Attempts to Gain Control of Critical Infrastructure Have Emerged. The State Must Act, Says NKÚ Head

The enormous losses are primarily due to the unsatisfactory condition of water infrastructure. According to the Supreme Audit Office (NKÚ), the renovation of public water and sewage systems should be an investment priority for every water company, a responsibility stemming not only from law but also from their key mission. Without active state assistance, these companies cannot address the multi-billion modernization debt.

The Standard discussed the serious situation and the necessity of taking corrective measures with Ľubomír Andrassý, the NKÚ Chairman.

After the publication of your report, several fundamental themes resonated in connection with the conducted audit. Citizens who try to save water and pay quite a lot for it were probably unpleasantly surprised to learn that if water companies modernized outdated and leaky water mains, they could supply this enormous currently lost volume to households for free or for a symbolic euro. What is actually the role of NKÚ in such findings?

We are not the institution that can defend the citizen, because primarily the citizen should be defended by the state regulator. In Slovakia, we have an independent regulatory authority – ÚRSO (Network Industries Regulation Office) created to fulfill this goal. It must protect not only the water company's interest in generating an appropriate volume of finances for its regular operation and development, which must be reflected in the regulatory formula. On the other hand, the independent regulator must protect citizens so that the water company does not transfer everything it wants into the regulatory formula, which consumers would then pay for in water and sewage prices.

Eastern Slovak water managers wanted to achieve through public pressure that we would also issue them a kind of "positive certificate" for their bond project. However, this is not our competence, and our actions could go beyond our competencies and compromise the mission of external control. In accordance with applicable rules, the National Bank of Slovakia declared its position, assessing the project only in the context of fulfilling statutory obligations. However, it did not stamp that the bond owner has guaranteed returns – that depends solely on the financial condition of the issuer, the water company, and no one else.

So you are the institution that periodically checks whether what you've described actually functions.

The national control institution has an irreplaceable role in this strategic state infrastructure segment, which stems from our constitutional jurisdiction and legal competencies. To fulfill this societal responsibility, we cannot allow ourselves to be pushed into a corner or succumb to any media or legal attacks from the external environment.

Can you be more specific?

For example, voices from eastern Slovakia claim that the office is misleading, that its chairman is lying, that our statutory activities damage their reputation. The attacks come because we publicly alert competent institutions and company shareholders – municipalities and cities – to be cautious when handling their property, because shares are municipal assets, not private wealth. Eventually, when an audit comes, municipal representatives will have to answer simple questions: Why did you exchange shares for bonds? Did you base your decision on impartial expert opinions or internal analyses? Why did you set the share price at 10, 13, or 20 euros?

Every municipality in Slovakia received shares from the state 20 years ago, with an accounting value of around 30 euros at the time. Therefore, it is logical that a municipality or city that exchanged shares for bonds at a lower value must be able to explain to control institutions and, most importantly, to its citizens why it acted this way. Not to mention that such actions weaken their position in water companies, where management has more influence or control, not shareholders. This was certainly not the state's intention when transferring billions in assets to water companies and entrusting control to shareholders, which should only be municipalities.

It sounds logical, but why are NKÚ's positions challenged, for example, by one of the largest water companies from eastern Slovakia, which has nearly a million consumers?

A question that those attacking and ridiculing others' work should answer substantively and argumentatively. From my perspective, the other side uses very strong words like "they lie", "they mislead", or "they don't understand the topic", while these general statements are not supported by evidence. The control office is not here to become a punching bag, to react to various media attacks from those being controlled. They present numbers to us during the audit, provide decisions, and controllers work based on these obtained facts. The office does not have the competence to assess planned projects or investment activities.

And what were your next steps?

From our perspective, our experiences, and the view of external experts, we could have drawn the attention of those who hold decision-making power - mayors, city representatives, or local council members - to the potential risks and weak points of the project. Since this involves critical state infrastructure and public corporations, the responsibility also lies on the shoulders of local governments. I decided to inform the former head of the technocratic government about our perspective on the matter. I was pleased that Ľudovít Ódor began to act actively and created a team to more broadly describe the risks, to which he also invited a representative from the Supreme Audit Office (NKÚ).

