National Audit Office: KredEx has distributed loans with vague objectives and criteria

Priit Simson | 12/3/2020 | 12:00 PM

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TALLINN, 3 December 2020 – The criteria and objectives for distributing nearly one billion euros of extraordinary loans and guarantees allocated to KredEx with the supplementary state budget for 2020 have been vague, the National Audit Office finds in its overview concerning the measures for alleviating the impact of the corona crisis implemented by KredEx. Further distribution of loans and guarantees requires significantly clearer rules to ensure equal treatment of target group enterprises and the best use of public money.

It has to be specified more clearly what benefits the state is expecting from the guarantees and loans measures created in spring. Loan measure for projects of national importance, needs better explanations on what are the features for a project to be deemed of national importance and who are therefore justified to receive major public loans.

The declared objective of the loan and guarantee measures is generic: to alleviate the impact of the corona crisis by helping to overcome liquidity problems and taking advantage of new business opportunities derived from the spread of corona virus. It is understandable that, at the beginning of the emergency situation in the spring, the supplementary budget and the crisis measures were designed under time pressure and limited information, but the performance of the KredEx measures also needs to be assessed, especially now that many agreements entered into between entrepreneurs and banks in the spring have expired or are expiring.

“Unclear objectives and large amounts of money should never go together,” the Auditor General Janar Holm remarked on the results of the overview. “When the National Audit Office wanted to learn from KredEx how the objectives are established for a loan measure of national importance and how the achievement of objectives is monitored, KredEx suggested directing the questions to the Government of the Republic instead. The reason may be that they as the body preparing decisions for funding don’t have the exact information.” 

The interest or need of enterprises for KredEx’s aid has so far turned out to be several times smaller than predicted. In half a year, 5% of the enterprises forecast in spring have benefited from the measures, i.e. approximately 300 enterprises of the more than 6,000 forecast have reached a loan or guarantee agreement. The mere spending of money should not be the goal, but the poor use of KredEx measures indicates the need to better know the reasons for the low take-up among entrepreneurs and to monitor the market.

Forecast of the use of KredEx extraordinary measures in March 2020 and actual use as at 23 November 2020 (in million euros)

 

Forecast number of applicants/transactions

Number of contracts signed

Budget for the measure

Value of contracts signed

Extraordinary loan

475

129

550

218.9

incl. extraordinary working capital loan

375

104

500

209.9

incl. extraordinary loan for projects of national importance

 –

4

186.4

incl. extraordinary investment loan

100

25

50

9.0

Extraordinary guarantee

5,859

217

300

55.6

incl. extraordinary guarantee for existing bank loans

5,859

132

300

35.0

incl. extraordinary guarantee for new bank loans

 –

63

 –

18.6

incl. extraordinary small loan guarantee

 –

14

 –

0.6

incl. extraordinary guarantee for businesses in the accommodation and catering sector, travel agencies and tour operators

 –

8

 –

1.4

incl. extraordinary guarantee for projects of national importance

 –

0

 –

0

TOTAL

6,334

346

850

274.5

Source: National Audit Office on the basis of data from KredEx and the Ministry of Economic Affairs and Communications. https://www.kredex.ee/covid19/

In the overview, the National Audit Office analysed the KredEx loan measure for projects of national importance from which loans in the amount of 10 million euros and more can be applied for. It turned out that the terms and conditions of the loan measure and criteria for assessing national importance are general, and the processing of applications therefore largely lacks transparency. 

It remains unclear how an entrepreneur should have obtained the Minister’s approval for its loan application before submitting the application to KredEx as required by the terms and conditions of the measure which were in force until mid-June.

The Government of the Republic approved Tallink’s loan one day after the terms and conditions entered into force, i.e. before the measure was actually implemented.

Although KredEx’s extraordinary loan measure requires an assessment of the socio-economic impact of loan applications of national importance, KredEx was unable to explain in the course of preparing the overview how the impact is assessed and how a proposal to the government is prepared regarding which applications are of national importance and which are not.

The materials submitted to the Government of the Republic for making loan decisions reveal that, for example, in the case of the 100 million euro loan to Tallink, KredEx would have, according to KredEx themselves, required more time to make a considered proposal. In the case of the decision regarding 39.4 million euros to Porto Franco, KredEx warned the government that granting the loan could lead to the risk of reputational damage for both KredEx and the government because the national importance of the project is questionable in the eyes of the public.

The Porto Franco project received a positive decision before it was determined which real estate developments may be considered of national importance. After the loan was granted, an additional condition on size was included in the terms restricting the pool of potential applicants among real estate developers .

While preparing the overview, the National Audit Office concluded that entrepreneurs had been insufficiently informed about the changes to the terms and conditions of the measure. Therefore, it is uncertain whether the current process ensures equal treatment of target group enterprises and the best use of public money.

In addition, it is unclear from which source the loans are granted for projects of national importance. If the projects are financed from the measure referred to by KredEx, then the Riigikogu has not given permission for this with the supplementary budget for 2020.

If it is decided to continue with loan measures for projects of national importance, specific criteria should be established based on which KredEx and the Government of the Republic classify whether or not a project is of national importance. In the opinion of the National Audit Office, it must be analysed whether and under which terms and conditions the continuation with loan measures for projects of national importance is justified.

It would also be worth deciding whether focus should be put on guarantees instead of direct loans in the case of extraordinary support measures for enterprises to achieve the state’s objectives more (cost) effectively.

The National Audit Office will continue to monitor the implementation of the measure titled “Extraordinary loan for projects of national importance” and has commenced with an additional analysis of the measures of KredEx and Rural Development Foundation in order to determine the circumstances of supporting specific projects.

Background

Based on the supplementary state budget for 2020 and the general regulation of the Government of the Republic passed on 28 April 2020, the National Audit Office has analysed, in particular, the following:

  • How the KredEx extraordinary measures for supporting enterprises were designed, what the state wants to achieve by implementing thereof, and how it monitors the results
  • Whether the procedural and decision-making process of the KredEx support measure titled “Extraordinary loan for projects of national importance” is clear and transparent at the level of both KredEx and the Government of the Republic and whether it establishes preconditions for equal treatment of enterprises
  • How many enterprises have applied for and received support from the KredEx extraordinary measures, and whether it meets the expectations set by the state when developing the measures

The National Audit Office analysed the grounds for granting the aid to enterprises through KredEx (terms and conditions of the measures) and the process of how loan applications for projects of national importance were processed and how the decision was made, but not every individual decision of the Government of the Republic and its (political) justification.

 

Priit Simson
Head of Communications of the National Audit Office of Estonia
+372 640 0102
+372 5615 0280
priit.simson@riigikontroll.ee
press@riigikontroll.ee
http://www.riigikontroll.ee/

  • Posted: 12/3/2020 12:00 PM
  • Last Update: 12/3/2020 1:24 PM
  • Last Review: 12/3/2020 1:24 PM

“Unclear objectives and large amounts of money should never go together,” the Auditor General Janar Holm remarked on the results of the overview.

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