to the various MOI regional directorates to deliver the vouchers and collect corresponding payments from the staff employed by the particular regional directorate in cash. In an effort to optimize these “payment toursâ€?, individual facility managers travel to different regional directorates across the country and deliver vouchers and collect corresponding payments for all MOI facilities on the coast,79 and not only for the facilities that they manage. This system is needlessly cumbersome and can be easily replaced by a centralized reservation system. Selected Facilities Profile: Recreational Facility Izgrev, Sozopol, Burgas Region The Izgrev facility is operated by the Ministry of Interior (MOI). The facility is located in the more central parts of the new town area of Sozopol. Izgrev does not have direct beach access, however, its guests can enjoy of a large well-groomed park close to the town center – something that even the most luxury accommodation in Sozopol cannot provide to their guests. The total capacity of the Izgrev facility is 413 beds and the facility generated 40,718 overnights in 2016. The park area is very well maintained, however, the facility itself is rather old and dilapidated: the buildings were erected over 30 years ago, and for the most part it has not been renovated. In 2016, about BGN 150,000 were invested in renovating 45 of the rooms – partial not successful in attracting workers. Instead Zelenika engaged retirees; correspondingly, the current pool of temporary staff is for the most part (85%) older workers aged 65 years and older. 79 In illustration, the Izgrev facility manager would travel to the city of Plovdiv to deliver the vouchers and collect corresponding payments from MOI staff based in Plovdiv for its facility, as well as for the other 2 MOI facilities - in Nessebar and Kiten. On the same token, the Lazur facility manager would travel to the city of Ruse to deliver the vouchers and collect payment for the other 2 MOI facilities. Reportedly this reservation and payment mechanism is cumbersome and can easily be replaced by a more efficient system. 104 www.eufunds.bg renovation of the bathrooms and installing air-conditioning units;80 the renovated rooms are sold at a premium. Despite its poor condition, the facility is very popular with MOI staff. Similarly, to the Lazur facility in Nessebar, the Izgrev facility operates at overcapacity during the high season (July- August). It has more guests than listed bed capacity, as is allows accommodation of children on stow away cots etc. Customer satisfaction at the facility is not formally tracked; the management reviews only the entries (if any) in the facility’s recommendations and complaints journal. Accommodation rates charged by the facility are well-below market rates - the management noted that they offer the cheapest rooms in Sozopol: even the most modest private sector accommodation would cost at least twice what Izgrev is charging per bed. The facility provides a canteen-style food service, on a week ahead preorders of set menu, but does not generate any income from this activity – food prices are set at cost. The facility generates revenue from outsourcing the operation of one of the cafes to a private operator. The facility has another café, which is not operating, and attempted to rent it out to a private operator, but reportedly there were no candidates. The recreational facility canteen is not categorized under the Law on Tourism and cannot offer food service to the general public. Opportunities and Recommendation Property, Location, Principal Opportunities and Recommendation Outsource operational management under a Works Concession. The facility consists of several stand-alone buildings constructed in a large wooded park. As with all MOI facilities, the current buildings are not sufficient to meet staff demand during the active tourist season. The current buildings are very outdated and MOI may wish to consider demolishing them and constructing a several larger buildings on the current lot in partnership with a private investor, who would take on operational management after completing the construction works under a Works Concession. Facility Izgrev The concession could define the construction and building works to be Sozopol, Burgas Region completed by the private investor, the performance standards with respect Ministry of Interior to service quality as it resumes operations and the amount of rooms set aside for MOI and other public administration staff and their families during the active tourist season. The performance of the private operator should be monitored by a representative of the MOI property management directorate – i.e. a property management supervisor for all MOI facilities in the Burgas region. The Works Concession should have the maximum term (35 years) so that the private operator has sufficient time to recuperate his/her investment while at the same time deliver recreational services to public employees at reduced rates. 80 The management reports their upgrade and maintenance needs regularly to MOI; however, has not developed a dedicated investment plan based on the assumption that the requested investments would not be approved. Management estimates that BGN 1 million is required for full renovation of the facility. 105 www.eufunds.bg The Government should sell the property after the expiration of the concession agreement and use the sales proceeds to subsidize the provision of social benefits to public employees. Recreational Facility Zelenika, Kiten, Burgas Region The Zelenika facility is operated by the Ministry of Interior (MOI). Zelenika has an excellent location - the property borders a large forested area, the town park and the premier beach of the Kiten resort area. MOI has clear property title with respect to the facility building, but the land on which it is constructed is owned by the Kiten municipality. The total capacity of Zelenika is 306 beds, but as with the other MOI recreational facilities located at the sea side, Zelenika operates at full capacity during the high summer season, i.e., mid-July –mid –August. Similarly, to other MOI facilities, occupancy drops to about 70% of capacity during the beginning and the end of the summer season. The Zelenika facility was built in the 1970s and is in a good condition, some of the rooms have been renovated and have air-conditioning, while other rooms have not. The management develops annual reports on maintenance, upgrades and investment needs and submits these to MOI for approval; however, requested investments are rarely approved. The facility has not yet developed a business plan, but has a construction and renovations plan. Management estimate that the renovation costs would be of the order of BGN 500,000. Top investment priority is renovating the bathrooms and replacing the water and sewage system. The management regularly tracks customer satisfaction – visitors receive standardized surveys (left in the room) toward the end of their stay at the facility; and reviews sporadically the entries made by the guests in the complaints and recommendations journal of the facility. Reportedly, most of the complaints are associated with the conditions of the rooms – bathrooms, bedding, furniture, etc. The facility has 2 cafes – one in the lobby and a one very attractive roof top terrace; the café in the lobby is outsourced to a private operator, but the management was unsuccessful in attracting a private operator for the roof top terrace; it is currently closed. Management report that the police officers who stay at the facility are very cost conscious and bring their own alcohol and food. 106 www.eufunds.bg Opportunities and Recommendation Property, Location, Principal Opportunities and Recommendation Outsource operational management under Services Concession. The facility has an excellent location and the current building, albeit very outdated, is in a fairly good condition. MOI may consider outsourcing operational management of the facility to a private operator under a Service Concession. The performance of the private operator would be monitored by a representative of the MOI property management directorate – i.e. a property management supervisor for all MOI facilities in the Burgas Facility Zelenika region. Kiten, Burgas Region Ministry of The concession agreement should define the building upgrading works to Interior be completed by the private investor, and the performance standards with respect to service quality and the amount of rooms set aside for MOI and other public administration staff and their families during the active tourist season. The Services Concession should have the maximum term (35 years) to encourage the private operator to provide recreational services to public employees at reduced rates. The Government could sell the property after the expiration of the concession agreement and use the sales proceeds to subsidize the provision of social benefits to public employees. Recreational Facility Lazur Nessebar, Burgas Region The Lazur facility is managed by the Ministry of Interior (MOI). The facility is located in Nessebar, one of the premier vacation destinations on the Bulgarian Black Sea coast. The MOI owns the buildings, but title to the land is contested by the Nessebar municipality and this dispute is currently being resolved in courts. The facility has 345 rooms, and occupancy spikes during the high summer season- full occupancy. Reportedly, MOI staff is very fond of the facility, not only because of the modest prices, but also because it is a venue for the socialization of police officers working in different parts of the country, which in turn supports social cohesion among MOI staff and forms partnership that help police officers in their work. In addition to hosting MOI staff, the facility also hosts Slovak police staff under a holiday exchange program, under which Bulgarian and Slovak police officers cross pay for each other’s holidays: the accommodation of Slovak police officers and their families visiting the Lazur facility is paid by the Bulgarian police officers on holidays at Slovak recreational facilities and vice versa. 