TALLINN, 8 April 2005 - The State Audit Office (SAO) supports the proposal of the Council of E-Arsenal Ltd, a company which has generated loss to the state for years, to find a most appropriate way for the termination and sale of the state-owned company. If it is decided that the government will retain ownership of the company, its operations should be radically reorganised.

E-Arsenal is a government-owned limited liability company, whose primary purpose is to meet the needs of the Estonian Defence Forces for the conservation and repair of arms, but it also produces training and blank cartridges, hand grenades and their fuses for training purposes, various simulation equipment like explosive packets, smoke grenades, etc.

The accumulated loss of the company since its foundation is about EEK 5.4 million as at the end of 2004 (non-audited data). The occurrence of loss is due to lower production volumes resulting from the drop in production orders by the defence forces and the expenses persisting at earlier levels.

In order to keep the company sustainable, it has been financed through non-monetary contributions. For instance, a registered immovable property belonging to the state has been transferred to the ownership of the company, whereas part of this property was later disposed of to the renters. The accumulated loss from continuing operations less the proceeds from the sale of assets amounts to nearly EEK 10.3 million.

In the opinion of the SAO, the strategic goals of E-Arsenal Ltd for 2003 and 2004 were overly ambitious and unrealistic. The Ministry of Defence has failed to direct the activities of the company to a necessary extent. The Council and the Board have not taken adequate action to improve the financial position of the company through its main operations.

In the opinion of the Ministry of Defence as well as other clients, there will be future demand for products similar to those manufactured by E-Arsenal Ltd. However, according to the Ministry of Defence it is irrelevant who is the provider of such products and services because the products and services of E-Arsenal are not of strategic importance. The Ministry of Defence is sure that the situation as to the defence policy is fundamentally different today when Estonia has become member of the NATO and the European Union and there is no more need for government ownership of the company.

The Chief of the General Staff of the Defence Forces, Brigadier General Alar Laneman noted in his reply to the SAO that the defence forces are interested in the existence and development of domestic arms industry but it has to be economically feasible for the state. The General Staff explained the decline in orders for the products of E-Arsenal by sufficient stockpiles, the poor quality of some products (e.g. track mines for training purposes) and prices exceeding the prices of competitors (e.g. blank cartridges).

In the opinion of the core clientele (excl. the Logistics Department of the Defence Forces) of E-Arsenal Ltd, the products of E-Arsenal can be replaced by goods ordered from elsewhere and the Defence Forces are developing proper skills and resources to maintain and repair armament and other defence equipment.

The SAO admits that E-Arsenal does not produce high technology equipment, this is ordered by the Ministry of Defence from several private companies (for instance, of Estonian companies, OÜ Eli produces military simulators and OÜ Englo produces electronic equipment).

In reference to the outcome of the audit, the SAO has proposed to the Ministry of Defence to terminate the operations of E-Arsenal Ltd as they are currently conducted (by sale of stock or in another manner) for the following reasons: the need of the defence forces for the products and services of E-Arsenal Ltd has decreased by 3 to 4 times; the government can buy necessary products and services from privately owned companies; the government does not have to hold ownership interests in a small company which today is doing business mainly in the civil market.

It appears from the minutes of the meeting of the company’s Council held in September 2004 that the Directors of E-Arsenal are interested in buying the stock of the state-owned company under their management if it should be put up for competitive bidding at acceptable price.

The Minister of Defence concurred with the audit findings and the recommendation that E-Arsenal needed a radical rethink and promised to seriously consider the proposal for the termination of the company.

The SAO suggests that if E-Arsenal Ltd remains in government ownership, the Ministry of Defence together with the company should draw up a production plan for a minimum of five years based on the orders put by the defence forces and a professional cost-benefit analysis; and direct the activity of the company for the introduction of new products as ordered by the Estonian Defence Forces.

The activity of the company is supervised by the Minister of Defence together with the Minister of Finance through the Council. The Estonian Defence Forces as the main customer are not represented on the Council, though such representation would be necessary.


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

• Posted: 4/8/2005 12:00 AM
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