The hocus-pocus of state support

Aivar Hundimägi.
Aivar Hundimägi. Source: Erik Prozes

It is important for Estonian companies not to get used to broad-based subsidies and for society to remain constructively skeptical of every new measure. Enterprise does not need support but equal treatment, Aivar Hundimägi finds in Vikerraadio's daily comment.

Many Estonian entrepreneurs have said in recent months that the state should support business through various measures. Politicians have created such measures and channeled more taxpayer money into enterprise. The coronavirus crisis has sharply increased available support.

However, we should not abandon critical thinking in this downpour of subsidies and make sure support ends up where it is of use. That is not always the case because where there is money, there are those who will find a way to qualify for support. One such example was covered by Kristjan Pruul in last week's Äripäev.

Years ago, officials and politicians came up with a renewable energy support measure for small producers. Owners of small solar farms can ask the state for renewable energy support of on average €2,500 per a 50-kilowatt solar plant. The measure was aimed at motivating apartment associations and farmers to produce solar energy for their own needs.

The reality was different. A few major market participants saw in the measure a way to shorten the payback period of large solar farms. The scheme is a simple one. Because the measure is open to small plants, major farms need to be cut into pieces, creating clusters of small plants inside larger ones. Visually, we are dealing with a single solar farm, while it may be made up of dozens of smaller ones on paper.

This way, a support scheme meant for small producers is actually benefiting larger ones and giving them a competitive edge over those who do not use it.

The scheme's popularity is reflected in the fact that power network operator Elektrilevi is processing applications for 240 megawatts worth of solar farms. Of that capacity, 200 megawatts covers applications for projects made up of more than one solar plant. Not all of it concerns clusters of small plants made to capitalize on the scheme, while there are dozens of major farms made up of smaller clusters.

It is not the only example of support-related hocus-pocus. When the coronavirus crisis hit, the state decided to offer entrepreneurs salary support to avoid mass layoffs.

The measure was aimed at companies that experienced a sharp and unexpected decline in revenue. The criteria were a 30 percent drop in turnover, 30 percent drop in volume of work and a 30 percent wage cut. Two out of the three conditions had to be met to qualify for the instrument.

Companies that didn't really meet these criteria took action to qualify for the instrument. A self-fulfilling prophecy had been created. If a wage cut of 30 percent was what it took, that is how much salaries were cut. If turnover had not fallen enough, some of it was simply postponed on paper.

It is a good thing salary support rules were made tougher in June.

Äripäev wrote in a recent editorial that Estonia has become a republic of subsidies where an increasingly big part of companies' turnover is made up of support instruments, writing applications for which has become a new kind of written language. Estonia is not alone in this. The same development has taken place in other Western countries.

It is important for Estonian companies not to get used to broad-based enterprise support and for society to remain constructively skeptical of every new measure. Enterprise does not need support but equal treatment, fair competition and promotion of investments everyone could compete for from the public sector.

At worst, direct support for companies keeps the economy from renewing itself, wastes limited resources in the wrong places, distorts competition and takes the life out of market economy in general. Support also has another downside. It tends to reproduce itself. Give it once and the company will be back for more.

The problem with taxpayer money is that while we all contribute to that wallet, it doesn't really have an owner. And money that doesn't have an owner can easily end up in places where it shouldn't. The solar park scheme described in the Friday issue of Äripäev is a vivid example.


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Editor: Marcus Turovski

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