107 www.eufunds.bg Accommodation is modest, the facility is in dire need of upgrading, but appears well-maintained and welcoming. Food service is provided on a canteen-style manner, based on day ahead preorders. Food service is provided at cost – no overhead.81 Customer satisfaction is regularly tracked– the management distributes a standardized anonymous survey to most visitors at the end of their stay at the facility. The survey is used to track service quality and to guide management focus to areas in need of improvement. The management shares the survey results with the staff and reports that the survey has been an excellent tool for motivating staff performance. The “budgetâ€? (i.e., spending limit) determines both the accommodation prices and the time period for operating the facility. The facility revenues for 2016 are BGN 254,000, including BGN 246,000 generated from accommodation, while the management reports operational expenses of BGN 823,000, mostly to cover the cost the facility’s wage bill and maintenance costs. Food service expenses are not included, only the salaries of food service personnel. The management develops annual reports on maintenance needs and required capital investments and reportedly most of the items are not approved by the MOI property management directorate. In 2016 only BGN 120,000 of the requested funding for capital investments were approved and 45 of the rooms were renovated. Opportunities and Recommendation Property, Location, Principal Opportunities and Recommendation Outsource operational management under a Works Concession. The facility has an excellent location but the two buildings that house the facility are insufficient to meet staff demand during the active tourist season. The buildings are very outdated and MOI may wish to consider demolishing them and constructing a large new building with greater accommodation capacity on the current lot. MOI may consider partnering with a private investor under Works Facility Lazur Concession to complete the construction works. As the property title to the Nessebar, Burgas Region Ministry of land is contested, MOI should partner with the Nessebar Municipality in Interior this process as well. The Works Concession should define the construction and building works to be completed by the private investor, the performance standards with respect to service quality after the facility resumes operations and the amount of rooms set aside for MOI and other public administration staff and their families during the active tourist season. The MOI property management directorate should designate a property management supervisor to control the performance of the private operator of this facility and other MOI facilities in the Burgas region. The Works Concession should have the maximum term (35 years) so that the private operator has sufficient time to recuperate his/her investment 81 The Lazur facility, following MOI guidelines, records expenses for providing the food service as income, not an expense, as the facility sells vouchers for food service that covers the cost of the food stuff and the expenses associated with preparing the meal. 108 www.eufunds.bg while at the same time deliver recreational services to public employees at reduced rates. The Government could sell the property after the expiration of the concession agreement and use the sales proceeds to subsidize the provision of social benefits to public employees. 109 www.eufunds.bg Facilities operated by the Ministry of Defense Data Summary 110 www.eufunds.bg Assessment of Operations Government properties entrusted to the Ministry of Defense (MOD) are managed by a special Executive Agency under the MOD - Military Clubs and Military Recreational Activities (MCMRA), which manages in addition to recreational facilities, also hotels, representational properties, apartments provided to MOD staff, homes for retired military personnel, kindergartens, soup kitchens and numerous event venues. The MCMRA organizes vacations for military personnel at the numerous hotels and facilities it operates in Bulgaria, as well as abroad under the Liaison Committee of Social Military Organizations framework (CLIMS)82. As with the vacations in Bulgaria, the MCMRA also subsidizes MOD staff vacations abroad. Overall, the visited MCMRA properties are managed well; however, there are shortcomings that need to be addressed. The sample of visited properties under the MCMRA, included a recreational facility (near the tourist resort Ribaritsa), a city hotel in Sofia and a representational property, Residence Lozenetz.83 The management of Hotel Shipka is facing many challenges, which affect its performance: NATO is expanding its operations in Bulgaria and is taking up approximately a quarter of the hotel capacity and the largest conference room. In addition to that, occupancy has fallen to 46%, because the hotel no longer works with tour operators and attracts fewer external visitors, while the number of seconded MOD personnel that stays at the hotel for free keeps rising. In effect, seconded military personnel are incentivized to stay at the hotel limiting the number of available rooms for external guests. That being said, the hotel management is confident that Hotel Shipka would be successful as a commercial entity. It is surprising that Residence Lozenetz does not generate revenue from government events. The use of the property for official functions is free not only to the MOD but for the entire administration. In comparison, the Boyana Residence under the Council of Ministers charges all administrations, including the Council of Ministers, for the use of the property for official functions. The rates charged by Residence Lozenetz for private events are a little higher than the rates charged by private event centers in Sofia, which is a clear indication that it offers more than value for money; however, despite having a large kitchen, events organized at the Residence rely on outside catering and do not take advantage of generating revenue from catering services. Also, the Residence has an empty building with separate access to the property that can be used to generate revenue – as small hotel and restaurant serving the general public. Another potential revenue stream is to open the accommodation to paying customers that meet certain security criteria. 82 CLIMS is a network of agencies providing social services and vacation packages to military personnel; its members are Bulgaria, Germany, Belgium, Spain, France, Italy, Hungary, Poland, Portugal, Czech Republic, Romania and Greece. MOD covers 50% of the cost of the vacation packages for Bulgarian military personnel organized by CLIMS partner organizations. In addition to partnering under the CLIMS network, the MCMRA also has similar arrangements with agencies providing social services to military personnel in Turkey and Vietnam. 83 All three facilities are part of the portfolio of properties managed by the Sofia Territorial Unit of the MCMRA. In addition to the Sofia unit, MCMRA has territorial units in Plovdiv, Varna and Burgas. 111 www.eufunds.bg The Ribaritsa facility is a large and well-maintained property and is gradually improving its financial performance. That being said, the facility could increase is revenue with small improvements. For example, increasing the operational period of the swimming pool and expanding the SPA services would attract more external guests, specifically families with children; however, the management must focus on introducing energy efficiency measures to drive down heating costs. The facility grounds are an excellent venue for organizing of various competitions, hosting various festivals, reenactments of medieval battles, etc. The facility could generate revenue from private sector establishments in the Ribaritsa area as there is no local laundry service provider, the facility could offer laundry services to private sector establishments in the area, provided additional equipment and staff is hired for the purpose. Selected Facilities Profile: Hotel Shipka, Sofia, Sofia Region Hotel Shipka is entrusted to the Ministry of Defense and managed by the Executive Agency Military Clubs and Military Recreation Activities (MCMRA). The Shipka hotel was built in 1977. It is public private property and is located in the central part of Sofia. The hotel provides accommodation to seconded military personnel for free and is open to external guests. Hotel Shipka has 173 rooms, but only 135 room have been categorized as hotel rooms. A large portion of the hotel’s capacity is used by the NATO Crisis Center84 located in the hotel building. The hotel has a 43-46% average annual occupancy, including non-paying seconded military personnel. The hotel is in good condition, and it is well-maintained. Hotel rooms are being renovated gradually and renovation works are still ongoing. This facility has a SPA center, which is well maintained and offers various services to hotel guests and walk in customers. Shipka operates as a regular city hotel and charges market rates. The rate for external guests reflect the operational expenses for providing the service, and is partially formed based on marketing data on competitive accommodation offers in the general area where the hotel is located. The hotel also offers discounts to groups of external guests of 5 or more persons and for extended stay at the hotel (over 30 days). 84 The NATO Crisis Center was supposed to be located at the Sofia Tech Park, but MOD located the Crisis Center at the Shipka Hotel despite the protests of the hotel management and the EA MCMRA. 112 www.eufunds.bg Shipka uses a hospitality reservation system “Hotel Computer Systemâ€? provided by “El Tour 95,â€? which is a software product used by MCMRA for all of the facilities managed by the agency. The reservation system is a closed one as it has no interface with other reservation systems. Reservations can be made via the hotel website, but the site has no online payment module. Guests can pay by bank transfer or on-site in cash or via the hotel POS terminals, which operates only with credit cards issued in Bulgaria. Opportunities and Recommendation Property, Location, Principal Opportunities and Recommendation Hotel Shipka Continued operation under an improved model. Sofia city Executive Agency The hotel has a good location and great revenue generating potential. “Military Clubs and Military Unfortunately, it was selected to host the NATO Crisis Center and many Recreation Activitiesâ€? under the of the hotel rooms are used as administrative offices, which has a severe Ministry of Defense impact on its financial performance. In the short term, MOD should operate the hotel under the current model, while in the medium term; MOD should consider selling the property to a reputable international hotel operator. 