National Audit Office of Estonia: state authorities must be able to tell how much an investment project cost

Priit Simson | 2/12/2020 | 10:00 AM

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TALLINN, Feb 12, 2020 - The National Audit Office found in its report that there is no country-wide perspective of investment management that would reach further than four years. The Ministry of Finance and several other ministries lack comprehensive overview of completed and pending investments, and they are not aware of the cost of investments in their area of governing. Socio-economic impacts of completed projects, that is, the actual benefits of expensive investment projects, are not being assessed.

Generally, ministries also do not have detailed information on investments made by companies, foundations and public universities in their area of government. "On several occasions, we found that answering the simple question of how much the five most expensive investment projects of a single ministry or institution cost was anything but simple," commented Auditor General Janar Holm. “In one case, when we asked the ministry about its investments in recent years and how much they had cost, we were directed to the Ministry of Finance that in turn directed us to the State Real Estate Company (RKAS). Later, however, the Minister of Finance said that the RKAS’ data were not correct. The figures of the ministry and its subdivision could also been different. In another case, the Ministry of Justice and RKAS provided contradictory information on whether the construction of Tallinn Prison had been completed or not. The International Monetary Fund (IMF) has suggested that Estonia set up a database to provide an overview of its investments.

There is a comprehensive and accurate overview of the projects financed by the European Union, as the data of these projects are collected in the Structural Funds Information System. There is no equivalent information on investments made by Estonia using its own money. "The movement of funds from Estonia must be monitored as closely as the use of funds granted by the European Union," said Auditor General.

The process of selecting potential investment projects has been up to the ministries’ decision and the practice of ranking and selecting potential investments varies. The Ministry of Finance organizes and coordinates the state budgeting process, in the course of which ministries submit additional applications for covering all kinds of expenses, including investments. The eligibility and reasonableness of these applications is assessed by the Ministry of Finance, but potential investment projects of the ministries are not compared or ranked. There are no cross-sector evaluation criteria established for this purpose.

Larger state companies, universities and hospitals have usually better planning and execution of investments than ministries. Unlike ministries that had rather ambiguous project selection process, major state hospitals, universities and companies generally had well-established rules for the selection, deciding on and implementation of investments, including special arrangements for managing more expensive investment projects and assigning specific managers. Ministries generally do not interfere in the decision-making and management of investments made by state-owned companies, universities and hospitals, unless the investments include national funds (including foreign funds).

The National Audit Office points out that the state budget strategy, including investments, is planned with a four-year perspective, while the preparation of a single road construction project often takes more than five years, not to mention construction work itself. "Such a short perspective does not fit into the logic of project completion, hinders planning and makes it difficult for the Ministry of Finance and government to assess the use of the investment," said Janar Holm. Government sectors make long-term plans in their development plans or other strategic documents, but there is no long-term cross-sector plan for financing and implementing investments.

A multi-year cross-sectoral investment plan would help ministries prepare projects in the longer term and provide greater confidence that the investment will be funded until the project is completed. The International Monetary Fund (IMF) has also drawn attention to Estonian investment planning being overly short-term oriented, and recommended a 15-year investment plan covering all sectors.

Approximately 40% of all completed projects submitted to the National Audit Office exceeded their initial budget during implementation. The project executors themselves say that cost overruns and exceeded time schedule of projects are mostly due to poor planning. This means that project needs are not clearly identified in the planning stage, and the estimated cost of project implementation is not projected correctly, also the estimation of the increase in construction prices in the market and the potential for prolongation of the procurement process are not assessed properly.

There is no centralized overview of the progress of investment projects, and the Ministry of Finance only receives information about cost overruns when the ministries submit applications for additional funds to cover the increased cost of projects. As project costs increase, some of the planned activities/projects that are put on hold will be postponed or cancelled, but projects that have already commenced are usually completed. Normally, the authorities do not assess the impact of delays and budget overruns, but they admitted that this leads to additional costs, inconvenience, poorer quality of service, etc.

The review also revealed that broader benefits and socio-economic impact of projects are not assessed, which means that there is often no information as to whether and how the investments made affect the society at a larger scale. The ministries assess the impact their investments have on their budget and whether they complied with the plan in terms of construction.

As a result of the review, the National Audit Office found that the decision-making, preparation and management of state investments should be made clearer and more efficient. To this end, the National Audit Office posed six questions in its review, to which the ministries should find answers and agreements for the future. For example, the National Audit Office asked how the ministries could rank significant investments in all sectors with a longer than four-year perspective; who is responsible for the planning and managing of investments in the Ministry of Finance and other ministries; what should be the level of preparation of the project applying for funding; in what form and to what extent the Ministry of Finance should have an overview of public sector investments; and what is the impact and value of investment projects to the Estonian state at a broader scale.

For background:

The National Audit Office prepared a review of how large investments are selected and implemented in ministries, their subdivision, state-owned companies, hospitals and public universities. During the preparation of the review, the National Audit Office examined how investments to be made in the following years were selected and decided on, and collected information on more expensive investments as well as analyzed any changes in their schedule, budget and content. The National Audit Office reviewed the investments made by the aforementioned institutions in buildings and facilities; for example, IT investments and acquisitions were left out of the focus of the review.

The National Audit Office collected information on five most expensive investments made by each ministry, larger companies and hospitals and universities under the administration of the Ministry of Economic Affairs and Communications, which had been completed and commenced during the last five years and which they had reported about to the National Audit Office. Their total cost was approximately EUR 4.8 billion.

Ministries, their subdivisions, state-owned companies, foundations and public bodies make large investments for taxpayers' money. Of the € 11 billion in the state budget, around 1 billion is invested every year. A survey conducted by the National Audit Office showed that over the last five years, the most expensive investments worth more than EUR 100 million have been made in energy and health care sectors. The most expensive investments in progress are the construction of the Rail Baltic railway and the eastern border of Estonia, and the development of wind energy. The five most expensive investments made by various institutions ranged from €75,000 to €1.1 billion (excluding VAT) over the period under review. Out of 89 projects submitted to the National Audit Office over the last five years, 58 were implemented by companies, universities and hospitals and 31 by ministries.

Estonian investment practice was assessed by the International Monetary Fund (IMF) delegation in early 2019, and they found that overall, Estonia's investment practice was at a good level, but they also pointed out issues to be developed. For example, Estonia was advised to improve the process of planning and selecting major investment projects, including preparing a list of nationally important investments covering all sectors and a longer than four-year period, assessing the impact of investments and involving external experts in project evaluation and selection.

 

Priit Simson
Communication Manager of the National Audit Office
+372 640 0777
+372 5615 0280
priit.simson@riigikontroll.ee
press@riigikontroll.ee
http://www.riigikontroll.ee/

  • Posted: 2/12/2020 10:00 AM
  • Last Update: 2/12/2020 11:56 AM
  • Last Review: 2/12/2020 11:56 AM

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