Was he the one who attempted to solve the issue?

 He was the one who created space for professional discussion about this significant risk. He formed a team that assessed risks with the participation of experts and specialists. There were representatives from the finance sector, our office, as well as from justice and the environmental sector. They described the potential risks of the bond program of the East Slovak Water Company. Through cooperation between the Supreme Audit Office and the Association of Municipalities and Towns of Slovakia, or the Union of Cities of Slovakia, we sent a different perspective on this technically complicated topic to both representative self-government organizations. This was to ensure that those who needed to make decisions would have access to arguments beyond what the project's proponent offered.

I assume such a group reached serious conclusions.

They reached conclusions based on their long-standing professional and expert experiences in this segment of public policy and economics. The risks described in their document correlated significantly with our previous findings and analyses, based on which we prepared our own audit action focused on water company management, the actions of the state regulator, and fulfilling commitments in water and sewerage infrastructure that the state pledged upon entering the European Union. Recently published audit conclusions confirmed our risks. Recent government negotiations, actions by the environmental sector, and reactions from some VVS management members indicate that we're hitting the mark.

Interesting...

From my perspective, an interesting aspect of the "Water Sings" bond program is the fact highlighted by many mayors that the project did not originate as a shareholders' initiative. The project emerged as an activity of the water company's management, or more precisely, as an initiative of the civic association "Shareholders Club", which is not an official part of the joint-stock company. This means a situation where shareholders - local governments - are on the twenty-fifth track. The state, through its inaction, is on the hundredth or blind track. So far, the only entity systematically addressing water infrastructure development and modernization has been the audit office. I believe that after September's government meeting, and thanks to the interest of several parliamentary representatives, this will change.

How do you personally perceive this issue? You worked in parliament and at the local government level - what is your opinion?

Personally, I had the opportunity or luck to observe multiple attempts to control the water infrastructure segment. As a city council member in Spišská Nová Ves, I witnessed how a foreign investor was muscling its way into water management. Today, the situation under the Tatras and in central Slovakia is tense, primarily because water companies as infrastructure owners struggle to generate resources for repairs or development. Meanwhile, infrastructure operators - foreign owners - are smiling because money flows to their accounts from consumers every month without issues, and foreign headquarters rejoice in positive financial results. I am convinced that in these cases, the relationship between the water company and the operating company is unbalanced. Infrastructure owners and their shareholders - Slovak municipalities - are struggling with modernization debt, falling into the red economically, while on the other hand, the operator generates profits from services and payments from citizens, which end up outside the water sector, outside the region, and are not used for their primary purpose: repairing and developing water and sewerage systems.

This is certainly not what we wanted in Slovakia.

 was one of the few city council members who publicly spoke out and voted against this. Even then, I was attacked by various lobbying groups and intimidated, but I considered my actions principled and substantiated by factual arguments and experiences from abroad. Just four or five years ago, NAKA investigators visited me, wanting to know more about the actions of people around the sub-Tatra company and the activities of some mayors and city representatives. This situation shows that something is rotten in the justice system, that in cases of corruption or abuse of power, responsible parties must act in real-time and space. One decade is incredibly long for responsible institutions to derive personal or criminal liability. But I thought those times were in the past - I was mistaken. For example, during meetings recently organized by ZOMS on the water topic, I felt like I was part of an action or mafia series, where some bosses think they are above the law and that their behavior will intimidate honest and decent people.

Have you experienced more such situations during your career?

My second specific experience is from Bratislava. I had the opportunity to work at the level of the largest municipal district, as well as at the city level. At that time, Mayor Milan Ftáčnik had to address with city council members a problem related to the previous city leadership's actions, which allowed Infra Services - a company controlled by private sector individuals - to enter the water company environment. Stopping such business attacks in the water sector was only possible by changing legislation, which was initiated by the Supreme Audit Office after its first comprehensive audit of nine water companies. However, even other legislative modifications do not eliminate grey zones and examples of attempts to control critical state infrastructure or hidden privatization of public corporations, which we can observe in eastern Slovakia.

According to the law amendments initiated by your office, only municipalities and cities can own shares. So what is the problem?

