Large sums of money were often issued arbitrarily, while loan applications were often rejected over the phone, with nothing in writing, the audit office said.

The office says that the Rural Development Foundation (MES), under the aegis of the Ministry of Rural Affairs, had also issued funds to those businesses who had been unable to obtain regular loans from banks.

A total of €86 million has been issued to rural-based enterprises under the scheme.

€100 million set-aside, €86 million used

The scheme, dubbed: "The COVID-19 loan for bio-economy and rural enterprises", ran from May 15 to October 26 and was in fact one of the largest anti-crisis measures in terms of its financial volume, with €100 million set aside from the state budget for its usage.

Arvo Aller (EKRE) was rural affairs minister during the period the loan applications were made.

The MES itself was founded in 1993 and issues guarantees to banks for credit granted to farmers and other entrepreneurs in Estonian rural areas, the organization says on its website.

Just under 350 firms applied for the 2020 coronavirus loans, while only around half of the 248 successful applicants were actually engaged in the agricultural sector, the audit office says.

Auditor General Janar Holm said that. "In the case of more than 50 enterprises applying for loans, the statement that the bank does not lend money to the enterprise was enough to prove the impact of the crisis."

"Unfortunately, the foundation did not find out how the need for loans in specific cases had been caused by the coronavirus crisis," Holm went on, according to an audit office press release.

Audit office: Some applicants did not even claim to have been hit hard by the pandemic

In ten cases, loans totaling €5 million had been granted to enterprises which did not even make the claim that they had been hit by the coronavirus pandemic and its ensuing restrictions and economic effects.

The case is reminiscent of loans and guarantees issued by state credit agency KredEx during the worst of the coronavirus crisis, particularly a nearly €40-million sum granted to an unfinished central Tallinn real estate development. Allegations of corruption in the issuing of this loan led to the collapse of the Center/EKRE/Isamaa coalition in January, and the resignation of Jüri Ratas (Center) as prime minister.

In the case of the MES, just over 40 companies requested, and were granted, investment loans totaling €17 million.

Of these, 14 companies that received loans have, far from being hit by the crisis, seen turnover rise since the pandemic began, a development which should not have come completely out of the blue simply by studying financial data submitted by the enterprises to the MES in their loan applications.

Auditor: MES effectively go-to for those rejected by banks

Janar Holm added that: "The audit has shown that the MES often did not check the statements of enterprises, demonstrating that they would not have received a loan from a bank, or that the conditions offered by the bank would have been unreasonable."

"At the same time, it was precisely the fact that the enterprise could not attract additional financial resources from other sources, or that it would have been too burdensome for the enterprise, which was one of the preconditions for obtaining a [MES] loan."

The MES often did not ascertain whether the need for the loans applied for was directly the result of by COVID crisis, Holm added, while loan applicants have not been treated consistently, and some have been asked for more detailed information in their applications – in some cases in the form of several loan rejections from banks - than others.

Minister: It's not just the MES that is doing this

Minister of Rural Affairs Urmas Kruuse (Reform) said that that the application of administrative procedure to MES activities, as with other state foundations, is not yet a generally accepted and undisputed position, adding that the issue needs to be discussed nationwide via a broader context and not only in those of the MES.

Kruuse, who became minister in January though also had a stint in the same position 2015-2016, found that the MES should have applied an administrative procedure only if it had granted loans on more favorable terms than market conditions provide, i.e. as state aid.

The minister, who was not in office at the time the MES loan application process was open, said he promises to consider recommendations to guide the reorganization of the internal work organization at the MES and to introduce an internal audit, the National Audit Office reports.

The office recommends that the ministry nonetheless ensures the MES follows best practices and makes transparent and fact-based decisions. Standard procedures should be put in place in enterprises' proving or otherwise that they have been hit by the coronavirus pandemic's effects, should these recur.

Audit office: MES loan procedures should be standardized, governance more effective

The office also recommended ensuring the separation of the roles of the governing bodies belonging to the foundation in establishing internal procedures, plus a much more relevant set of rules, while the MES' supervisory board should be more effectively governed.

While no rationale containing the factual and legal basis, no considerations, and no reference to any fallibility of any MES decision was in place, over 100 loan applications were not satisfied, the most common reason being insufficient creditworthiness (in a little under a third of cases), the audit office said.

Rejections were often couched in vague terms along the lines of "the project is too risky," while notification was often given verbally, over the phone, and with nothing in writing.

Loan interest rates varied from one to 6.5 percent (average: 2 percent) the audit office says, with a term of five to 120 months (average: 72 months).

In just under 80 percent of cases, loans were secured to mortgages.

The MES is not the only state body under the rural affairs ministry's remit to have been at the center of controversy in recent years. In late 2019, a conflict of interest involving the Agricultural Registers and Information Board (PRIA), the body tasked with doling out EU subsidies, saw a ministry adviser acting as a lawyer in a subsidy fraud case in which the PRIA was plaintiff. Meanwhile cases of listeria poisoning traced to a fish-packing plant involved the Veterinary and Food Board (VTA), which has since been superseded by a new body, the Agriculture and Food Board (PTA). Both cases ultimately contributed to the-then rural affairs minister, Mart Järvik (EKRE), resigning.

At the same time, rural development and stemming depopulation and poverty away from the capital and other larger cities is often reported as a major challenge facing Estonia, even before the pandemic.

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