State left 261 million euros awaiting investment, audit says

Estonia’s state funds had 261 million euros sitting largely in term deposits at the end of last year while the government borrowed to cover daily expenses, ERR reported, citing an overview by the National Audit Office.

The state has transferred hundreds of millions of euros to the risk capital funds of SmartCap, a subsidiary of the Enterprise and Innovation Foundation, even though investment opportunities for some of the money were only beginning to be sought. The National Audit Office said this was an inefficient use of public funds.

“State support for developing the risk capital market may be justified, but millions of euros from the state budget should not simply be held in reserve while management fees are also paid on that money, at the same time as short-term bonds are issued to cover the state’s daily expenses,” Auditor General Janar Holm said.

Holm said the Ministry of Economic Affairs and Communications should better assess when funds would be needed for investment. The ministry should also clearly define the expected results, their deadlines and how their achievement would be evaluated, he said.

The state budget has allocated nearly 466 million euros to participate in SmartCap’s risk capital funds, according to the National Audit Office. However, the timing and amount of the payments have not been linked to the funds’ actual investment needs or pace.

SmartCap said reaching agreements for risk capital investments was a multiyear process and that hundreds of potential investment projects had to be analysed for each investment. By the end of 2025, its portfolio included investments in 17 companies and 16 sub-funds. Investment agreements had been signed for 230.4 million euros, of which 119.5 million had been paid out.

The remaining 261 million euros was available for future investments and expenses and had largely been held in term deposits, earning interest rather than being used for investments.

The National Audit Office said that under the usual operating model of risk capital funds, investors transfer money when it is needed to meet previously undertaken investment commitments. In SmartCap’s funds, however, the state transferred money before investment opportunities had been identified. At the same time, the Ministry of Finance had to borrow to cover the Treasury’s daily expenses.

The funds’ objectives are broadly worded and lack measurable targets or deadlines. SmartCap’s funds aim to improve access to capital for innovative companies, develop green technologies and strengthen the defence industry. The National Audit Office said the lack of clearly defined targets made it effectively impossible to assess whether the investments had achieved their intended results or whether the fund manager’s activities had met expectations.

The audit also found that the roles of policymaker, owner and supervisor had become blurred in the management of risk capital investments. The Ministry of Economic Affairs and Communications is simultaneously responsible for designing policy measures, investing in SmartCap’s funds and supervising the implementation of financing agreements, creating a risk of overlapping roles and reducing the transparency of decision-making.