Accessibility of foreign funds dictates local government investments
Eestlased Eestis 08 Jan 2014  EWR
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National Audit Office of Estonia
TALLINN, 8.01.2014 - The National Audit Office found that local authorities have often not thought through their investment needs for the coming years and the main strategy documents – the budget strategy, development plan and sectoral development plans – do not comply with one another in terms of the planned investments. As local authorities do not have enough money for investments, they plan their investing activities on the basis of what they can obtain money for from one fund or another.

The National Audit Office audited the planning of investments in municipalities, towns and cities and compared it to the situation in 2007. At that time, local authorities made ca 70% of their investments using their own money, but five years later this percentage had dropped to 36. The EU Structural Funds have become the main source of money from which essential local investments are covered. In 2012 Estonian local authorities invested 217.6 million euros in total, which is approximately 30% of the tax revenue of local authorities.

In order to invest such large amounts of money, the relevant activities must be well planned to ensure that the implementation and management of the investment is sustainable. It is also important that the investments made are those considered important by local taxpayers.

Looking at the three largest investments made by the 13 audited local authorities from 2010-2012, the National Audit Office found that only 15% of them were made without the help of foreign funds and that nine of the 13 local authorities had used foreign funds for all three investments.

The National Audit Office found that the system of development documents of local authorities has not been well thought through. All of the audited local authorities had established the required budget strategies for 2012, but in almost half of them the investments planned in the budget strategy did not conform to those prescribed in the development plan.

Also, most of the 13 audited local authorities had made an investment of more than 20,000 euros at least once between 2010 and 2012 without this investment being included in the investment chapter of the local authority’s development plan. The National Audit Office also found other weaknesses in the financial planning activities of local authorities.

For example, municipalities, towns and cities analyse the cost-effectiveness and feasibility of investment objects and future expenditure only if this is required by the financier. Local councils therefore make investment decisions without having the necessary detailed financial information: financial calculations, final cost of investment, how the entire investment is funded etc. The National Audit Office found omissions in the planning and implementation of investments in all of the 13 audited local authorities.

The preparation of a budget strategy is very difficult for local authorities in a situation where the actual implementation of most investments depends on the accessibility of foreign funds and such financing decisions are known four years in advance. In light of this, the creation of an ideal investment-planning system is probably impossible. Demanding the submission of highly detailed long-term financial plans from local authorities before the publication of the state’s investment plans is not justified if the lion’s share of the money for the investing activities of municipalities, cities and towns will also be provided by the state and on a project basis in the future. However, the state could decide on the investment capacity that local authorities should ideally have.

The National Audit Office finds that ministries lack a uniform sectoral approach to the topic of local government. Although there have been discussions of how to distribute the funds of the new European Union programme period (2014-2020) in such a manner that the dependence of local authorities on structural funds is reduced and their investment capacity is improved at the same time, the Ministry of Finance cannot see how this goal can be achieved until there is a common understanding of how the local government funding system or revenue base should be restructured. Representatives of the Regional Minister have not decided either which investments should be made by the local authorities themselves and to what extent, as well as the extent to which they should receive investment support.

The National Audit Office also highlights the omissions to which it drew attention in the audited it carried out in 2007. The agencies that distribute investment support still have no overview of the priorities or financial capacity of local authorities. Although the Ministry of Finance now has these data in the form of the budget strategies of local authorities, the data have not been systematised in a manner that would allow the agencies that distribute investment support to use them for the improvement of their work. For example, the audit revealed that seven of the 13 audited local authorities have received the state’s support for investments that were not planned in the investment chapters of their development plans.

The National Audit Office made several recommendations to the Minister of Finance and the Regional Minister as a result of the audit. Among other things, the National Audit Office advises the Minister of Finance to analyse the investment and financial capacity of local authorities and, in cooperation with the Regional Minister, to adopt uniform positions on the future plans of the local government funding policy. If necessary, the local government funding system should be changed in such a manner that their financial sustainability is guaranteed.

Background

The National Audit Office carried out a follow-up audit of local government investments to ascertain whether the problems revealed by the audit of 2007 have been solved and whether the amendments made in the relevant laws have created new problems. Planning and implementation of investments by municipalities, towns and cities from 2010-2012 was reviewed. The follow-up audit covered 13 of the 30 local authorities that were audited in 2007. The Ministry of Finance and the Ministry of the Interior were also included among the auditees in addition to local authorities. Local authorities in Estonia made investments in the total amount of 490.3 million euros from 2010-2012.

Toomas Mattson
Head of Communication Service, National Audit Office
 
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