Local government companies ignored public procurements

Toomas Mattson | 4/28/2010 | 2:52 PM

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TALLINN, 28 April 2010 - The National Audit Office finds that many companies founded by rural municipalities and cities have not seen the need for pursuing transparent activities that would promote competition and have failed to organize public procurements upon making purchases, because they have interpreted the Public Procurement Act so that its requirements do not apply for them.

Rural municipalities and cities as the members, founders and owners of the companies could not make them carry out public procurements either. As rural municipalities and cities can found companies, foundations and non-profit associations only based on taxpayers’ interests, it is understandable that the activities of said companies are an object of public interest. However, the audit also revealed that local government foundations and non-profit associations are aware of the necessity to organize public procurements.

Of audited entities the following completely ignored the Public Procurement Act: East Tallinn Central Hospital, owned by the City of Tallinn, whose purchases in the audited period amounted to EEK 385.6 million (excl. VAT), Estonia SPA, owned by the City of Pärnu, whose purchases amounted to EEK 44 million, and Saaremaa Golf in which the City of Kuressaare has a majority holding, whose purchases amounted to EEK 9 million.

The rest of the audited companies had spent at least EEK 42.8 million on bigger purchases without organizing public procurements and EEK 16.8 million on smaller purchases, without comparing tenders.

Undertakings providing services related to water, energy, passenger transport or other network services, whose procurement limit is higher for network-related procurements than for regular procurements, adhered to the higher limit in the case of regular purchases and did not organize public procurements. In 2008, the total amount of the purchases of three network-related suppliers was more than EEK 268 million whereas only one company carried out procurement during the entire year.

In 2008, the purchases of the companies of Estonian rural municipalities and cities amounted to more than EEK 4.8 billion. After analyzing the purchases of 30 companies, we selected 19 for auditing. The number of suppliers who failed to comply with the simplest requirements of the Public Procurement Act was disturbingly large. For instance, 14 audited entities did not comply with the obligation to inform the public of smaller purchases via a website or newspaper, and 13 audited entities did not comply with the obligation to submit a report to the Public Procurement Register.

According to the NAO and the Minister of Finance, the activities of all audited companies are of interest to the public, which is why they should have organized public procurements. Local governments, the owners of said companies, often failed to realize that transparent activities that promote competition help reduce squandering and risk of corruption within companies.

The NAO finds it extremely regrettable that for three years the Public Procurement Act was in force in a manner that provided a large number of local government companies with an opportunity to think that this Act does not apply to them. This month, the Parliament amended the provision that favoured said situation. The NAO hopes that this amendment is related to taking into consideration the observations listed in the audit report and will improve the situation, as only 15 companies engaged in public interest had notified of themselves as suppliers acting in the sphere of public interest. All in all, as at 01.01.2009, there were 335 companies controlled by the state and by rural municipalities and cities, 247 of them owned by rural municipalities and cities.

In addition to not defining themselves as suppliers, the companies have mostly also failed to implement other principles promoting transparent procurement and competition upon making investments and purchases. However, the Public Procurement Office, due to ambiguous interpretation of the law, has limited the scope of its surveillance to those local government companies who have defined themselves as suppliers, formalized a decision on it and informed the Public Procurement Office of this decision. Although the Public Procurement Office carried out surveillance of 55 suppliers in 2008, these included only one company founded by a local government.

The amendment drawn up in the Ministry of Finance and approved by the Parliament reorganizes the surveillance of public procurements, thus ending the activity of the Public Procurement Office. The NAO is of the opinion that along with this amendment, the Ministry of Finance must solve unambiguously and clearly the substantial problems related to the implementation of Act.

The NAO audited the organization of public procurements in the companies, foundations and non-profit associations founded by cities and rural municipalities or with their participation, analyzing the acquisition of assets and contracting of services and construction work by companies in 2008.

Toomas Mattson
Communication Manager of National Audit Office
Telephone: +372 640 0777
Mobile: +372 51 34 900
[email protected]

  • Posted: 4/28/2010 2:52 PM
  • Last Update: 11/10/2015 6:03 PM
  • Last Review: 11/10/2015 6:03 PM

The system of public procurements helps to reduce the likelihood of 'you scratch my back and I’ll scratch yours’ transactions and promotes both transparency and competition.

Corbis/Scanpix Baltics

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