National Audit Office: administration of hire purchase receivables amounting to EEK 2 billion is confusing and expensive

Toomas Mattson | 11/20/2006 | 12:00 AM

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TALLINN, 20 November 2006 - The National Audit Office is deeply concerned with the situation where the state's chances of receiving two billion Estonian kroons of hire purchase payments for the land privatised during the land reform are limited, the long-term administration of the debts is expensive and problematic in practice.

During the land reform land was privatised with a hire purchase term of up to 50 years and at low interest calculated on the amount payable annually, not on the amount outstanding.

The audit of the National Audit Office showed that the same benefits which the state prescribed for the first buyers of land are used by those to whom the initial buyer has resold the land. Thus, instead of claiming immediate payment of the amount payable from the new buyers of the privatised land, the state is giving them a great gift at the expense of the taxpayer – the opportunity to continue making hire purchase payments for the land over a period of up to 50 years.

“The purpose of the incentives given upon privatisation was to contribute to the emergence of the private ownership of land in a situation where bank loans were rather inaccessible. By this time the market price of the land has increased and it is relatively easy to get a bank loan. Thus, it does not seem to be justified to transfer the incentive to the subsequent buyers of the privatised land,” explained Õie Soovik, the Audit Manager of the National Audit Office. “Upon the resale of the privatised land the subsequent buyers virtually receive a loan at the expense of the taxpayer without any apparent reason. The Land Reform Act does not provide for with sufficient clarity whether the county governor has the right to refuse transfer of the hire purchase obligation to the new owner, as a result of which the county governors tend to transfer the incentive.”

The National Audit Office analysed the information technology solutions of county governments and found that the administration of the receivables is not in order, because the information technology databases of the country governments do not support auditing payment of the debts or timely arrangement of collection thereof. If a debtor goes bankrupt, there is a risk that the state will not receive any money for the privatised land.

In the course of previous audits the State Audit has detected problems in the accounts of county governments regarding land hire purchase as well as upon ensuring the scheduled accrual of the payments.

In 2003 the National Audit Office completed the audit “Risks of Privatisation of State Land by Hire Purchase,” as a result of which recommendations were made to the Minister of Finance and the Minister of the Environment. Over the last three years most of the important problems that were pointed out have not been solved. To the knowledge of the National Audit Office the sale of the privatisation claims, among other things, has not been seriously considered.

The purpose of the audit was to assess the accounting of payment of hire purchase amounts for privatised land and the means taken for ensuring the accrual of the amounts receivable. Five county governments were included in the sample for the purpose of giving the assessment. To analyse the terms and conditions of the contracts a sample was formed of purchase and sales contracts, contracts in rem and contracts for the establishment of a mortgage.

As of the end of 2004 the accounts of the county governments contained hire purchase receivables in the amount of EEK 2.2 billion, of which EEK 64.3 million had been indicated as uncollectible accounts. By the end of 2005 the amount of uncollectible accounts amounted already to EEK 109.3 million. In 2004 EEK 386.7 million and in 2005 EEK 404.3 million accrued from the satisfaction of the hire purchase claims.

The National Audit Office finds that the issue is not merely in finding the technical solution, but that the whole range of issues pertaining to the administration of the land hire purchase receivables needs improvement. Thus, it is not reasonable to preserve and deepen the division of responsibility between various ministers. Differences regarding the division of responsibility between the Minister of the Interior, the Minister of Regional Affairs, the Minister of the Environment and the Minister of Finance need an urgent and clear solution.

Toomas Mattson
Communication Manager of National Audit Office
Telephone: 6400 777
Mob: 51 34900
E-mail: [email protected]

  • Posted: 11/20/2006 12:00 AM
  • Last Update: 9/18/2015 1:51 PM
  • Last Review: 9/18/2015 1:51 PM

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