Selecting the form of cooperation between the public and private sectors and entering into financial obligations on the account of future generations has not been properly analysed

Toomas Mattson | 4/11/2012 | 12:00 AM

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TALLINN, 11 April 2012 - The National Audit Office found that local authorities are often unaware of the requirements set for public-private partnerships (PPP) and do not analyse whether the implementation of a project with a private partner is the most expedient solution. Selection of private partners for cooperation is not transparent.

The National Audit Office audited the cooperation of local authorities with private partners in the provision of public services. 15 PPP projects, where one of the parties was a local authority or its company and the other party was a private company, were analysed. The activities of the local authority or its company in the implementation of the project were evaluated in the course of the audit: was the private partner selected pursuant to the Public Procurement Act; have the long-term financial obligations assumed in order to carry out the project been correctly recognised; and have the projects been evaluated according to the principle that public services must be provided under the most favourable conditions.

A typical PPP is characterised by the circumstance that the private partner participates in the development and carrying out of the project, and then manages it over a longer period of time, and the end consumer or the public sector pays the private partner for this. The other characteristic feature of PPP is that risks are shared between the public sector and the private partner in such a manner that the risk associated with a certain field is borne by the party that is more competent in the relevant field. Assigning more risks to the private partner usually increases the costs of the project, because the private partner asks for bigger payments due to the risks.

Municipalities, towns or cities usually initiate PPP projects when they need to rapidly carry out a development plan, but lack the money, knowledge and will to do so, which can however be found in the private sector. Local authorities must consider whether the assignment of their tasks to private partners is the best and most efficient solution for the taxpayer.

The National Audit Office found that none of the local authorities who had decided to opt for a PPP had analysed whether preferring the PPP to other forms of cooperation was justified. There was also no thorough risk assessment or attempts to analyse whether binding the local authority to long-term financial obligations on the account of future generations is reasonable.

The main criterion in the selection of a private partner for the local authorities was their financial capability with less attention paid to the partner’s competency in the field of the project. However, the construction and economic parts of the project had been thoroughly analysed in some cases (Loopealse residential buildings in Tallinn, Vändra Health Centre, car park of the Koidula border inspection point in Värska).

In the case of more than a half of the audited projects, the local authorities did not understand that the projects are PPP projects the implementation of which is regulated with several legal acts. The reasons for this are that the legal acts which regulate PPPs are ambiguous, the theoretical interpretation of a PPP is unclear and the guidelines necessary for such cooperation have not been established.

In nine of 14 projects, the local authority had not proceeded from the Public Procurement At when selecting their private partner. A public procurement had been carried out in only one of ten construction concessions (long-term contractual permissions for the establishment and use of a building in which public services are provided) - in Vändra. The Public Procurement Act had been adhered to in all three cases where cooperation with a private partner entailed the provision of services.

Four of the six projects that brought about long-term financial obligations for the local authority were not recognised by the local authority as an obligation in their annual reports (Kuusalu Municipality had corrected this error in their financial statements before the start of the audit).

Local authorities had mainly decided to carry out the projects that had brought about long-term financial obligations in cooperation with the private sector in order avoid the borrowing restrictions established for them by law. Although local authorities are well aware that a PPP is more expensive than a bank loan, they still decide in favour of PPPs because they want to start building as soon as possible. For example, the calculations done by a local authority showed that the PPP project undertaken to avoid the borrowing restrictions ended up costing the taxpayer ca. 50% more.
The National Audit Office believes that the Ministry of Finance should analyse the PPP projects carried out by local authorities, take the initiative in developing the guidelines that regulate such projects and counsel those who carry out these projects.

The 15 audited PPP projects divided as follows: ten of them had the features of a construction concession (i.e. a long-term permit to establish and use a building in which public services are provided had been granted). Six of these ten contracts brought about long-term financial obligations for the local authority. Three of 15 projects were concessions for services (i.e. the long-term permit to provide a public services had been granted) and the local authority and the private company had created a joint company in order to carry out one project (Tallinn City Hall). One PPP project was discontinued during the audit and the National Audit Office therefore did not give its opinion of the project.

The National Audit Office did not evaluate whether the implementation of PPPs is reasonable, sustainable and in the interests of the taxpayer, because the National Audit Office has not been authorised by the legislature to evaluate the activities of local authorities from the viewpoint of performance.


Toomas Mattson
Head of Communication Service, National Audit Office
+372640 0777
+372513 4900
[email protected]

  • Posted: 4/11/2012 12:00 AM
  • Last Update: 11/10/2015 5:36 PM
  • Last Review: 11/10/2015 5:36 PM


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