TALLINN, 11 September 2024 – The national rental housing programme has not been effective in achieving its main objectives of promoting workforce mobility and the development of business, National Audit Office finds in its audit published today. There are also successful projects among the rental housing established for this purpose, but significant risks of failure in the use of public funds have not been mitigated. If the programme were to continue, the Ministry of Climate would have to measure the economic impact more accurately and adhere to the programme’s targets more rigorously.

“Although the Minister of Infrastructure has assessed that the national rental housing programme is a success story and the Minister of Regional Affairs and Agriculture is also calling for the construction of rental housing in every municipality, the experience so far should be critically assessed before new funding decisions are made and the cement mixers are turned on,” said Janar Holm, Auditor General. “During the audit, we identified a number of fundamental problems in the implementation of the current rental housing programme, which do not allow the National Audit Office to share the optimism of the ministers. The problems highlighted in the audit need to be resolved before the next rounds are launched.”

The projects that received funding in the first calls of the programme (2018–2019) were examined during the audit. The time that has passed since the construction of the first rental housing is long enough to take stock of how the programme has justified itself in the promotion of workforce mobility and business. In this stage, 11 dwellings in 10 local governments were built for the target group of mobile workforce and taken in use. The total cost of the project was approximately €16 million, almost half of which was covered with the support funds received from the state.

The need to solve market failures on the rental market – the situation where demand exceeds supply in rural areas and the private sector is not prepared to increase the supply – was declared as one of the main objectives of allocating investment support to local authorities for building rental housing.

The nature and extent of the market failure were not thoroughly assessed and when the rental housing programme was launched, the specific solution was clear before the problem itself. A survey was commissioned before the launch of the rental housing programme, which was supposed to give answers about the existence of the market failure problem as well as suitable solutions. As the time given by the Ministry for carrying out the survey was a little over a month, the most important aspect – the planned assessment of the nature of the market failures – was dropped and the focus of the survey shifted to the narrower issues concerning the implementation of the measure. This failed to provide any reliable data on the actual demand for rental flats or the frequency and extent of market failures, and it therefore became impossible to assess which measure would be the most appropriate and effective for solving the problem. The Ministry of Finance also pointed out the high risk of misuse of public funds in this manner when the programme was developed.

The audit indicated that the assessment of the market failure was superficial also when the funding decisions of specific projects were made. The Estonian Business and Innovation Agency (then KredEx) has distributed the support funds by the principle that the local authority itself knows where the market failure that obstructs the development of business lies and the explanations given in the applications were not checked. There were also no clear criteria for this in the project assessment methodology. The audit found that, as the total amount of the applications for support received in the call was similar to the budget of the support, there was no substantive need to start comparing the alleged market failures in different places. Funding decisions should be based on the merits of the application, not the sufficiency of the available funds.

The National Audit Office is of the opinion that market failure is inadequately proven in the applications and was almost entirely based on the letters of support of local companies. The collection of letters felt like a campaign and it was obvious that the share of the employees of such companies among tenants is currently small. In total, letters of support for the projects were received from 22 companies or institutions, the employees of seven of these companies were among tenants at the time of the audit.

Proving the existence of a market failure in a region solely on the basis of the opinion of companies is not adequate as a method, as it is very likely that similar interest can be found among companies in regions where the market failure does not exist according to the logic of the rental housing programme (e.g. in Tallinn and Tartu). The problem here is not with the companies that sent the letters of support, but with the inadequate criteria for funding decisions and the implementation of the programme.

The National Audit Office points out that, although the development of business is dynamic, the number of unlet flats and tenants who do not work is an indication that the demand for flats may be overestimated. For example, some flats in most of the rental dwellings (seven of 11 dwellings) had no tenants in October 2023. The share of such flats ranged from 18% to 50%. A similar situation prevailed in several rental dwellings in August 2022 as well.

Some vacancy at certain times is natural, but if it is large and permanent, the question arises whether the support has gone to the right place. Also, almost all dwellings had tenants who did not work (14% to 27% of tenants) in 2023 according to the Employment Register. Again, this does not meet the objectives of the programme.