113 www.eufunds.bg Residence Lozenetz, Sofia, Sofia Region Residence Lozenetz is a government representational property entrusted to the Ministry of Defense and managed by the Executive Agency Military Clubs and Military Recreation Activities (MCMRA). The facility was established in the early 1950s - originally intended as the residence of the Bulgarian head of state; and was constructed on nationalized properties near the center of Sofia. The facility has severe property title issues and is subject to multiple property restitution claims. Lozenetz is in very good physical condition, but has severe investment needs associated with the heating and water and sewage installations. The Residence has upscale accommodation– total capacity 29 beds. Accommodation is provided only to high-ranked official delegations for free and the accommodation capacity cannot be offered to external guests due to the busy official event schedule of the Residence. The Residence has a large equipped kitchen, but does not offer event catering; events are served by different catering companies, selected by the event organizer – not the residence management. The management does not wish to offer catering due to potential allegations of abuse. Lozenetz has a complex price schedule and rates vary depending on the size of the private event and duration. The Residence currently has 5 staff: 2 chamber maids and 2 maintenance personnel, plus the Residence manager. Opportunities and Recommendation Property, Location, Principal Opportunities and Recommendation Residence Lozenetz Continued operation under an improved model. Sofia city This is the only representational property in the sample of properties Executive Agency “Military Clubs selected for detailed review. As such it has very limited prospects to and Military Recreation Activitiesâ€? become financially self-sustainable as it is used for protocol and official under the Ministry of Defense events and its operational costs vastly exceed any revenue that the Residence could generate even by introducing services typically offered by luxury private sector establishments. It is in a very good condition and is used by the administrations for official events and by private parties alike, but at present only external gusts pay to use the Residence. MOD should address this issue and charge the administrations for using the facility. The current building is in very good condition, most of the rooms have been renovated. The facility requires small investment in 114 www.eufunds.bg energy efficiency measures and upgrading the water supply and drainage systems to curb operating costs. MOD should continue operating the facility under an improved property management model – based on financial incentives for good performance, defined financial targets for generating revenues and performance standards with respect to service quality to external guests. MOD should use the generated revenue to offset some of the cost associated with the provision of representational and protocol functions, i.e., reduce the burden on the budget 115 www.eufunds.bg Recreational Facility Ribaritsa, Ribaritsa, Lovech Region The property is entrusted to the Ministry of Defense and managed by the Executive Agency “Military Clubs and Military Recreation Activitiesâ€? (MCMRA) The recreation facility is operational since December 1979, it has its own waste water treatment installation, as the waste water used by the facility flows into the adjacent river “Vitâ€?. It is a large facility constructed on a well- maintained 3.3 hectare wooded lot and has a large barbeque pit available to the facility guests. The facility amenities are geared toward families with children: on average the facility accommodates about 50 children per month. Correspondingly, the facility has a swimming pool, a football field, 2 tennis courts, a volleyball field, ping pong tables and an air rifle shooting range and 2 non- operational fighter jets installed on the property set as monuments. The facility has a total capacity of 178 beds - 85 rooms and 5 apartments and 2 conference rooms – one renovated in 2016 with seating capacity for 30 persons, and a larger conference room with 120-person seating capacity. The facility’s indoor swimming pool operates only from June 15 to September 15 as the heating costs during the winter months are excessive. The pool building houses also sauna, gym and has an open terrace overlooking the woods. The average annual occupancy of the Ribaritsa facility for 2017 (as of August 22, 2017) was 28.7%, while the occupancy during the more active tourist season for the region (December, July and August) was 75%. Average annual occupancy grew by 6% in the period 2015-2016 – from 25% in 2015 to 31% in 2016. The growth trend is attributed to the rising number of accommodated external guests – and increase of about 900 external guests per year, as well as due to improvements of the facility. Food service is provided under a socially subsidized full board program on a week-ahead preorders for the entire vacation package period. The facility charges a small overhead for the different food categories – on top of cost for providing the service, the facility charges 100% overhead on beverages, 50% overhead on food stuff, and 30% overhead on coffee/tea. The restaurant operates a la carte to external visitors and MOD staff alike. Ribaritsa also has a lobby bar with a seating capacity for 30 persons, a traditional style restaurant (mehana-style). The facility restaurant has a 120-person seating capacity indoors, a separate room for smaller gatherings seating 20, and a summer garden with a seating capacity for 190 persons. 116 www.eufunds.bg Customer satisfaction is tracked by the MCMRA – anonymous surveys are distributed to all guest and they place the completed surveys in a sealed box at the reception desk; the survey box is opened and its contents are reviewed and analyzed by a special committee; survey results are used to improve the service offering. Opportunities and Recommendation Property, Location, Principal Opportunities and Recommendation Recreation Facility “Ribaritsaâ€? Continued operation under an improved model. Ribaritsa, Lovech Region This is a very large facility, with an excellent location and a very good Executive Agency “Military Clubs revenue generation potential: both as a tourist accommodation and as an and Military Recreation Activitiesâ€? event venue. The current building is in very good condition, most of the under the Ministry of Defense rooms have been renovated. The facility requires investment in energy efficiency measures to curb operating costs. MOD should continue operating the facility under an improved property management model – based on financial incentives for good performance. MOD should consider defining financial targets and performance standards with respect to service quality and regularly monitor management performance. MOD should continue operating the facility as a recreational facility for military personnel and should consider attracting other public employees, such as law enforcement personnel, to use the facility for recuperative vacations sponsored by the administration. In the long term, MOD may consider outsourcing operational management under a Service Concession or sell the property and use the sales proceeds to subsidize the provision of social benefits to military personnel. 117 www.eufunds.bg Facilities operated by the Ministry of Labor and Social Policy Data Summary 118 www.eufunds.bg Assessment of Operations The property entrusted to the Ministry of Labor and Social Policy (MLSP) is the only training center in the sample of visited government properties. The Center for Human Resource Development and Regional Initiatives is dedicated to designing and delivering trainings, and all activities not part of the educational process, including the dormitory-style hotel accommodation, the restaurant, property maintenance activities and facility security are outsourced to private vendors. The facility is modern and its service offering is on par with that of similar public establishments in other EU Member States; however, at least at the moment its capacity is not used efficiently – a large portion of the new accommodation capacity is used as file storage by the MLSP, despite the availability of vacation older building on site. Selected Facilities Profile: Center for Human Resource Development and Regional Initiatives (CHRDI), Kremikovtsi, Sofia Region CHRDRI is only training facility of the MLSP and is established to design, organize and implement trainings related to social activities. The Center develops methodologies and guidelines on trainings, including interactive trainings for the unemployed – it is licensed to train unemployed in 24 different disciplines. It is also a training facility for civil servants and mentors working under various programs of the Labor Agency. The facility is in very good condition, has been recently renovated it offers modern dormitory-style hotel accommodation. The Center is housed in a 10-hectare wooded park, it has multiple buildings with a total constructed space of over one hectare, including 4 hotel buildings85:; it has a restaurant with 150-person seating capacity, and 9 conference rooms: conference hall seating capacity 60 persons (could be arranged to seat 120 persons), another conference hall with 130 seating capacity, and multiple class rooms-style training facilities. The Center also has a distance (online) learning program and trains remotely on average about 150 persons per year; it maintains a club of lecturers on labor and social topics and an Information Center, including a smart social network of trained personnel, on demographic and social policies in the Western Balkans. CHRDRI has a partnership with the International Labor Organization of the United Nations and it could be established as outsourced location for ILO trainings. 85 One of the renovated dormitory buildings is used to store the MLSP archive. 