National Audit Office: clear economic interest in promoting business needs to be developed for local authorities

Priit Simson | 3/3/2020 | 4:24 PM

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TALLINN, 4 March 2020 – analysis by the National Audit Office showed that the local authorities’ interest in promoting business should be dramatically increased – if the local authorities felt the direct financial benefit, this would, in turn, help the communities to understand that this improves the local infrastructure and creates stable jobs in rural areas. Entrepreneurs are generally not expecting financial support from cities and rural municipalities and are instead prioritising infrastructure, well-functioning roads, rational and reasoned communication upon the processing of plans and permits.

A survey conducted by the Estonian Chamber of Commerce and Industry in cooperation with the National Audit Office among 159 entrepreneurs revealed that one-fifth of the respondents had ceased making investments due to the lengthy planning process. Entrepreneurs also value thinking along, being heard and involved in shaping the local living and business environment. 88% of the respondents were of the opinion that cities and rural municipalities should put in more effort to develop business.

“Entrepreneurs feel that there is an increasing number of incidents where local authorities are hesitant about an investment planned by an undertaking, trying to meet the undertaking halfway in terms of their wishes, but also attempting to avoid confrontation with a loud interest group or activist,” said the Audit Manager Tambet Drell. He added that in the opinion of entrepreneurs, but also the representatives of local authorities, emotions rather than rational agreements uniting the interests of parties tend to come out on top.

No important business-related fees accrue into the budgets of cities and rural municipalities. Local authorities also have no opportunity to establish local taxes or set the levels of state fees levied in their territory pursuant to the law to the extent that would have a significant effect on the decisions of undertakings. “The majority of taxes affecting business – corporation tax, value added tax and excise duties or income tax on dividends – accrue into the state budget, not in the budget of cities and rural municipalities,” said the Audit Manager Tambet Drell. “So, the only ‘bonus’ for the local authorities from the development of business is seen when better-paying jobs generate higher personal income tax revenues for the city or rural municipality.” At the same time, however, this may also not occur, because the distribution of income tax is based on residence, not on place of employment.

The analysis also showed that the opportunities for promoting business are often not thought out from the point of view of the local authority. The treatment of business in the development documents of local authorities is often superficial, objectives are general and weakly supported by activities. While some local authorities only wish to serve companies within the context of their current tasks, the others find it important to think about the business environment more broadly and do everything in their power to foster and develop business. “Entrepreneurs have expressed to the National Audit Office that they feel that the attitude and contribution of local authorities is often dependent on which head of local authority happens to be in office in the specific city or rural municipality,” said the Audit Manager of National Audit Office Tambet Drell.

Scarcity of land by regions also prevents local authorities from taking greater responsibility. This is particularly the case for the establishment of industrial sites that have so far proven to be one of the best ways to promote higher value added and business that creates jobs. There are regions where local authorities are not able to work on establishing industrial sites, because suitable land is held by the state, but no decisions have been made regarding the future thereof.

In order to increase the responsibility of local authorities in the purposeful development of the business environment, the National Audit Office made several recommendations to the Minister of Public Administration. The National Audit Office finds that the land units set aside as state reserve land should be registered in the ownership of the state quicker, followed by the establishment of common and understandable terms and conditions of how the cities and rural municipalities could acquire the land for the development of business. The National Audit Office also recommended motivating local authorities financially to ensure activities that promote business, whether through the redistribution of tax revenues or expanding the rights to establish local taxes.

For background:

Of the nearly 75,000 companies (with turnover or employees) operating in the beginning of 2019, 57% were based in the Tallinn and 10% in the Tartu area according to their legal address. The largest number of companies per 1,000 residents were situated in Rae rural municipality (85) and the lowest number in Kohtla-Järve (17). The majority of municipalities were home to 30–50 operating companies per 1,000 residents. Places of employment were also mostly based in the Tallinn and Tartu area (55% and 11% respectively) according to their actual location (data of the employment register). Compared to the population, a relatively large number of places of employment were also situated in the Pärnu, Paide and Rakvere area and in mining municipalities in Ida-Viru County. As with companies, the highest number of places of employment per 1,000 residents were situated in Rae rural municipality (850).

The analysis titled “The role of local authorities in promoting business. Whether and how could local authorities contribute more to the development of business?” was conducted from spring to autumn 2019.


Priit Simson
Head of Communications of the National Audit Office of Estonia
Phone +372 640 0777
+372 5615 0280
[email protected] 
[email protected]

  • Posted: 3/3/2020 4:24 PM
  • Last Update: 3/4/2020 10:12 AM
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