The controversial deal over the expropriation of a Valletta property was first exposed by The Sunday Times of Malta last May. Leonard Callus dissects the National Audit Officer’s report on the scandal that led to parliamentary secretary Michael Falzon’s resignation.

The events leading to last Wednesday’s NAO report about the Gaffarena deal started on May 31, 2015 when this newspaper reported how Mark Gaffarena had made a mint on a property in Valletta.

The newspaper described how the government paid €1.65 million in cash and land to Mr Gaffarena to expropriate the half ownership of a palazzo in Old Mint Street between February and April 2015.

In less than two months he was paid €516,390 and acquired parcels of land measuring more than 10 football pitches in total. Mr Gaffarena bought part of the property for a fraction of the price just weeks earlier.

It later transpired that the land in question was grossly undervalued and estimated to cost around €2.9m, while the damning NAO report has established “collusion” between the Land Department and Mr Gaffarena.

The contents of the report

On June 5, 2015, five days after The Sunday Times of Malta broke news of the Gaffarena scandal, six Opposition MPs asked the National Audit Office to investigate the matter and put forward 18 questions. These are the questions and a summary of the NAO findings.

1. Did taxpayers get value for money?

No. The NAO did not deem this expropriation as constituting value for money in the light of the vague public purpose, as well as the undervaluation of government land disposed of and the substantial payments made to Mr Gaffarena.

2. Were principles of good governance and transparency observed?

The NAO established that the standards expected in terms of good governance were lacking. The Government Property Department’s quick and decisive action to advocate these expropriations, without any discussion or analysis, was deemed incomprehensible. Since no written record about the meetings held exists, the NAO had to rely on verbal testimony provided by the officials involved, which was riddled with inconsistencies.

3. Did any public officials or civil servants furnish confidential information to third parties?

Mr Gaffarena was privy to sensitive government-related information, placing him at an unfair advantage over the other co-owners, as he could anticipate the government’s intention to expropriate the remaining undivided shares. Circumstantial evidence reviewed by the NAO indicates that certain critical confidential information was diclosed.

4. If so, were the actions of such public officials in breach of the Criminal Code? Were rules governing the actions of civil servants breached?

The NAO remarked that the determination of whether the Criminal Code has been breached was outside its mandate.

5. Did the government property division make an honest assessment when it classified the Valletta property as a building rather than a historical site?

The expropriation of 36, Old Mint Street as a historical building, rather than a building, would have resulted in less of a disbursement by the government since its open market value would have been adjusted to take into account the cost of the limitations imposed by such classification. While this building is not scheduled by Mepa, Valletta as a whole is on the national protective inventory. Thus all Valletta buildings are subject to the same level of scrutiny as in the case of scheduling.

6. Was the advice of the Superintendence of Cultural Heritage sought in the assessment of the property as a building site?

No. The advice of the Superintendence of Cultural Heritage was not sought by the Government Property Department.

7. Has the deal set a dangerous precedent that will force the government to expropriate all properties rented out for commercial purposes/offices by 2028 – the deadline for eviction according to the revised rent laws?

The NAO did not consider it reasonable to assume that this expropriation would serve as a precedent. Public purpose should determine the government’s acquisition of property rather than other characteristics, such as lease expiry. However, this case has established that the government may expropriate an undivided share of a property, even in cases when it owned no previous share in the property.

8. Did the Government Property Department reply to a legal letter received last August? If not, why?

The NAO established that the Government Property Department did not reply to the letter, dated August 15, 2014, submitted by the legal representative of the Cefai family to the Building Industry Consultative Council (BICC). This correspondence bore no influence on the decision to expropriate, as negotiations had already started between the department and Mr Gaffarena. Before the Cefai family’s legal letter, the estate management director Charles Camilleri (who has since resigned) had already submitted ­correspondence to parliamentary secretary Michael Falzon advocating the acquisition, while the consultant architect had already been engaged to value the property.

9. Who was the Government Property Department negotiating with last year?

The NAO reached the conclusion that it was the estate management director who assumed the primary role of negotiating with Mr Gaffarena. However, the NAO said these negotiations could not have been concluded without the endorsement of the director general, Ray Camilleri (who resigned last year), and Dr Falzon’s final authorisation. The NAO also noted the involvement of an officer in Dr Falzon’s private secretariat, who initially served as liaison between Mr Gaffarena and the Government Property Department, acting on Dr Falzon’s instructions.

10. Were the valuations on parcels of land given to Mark Gaffarena accurate and fair?

There was a notable discrepancy between the Government Property Department’s rates and those established by the NAO. All but one of the valuations differed significantly and the total variance was €1,733,000, to the detriment of the government. Although this discrepancy may be partly attributed to the subjectivity of such valuations, the NAO criticised the department’s failure to consider key facts that bore a direct and significant impact on the property’s value.

11. Did the Government Property Department practice due diligence in giving Mr Gaffarena the property in Manwel Dimech Street, Sliema, when its value will increase next year?

Yes. The valuation prepared by the department’s architect reflected this consideration and was accounted for when establishing value.