119 www.eufunds.bg The Center provides accommodation to the staff being trained at the facility and occasionally provides accommodation and access to training facilities to external guests. The CHRDRI has 16 staff, which supports only the educational and training activities. Opportunities and Recommendation Property, Location, Principal Opportunities and Recommendation Training Center for Human Continued operation under the current model. Resources and Regional Initiatives This is the only training facility in the sample of properties selected for Kremikovtsi, Sofia region Ministry detailed review. It is a modern training facility located in a calm forested of Labor and Social Policy area. It has modern training halls and new hotel-style dormitories. MLSP should continue operating the property under the current model – MLSP is engaged only in the design and delivery of educational content – accommodation and food service is outsourced to a private operator. The current management has been successful in attracting private users of the training halls and accommodation capacity, as well as forming partnerships with similar venues abroad, most notably the training center of the International Labor Organization in Torino; it could attract ILO trainings and generate additional revenue to offset operational costs. The MLSP may consider marketing the facility more aggressively to other administrations to attract them in conducting their trainings at the center. 120 www.eufunds.bg 3. Inventory Matrix For the purposes of this analysis and planning for future proposed actions, four categories (A- D) of properties have been developed. The categories are based on the number of criteria met per facility. The elements defining these categories are not exhaustive. They are sufficiently consistent and relevant to inform and be considered in the decision-making process given the current legal arrangements for property management.86 These categories are: • Category A: facilities that have clear ownership titles, and meet a considerable number of the criteria (6 to 10) • Category B: facilities that are identified as non-discretionary based primarily on existing property ownership, and meet a high number of criteria (5 to 7) • Category C: facilities that do not meet all the criteria but have clear ownership titles (3 to 5) • Category D: facilities that meet very few or none of the criteria (less than 3) The categories incorporate existing conditions and facilities relevant for effective property management development. This classification should not be considered as a list of prioritizing criteria for future investments, it rather illustrates good practices, and the degree of effort needed to better coordinate the management of these facilities. None of the facilities visited meets all criteria. All facilities were build 30-50 years ago, and no longer serve the expectations that existed back then. More than two thirds of facilities fall in lower half of the classification with poor property management infrastructure, high demand for investments and upgrades. Many of the facilities are in different states of dilapidation and require heavy investment just to halt the process of deterioration of the assets. This has been clearly communicated by the facility managers to the ministries which operate them. The Government could look into its recreation infrastructure to align its use with the resources available to operate and maintain it to standard. The overall results are poor. 86 Compared to other EU countries, Bulgaria does not have a specific law for managing state property www.eufunds.bg Проект â„–BG05SFOP001-2.001-0009 „Въвеждане на принципа на Ñ?поделените уÑ?луги в организациÑ?та и работата на централната админиÑ?трациÑ?“, финанÑ?иран от Оперативна програма „Добро управление“, Ñ?ъфинанÑ?ирана от ЕвропейÑ?киÑ? Ñ?ъюз чрез ЕвропейÑ?киÑ? Ñ?оциален фонд. Table 7: Inventory Matrix for thirteen selected properties Properties Additional information Total number of Category Sports facilities/Spa Occupancy rate (≥ criteria met (A-D) Marketing (Y/N) Ownership Staff Outsourced Season Online booking improvements Business Plan issues #s services (renovations, Food service Playground satisfaction furniture) Customer Vouchers Recent 40%) “Zoraâ€? 56.18% 14 Food Summer 5 B X X X X X owned “Morsko Utroâ€? 28 Food Summer 6 A MAFF X X X X X X “Vedraâ€? X X X X 7 All Year 4 C “Morsko Land 9 Food Summer 1 D X Koncheâ€? “Lazurâ€? X X X Land 11 Food Laundry Summer 3 C MOI “Izgrevâ€? X X X 11 Cafe Summer 3 C “Zelenikaâ€? X X X X Land 69 Food Summer 4 C Hotel “Shipkaâ€? X X X 40 City 3 C EA|MCMRA “Ribaritsaâ€? X X X X X 40 All Year 5 B “Residence 5 All Year 0 D Lozenetsâ€? ME MFA “ADIS-Holiday 23 Laundry Summer 7 A X X X X X X X Innâ€? “Kamchiyaâ€? X X 2 Summer 2 D W www.eufunds.bg Проект â„–BG05SFOP001-2.001-0009 „Въвеждане на принципа на Ñ?поделените уÑ?луги в организациÑ?та и работата на централната админиÑ?трациÑ?“, финанÑ?иран от Оперативна програма „Добро управление“, Ñ?ъфинанÑ?ирана от ЕвропейÑ?киÑ? Ñ?ъюз чрез ЕвропейÑ?киÑ? Ñ?оциален фонд. Training Center 16 Food All Year 1 D MLSP Accommodation X Maintenance Security www.eufunds.bg Проект â„–BG05SFOP001-2.001-0009 „Въвеждане на принципа на Ñ?поделените уÑ?луги в организациÑ?та и работата на централната админиÑ?трациÑ?“, финанÑ?иран от Оперативна програма „Добро управление“, Ñ?ъфинанÑ?ирана от ЕвропейÑ?киÑ? Ñ?ъюз чрез ЕвропейÑ?киÑ? Ñ?оциален фонд. Annex 3: Strategic Considerations a. Does government want to continue to provide a social benefit to employees? This is perhaps the most fundamental question to be considered. Many governments around the world provide a range of non-monetary benefits to public sector employees. Such benefits include housing, health insurance, pension benefits, training subsidies, subsidized food etc. However, in recent years many of these benefits have been monetized as governments have tried to introduce a “clean wageâ€?. This has several advantages. Firstly, it allows government to easily and accurately assess the cost of the civil service. Secondly, it allows employees the option of using their monetized benefits for something they would prefer to purchase. Thereby reducing the cost to government and increasing the satisfaction of the employee. Health insurance is a different topic since providing such a benefit to all employees reduces the cost of purchasing or providing such a service. In this case government is able to purchase something at a significant discount and pass on the savings to employees. Moreover, it is assumed that all employees care about their health and would prefer to have health insurance and of course government has an interest in having healthy and productive employees. However, recreational services do not seem to fall in the same category. Presumably if the government provided the benefit in cash to all employees and allowed them to choose how to spend it some would choose to go on vacations internally, others abroad, while others might choose not to take vacation at all. As noted above, this benefit was started during the communist era where there were no private facilities providing such a service and overseas travel was limited. This situation has changed and the Bulgarian Government may wish to reconsider its options in a different context. b. Can government efficiently own and operate recreational facilities? There is no evidence that the Government of Bulgaria is better placed to run recreational facilities than the private sector. The case for continuing to provide such a benefit often hinges on the idea that government can provide the service at a lower cost than the private sector. However, the true cost of providing the service remains hidden. Government currently only announces the operating costs of the facilities as if these were the only costs involved in running the facilities. Therefore, in comparing the costs of service provision, the government facilities operating costs are compared to the total costs of provision in the private sector and of course the later are much higher. Managing tourist accommodation establishments is not a typical Government function. The government should focus on providing core public services rather than competing with the private sector to provide what are essentially private goods. The government of Bulgaria and probably 124 www.eufunds.bg Проект â„–BG05SFOP001-2.001-0009 „Въвеждане на принципа на Ñ?поделените уÑ?луги в организациÑ?та и работата на централната админиÑ?трациÑ?“, финанÑ?иран от Оперативна програма „Добро управление“, Ñ?ъфинанÑ?ирана от ЕвропейÑ?киÑ? Ñ?ъюз чрез ЕвропейÑ?киÑ? Ñ?оциален фонд. any government has no additional expertise or abilities in providing recreational services than they do in making cars or clothes. c. Can government calculate the true costs of providing such a service? The true cost of providing subsidized vacations remains hidden. The Government currently only announces the operating costs of the facilities as if these were the only costs involved in running the facilities. The Government would need to calculate the true costs of providing recreational services. The costs that remain hidden include: (i) the full operating costs, including depreciating the assets and providing a regular maintenance and renovation budget; (ii) the opportunity costs of continuing to hold the facilities in state hands rather than providing an opportunity for private investors to develop the land and facilities and create a unique tourism product tailored to the specific conditions and features of the location. This should be weighed against the value derived from providing a social service to selected staff of certain ministries and agencies. Without an accurate idea of the true costs of providing the service, the Government cannot take an informed decision on the future of the recreational facilities it owns. A valuation of the real estate assets would need to be conducted in order to calculate the full costs of providing the recreational services. This would be a costly and time-consuming task but is important in the broader context of maintaining and protecting government property. Once the value is known the depreciation costs would be easily estimated. In addition to these costs, we would need to add the administrative costs i.e. the costs involved in having centralized staff in the ministries overseeing the process, the costs of their salaries and benefits and their full on-board costs (the costs of their IT equipment, rental and office costs). All of these administrative costs are currently covered in the central ministry budgets and could prove to be substantial burden if added to the cost of operating each of the individual facilities. We would recommend making some back of the envelope calculations based on estimates of valuations per square meter until such a time as government can undertake a full inventory valuation. d. How can government improve the facilities under the current model? Adopting a shared services approach and centralizing some of the functions around recreational facilities would help to improve the efficiency of operation in the following ways: • The Government could consider centralizing the management of the facilities or at least some of their functions. At the moment, the facilities are run independently by each administration and some of the civil servants benefit from them while others are excluded. There does not appear to be a strong rationale for operating recreational facilities across the Government, although there might be a good reason to maintain certain facilities (e.g. 125 www.eufunds.bg Проект â„–BG05SFOP001-2.001-0009 „Въвеждане на принципа на Ñ?