Lack of clear objectives in creation of state foundations

Toomas Mattson | 5/5/2014 | 4:18 PM

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TALLINN 5 May 2014 - The National Audit Office finds in its audit that over a period of almost twenty years, the state has failed to develop a best practice for using the format of foundations for the performance of public functions, and the state also lacks general principles for determining when to establish a foundation and when it is more practical to provide public services through public agencies. Instead, the position of the ministry in charge of a particular area of government or the current political preferences seem to prevail.

The law stipulates that the state should establish foundations for the performance of public functions which are not directly related to the exercise of state authority and for which other forms of activity are unsuitable, but in practice the state has established foundations for the provision of very different public services.

The result is that the largest Estonian hospitals (Tartu University Hospital, North Estonia Medical Centre), the distributors of European Union grants (the Environmental Investment Centre, Archimedes, Enterprise Estonia, etc.), many cultural establishments (museums, theatres) and organisations that focus on the advancement of local life (county development centres, managers of sports facilities) all operate as foundations.
As of the end of last year, the state exercised its rights as the founder in 70 foundations and in terms of the number of foundations the biggest exerciser of these rights is the Ministry of Culture. This ministry has also been the most active founder of foundations in recent years. The support paid to foundations from the state budget amounted to 114.4 million euros in 2012 and 126.7 million euros in 2013. (These figures do not include the EU grants mediated by several foundations.) The audit also indicated that irrespective of being left to their own devices in terms of development, the foundations have generally achieved their statutory goals and used the money they have received from the state expediently.
However, in addition to the clarification of the public functions that the state should organise via foundations, it is also necessary to increase the transparency of how foundations are financed through the state budget. As foundations work to achieve very different goals, it is clear that agreeing on the same financing model for all foundations is impossible. However, in its audit the National Audit Office found problems with adherence to rules as well as vague rules. In addition, foundations have also become sources of financing for the ministries. In the course of the audit, the National Audit Office obtained the following explanation from a ministry: we were not allocated money from the state budget for certain activities we are obliged to perform pursuant to law, but it was possible to give funding to the foundation for this purpose.
The National Audit Office is of the opinion that such financial planning will certainly not make the state budget more transparent.

General observations of the National Audit Office:

  • the principles of allocating money to foundations from the state budget are very different in various ministries, but the areas of activity and functions of the foundations also differ from each other significantly;
  • in general, ministries have established the rules for carrying out supervision of the use of funds allocated. There were cases where the rules for allocating money were not observed or were not transparent. The practices of the ministries in exercising supervision are also different: in some cases, the rules and organisation of supervision are effective, but in other cases they are not;
  • no inexpedient use of money allocated from the state budget was found in the audited foundations. Foundations had established systems of internal supervision to ensure expedient use of the money;
  • the exercise of the founder’s rights and the actual supervision of the Environmental Investment Centre are the functions of different ministries for no apparent reason: the Ministry of Finance acts as the foundation's founder, but the policy area and supervision is overseen by the Ministry of the Environment;
  • the foundation Estonian Fund of Disabled People does not perform its functions, making the necessity of the foundation questionable. The Fund was established for the purpose of collecting money for supporting disabled people, but all the Fund actually does is facilitate the transfer of the money received from the Gambling Tax Council to the Estonian Chamber of Disabled People and other associations.

Some characteristic examples of the problems related to foundations that were revealed by the audit.

Example 1
Financing of theatres that have been turned into foundations has been a mess for years

The theatres that used to operate as public agencies in the Ministry of Culture have been transformed into foundations over the last ten years, and eight foundations have already been established. At the same time, the Ministry of Culture has failed to adhere to the rules in allocating funding to theatres established by the Performing Arts Institutions Act. The above Act stipulates that funding is granted as a subsidy for a visitor of a performance. This compensates the performing arts institution for the difference between the actual cost of servicing a visitor and the estimated ticket price. The Ministry of Culture doesn’t actually follow this principle.
The reason is that cost accounting in theatres (shown by the example of the Russian Theatre in the audit) does not make it possible to obtain data about the expenses incurred from performances and the ministry has not calculated the estimated ticket price. In other words, there are no preconditions for the implementation of the financing model set forth by law. Although the model for calculating subsidies provided by law has in practice proven to be unsuitable for implementation, the law has not been amended to harmonise the basis for granting subsidies with actual practice. Such lack of clarity in financing rules does not give theatres any reassurance for making long-term decisions, and it is a major problem under the circumstances where state-owned theatres are transformed into foundations one after the other.

Example 2
How ministries themselves also use the money allocated to foundations

The National Audit Office found cases during the audit where the money initially allocated to the foundation moved back to the ministry. This problem was the most serious and longest lasting between the Environmental Investment Centre (EIC) and the Ministry of the Environment.
Namely, the activities of the Ministry of the Environment are financed through the EIC, although money for them should be requested from the state budget. Among else, 80 projects of the Ministry of the Environment and its divisions were financed from the budget of the 2012 environmental programme (1,076 projects in total were financed for a total of 42.2 million euros and the Ministry’s area of government received 7 million). When the Ministry and its divisions are financed through the EIC, the money required for their activities is not recognised in the state budget as an operating expense of the Ministry of the Environment and there is no comprehensive overview of how much money the Ministry's activities need from the state budget. In order to obtain money via the EIC, the Ministry of the Environment and its divisions have to write projects; the EIC must process them; the Ministry’s committee must assess them; the Supervisory Board of the EIC must approve them; the recipients of the money must report the use of the funding and the EIC must check these reports. Financing in such a manner increased the administrative burden of the Ministry of the Environment, its divisions and the EIC. Moreover, if the divisions of the Ministry of the Environment submit applications as urgent, the applications are evaluated by the employees of the Ministry itself. This basically means that the Ministry’s employees evaluate the work of their own employer or its divisions.
The fact that it is possible to request the money given to a foundation back into the budget of a ministry may also be the reason why the ministries that exercise rights as founders have little motivation for streamlining this area.

Background
The audit carried out by the National Audit Office clarified whether granting funding to the foundations established by the state is clear and transparent, and whether ministries have created systems for supervising the granting of funds as well as their use. The National Audit Office also investigated how thoroughly ministries weighed the selection of the legal format when foundations were established.
In the foundations selected for the audit, the National Audit Office inspected how the use of the money obtained from the state budget is organised and whether the money has been used expediently and lawfully.
Ministries, county governments and constitutional institutions exercise the rights of founders on behalf of the state in 70 foundations. Almost all ministries grant funding to the foundations established by the state. The support paid to foundations from the state budget amounted to 114.4 million euros in 2012 and 126.7 million euros in 2013. Foundations perform very different functions when using the money obtained from the state budget and the assets transferred to them, from distributing foreign aid to activities in the areas of health, culture, etc. It is therefore important that both the ministries and the foundations that distribute money have established internal audit systems that ensure the expedient and lawful use of money.

Toomas Mattson
Head of Communication Service, National Audit Office
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+372 513 4900
toomas.mattson@riigikontroll.ee
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  • Posted: 5/5/2014 4:18 PM
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