Today, the law states that only municipalities or cities can own shares. However, another legal provision allows the company's management to transfer shares under certain circumstances to a legal entity or an association where a municipality or another legal entity, including a civic association, is a part. Therefore, the legislation does not speak of just one exclusive shareholder but allows other possibilities. Moreover, we already have water companies that have shares from municipalities that did not want to own them. So the law says one thing, but practice brings something different, and it is the duty of the audit office, state institutions, or lawmakers to respond. Without an active approach from those responsible, things will not change on their own, and an ambiguous environment plays into the hands of the "clever" or those with ulterior motives.

This seems almost illegal if municipalities were supposed to remain the owners.

We are not saying that someone violated the law because the law was set up in a way that allowed the clever to pursue their own business activities. That is why we are now speaking loudly that first and foremost, a water company is a public corporation, managing public property - it is not private property, and not a single euro belongs to board or supervisory board members. This is property that the state owned and transferred to water companies 20 years ago, which are meant to operate as public corporations, precisely because their shareholders are public, self-governing institutions. Management, together with shareholders, should develop and take care of existing infrastructure, increase its value - even in cooperation and with state financial support - but this must go hand in hand with control and, if necessary, repression.

Clearly, this was not the case, and water companies were living their own lives...

We have both positive and negative knowledge. Several water companies took on the state's responsibilities and invested in sewerage infrastructure development, but then had no free resources for repairing existing water mains. Municipalities and cities helped them with their activities, but that is not enough because the debt in the water sector is climbing above 10 billion, and companies and their shareholders cannot solve this challenge within their own boundaries. However, I must note that this business operates in a monopoly world where strong competition does not exist, and essentially everyone who has a water tap pays. And that is also why the state must play the role of a transparent regulator and must actively exercise supervision and control. Otherwise, water trade can easily become a lucrative business for the chosen and the "clever".

When can such a negative situation occur according to you?

For example, when the General Assembly turns into a social or cultural performance. When there is insufficient discussion about strategic documents that shareholders should decide on, and the water company's management creates barriers for mayors to access submitted materials with great difficulty. Or when you change voting ratios and support an environment where one shareholder is favored over another. All of this creates risks that the key players in the water infrastructure segment - undoubtedly the shareholders, namely municipalities and cities - become subordinate to management and inadvertently, consciously or unconsciously, do what management wants.

Can we discuss examples of where such an environment might function?

In the recent past, we could observe this in Bratislava Water Company, and even today, there are questions about whether everything is in line with the law regarding its subsidiary companies. I can use another example from the other end of the republic. The East Slovak Water Company, together with a civic association - which I've already mentioned is outside the official structure of this corporation - organizes activities across Slovakia presenting the "Water Sings" project. The water company transfers substantial finances to the civic association so that someone else speaks on behalf of the company, which has a monopoly position in the region and can compete for drinking water consumers only with itself. Or by having a good business model, or with state help, it is able to expand existing infrastructure and thereby acquire new customers.

So if I have a cottage in the east where drinking water and sewerage are currently planned, does the same apply? I won't be able to choose?

A customer in the east cannot simply choose a drinking water supplier because only the water main administrator can bring water to their home or cottage, and in the east, the East Slovak Water Company is the dominant operator of public water mains. There are very few exceptions where a specific local government is both the owner and operator of small infrastructure. But right now, I cannot tell you whether this model works in which villages in the eastern part of our country.

You say the state gave municipalities property they were supposed to take care of.

The state transferred existing water infrastructure, property from state water companies, to water joint-stock companies where local governments are shareholders, regardless of whether they had water mains or sewerage at the time. The value of one share was then valued at one thousand Slovak crowns, which is something over 30 euros today.

On the surface, it appears that municipalities acquired this property relatively easily and cheaply at the time. Why was it like this?

The state evaluated that this was significant infrastructure for municipalities and cities. They have the obligation to ensure drinking water supplies for citizens. And how can they ensure this? By bringing water in cisterns or digging wells. They can fulfill this responsibility through water infrastructure. Therefore, it was logical in my view that the state transferred state enterprises to local governments free of charge, expressed trust in them, and believed that municipalities as shareholders would behave like good stewards. A good steward should not only take care of property but also increase its value and not sell or transfer it to someone else in any way. And this applies regardless of whether I'm talking about water infrastructure or a school, kindergarten, or cultural center.