поделените уÑ?луги в организациÑ?та и работата на централната админиÑ?трациÑ?“, финанÑ?иран от Оперативна програма „Добро управление“, Ñ?ъфинанÑ?ирана от ЕвропейÑ?киÑ? Ñ?ъюз чрез ЕвропейÑ?киÑ? Ñ?оциален фонд. those of the Ministry of Defense) in state hands. Centralizing the operation of the facilities will allow economies of scale in management, reservations and maintenance. • The Government could establish a systematic maintenance budget. At the moment, the facilities are in various states of disrepair. With a sporadic maintenance budget, they are often not able to cover even the costs of emergency repairs and maintenance. A leaking roof or damaged water pipes can result in large damages that would dwarf a regular maintenance budget. The limited budgets of the ministries for operating recreational facilities have led to the closure of recreational facilities, shorter operational periods, operating with less staff, limiting activities, but most importantly have resulted in deterioration of the value embedded in the public property assets. • The Government could consider setting efficient prices. In the short-term, the Government could consider setting minimum prices for some of the facilities. Small increases in the price will not affect demand since the prices are currently so low. For example, many of the visited facilities on the sea side sell a room for less than the price of a sunbed and umbrella on the beach. The demand side survey revealed that staff would support price increases provided these are associated with improvements of the infrastructure and service quality. The increases in the price will help to offset some of the operating costs. If the facilities are allowed to keep some or all of their revenues, there would be an incentive to increase the revenues especially if this was matched to bonus payments for management e.g. tied to occupancy rates or centrally gathered customer feedback. e. Can the private sector effectively be incorporated to meet government’s needs? Privatizing unwanted properties and transforming recreational facilities into income generating properties Properties no longer needed by the Government to implement strategic objectives or social policies should be either disposed of, or converted to “investmentâ€? or “income-producingâ€? properties.87 The disposition path includes privatization of the recreational facilities that the Government no longer needs or assigning the properties to serve a different social function, such as social housing, educational facilities or other depending on the particular case. In many EU Member States: Finland, the Czech Republic, Germany, France, and Holland88 the public authorities tasked with managing government properties regularly assess their real estate portfolio and sell the properties that are no longer needed by their governments. The options for transforming the facilities no longer required by the Government into “income producing 87 For detailed discussion see: Kask, Kaia: “Public sector real estate asset management models and their evaluationâ€?; University of Tartu Press, Estonia (2014) 88 For Details see Annex 126 www.eufunds.bg Проект â„–BG05SFOP001-2.001-0009 „Въвеждане на принципа на Ñ?поделените уÑ?луги в организациÑ?та и работата на централната админиÑ?трациÑ?“, финанÑ?иран от Оперативна програма „Добро управление“, Ñ?ъфинанÑ?ирана от ЕвропейÑ?киÑ? Ñ?ъюз чрез ЕвропейÑ?киÑ? Ñ?оциален фонд. propertiesâ€? also fall in two groups: increasing revenue generation by drastically improving public property management or partnering with the private sector in managing and operating government- owned assets under various lease and concession arrangements. While the Government has full discretion with respect to privatizing unwanted properties, it needs to consider that, at least in the short term, the sale of properties will face certain challenges. Many of the public properties are located within oversaturated real estate markets, which could impact the sales price. Government also needs to consider the pool of potential buyers, realizing that investors may acquire the assets for speculative purposes rather than to use the facilities to develop a competitive tourism offering. The Government needs to consider the benefits and shortcomings of privatizing the facilities. If handled correctly, it could attract investment from reputable hospitality operators, while the downside is that the privatization creates opportunities for capture by non-state interests that could be detrimental both to the overall privatization process as well as to Bulgaria’s tourism sector. In many cases, the more advantageous option for the Government would be to partner with the private sector in developing the properties, which in addition to receiving income from lease or concession payment could also enhance Bulgaria’s tourism sector. Outsourcing operational management to the private sector Outsourcing facility operation would lead to the introduction of commercial practices without changing the ownership model. Public properties operate well below private sector operational and financial benchmarks. State-owned real estate is used to implement government policies and deliver public services, rather than generate profits. Managers of state-owned properties are not focused on deriving maximum financial gain from using the property assets, but on providing the public service. Public properties lag the private sector not only in terms of financial results but also with respect to the quality of services provided through the properties. A valid concern is that many government properties are not in a condition that allows effective delivery of public services. Attracting private sector investment could address capital improvement needs, especially considering the chronic shortage of budget funds for renovation and retrofitting activities. The decisive factor for a more effective and efficient property management is not the ownership structure but the strict adherence to clearly defined performance criteria and introducing the correct management incentives. In the process of introducing standards of economic efficiency and effective organizational management, the Government could take advantage of performance-based management techniques applied by the private sector, especially with respect to promoting a more customer-centric orientation of the services and increasing the financial effectiveness of the service delivery. When entrusting the management of government assets, it is critical that private sector operators are only engaged under a performance based-management model that clearly 127 www.eufunds.bg Проект â„–BG05SFOP001-2.001-0009 „Въвеждане на принципа на Ñ?поделените уÑ?луги в организациÑ?та и работата на централната админиÑ?трациÑ?“, финанÑ?иран от Оперативна програма „Добро управление“, Ñ?ъфинанÑ?ирана от ЕвропейÑ?киÑ? Ñ?ъюз чрез ЕвропейÑ?киÑ? Ñ?оциален фонд. defines the cost savings and efficiencies in delivering the services.89 The same criteria used for measuring the performance of private sector operators should be applied also in cases where government units retain the property asset management function. For detailed discussion see: Kask, Kaia: “Public sector real estate asset management models and their evaluationâ€?; 89 University of Tartu Press, Estonia (2014) 128 www.eufunds.bg Проект â„–BG05SFOP001-2.001-0009 „Въвеждане на принципа на Ñ?поделените уÑ?луги в организациÑ?та и работата на централната админиÑ?трациÑ?“, финанÑ?иран от Оперативна програма „Добро управление“, Ñ?ъфинанÑ?ирана от ЕвропейÑ?киÑ? Ñ?ъюз чрез ЕвропейÑ?киÑ? Ñ?оциален фонд. Annex 4: Legal Options and Considerations While the legal options available for facilities classified as private or public state property are similar, some of the options are available only for private state property (e.g. privatization or transforming a recreational facility into a state-owned commercial company and vesting the assets in that company by way of an executive act) while other options are available only for facilities classified as public state property (e.g. concession for use or vesting in a state-owned company by virtue of a law). This annex outlines these options and considerations for each. Options for recreational facilities classified as private state property Privatization Lease of private state property (up to 10 years) Vesting in a state-owned company Works concession (up to 35 years) Private state property Concession Services concession (up to 35 years) State body manages the property directly Continued management by the State body assigns management state body to shared services center State body assigns management through procurement contract (up to 5 years) If the Government decides to discontinue providing recreational services through a particular facility classified as private state property, it may privatize it. Privatization of private state property with a tax evaluation of more than BGN 10,000 would be carried out pursuant to the procedures set out in the Act on Privatization and Post-Privatization Control (APPC), unless the property in question is assigned to the Ministry of Defense, to political parties or to state-owned companies (Art. 1, APPC). A partnership option is to lease the facilities classified as private state properties to the private sector. Private operators of leased facilities classified as private state property have more flexibility with respect the use of the property, including choosing not to use the facility for recreational purposes. The procedure for leasing out private state property follows the tendering 129 www.eufunds.bg Проект â„–BG05SFOP001-2.001-0009 „Въвеждане на принципа на Ñ?