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Real Time Audit

-The Practice in Israel*

*    Contributed by the State Comptroller's Office, Israel

The dynamics of modern decision-making processes and their potentially far-reaching consequences, created the need for an active and relevant audit, namely, Real Time Audit. This type of audit, raises interesting philosophical issues, concerning the scope of authority of State Audit, and its relation to the executive branch. The State Comptroller of Israel carries out real time audit and in exceptional cases, even intervenes in the course of the decision-making process. For instance, the State Comptroller did so when dealing with long range projects or processes such as the absorption of mass immigration of Soviet Jewry in Israel during 1990-1991 or the development of the Lavi fighter aircraft.

In exceptional cases, in order to prevent heavy losses, when they could have been avoided, the State Comptroller intervenes in real time, during the decision-making process itself. This is done not by dictating or even recommending which decision should be taken, but by bringing to the decision-maker's attention, relevant information that they should consider during the decision-making process. The State Comptroller will also intervene when it is clear that a certain decision preferred by the administration might result in a violation of the law.

Following are several examples :

• An appeal to the Minister of Finance to reconsider a certain proposal adopted by the ministerial committee for selling government corporations, when information reached the State Comptroller that the proposed deal undervalued the assets of the firm.
• The State Comptroller addressed the Finance Minister during the course of the deliberations to approve the sale of the corporation: i.e. after the government had already adopted the decision to approve the sale, and before the sale was finally approved by the Finance Committee of the Knesset (Israel's Parliament).
• An appeal to a municipality to reconsider its initiative to build municipal offices and a school on the basis of certain credit arrangements that were highly disadvantageous. At the same time, an appeal was made to the Ministry of Interior, which had approved the credit arrangements, to reconsider the matter as well. This intervention actually resulted in a reassessment by those concerned and a savings of $25 million.
• Intervention in an enormous development project in Jerusalem, before the final contract was signed with the private entrepreneur, when it became clear that the public authorities were about to sign a contract much too disadvantageous to the public interest.

Given below is an extract from the audit report regarding the privatization of a government corporation, as noted in the first example above and as published in the State comptroller's Annual Report in 1990 :'

"The Jerusalem Economic Corporation was established to contribute to the city's economic development by encouraging industry and trade. The corporation dealt with developing industrial and trade areas in the city and adjacent suburbs. The structures that it built were leased to entrepreneurs and facilitated establishment of their enterprises. Throughout the years the corporation concentrated under its ownership the majority of land tracts designated for industry and trade and a smaller proportion of those for commercial enterprises. As a result, the corporation accumulated substantial power, and its negotiating position with respect to tenants and potential tenants was very strong. As it was a public corporation whose main purpose was developing the city, the corporation did not utilize its strong position to increase profits.

At some of the tracts owned by the corporation, development had been completed, and generally, the structures were mostly occupied. Other tracts like those in the Atarot industrial area and in Mishor Adumim, the development process had not been completed and a small number of buildings erected are still vacant. In the course of events, there exists a larger commercial risk in those areas that development has not been completed and private entrepreneurs are likely to be more indecisive whether to invest large sums to complete the development. In other words, private investors usually capitalize projected income in less developed areas at a higher capitalization rate than those areas where development is complete.

In accordance with the government's general policy to reduce its involvement in the economy's activity, the Government Companies Authority decided in mid-1989 to sell the government's stock in the corporation. Since, with property management there is no expectation of attracting specialized knowledge from abroad or opening new marketing channels, the primary purpose of selling the corporation was to generate the maximum revenue for the national treasury.

In the opinion of the State Comptroller, this objective could have been achieved while ensuring the public interest in developing the city. By transferring the economic strength of the corporation to private owners, potential entrepreneurs face a single entity which controls the major land reserves zoned for industry and trade. This entity is not restrained by public welfare considerations. Also, continued development of outlying industrial zones will be dependent on general profitability considerations of the new owners.

This transfer of economic power to a business entity did not contribute to increasing the sales price for the government. Had the corporation's assets been sold, even in large units, it would have been possible to increase the number of buyers that would have competed to acquire the properties and through this to eliminate the monopoly and increase the possibility of commanding a higher sales price.

Selling the corporation as a whole reduced the government's revenue from another aspect. The State Comptroller's office estimated the value of the corporation's properties which were fully developed. From this estimate it is apparent that it was possible to receive the maximum amount tendered for purchase of the entire corporation, and to retain government control of those sites whose development had not yet been completed. This result is plausible since, as regards the continued development of the city, the state is more optimistic than are private developers and, therefore, private developers are not likely to pay the full value for areas in which development has not been completed. The tracts in these areas could have been sold at a later date and significantly enhance the government's revenue. In this manner it would have been possible to avoid control over the majority of land reserves necessary for continued development of the city by one business entity."