National Audit Office: Government decided Estonian Air issues unreasonably quickly (1)

The government continued to grant new loans even when the Ministry of Finance no longer believed that earlier loans would repaid, the report stated (ERR)
5/24/2016 10:31 AM
Category: Business

The National Audit Office published its report on state support of Estonian Air, how the government handled its financial demise, and how it established the businesses that followed it on Tuesday.

The National Audit Office is of the opinion that the resolution of the European Commission, in which it finds that the decision of the state of Estonia to support national airline AS Estonian Air with €84.9m was against the rules of the European Union, could have been avoided if the Government had complied with the principles of the State Assets Act and made sure that giving money and loans to AS Estonian Air was purposeful, expedient, economical and lawful.

The audit states that the basis of the government’s decisions was that Estonia needed a Tallinn-based airline of its own. It didn’t consider other options that could have guaranteed sufficient air services, and never insisted on a comprehensive business plan of Estonian Air.

As such a plan had never been submitted and analyzed by an independent expert, the government couldn’t have had reasonable assurances that it was making a rational investment, the report read.

The government delayed notifying the European Commission

The government notified the European Commission of its support of Estonian Air only in 2012, while having supported the company with €30m already in 2011 allocated for its expansion strategy. The National Audit office found this fact to be the main reason for the commission’s negative decision in the matter.

Against the Ministry of Finance’s position that supporting Estonian Air further would constitute prohibited state aid, the government followed Prime Minister Andrus Ansip’s clear opinion in the matter and decided to not let the airline go bankrupt. It continued to grant new loans even when the Ministry of Finance no longer believed that earlier loans would repaid.

“For example, the last loan instalment in the amount of 12.1 million euros was transferred to the company in 2014, although the 24.9 million euros granted to the airline earlier had been written off by that time by decision of the Secretary General of the Ministry of Finance.”

“The materials of the audit indicate that the government made its decisions to finance AS Estonian Air unreasonably quickly and on the basis of superficial information even in situations where it had the opportunity and time to carry out the necessary analyses and commission expert opinions in the issues where officials are unable to answer all questions,” the National Audit Office stated in a press release on Tuesday.

The government supported four unsuccessful business strategies

The government financed no fewer than four different business strategies of Estonian Air, not one of which was successfully implemented. There had been no consistent analysis of the company’s failures, and the only consequence had been that the CEO and two members of the supervisory board were replaced, the statement continued.

The Government discussed issues related to Estonian Air 25 times over the last five years. Every time it treated it as an urgent matter, usually getting its materials either on the spot or the day before, which the National Audit Office found would have made it impossible to study them thoroughly.

The government wasn’t diligent in the preparation for its decisions

In the preparation of the materials decisions were based on, the relevant minister as well as the prime minister failed to be demanding enough. “I would like to believe that the manner in which the government made its decisions about Estonian Air was just a one-off bad example. An exception, an accident that does not illustrate the shortcomings in the process of making choices in general. But I’m afraid that this is not the case. Therefore, this audit does not just speak about aviation, but there is more to learn from it than is necessary for the next decisions concerning the field of aviation,” Auditor General Alar Karis said.

In the report, the National Audit Office also expressed its concern about how materials that are the basis for management decisions of public enterprises are preserved. For example, there was no clarity about a lot of important materials concerning Estonian Air.

Materials of the supervisory board meetings of Estonian Air from 2010 to May 2012 were only preserved in the private company, and the data of the Ministry of Economic Affairs and Communications as well as the Government Office’s based upon which the government made its decisions differ from them.

No confirmed business plan for Nordica either, far away from profitable

In September 2015, the government established two new public aviation companies before the operations of AS Estonian Air had even been terminated. One of them is Nordic Aviation Group, currently operating under the trade name Nordica, the other is OÜ Transpordi Varahaldus.

In total, the Government allocated €72.7m to the two new businesses.

While the National Audit Office stated that the government made the decision to establish two new aviation companies predominantly in compliance with the principles of the State Assets Act, and also received complete business plans that forecasted profits, the final opinion of the independent expert was received after the government’s decision to go ahead with the plan.

This means that the government could not have had reasonable assurance that it was being a rational investor at the time. Also, the supervisory boards of the companies as the representatives of the owners even now have not approved the business plans.

On top of that, Nordica’s projections have changed. The time it will take the company to finally be operating at a profit has changed. Its expected economic performance should become clear in June 2016.

Recommendations: Change law and procedures

The National Audit Office recommended to define by law what kind of information needs to be submitted to the government for a decision on capital contribution and loans to new or operating public enterprises.

The materials to be submitted to the government should include the complete business plan of the company in question for at least four years, as well as financial forecasts. In addition, the opinion of an independent expert should be submitted who did not participate in the preparation of the business plan.

Their opinion should cover the economic feasibility of the business, and whether the assumptions made in the business plan are realistic. Furthermore, an analysis prepared or commissioned by the Ministry of Finance on whether or not the decision complies with state aid rules of the European Union was needed, as well as the ministry’s confirmation that the decision complies with the common market rules, the National Audit Office stated.

Another recommendation made is the establishment of a center of excellence in state aid issues, which would advise public authorities about state aid irrespective of the field and in the case of decisions concerning it. Such a center of excellence could give the government an idea whether or not its intentions complied with the common market rules of the European Union.

Editor: Dario Cavegn

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