поделените уÑ?луги в организациÑ?та и работата на централната админиÑ?трациÑ?“, финанÑ?иран от Оперативна програма „Добро управление“, Ñ?ъфинанÑ?ирана от ЕвропейÑ?киÑ? Ñ?ъюз чрез ЕвропейÑ?киÑ? Ñ?оциален фонд. provisions prescribed in the Rules on the Application of SPA. In addition, there are a number of exceptions to these rules; facilities classified as private state property may be leased without a tendering procedure to: â—? foreign diplomatic or consular representatives, as well as to international organizations with an order of the Minister, the Regional Governor or the head of the administration to which the corresponding property had been assigned; â—? private and public operators for health, education or humanitarian purposes or to meet the relevant needs of the population; â—? non-profit legal entities for public benefit, based on approval of the request of the non-profit by Minister, the Regional Governor or the head of the administration to which the corresponding property had been assigned. â—? political parties or to trade unions following a corresponding decision of the Council of Ministers. Options for recreational facilities classified as public state property Change classification to private state property (see options above) Lease of public state property (up to 10 years) Vesting in a state-owned company Works concession (up to 35 years) (only by virtue of a law) Public state property Concession Services concession (up to 35 years) Concession for use (up to 25 years) State body manages the property directly Continued management by the state State body assigns management to body shared services center State body assigns management through procurement contract (up to 5 years) Facilities classified as public state property must be operated only for the purpose for which they have been assigned to the corresponding public body: e.g., as recreational facilities serving a social function. There are however, exceptions to this rule, in case: (i) a concession has 130 www.eufunds.bg Проект â„–BG05SFOP001-2.001-0009 „Въвеждане на принципа на Ñ?поделените уÑ?луги в организациÑ?та и работата на централната админиÑ?трациÑ?“, финанÑ?иран от Оперативна програма „Добро управление“, Ñ?ъфинанÑ?ирана от ЕвропейÑ?киÑ? Ñ?ъюз чрез ЕвропейÑ?киÑ? Ñ?оциален фонд. been awarded for operating the property by a third party; or (ii) the property has been leased out to an international organization in order to comply with the requirements of an international treaty to which Bulgaria is a party. Recreational facilities do not require the legal protection inherent to a public state property classification, as long as they are not instrumental in discharging specific policy objectives. Correspondingly, when it comes to considering the future of facilities classified as public state property, it is always advisable to first make a decision on whether it is justified to retain the classification of the property as public and if the justifications for this classification are no longer present, to re-classify the facility as private state property. 131 www.eufunds.bg Проект â„–BG05SFOP001-2.001-0009 „Въвеждане на принципа на Ñ?поделените уÑ?луги в организациÑ?та и работата на централната админиÑ?трациÑ?“, финанÑ?иран от Оперативна програма „Добро управление“, Ñ?ъфинанÑ?ирана от ЕвропейÑ?киÑ? Ñ?ъюз чрез ЕвропейÑ?киÑ? Ñ?оциален фонд. Annex 5: Outsourcing Models Concessions, as defined under the recently adopted Concession Act, are legal tools specifically designed to enable partnerships with the private sector. The Concessions Act, which entered into force on 1 January 2018, replaced the Concessions Act of 2006 and the Public- Private Partnership Act of 2012,90 transposes Directive 2014/23/EU91 and expands the choice options available to public bodies for incorporating the private sector in the management and operation of state-owned resources. The new framework introduces more flexible terms, specifically designed to encourage public-private partnerships and outsourcing the management and operation of state resources under concession arrangements, especially in vastly underutilized area of construction and building works. Outsourcing property management under one of the concession mechanisms of the new act is particularly appropriate for improving service quality and attracting private investment in state-owned property, which may be leading concerns at least with respect to some of the government facilities in light of the chronic lack of public funding for repairs and upgrades. Depending on the stated objectives, administrations may choose between three types of concession arrangements: â—? Works Concession under the provisions of Art. 7, Concessions Act of 2018 â—? Services Concession under the provisions of Art. 8, Concessions Act of 2018 â—? Use Concession under the provisions of Art. 9, Concessions Act of 2018 Works Concession Services Concession The Work Concession instrument is particularly The Services Concession instrument suitable for appropriate for outsourcing the upgrading and facilities located in commercially attractive areas operation of recreational facilities with a but in need of expensive maintenance. The commercially attractive location, but in dire need Services Concession is a public-private partnership of upgrading. Work Concessions are essentially model for outsourcing service provision (other than “renovate to operateâ€? contracts. Albeit being construction and capital repair services) and defined as a “concessionâ€? this instrument is a form property management to a private operator in of a public-private partnership, under which the exchange for the right to receive income generated 90 Both pieces of legislation were associated with a number of limitations that have diminished their applicability. Due to a number of limitations, the Concessions Act of 2006 has been used almost exclusively with respect to exploration and utilization of natural resources, while its application for granting building concessions has been insignificant. The repealed Public Private Partnership Act of 2012 has not been used at all, because of the very narrow range of cases to which it could be applied. 91 Directive 2014/23/EU on the Award of Concession Contracts establishes rules on the procedures for procurement by contracting authorities and contracting entities in EU member states by means of a concession, whose value is estimated to be not less than EUR 5,186,000. Member states needed to transpose this directive in their national legislation by 18 April 2016. 132 www.eufunds.bg Проект â„–BG05SFOP001-2.001-0009 „Въвеждане на принципа на Ñ?поделените уÑ?луги в организациÑ?та и работата на централната админиÑ?трациÑ?“, финанÑ?иран от Оперативна програма „Добро управление“, Ñ?ъфинанÑ?ирана от ЕвропейÑ?киÑ? Ñ?ъюз чрез ЕвропейÑ?киÑ? Ñ?оциален фонд. public body assigns to a private operator the in the course of operation. As with the other type implementation of the construction works, the right of concessions the private concessionaire bears the to operate the renovated buildings and the operational risk. The Services Concession may operational risks. It is suitable not only for include certain construction works, i.e. ongoing designing and constructing new buildings but also repairs and maintenance of an existing facility, for attracting private investment for the allows engaging private operators in the provisions reconstruction or restoration of existing buildings. of public services that benefit the society or the Such concessions may be awarded for a period of public body. Such concession may be awarded for up to 35 years, and the private concessionaire a period of up to 35 years and the concessionaire bears, in addition to the operational risk, also the bears all operational risks. building risk, i.e. the probability of events, facts or circumstances, which may affect the cost or the duration of the building works. A concession procedure could be initiated by the administration or a private entity that is interested in obtaining a concession for a specific property. At the time of opening the concession procedure, the public body must define the forecast value of the concession. It is calculated as the total expected income from using the property for the entire concession period, excluding VAT. If the value of the concession equals or exceeds EUR 5,225,000, the concession must be awarded under the trans-border concession procedure following much stricter provisions in conformity with of Directive 2014/23/EC. If a private entity initiates the procedure for awarding a concession, it needs to provide a justification and a financial-economic analysis. If the proposal is for a initiating a procedure for awarding a Works Concession, the private party should also provide an investment offer, including a pre-investment study and an investment project fiche specifying the forecasted technical and functional characteristics and the economic parameters of the building that will be constructed or renovated. If the administration chooses to award a concession to another private entity, different that the one that developed the investment proposal, the public body should compensate the private entity that has developed the investment proposal. This right to compensation was not available under the previous concessions regime and would likely incentivize for private entities to initiate concession procedures. If a facility is outsourced under a concession arrangement, the concessionaire may receive payments directly from the users of the facility, from the public body that has awarded the concession or from both. The Works or Service Concession arrangements also allow payments from the administration awarding the concession to the private party in the following cases: â—? When no payments would be due by users of the services provided by the concessionaire; or, if such payments are due, the concessionaire would not be the one to receive them; â—? When the aim is to receive a socially acceptable price of the services offered by the concessionaire; 133 www.eufunds.bg Проект â„–BG05SFOP001-2.001-0009 „Въвеждане на принципа на Ñ?