TALLINN, 26 SEPTEMBER 2024 – In the management of state-owned companies, information exchange with the ministry that owns the holding is inconsistent and the effectiveness of measures against conflicts of interest is questionable, the National Audit Office finds in its analysis published today. In the opinion of the National Audit Office, the state should be significantly more demanding in managing its transport companies.

“The management decisions of state-owned companies concern large sums of money: hundreds of millions of euros are invested annually, the assets exceed ten billion euros,” says Märt Loite, Director of Audit. “The ministries that govern state-owned companies must be clear about what materials have to be accessible and how, and the present disorder in the exchange of information between state-owned companies and ministries is a sign of lukewarm sense of ownership.”

Being an informed owner means that the minister and the ministry managing the holding must be informed about who made the management decisions of the state-owned company, which decisions they made, and based on which data. The traceability of the management of state-owned companies may be important in developing owner expectations, identifying new business lines, or identifying potential mismanagement. It is possible and easier to trace the decision-making process if the minutes and discussion materials of the meetings of the supervisory boards of state-owned companies are preserved and accessible to ministries even when people or the areas of responsibility of the authorities change.

In addition to the clarity of the decision-making process and the adequacy of information, it is important for state-owned companies that their management bodies – the management board and the supervisory board – use their best knowledge and skills to act solely in the interests of the state-owned company and not in the interests of a competitor.

The Ministry of Economic Affairs and Communications, the Ministry of Climate and the Ministry of Regional Affairs and Agriculture, which governed the transport companies inspected by the National Audit Office, have at their disposal most of the minutes of the supervisory board meetings (ca 90%), in which the decisions made by the supervisory board are recorded. However, only approximately 50% of the discussion materials belonging to the agendas of the supervisory boards on which decisions are based and which would show the circumstances of decision-making are at the disposal of the ministries. Earlier audits of the National Audit Office in the area of aviation have ascertained that sometimes, the company itself has also not kept the materials on which the decisions of the supervisory board are based.

The National Audit Office points out that the incompleteness of the information at the disposal of the ministries indicates a breach of the requirements of the State Assets Act. Until 2021, chairmen of the supervisory boards of state-owned companies were required to send the materials on which decisions are based to the ministry managing the holding. Six of the 11 audited transport companies complied with the requirements of the State Assets Act effective in 2021. The Ministry of Economic Affairs and Communications, which governed all transport companies at the time, did not require that the supervisory boards of the companies comply with them.

The National Audit Office finds that the circumstances of management decisions and the decision-making process are traceable and, if necessary, can be clarified retroactively in the case of a few state-owned transport companies. The fact that the quantity of information ministries have about the management decisions of transport companies is so different indicates that the provision of information to the ministries has depended on the will of the company, not the demands of the owner.

“Steering the activities of a state-owned company requires the owner to be interested and informed,” said Märt Loite. “In addition to the managers, the success of state-owned companies is also the responsibility of the minister and the ministry, because if the company does not do well, the loss will be covered by the state and the taxpayer, not the management board or the supervisory board.”

The audit ascertained that the practices, role perception and strictness of the supervisory boards in respect of management boards varies considerably. Some supervisory boards prefer written material for the discussion of every item on the agenda, which restricts the ‘oral’ management of the company. Sometimes, it is accepted that the management board sends the material late and in several parts immediately before the meetings. Some supervisory boards actively correct/order the form and content of information. The minutes of the supervisory board meetings are often not very informative and signing them may take up to six months.

The National Audit Office found that although there are relatively many different measures for the prevention of conflict of interest and compliance with the prohibition on competition, their effectiveness is not a given. Ministries and companies use different measures. However, ministries mainly rely on the hope that the people elected to management bodies avoid controversial situations. According to the ministries, the measures are aimed at the assessment of the suitability of a member of the management body at the time of appointment and, if changes take place in the data, interests or circumstances of the member of the management body later on, it is very difficult to ascertain this if the member of the management body does not report it themselves. If the ministries continue to apply measures in the same way, they cannot be sure that the case of Nordica, where a member of the management board also acted for a competitor, is a one-off.

This report on the management of state-owned companies also confirms that the state’s sense of ownership and responsibility with regard to its companies must become stronger. The National Audit Office advises the ministries and ministers to agree with the companies they manage during 2024 what information is needed from the companies to substantively perform the rights and obligations of the manager of the holding. The composition of the information required, its regularity and the way in which it is made accessible to the ministry should be specified. Making materials accessible does not necessarily mean sending them to the ministries, as it is important that ministries have access to the materials.

Background

In July 2023, the state of Estonia was the sole owner of 23 companies and one of the owners of another five companies. According to the latest data, the assets of companies where the state had a holding amounted to €10.3 billion at the end of 2022 (annual growth 19%), their sales revenue in 2022 amounted to €3.5 billion (growth 50%) and net profit to €366 million (growth 71%).

State-owned companies are an economically active part of the public sector, which in 2022 invested a total of €815 million, employed 12,539 people on average and paid €116 million in dividends to the treasury (growth 51%). According to the Ministry of Finance, the state owns the majority of the companies (19) for the purpose of serving public interests, five companies must earn income and four have to do both.

The National Audit Office assessed with the audit whether the ministries managing the holdings can present the minutes of the supervisory board meetings of the companies with discussion materials for the period of 2021–2023.

The National Audit Office included state-owned transport sector companies in the audit: AS Eesti Raudtee, AS Operail, OÜ Rail Baltic Estonia, AS Eesti Liinirongid, AS Eesti Loots, AS Saarte Liinid, AS Teede Tehnokeskus, OÜ Transpordi Varahaldus, AS Nordic Aviation Group, AS Tallinna Lennujaam and Lennuliiklusteeninduse AS. Also the ministries that manage their holdings: the Ministry of Economic Affairs and Communications, the Ministry of Climate, the Ministry of Regional Affairs and Agriculture and the Ministry of Finance as the general coordinator of the state’s holding policy. The audit of the National Audit Office did not cover the activities of AS Tallinna Sadam, which is a listed company partly owned by the state.

Table 1. Overview of the minutes and discussion materials of supervisory board meetings of companies presented by the ministries managing the holdings to the National Audit Office (2021–2023)

Source: National Audit Office on the basis of the materials presented by the ministries

In addition, the National Audit Office asked whether the ministries were aware of any members of the management boards of companies in the field of transport who acted as a member of a management body of another company in the same field of activity with the permission of the supervisory board in the period 2021–2023. Also, what steps do the ministries take to ensure compliance with the requirements of the Commercial Code and the State Assets Act to prevent conflicts of interest and non-compliance with the prohibition on competition by members of the supervisory board.

Priit Simson
Communication Manager, National Audit Office
+372 640 0777
+372 5615 0280
[email protected]
[email protected]
http://www.riigikontroll.ee/

• Posted: 9/26/2024 11:00 AM
• Last Update: 9/26/2024 12:10 PM
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