12. Was the hefty expenditure justified when citizens have been waiting decades to be paid smaller amounts for expropriated property?

The NAO considers the discretion exercised by Dr Falzon in determining who was to be paid for expropriations as absolute and lacking in terms of fairness and transparency. It recommended that pending expropriation payments be settled according to established criteria that take into consideration the period such dues have been outstanding and the materiality of amounts payable. The process should be managed by the department and not at ministerial level.

13. Who made the request for expropriation and who decided to purchase it gradually?

On July 28, 2014, Mr Gaffarena offered to exchange his one-fourth undivided share of the Valletta property for government-owned agricultural land already leased to him. However, Dr Falzon had met Mr Gaffarena before this date and advised him to pursue the matter with the Government Property Department. Shortly after receiving Mr Gaffarena’s letter, in a minute to Dr Falzon dated July 31, 2014, the estate management director favourably advocated the exchange. The endorsement of the director general and the final authorisation by Dr Falzon concluded the exercise.

14. Is it normal practice for the Government Property Department to expropriate property in fractions?

There is no legal obligation for the department to expropriate an entire property, as opposed to an undivided share. However, the former option would certainly have presented a stronger argument for public purpose. Although not illegal, the NAO deems the expropriation of these undivided shares as highly irregular, particularly when one considers the circumstances providing context, the sequence of events and the lack of documentation prevalent throughout.

15. Does the government really need this building, paying more than €3 million, when it has many other properties that can house the Building Industry Consultative Council?

No. The allocation of the property to serve as offices for the BICC was a temporary measure and not the reason why 36, Old Mint Street was expropriated.

16. Does it make sense for the government to expropriate first one quarter and then another quarter when it would have cost less to buy it all at once?

The justification for the piecemeal approach instead of the entire property was unconvincing. The director general’s claim of lack of funds as the reason was deemed as entirely unacceptable by the NAO given that funds for acquiring the entire property were to be shortly available with the department’s budgetary expropriation allocation for 2015, which stood at €7.2 million. Equally unacceptable was the explanation put forward by the estate management director who sought to justify the department’s piecemeal expropriation by saying that Mr Gaffarena was the only co-owner who had approached the department.

17. Was it Mr Gaffarena who chose the land he was given since he has a commercial and strategic interest in the parcels of land in question?

The only documentation that indicated that Mr Gaffarena had in fact identified the properties that were to be exchanged were the minutes submitted to Dr Falzon. The NAO found no evidence or documentation substantiating how Mr Gaffarena chose the properties intended for exchange, how the department was informed of these and whether Dr Falzon was consulted. The absence of such documents hindered the audit process and limited this office’s ability to fully establish who was informed and consulted when the properties were being identified.

18. Considering the chronology of events, does the deal merit disciplinary or criminal action against those who failed in their duties?

The NAO is not mandated to instigate disciplinary or criminal proceedings.

The other owners of Old Mint Street

The other co-owners could bring a claim against the government for the payment of their respective share of compensation established for this expropriation.

It is legally possible that the government acquires undivided shares in a property through expropriation. However, the advice provided by the Attorney General to the Internal Audit and Investigations Department, supported by the NAO, is that compensation must be paid to all co-owners in proportion to their share in the ownership.

The President’s declarations were that two one-fourth undivided shares of the property were to be expropriated, making no reference to a specific co-owner.

Compensation must be paid to all co-owners

Thus, the expropriation affects all the co-owners of the property in the sense that a quarter undivided share would be taken from all the co-owners and the relative compensation would be consequently due to each and every one of the co-owners and not only to Mr Gaffarena alone.

In both expropriations, the compensation payable to Mr Gaffarena should have been equivalent to one-fourth of the value of the one-fourth undivided share.

The Prime Minister is also using this argument in his application in court filed last Thursday to nullify the expropriation agreement.

To what extent has the Gaffarena scandal damaged the government? The Times of Malta columnist Martin Scicluna and sociologist Michael Briguglio weigh in on the debate.

Has the Gaffarena scandal damaged the government?

Martin Scicluna: Yes. Undoubtedly, it has damaged the government. All evidence shows that there was collusion going on, as well as maladministration. Moreover, this week’s findings come on top of other cases of bad governance.

Michael Briguglio: Yes, it is one example among others of the governance deficit that characterises the current Labour government.

Should Dr Falzon have resigned earlier?

Scicluna: No, I believe he was right to wait to for all the evidence.

Briguglio: Yes.

Should he step down as an MP?

Scicluna: Stepping down from a ministerial post is enough of a punishment. Leaving Parliament would be an overkill.

Briguglio: That is up to him and the constituency he represents.

Has the Prime Minister acted correctly in waiting for the NAO report?

Scicluna: It is a really difficult judgement call to make. It is part of human nature to be loyal to one’s colleagues and to find it difficult to wield the knife. I think it was right for the Prime Minister to wait for the conclusion of the investigation.

Briguglio: No. The Prime Minister is looking increasingly weak in relation to the interests representing Labour’s pre-electoral promises and only seems to take action when he has no other viable political way out.