поделените уÑ?луги в организациÑ?та и работата на централната админиÑ?трациÑ?“, финанÑ?иран от Оперативна програма „Добро управление“, Ñ?ъфинанÑ?ирана от ЕвропейÑ?киÑ? Ñ?ъюз чрез ЕвропейÑ?киÑ? Ñ?оциален фонд. â—? In case the prices of the services offered by the concessionaire are regulated by the state. The opportunity to include in the concession contract a clause, under which the public body may owe a fee to the concessionaire and, in return, require the concessionaire to provide services below market prices is very relevant to outsourcing the operation of the recreational facilities of the state. This mechanism is particularly appropriate in cases where the administration in question wishes to outsource the renovation or operation of state-owned recreational facilities and transfer the operational risk, while retaining the possibility to provide recreational services to public sector employees at affordable rates. 134 www.eufunds.bg Проект â„–BG05SFOP001-2.001-0009 „Въвеждане на принципа на Ñ?поделените уÑ?луги в организациÑ?та и работата на централната админиÑ?трациÑ?“, финанÑ?иран от Оперативна програма „Добро управление“, Ñ?ъфинанÑ?ирана от ЕвропейÑ?киÑ? Ñ?ъюз чрез ЕвропейÑ?киÑ? Ñ?оциален фонд. Annex 6: Approaches to Managing Lodging Facilities 1. Operational models for lodging facilities The development of the private tourism sector and the emergence of new practices in recent years has moved forward quickly utilizing various management models, standardized financial practices, sharing resources and economies of scale. At the same time, government-owned recreational facilities continue to lag behind, at least in terms of quality of service offering, and operate under limited budgets and with minimal capital investment; instances of pooling of resources, shared back and front office services, coordination among government-owned recreational facilities is rare. Below are examples of private sector approaches, which the Government may wish to consider. Hotel owners and property management companies have developed different operating models to increase service quality, as well as profitability. In the hotel business a lease agreement is typically an agreement between two parties where the hotel company leases land, property and sometimes equipment from the owner of the property. Leasing, first and foremost, removes owners from day-to-day operations for an extended period of time. Operating an accommodation property through a lease agreement offers a variety of advantages and limitations for owner and operator. Lease advantages and limitations Party Advantages Limitations Owner Limited experience required Stable and predictable returns Easier to predict returns Lack of appetite from brands and operating Lower market/operating and financial risks companies assumed No control over hotel operations Defined term Less control over hotel positioning Appealing to institutional investors Potential loss of upside business Lessee Enables brand growth (if a brand) Higher market/operating risks assumed Potential benefits from upside Responsible for operating loss risk and rent payments Control over quality of product and capital expenditure investment to strengthen brandTermination and exit might be difficult Liability on balance sheet Potentially stronger rights in the event of foreclosure Potential impact on credit rating, debt capacity, share price Adapted from: Collins, S., (2015). Which hotel operating model is right for you? HVS Retrieved from https://hvs.com/StaticContent/3672.pdf. In contrast, a management contract is an agreement where a brand or a lodging management company takes responsibility for hotel operations in exchange for a fee. In this case, the financial burden is entirely on the owner. This model is especially popular in emerging markets utilizing tourism as an economic development tool since affiliation with international hotel chains often 135 www.eufunds.bg Проект â„–BG05SFOP001-2.001-0009 „Въвеждане на принципа на Ñ?поделените уÑ?луги в организациÑ?та и работата на централната админиÑ?трациÑ?“, финанÑ?иран от Оперативна програма „Добро управление“, Ñ?ъфинанÑ?ирана от ЕвропейÑ?киÑ? Ñ?ъюз чрез ЕвропейÑ?киÑ? Ñ?оциален фонд. brings such advantages as brand name recognition, established reservation systems and professional operational expertise.92 Management contract advantages and limitations Party Advantages Limitations Owner Limited experience required No control over hotel operations No operations team or management effort Higher market/operating risks assumed Easier to finance with strong brand and Operating loss risk +fees payable operating company Lack of control over brand reputation Access to development, design and Bound to brand –imposed global initiatives operations support from brand Solid upside potential after fees Brand Brand growth with minimal investments Earnings limited to fees Company Growth of operating structure Incentive fees subject to higher market risk Brand + management revenues with Dependence on ownership for project minimal investment development and capital expenditure – Opportunity to earn incentive fees potential brand risk Lower market risk Adapted from: Collins, S., (2015). Which hotel operating model is right for you? HVS Retrieved from https://hvs.com/StaticContent/3672.pdf. Franchising in the lodging sector has become a useful vehicle for owners to capture brand benefits while reducing financial investment. A franchise is “an agreement between a hotel-motel company (usually a national or regional chain) and an independent hotel owner in which the owner pays a fee to use the name, trademarks, and various services offered by the chainâ€?.93 Choosing the franchise affiliation impacts the property’s profile and ability to compete in the local market, generate profits, manage a particular image or market orientation, and benefit best from referrals. This has become a popular model in many markets globally. Franchising remains the most popular mode of operation in North America (85%) and Europe (50%). 92 Gee, C.Y. (2008). “International Hotels Development and Managementâ€? Second Edition (p. 219 -221). Lansing, MI: American Hotel & Lodging Educational Institute. 93 Rushmore S., & O’Neil J.W., & Rushmore, Jr., S. (2012). “Hotel Market Analysis and Valuationâ€? (p. 15). Chicago, Illinois: Appraisal Institute. 136 www.eufunds.bg Проект â„–BG05SFOP001-2.001-0009 „Въвеждане на принципа на Ñ?поделените уÑ?луги в организациÑ?та и работата на централната админиÑ?трациÑ?“, финанÑ?иран от Оперативна програма „Добро управление“, Ñ?ъфинанÑ?ирана от ЕвропейÑ?киÑ? Ñ?ъюз чрез ЕвропейÑ?киÑ? Ñ?оциален фонд. Franchise advantages and limitations Party Advantages Limitations Owner Full operational control within brand Experienced operating team or third-party standards operator required plus management effort Instant market presence and access to Higher market/ operating risk global distribution systems Operating loss risk +fees payable Access to development, design and Lack of control over brand reputation Operations support from brand Bound to brand – imposed global initiatives Management assistance Stronger upside potential for profits after fees (5 -9% of rooms revenue) Group purchasing Loyalty programs Procedure manual Brand Growth of the brand Risk of quality of operation, guest and Company Allied expansion employee satisfaction, and brand image Increased brand fees with minimal Fees limited to franchise fees investment and effort Does not contribute to the growth of the Low market risk and no operating risk operating structure Ability to terminate if non-compliance issues Source: Collins, S., (2015). Which hotel operating model is right for you? HVS Retrieved from https://hvs.com/StaticContent/3672.pdf. In summary, owners of accommodation and hospitality assets have a choice of operational models. Each has advantages and limitations. These are weighed by owners when determining which model is best for their situation and summarized below. 2. Standardized accounting and financial reporting The Uniform System of Accounts for lodging and hospitality operations is the standardized tool for tracking lodging operations financial data such as departmental expenses, income before fixed charges, and general administration. Further, it enables accounting for the asset’s depreciation. Adoption of the uniform system of accounts is not only useful for internal tracking revenues and expenses, but also enables comparisons with similar operations within a portfolio and across portfolios through creating profit and loss statements.94 Further operational sustainability is achieved through revenue management techniques similar to those first pioneered by airlines. Demand fluctuations, seasonality and service intangibility all 94 For valuation of properties, investors and lenders typically require and use financial performance stated following the uniform system of accounts. 137 www.eufunds.bg Проект â„–BG05SFOP001-2.001-0009 „Въвеждане на принципа на Ñ?поделените уÑ?луги в организациÑ?та и работата на централната админиÑ?трациÑ?“, финанÑ?иран от Оперативна програма „Добро управление“, Ñ?ъфинанÑ?ирана от ЕвропейÑ?киÑ? Ñ?ъюз чрез ЕвропейÑ?киÑ? Ñ?оциален фонд. contribute to the need for lodging operators to use revenue management techniques in order to make timely decisions and increase profitability.95 Due to the unique characteristics of lodging operations such as seasonality, the daily perishability of lodging room inventories and the many consumable goods a lodging operation sells, systematic financial reporting is a priority. Lodging expenses have one component that is fixed and variable expenses that varies directly with hotel occupancy and the use of the facility. Fixed expenses are typically not directly dependent on the hotel occupancy. In contrast, variable expenses such as laundry operations or management fees depend directly on the business volume. It is crucial for lodging operators to track the profitability of daily operations in order to efficiently run a property. The profit and loss (P&L) or income statement is the main document that measures hotel operations for a specific period of time. The statement provides information on operation of different departments and compares actual monthly operations to the budget established for the month, year and longer forecasts. 