It seems many of them didn't do this for 20 years.

If we had done so, we would not be in a situation where the infrastructure's wear and tear is over 50 percent. Where more than 30 percent, nearly a third of produced drinking water, is lost in the ground or doesn't reach the end consumer.

In professional circles, it is often noted, and you also mention, that water losses are high because we have leaky pipes, some water mains are over 70 years old?

In Slovakia, we have water mains that were built during the first Czechoslovak Republic or in the interwar period. Many investments were made in the 50s and 60s of the last century, and you can see how old some pipes are. This also impacts water losses, which move at the level of 51 million cubic meters annually. Some places are better, some worse, in larger cities losses are lower than in small end villages. In these places, we reach losses even above 60 to 70 percent, but even in these remote corners of Slovakia, people have the right to have drinking water from a water main. Today in Slovakia, we have more than 440 municipalities that don't even have a water main in the third decade of the 21st century, not to mention sewerage or wastewater treatment plants.

Water companies disagree with your conclusions and claim that losses are lower and that you don't take into account the type of losses, such as water used for pipe flushing.

A loss is just a loss, and the numbers we used we got from water companies, my colleagues, the auditors, didn't invent them. And it's true that the total loss NKÚ talks about considers multiple variables. It includes technical water used for filter and pipe cleaning after accidents, we can talk about invoiced or non-invoiced water. Ultimately, it's still a loss that is also on the citizen's account. Someone always has to pay the loss. If a thousand liters of drinking water are produced, it should reach the consumer, but realistically only seven hundred liters arrive for various reasons, so the remaining 300 ended up in the ground. Simple, but in my opinion clear, with today's water loss being paid not just by the water company, but by every citizen in the water and sewerage price.

Slovakia doesn't yet have significant drinking water supply problems. However, in the recent past, we were among countries where drinking water consumption per citizen was significantly above the international average. How is it today?

Looking at the statistics, I can state that people's attitude toward drinking water has changed in Slovakia. Water consumption per citizen has significantly decreased in recent years. People have realized it's a precious commodity, and rising prices have forced them to behave more responsibly. Today, people no longer water their gardens with drinking water, don't wash cars with it, and don't shower for a quarter-hour like in the past. Today, for example, a two-person household consumes 50 to 60 cubic meters of water per year. And thanks to citizens' changed approach to drinking water, we are now approaching a good average in Europe.

Can you show our reader on a simple example what such high losses look like?

I'll try, but I'm not sure if I'll succeed. I would explain it with this example. If during the year we lose more than 51 million cubic meters of drinking water due to leaky pipes, cleaning, and frequent emergency situations, then looking at the average annual consumption of a one or two-person household, we could supply this commodity to almost a million Slovak households for a symbolic euro.

And what about finances?

One of the fundamental questions. Without money, without sustainable financial management, and without a clear vision of how the state can sustainably support the development of this critical infrastructure, we won't move forward. Today, the modernization and investment debt in water management climbs above 10 billion. To get out of this dead-end and not conclude in a few years that the debt in this segment is reaching 15 billion, the environmental sector, together with the government and parliament, must show how we can set up a sustainable financing system. How we can use public or European resources to support reducing our debt in the state's critical infrastructure, how we can build and renovate water mains, sewerage, and wastewater treatment plants through state support.

What does this mean?

Each stakeholder today knows that neither shareholders (municipalities and cities) nor company managements can handle this neglected debt. Time cannot be stopped, existing pipes are aging, we have an obligation to build new networks and water sources, and postponing the solution will only worsen the situation. If the state is to actively intervene, it must clearly say that it cannot be just about giving, but also about control, strengthening state responsibility - which can be achieved by modifying legislation to create a legal framework so that shareholders with primary responsibility for the joint-stock company's functioning are not just municipalities and cities, but also the state, for example through the ministry that oversees this public policy.

Some water companies are trying to go their own way, and one of them offered shareholders the option of exchanging shares for bonds. Can such an activity, in your opinion, generate the missing finances?

