National Audit Office: government pumped money into Estonian Air hurriedly and superficially

Photo: Postimees.ee

National Audit Office says the European Commission decision regarding Estonian state having supported national airline AS Estonian Air with €84.9m in violation of EU rules could have been avoided, had the government followed the principles of State Assets Act and asked if giving money and loans to Estonian Air was purposeful, expedient, economical and lawful.

The government passed decisions regarding Estonian Air from the principle that Estonia of necessity needed a Tallinn-based airline. The government failed to essentially and thoroughly weigh other options for ensuring flight connection, neither did it on any occasion of opting to give money or a loan (totalling close to €58m) require that Estonian Air present a comprehensive business plan approved as realistic by an independent expert, nor a legal analysis. Thus, the government could not have had an assurance that it was acting as a rational investor when giving money, said National Audit Office.  

According to Auditor General Alar Karis, the government was basically paying off the losses of Estonian Air. 

The government gave money to Estonian Air for expansion, and a couple of years it again gave it money for cutting operations, said National Audit Office chief auditor Tarmo Olgo. Thus, the number of routes grew from 13 to 24, and was a few years later shrunk to 12.

He said all placements of money by the state ought to be by private investor principle i.e. knowing that when I place money into a company, I get some amount back in some years. But an analysis if the airline was needed at all was never made. Analyses were so general as to make it impossible to understand what would happen if Estonian Air did not exist.

The first analyses regarding state aid were only ordered in 2013 when the commission had triggered the procedure. By that time, however, the decisions to give Estonian Air money which led the commission to the negative opinion had already been made a while ago: what proved decisive for the commission was the decision dating 2011 to grant Estonian Air €30m for expansion strategy while the commission was not notified thereof.

«While all the other things could have been negotiated, not so with this €30m episode,» said Mr Olgo. 

Thereby, National Audit Office concludes that the commission’s negative decision was firstly because of governmental decisions before the commission was notified, and better communication in later stages of the proceeding would hardly have helped.

The government continued making new loan transfers even when finance ministry believed not the former loans would be repaid and declared these to be unlikely to be paid. As an example of that, in November 2014 the company was sent the last loan sum of €12.1m though by then €24.9m granted earlier had by then been written off by decision of finance ministry chancellor.

In September 2015, before Estonian Air had even ceased to operate, the government established two new national aviation companies: one of these is not operating under Nordica brand, the other is OÜ Transpordi Varahaldus (Transport Asset Management). In total, the government allotted €72,700,000 to the two new aviation companies.

As assessed by National Audit Office, the government took the decision to establish the two new companies largely pursuant to principles of State Assets Act. Meanwhile, final assessments by an independent expert were only completed after the governmental decision; therefore, during the decision the government could not have had full assurance it was acting as rational investor. Thereat, the business plans of the new national aviation companies have not been ratified by councils of the companies as representatives of owner.

For better management of the state enterprises and to support prudent decisions by government, National Audit Office advised to agree and write into law which information must be presented to the government if the government decides to place capital into or grant a loan to a state enterprise being created or already operating.  

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Nine vital conclusions in the audit

1.     During the past five years, on 25 occasions the government has always discussed Estonian Air as a matter of urgency; the members of government have usually received the material as the y convened or a day before, though the rules say the materials must be presented a week in advance. The auditors say the materials, on almost all occasions, were such that the body presenting the bill ought to have known the facts earlier than a couple of days. The reasons for failure were essentially not analysed, and it was episodic.

2.     In 2010-2014, the state placed money into Estonian Air on four occasions. In none of these was the government presented a business plan or restructuring plan approved as doable by an independent expert. The government continued transferring new loans while earlier loans were judged to be bad by finance ministry.

3.     In 2013, the government ignored assessment by finance ministry that further lending to Estonian Air in danger of bankruptcy was forbidden state aid. Also, the government ignored opinion of economy ministry that the outlook of positive decision by the commission and of successful restructuring of the company was small. Despite that, loans were extended to Estonian Air.

4.     European Commission passed a negative decision mainly because the government gave Estonian Air €30m in 2011-2012 for expansion while failing to notify the commission.

5.     Afterwards, the government tried to claim that the loans granted at various times were all part of the same rescue plan, but the commission found they could not be treated as a single restructuring process as in 2012 the aim was expansion which does not agree with the idea of restructuring a company in difficulty.

6.     The expansion strategy of 2012 played a key role in the negative decision by the commission, but given the conditions it could never have been a success. This could have been discovered, had they asked the opinion of an independent expert – but they did not. Also, the hope was to get €25m from a bank in addition to the €30m, but they failed to get the loan. Despite of that, they did not review the strategy.

7.     National Audit Office did not find thorough analyses on whether the state needed necessarily to participate in aviation business, or whether the government had pondered that deep enough. The effect of the disappearance of the airline was based on two analyses composed in 2012 and 2013 by Estonian Air and Tallinn Airport. The methodology of these analyses has not been explained, neither are these detailed enough for conclusions. While the materials were being prepared for the decisions, the government was not strict enough with its officials, nor prime minister with members of the government. 

8.     National Audit Office raises the question how decisions are prepared and passed at the government, fearing that Estonian Air is not a single occasion but might be a picture of a faulty decision making process generally.

9.     National Audit Office advises that during six months finance ministry be turned into a competency centre regarding state aid, to counsel agencies of all domains and tell the government whether it thinks the decision planned agrees with EU single market rules.