The Ministry of Climate, which is currently responsible for the programme, admitted that the demand for rental premises may have decreased, but blamed this on the general deterioration in the economic climate in recent years. At the same time, the audit indicated that there are also more successful projects in the rental housing programme, which have no occupancy problems, all the tenants are employed, their employers are companies with significant operations in the area, etc. The implementers of the programme have reason to wonder why, against the background of the same macroeconomic changes and the same objectives of the programme, the picture today is so different in the comparison of projects.

The National Audit Office finds that the meaning of a mobile worker and the requirement to set the rent at the market rate have been approached too loosely in the rental housing programme and sometimes in a way that contradicts the conditions of the support. The conditions of the support leave several important circumstances open, which is why local authorities have no uniform approach on how to define mobile workforce, for example. While one local authority regards tenants from another building on the same street as mobile workers, another strictly checks that the person’s previous place of residence is not in the same settlement as the rental housing and that they also have no residential property in the territory of the particular local authority. The interpretations overlap to some extent, but the way local authorities understand the employment of the tenant, the registration of the place of residence, the location of the place of work and the term of the lease is sometimes contradictory.

There is a clear rule that the rent in residential housing built for mobile workforce must follow the market rate in the region so that the rental housing built with the support of the state does not create unfair competition with private landlords. Unfortunately, it was not possible to find any evidence of this during the audit, as the local authorities had no market price analyses or they were outdated. The amount of rent was determined on the basis of perception and in several cases in such a manner that it would only cover the costs. The rate of rent in Pärnu raised the most questions, as it is almost two times lower than the rent in other blocks of flats of a similar condition and in the same region.

One of the objectives of the rental housing support measure was to have a positive impact on the business environment and the economy of the region, but there are no agreed indicators against which to measure the impact. It can be argued that no serious attempt has been made to measure the impact. When it comes to the question of who should have determined the indicators, the parties concerned play pass the parcel – during the audit, local authorities pointed at the state, the Estonian Business and Innovation Agency from the state’s side at the Ministry and the latter in its turn at the implementers of the measure, i.e. the Estonian Business and Innovation Agency and the local authorities. The summary of the programme’s progress so far focuses largely on the physical indicators of the buildings, describing the spatial impact and reiterating the outcomes that the programmes hope to achieve. No conclusions on the impact of boosting the economy can be found there.

The National Audit Office points out that if the rental housing programme is to be continued, and if the programme is to continue to be based on alleviating the market failure that hinders business, the programme implementers will have to make more effort to determine the existence of a market failure for each application. It should also not be accepted that the essential conditions determining the nature of the support measure, such as the rules on a mobile worker and the rent corresponding to the market rate, have been ignored or interpreted differently. The Ministry of Climate is ‘ultimately responsible’ for the rental housing programme and must ensure that the objectives of the programme are adhered to and their achievement is monitored. Also, the National Audit Office finds that the conditions of the support measure should be reviewed and it is necessary to rule out situations similar to the rental housing in Otepää, where the support money granted by the state basically became an interest-free loan as the objectives of the project are changed.

Background

The rental housing programme is a national support measure aimed at supporting the establishment of rental housing in local governments. The programme has two target groups of tenants: mobile workers and the economically disadvantaged. The audit focused on rental housing established for mobile workers.

Twelve buildings with 239 flats were built for the target group of mobile workers. The rental housing covered by the audit were located in the following settlements: 1) Imavere (Järva Municipality), 2) Linnamäe (Lääne-Nigula Municipality), 3) Liiva (Muhu Municipality), 4) Koksvere (Põhja-Sakala Municipality), 5) Pärnu, 6) Kuressaare, 7) Laagri (Saue Municipality), 8) Turba (Saue Municipality), 9) Türi, 10) Valga and 11) Vastseliina (Võru Municipality).

Otepää also received support, but the support has been clawed back as the dwelling was not taken in use as rental housing. In addition to the 12 rental dwellings built for mobile workforce that were mentioned above, nine dwellings were also built for the target group of the economically disadvantaged in eight local governments.

Priit Simson
Communication Manager of the National Audit Office
+372 640 0777
+372 5615 0280
[email protected]

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• Posted: 9/11/2024 11:00 AM
• Last Update: 9/12/2024 4:13 PM
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