I tried to find, but did not find a comparable project in Europe or the world, through which a company would issue bonds, but not for the purpose of obtaining finances for its strategic development, but for paying out and thus draining resources intended for development. Or whether similar companies like water companies issue bonds with a commitment of two decades and a fixed annual yield of 6 percent. Not to mention that yields are not guaranteed, the economic results of companies depend on many variables they themselves cannot influence, because they operate in a strictly regulated environment and have more than 95 percent of resources from regulated activities. And these resources cannot be used for paying yields. The question is, from what unregulated activities can a company generate nearly two and a half million euros annually for paying promised yields?

I admit that I have not heard of something like this, but nothing is impossible.

Yes, everything is possible, and I also admit that I don't have to know everything. However, if you analyze the economic results of water companies and evaluate their economic performance not just for the last three years, but for 20 years of their existence, you will find that many numbers are entering the red zone. Just looking at how many resources went into repairs, maintenance, development, what obligations these companies have, how much of their economic result consists of income exclusively from regulated activities, what is the wear and tear of existing infrastructure. Looking at the set of numbers, anyone can ask how the company is able to generate money to pay, for example, 6 percent yields and at the same time create a discriminatory environment where one shareholder can enjoy income in the municipal budget and another will have zero and with it the obligation to find sources for modernizing water infrastructure, which fulfills one of the key original obligations of local government towards its inhabitants.



But there's also the question of whether this isn't a way for mayors who are struggling with a lack of finances to obtain resources for fulfilling other legal obligations?

I understand that today, especially small municipalities have a problem ensuring not only original but also transferred competencies because the state does not give them enough resources. But the solution should not be getting rid of shares they received for free and looking for other financing sources where it is at best on the edge of legality or contrary to good stewardship principles. Resources generated from water and sewerage fees paid by citizens should be used exclusively for activities related to the main mission of water companies. They should not serve as an alternative financing source, and in this area, I welcome the view of the Minister of Environment that resources generated by water companies should be used only for their main business activities. However, to fulfill this principle, a law amendment is most likely necessary.

In one interview, you said that municipalities that exchanged shares for bonds can take, for example, an investment loan due to expected yields, but what if the water company is unable to pay the promised yields?

They can very easily find themselves in a trap and fall into secondary insolvency. They will be able to solve this within their own budgetary possibilities, but municipal and city budgets are already significantly stretched, they might have to take money from a bank to refinance already launched activities. But what is essential is that they will report unpaid yields as a receivable. And I admit that I would not want to be in the shoes of a mayor who finds himself in such a situation. He has a budget set up even for revenues that did not occur in the first, second, or third year. One beautiful morning, a smiling gentleman will knock on his door and offer to buy the receivable for 80, 90, or maybe even an incredible 100 percent. What will a municipality in financial need do, desperately needing resources? I leave the answer to each reader, but this is also one of the risks that can result in taking control of a strategic public corporation not through buying shares, which the law prohibits, but through acquiring municipalities' receivables from the water company.

I will return once more with a question about the position of shareholders. Isn't a model that segregates shareholders of one company discriminatory?

I also ask myself why those who exchange shares for bonds, having relieved themselves of responsibility for controlling and influencing the strategic joint-stock company, should have financial benefits? Should they have benefits from a joint stock company where the rule of equal treatment should apply, and those who still have shares, who have not relieved themselves of responsibility, want to exercise their rights, will have nothing and will be left with only tears in their eyes? This is dual treatment of shareholders, and I think it is in sharp contradiction with the basic principles of functioning of joint-stock companies.

So ultimately, someone else decides for the shareholders?

Let's look at who represents shareholders today, who speaks on behalf of VVS shareholders, but what is even more interesting, who speaks for the strategic public corporation. It is a civic association called the VVS Shareholders Club. But this association is not part of the joint-stock company. When I read the statutes of the association, which is headquartered in Bratislava, and how the rules of communication, rights, or obligations of members are defined, I asked myself: Am I reading the statutes of an association functioning in the 21st century, or are these rules applied in totalitarian systems? I'm not saying the association operates contrary to the law, but I would not want to be part of an organization that wants to see the world in only one direction. What is more serious is that this association has long been speaking for the water company, speaking on behalf of shareholders without shareholders, and this should be a raised finger for every mayor and mayor who represents their local government as a VVS shareholder.