96 3. Operational efficiency indicators One of the main operational efficiency indicators is revenue per available room (RevPar). RevPar is considered to be the most important day to day indicator of operations because it serves as a tool for the hotel management to maximize room revenues. RevPar is used by owners, operators and investors for forecasting and determining cash flows needs. It measures both rooms sold (occupancy) and the ability to achieve the highest average daily rate97. This key performance indicator is contained in the Profit &Loss statement and annual financial reports. While effective revenue management, in general, requires specific training and software tools, calculating RevPar is widely used to compare performance of similar hotels within the same market area (i.e. within a competitive set). It also enables comparison of the property’s performance to the current budget and previous years’ performance. 95 Legoherel, P., & Poutier P. (2013). Revenue management for Hospitality and Tourism (pp.6-19). Woodeaton, Oxford: Goodfellow Publishers Limited. 96 Hales J.A. 2005. “Accounting and Financial Analysis in the Hospitality Industryâ€? (pp.68). Burlington, MA: Elsevier Inc. 97 Total room revenue divided by the total number of available rooms. See Room Revenue, Rooms Available. Average Daily Rate (ADR) -A measure of the average rate paid for rooms sold, calculated by dividing room revenue by rooms sold. Occupancy (Occ) -Percentage of available rooms sold during a specified time period. Occupancy is calculated by dividing the number of rooms sold by rooms available. (https://www.strglobal.com/resources/glossary) 138 www.eufunds.bg Проект â„–BG05SFOP001-2.001-0009 „Въвеждане на принципа на Ñ?поделените уÑ?луги в организациÑ?та и работата на централната админиÑ?трациÑ?“, финанÑ?иран от Оперативна програма „Добро управление“, Ñ?ъфинанÑ?ирана от ЕвропейÑ?киÑ? Ñ?ъюз чрез ЕвропейÑ?киÑ? Ñ?оциален фонд. 4. Shared services in lodging operations Many hotel chains use a shared services model to increase productivity and revenues. Hotel corporations use an integrated back-office software that allows for managing rooms and function space inventory; accounts and purchasing. This model can significantly increase productivity across lodging operations and ensure efficiency within budget. The use of computerized property management systems. Property Management Systems (PMS) have proven useful not only for managing guest check-in/check-out, but also for hotel distribution management, hotel revenue management, managing customer data, etc. Improved technology in back-office systems, such as guest accounts and financial transactions, has helped to increase operational efficiency, and, in turn, decrease labor costs---all enabling increased financial viability. Some hotel chains have started to share not only services, but also buildings. Developing dual– brand hotels is becoming very popular among large hotel chains: hoteliers combine different brands under one roof and share back-office operations, recreation facilities and sometimes even the front-desk. Combining back-office operations offers many benefits to hoteliers such as sharing staff and space and, thus, reducing expenses. 5. Training and professional development Inadequately trained staff can operate lodging facilities. However, specifically trained staff, certified in lodging operations accounting and management can grow returns, protect physical assets and take pride in their facilities. Adequately trained staff are integral to efficient and productive operations; their skills and experience directly affect financial performance and determine success of each lodging property. Technology utilization continues to influence the lodging industry requiring employees to have digital skills and to be competent with Property Management Systems. Higher level positions, such lodging revenue manager and food and beverage managers, requires analysis of financial and operational reports in order to make strategic decisions. This variety of responsibilities and diversity of jobs requires far more than “on-the-jobâ€? learning. For a viable lodging operation, appropriate levels of operational specific education, training and experience are needed. There are different technical and vocational levels of education in the hospitality industry such as university degrees, certifications, trainings and short courses. Hospitality associations such as American Hotel and Lodging Educational Institute (AH&LEI)98 offer a variety of programs and certifications online. 139 www.eufunds.bg Проект â„–BG05SFOP001-2.001-0009 „Въвеждане на принципа на Ñ?поделените уÑ?луги в организациÑ?та и работата на централната админиÑ?трациÑ?“, финанÑ?иран от Оперативна програма „Добро управление“, Ñ?ъфинанÑ?ирана от ЕвропейÑ?киÑ? Ñ?ъюз чрез ЕвропейÑ?киÑ? Ñ?оциален фонд. Length Program Content Delivery Cost of time Edx Students can gain valuable insight Online Free 6 week and advice from international course “Introduction hospitality experts, explore pricing https://www.edx.org/cours to Global strategies, and learn how to hire e Hospitality stellar employees /introduction-global- Managementâ€? hospitality -cornellx-hosp-101x-0 The course can teach the Online - each course is USD 302 4 week Coursera fundamentals of beginning your broken up into a collection (total); USD course own hospitality powerhouse, of video presentations, 79/course “Build a focusing on the hotel demand readings, peer reviews, and Hospitality management, distribution, and practices quizzes. Businessâ€? revenue management. Divided into four segments and culminating https://www.coursera.org/s with a capstone project, students pecializations/hotel- can earn a certificate to showcase management their achievement Udemy The course is focused on the Online USD 95 7 hours basics of owning and operating an https://www.udemy.com/h “How to independent hotel with an ow-to-open-an- Open an organizational strategy and independent-hotel/ Independent operating manual. Hotelâ€? ACS Distance An in-depth course for those who Online Approximately 100 Education run and manage their own hotel. It USD 420 hours involves learning about all aspects https://www.acs.edu.au/co “Hotel of managing a hotel and the many urses/hotel-management- Managementâ€? sections within it. It will teach you 280.aspx how to organize your staff to work effectively as a team, and how to manage areas such as food service, front desk, maintenance, activities, and staff Adapted from: Capterra Hotel Management Blog. (2017, August 15) “The top 9 Online Hospitality Courses to Kickstart Your Careerâ€?. Retrieved from http://blog.capterra.com/the -top-6-online-hospitality-courses-to-kickstart- your-career 6. Real time property management systems Property management software provides the basic functions of an information system that enables guests to make reservations; support staff with check-in and check-out procedures; tracks financial transactions, etc. When introduced as an integrated system, it enables separate departments such as food and beverage, housekeeping, sales and catering, front desk and others to be linked and to 140 www.eufunds.bg Проект â„–BG05SFOP001-2.001-0009 „Въвеждане на принципа на Ñ?поделените уÑ?луги в организациÑ?та и работата на централната админиÑ?трациÑ?“, финанÑ?иран от Оперативна програма „Добро управление“, Ñ?ъфинанÑ?ирана от ЕвропейÑ?киÑ? Ñ?ъюз чрез ЕвропейÑ?киÑ? Ñ?оциален фонд. contribute information to financial and accounting systems.99 A study from 2017 compared the most popular property management systems based on number of users, customers and social platform popularity. Opera PMS and Maestro, identified as top systems, are summarized below. Table 6: Examples of Property Management Systems’ advantages and disadvantages Advantages Disadvantages Opera Property • Profile management • Outdated online interface for some Management • Accommodation management • Can be slow during check-in/check - out System by Oracle • Housekeeping management process • Multi-property configuration • Multi-language and global currency support Maestro • Can be hosted on the cloud or installed • It was noted that there is a steep learning on Windows curve with the software • Lots of features are available a la carte, which is good for smaller hotels with unique needs • Maestro PMS provides excellent support, according to reviews • Integrated mobile housekeeping application Source: http://blog.capterra.com/the-5-most-popular-hotel-management-software-solutions-for-small-hotels- compared/ 7. Setting quality of service standards Quality control of lodging operations and services is fundamental to financially viable operations. Carefully defined quality of service standards and the regular monitoring of operator compliance with these standards is the tool used to determine actual performance. While most major hotel chains define their own standards, governments also assign hotel grades. International best practice shows that the most typical quality of service standards should be included in the service level agreement between the owner and the operator of a property under a performance-based property management model. The standards should be applicable to any operator public/private. Examples of such standards include room cleanliness paired with example how this is to be measured and controlled; typically, customer satisfaction is measured by the number of customer complaints. 99 Biederman, P. S. & Lai, J. & Laitamaki, J.M & Messerli, H. R. & Nyheim, P. D. & Plog, S. C. (2008) Travel and Tourism an industry primer 141 www.eufunds.bg Проект â„–BG05SFOP001-2.001-0009 „Въвеждане на принципа на Ñ?поделените уÑ?луги в организациÑ?та и работата на централната админиÑ?трациÑ?“, финанÑ?иран от Оперативна програма „Добро управление“, Ñ?ъфинанÑ?ирана от ЕвропейÑ?киÑ? Ñ?ъюз чрез ЕвропейÑ?киÑ? Ñ?оциален фонд.