One billion for social enterprises: unclear rules, control failures and sometimes benefits for beneficiaries rather than socially vulnerable people

Press release on audit No. 21/22 – 25 July 2022

The SAO audited how the Ministry of Labour and Social Affairs (MoLSA), the Ministry of Regional Development (MoRD) and the Centre for Regional Development (CRD) distributed public funds to support social enterprises from two operational programmes — OP Employment (OPEm) and Integrated Regional Operational Programme (IROP) between 2015 and 2021. The audit showed that the distribution of these subsidies amounting to almost CZK 1 billion was accompanied by a number of shortcomings. In this way, even ineffective and inefficient projects were also supported. Subsidies often helped their beneficiaries rather than socially vulnerable people. For example, one recipient of the subsidy used EU money of almost CZK 2.9 million to buy real estate from her husband. In addition, MoLSA and MoRD set unclear rules for social entrepreneurship, so that their implementation was often only formal.

The aim of social enterprises is to employ and socially integrate people disadvantaged on the labour market, such as the long-term unemployed, people after serving a prison sentence or people with disabilities.

The discrepancies occurred despite the fact that ministries and the CRD set up a ‘dense sieve’ in the selection process. Up to 76 % of applications not meeting the criteria were rejected. Out of the original 1,676 applications, only 405 projects were eventually subsidised. The SAO also audited 12 selected subsidy beneficiaries where the auditors examined 16 projects for almost CZK 63 million.

While a number of supported social enterprises used the subsidy effectively and efficiently, half of the projects in the audit sample were, on the contrary, assessed to be limitedly effective and efficient, or even as completely ineffective and inefficient. One of the reasons for this was insufficiently set rules by the ministries. For example, there were no limits on the maximum amount of support per project participant or per job created. The support of one person in the OPEm project, for example, exceeded the annual average of CZK 170 thousand up to six times, when it exceeded CZK 1 million per year.

The requirements for compliance with the principles of social entrepreneurship were set inappropriately, so they could often be fulfilled very easily. For example, in order to comply with the condition of environmentally responsible business, it was sufficient to provide three receipts for the purchase of environmentally friendly products (e.g. cleaning products). Three accounting documents per year on the purchase or delivery of goods or services from companies from the same or neighbouring region were enough to comply with the conditions for meeting the needs of the local community, regardless of the fact that the companies were even a hundred kilometres away.

In controlling European money from IROP, the SAO revealed a significant systemic deficiency. It consisted in reimbursing ineligible and therefore ineffective expenditures to the beneficiaries of the subsidy for the purchase of real estate from relatives. In addition to the above-mentioned case of payment of almost CZK 2.9 million for the acquisition of the real estate from a family member, which represented 69 % of the total subsidy, the SAO auditors revealed two other similar cases. The reason why these shortcomings occurred was a significant failure of the management and control function both on the part of the CRD, which recommended the projects, and also on the part of the MoRD, which reimbursed these expenses.

The SAO auditors also found that in a number of cases new social enterprises were created with significant personnel ties to their anticipated customers and suppliers. The motivation for establishing new social enterprises was often the economic benefits flowing to the beneficiaries rather than the actual help to disadvantaged groups of people. Some of them did not even hide this reason in their subsidy applications. Despite this, the vast majority of audited enterprises do not achieve the economic goals set in their business plans. For example, their sales were up to 80% lower than planned, which is also a risk for the long-term independent functioning of these social enterprises.

Communication Department
Supreme Audit Office

print the page