Given your meeting with the Minister of the Environment, it seems that this problem will finally start to be addressed.

We are simply fulfilling our legal obligation, and in addition to the conclusions of control actions, we have offered responsible institutions our view of potential risks we have identified in the water management segment. And this is not only our duty but also our competence. Not to mention that when looking at what is happening around us, water is not only a strategic commodity but also a key to life, sustainable development of a city, region, and state.

What has already been achieved in this matter?

I am pleased that we have moved the state, that we have brought our report to the parliament, that the government discussed it, and that the Minister of the Environment has also accepted our recommendations.

It looks like a long-term run.

I think it cannot be done with one legislative change. Several measures are needed. From share ownership, through clear definition of sources flowing into water companies from citizens or from the state, to changing the rules of functioning of public corporations, companies where the state or local government is a shareholder. These are companies that manage public property, decide on the use of state or European funds, but in many cases, the management of such commercial companies behaves as if the property and finances were not public, but private. And no less important is that finally, not only the environmental department but also district offices should start fulfilling their control or supervisory function.

What can the Supreme Audit Office (NKÚ) offer in terms of control?

Since the time of Karol Mitrík, we have set up a system of direct path, which means we never look left or right, to our or your politicians, but our conclusions and findings must be based exclusively on factual, indisputable evidence that we obtain directly from those being controlled, which we do not find on a table or in an anonymous submission. Only clear and provable findings can we transfer to protocols, and then we have the obligation to speak about these findings, because this is how we can contribute to positive changes.

So you have the obligation to speak about control results, alert to risks, help those responsible for implementing public policies, for using public state finances, to do it better. How should they proceed?

It is up to them whether they listen to us, whether they accept our recommendations or not, but within our international rules, international standards, within our independent position, we have a mechanism called "follow-up" controls. Within these, we return to segments we described two, three, four years ago. And we warn much more seriously that we were here recently and whether a positive change occurred or not. We gave you recommendations, you committed to taking measures to minimize those risks and problems. And we usually go back after three years to see how the system works, whether the measures brought a positive change, or whether the subject declared one thing and did another.

How should an ordinary citizen, a consumer, perceive this control?

Control should not be a tool for closing things down. It should be a tool to say whether something works or not, how to change it, and how to offer a different perspective from someone who has lived and worked in the system for 20, 30 years. That is precisely what independent control is for, and that's why we say no one should be afraid of controls, because already in elementary school from the first grade, when we had mathematics, we did correctness tests. And control is a test of correctness, to check whether what you do works, whether your internal control tells you that those responsible for the budget, property, public procurement, projects are doing what they should.

What is your message to society and competent authorities?

Everyone who manages and makes decisions needs feedback, and that can only be offered by an effective internal control environment. If internal control is decimated, the statutory representative responsible for the institution does not have basic information about managerial financial management and strategic functioning.

This is a memento that NKÚ has been pointing out for a long time - that in the last five or seven years in Slovakia, it seems internal control has been deliberately weakened and decimated. And if you decimate internal control, you decimate the entire system of managerial and financial management, and such a decimated system of public power cannot be replaced by one institution, such as an independent control institution like NKÚ.

Simply put, if the system of internal control does not work in institutions, we will not move forward. And this cannot be replaced by the idea of increasing NKÚ's staff by 100 percent or creating x more control institutions. Control must be an integral part of management, must come from risk analyses, and through an effective system of internal financial, administrative, or subsequent control, society can be assured that the state functions transparently, that public resources are handled economically, and that personal or criminal responsibility is imposed for the failures of specific individuals.

Source: Mitaľová, Petra. 2024. “Objavili sa snahy o ovládnutie kritickej infraštruktúry. Na ťahu je štát, tvrdí šéf NKÚ.” n.d. Štandard, September 22, 2024. https://standard.sk/765579/objavili-sa-snahy-o-ovladnutie-kritickej-infrastruktury-na-tahu-je-stat-tvrdi-sef-nku/.

Accessed: 27. 3. 2025