Audit Office: Local government needs better cooperation with business ({{contentCtrl.commentsTotal}})

National Audit Office logo.
National Audit Office logo. Source: National Audit Office

The National Audit Office (Riigikontroll) says that local authorities' interest in promoting business should be drastically increased, adding that if the local authorities felt the direct financial benefit, it would help communities to understand that it improves local infrastructure and creates stable jobs in rural areas.

The audit office based its findings on analysis, and says entrepreneurs generally do not expect financial support from cities and rural municipalities, and instead prioritize infrastructure, well-functioning roads, and rational and reasoned communication upon the processing of plans and permits, according to an audit office press release.

A survey conducted by the Estonian Chamber of Commerce and Industry (Eesti Kaubandus‑Tööstuskoda), in cooperation with the audit office, revealed that one-fifth of the 159 entrepreneur respondents had ceased making investments due to lengthy planning processes. Entrepreneurs also value their input and being heard and involved in shaping the local living and business environment.

Eight-eight percent of the respondents thought that cities and rural municipalities should put in more effort to develop business, the audit office says.

"Entrepreneurs feel that there is an increasing number of incidents where local authorities are hesitant about an investment planned by an undertaking, trying to meet the business halfway in terms of their wishes, but also attempting to avoid confrontation with a loud interest group or activist," Audit Manager Tambet Drell said.

Drell added that in the opinion of not only entrepreneurs, but also the representatives of local authorities, emotions, rather than rational agreements uniting the interests of parties, tend to come out on top.

Most corporate taxation ends up in hands of the state

No important business-related fees accrue into the budgets of cities and rural municipalities, the office said. Local authorities also have no opportunity to establish local taxes or set the levels of state fees levied in their territory according to the law to an extent that it would have a significant effect on the decisions of undertakings.

"The majority of taxes affecting business – corporation tax, value-added tax and excise duties or income tax on dividends – go to the state budget, not in the budget of cities and rural municipalities," Tambet Drell said.

"As a result, the only 'bonus' for local authorities from the development of business is seen when better-paying jobs generate higher personal income tax revenues for the city or rural municipality." 

At the same time, however, this may also not occur, because the distribution of income tax is based on residence, not on the place of employment.

The analysis also showed that the opportunities for promoting business are often not thought out from the point of view of the local authority. The treatment of business in the development documents of local authorities is often superficial, objectives are general and weakly supported by activities. 

Degree of arbitrariness with local authorities

While some local authorities only wish to serve companies within the context of their current tasks, others find it important to think about the business environment more broadly and do everything in their power to foster and develop business.

"Entrepreneurs have told the audit office that they feel that the attitude and contribution of local authorities is often dependent on which head of local authority happens to be in office in the specific city or rural municipality," Drell continued.

The scarcity of land by region also prevents local authorities from taking greater responsibility. This is particularly the case for the establishment of industrial sites which have so far proven to be one of the best ways to promote higher value-added and business that creates jobs. There are regions where local authorities are not able to work on establishing industrial sites, because suitable land is held by the state, but no decisions have been made regarding the future thereof, the office said.

In order to increase the responsibility of local authorities in the purposeful development of the business environment, the audit office made several recommendations to the minister of public administration (Jaak Aab-ed.).

The audit office finds that land units set aside as state reserve land should be registered in the ownership of the state quicker, followed by the establishment of common and understandable terms and conditions of how the cities and rural municipalities could acquire the land for the development of business.

The audit office also recommends motivating local authorities financially, to ensure activities that promote business, either through the redistribution of tax revenues or expanding the rights to establish local taxes.

Business unsurprisingly concentrated in Tallinn and Tartu, but disproportionately high figures for Pärnu, Rakvere and Paide also

Of nearly 75,000 companies (with functioning turnover or employees) operating at the beginning of 2019, 57 percent were based in the Tallinn area, and 10 percent in the Tartu area, according to their legal address. The employment register gives a similar proportion. The largest number of companies per 1,000 residents were situated in Rae rural municipality at 85 and the lowest in Kohtla-Järve (17). 

Most municipalities hosted 30-50 functioning companies per 1,000 residents, the audit office said.

The majority of municipalities were home to 30–50 operating companies per 1,000 residents. A disproportionately large number of places of employment were also situated in the Pärnu, Paide and Rakvere areas, in comparison with their population, as well as in some municipalities in Ida-Viru County.

The analysis, entitled: "The role of local authorities in promoting business. Whether and how could local authorities contribute more to the development of the business?", was conducted from spring to autumn 2019.

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Editor: Andrew Whyte

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