Republic of Estonia

Action Plan for Growth and Jobs 2008 – 2011 for the implementation of the Lisbon Strategy

Tallinn October 2008

CONTENTS

CONTENTS...... 2 INTRODUCTION...... 3 1. BRIEF ANALYSIS OF THE COMPONENTS OF ECONOMIC GROWTH...... 6 2. MACROECONOMIC ENVIRONMENT...... 10 OBJECTIVE 1: ENSURE A STABLE MACROECONOMIC ENVIRONMENT ...... 14 OBJECTIVE 2: DEVELOP A TAX SYSTEM THAT STRONGLY PROMOTES ECONOMIC GROWTH ...... 17 OBJECTIVE 3: ENSURING THE LONG-TERM SUSTAINABILITY OF FISCAL POLICIES...... 20 3. COMPETITIVE BUSINESS ENVIRONMENT...... 26

OBJECTIVE 4: INCREASE THE INTERNATIONAL COMPETITIVENESS OF RESEARCH AND DEVELOPMENT ACTIVITIES ...... 26 OBJECTIVE 5: INCREASE THE PRODUCTIVITY AND INTERNATIONAL COMPETITIVENESS OF ENTERPRISES ...... 37 OBJECTIVE 6: DEVELOP A BUSINESS ENVIRONMENT FAVOURABLE TO ENTERPRISE AND ENTREPRENEURSHIP 47 OBJECTIVE 7: ENSURE THE SECURITY OF ENERGY SUPPLY AND DEVELOP A COMPETITIVE AND ENVIRONMENTALLY-FRIENDLY ENERGY SECTOR ...... 56 4. EDUCATION AND LABOUR MARKET...... 67 OBJECTIVE 8: IMPROVE THE SKILLS OF THE LABOUR FORCE...... 69 OBJECTIVE 9: INCREASE THE FLEXIBILITY OF THE LABOUR MARKET AND IMPROVE THE QUALITY OF WORKING LIFE...... 87 APPENDICES...... 95

APPENDIX 1: THE COMPOSITION OF THE WORKING GROUP CO-ORDINATING THE ESTONIAN ACTION PLAN FOR GROWTH AND JOBS 2008 – 2011...... 95 APPENDIX 2: FINANCIAL PLAN BY MEASURES FOR THE ESTONIAN ACTION PLAN FOR GROWTH AND JOBS 2008–2011...... 97

2 INTRODUCTION

The Action Plan for Growth and Jobs 2008 – 2011 is the Government strategy for increasing the competitiveness of the economy. The plan sets goals to increase the Estonian work force to 80% of the European Union average, to increase scientific and development activities up to 2% of GDP and the growth of overall employment to 70.5%.

The Action Plan for Growth and Jobs 2008 – 2011 helps implement the European Union’s growth and jobs strategy. In 2005, the Government approved the Action Plan for Growth and Jobs 2005 – 2007. When compiling the new plan, the effectiveness of the measures applied during the last period and the current status of the main areas influencing Estonian competitiveness were thoroughly analysed. The Estonian Government together with European Commission has analysed the components supporting Estonian economic growth compared to other European Union Member States. The results of the analyses are the basis for setting the main goals and emphasises of the measures in the plan. In addition, the recommendations by the European Commission1 regarding Government policy for economic competitiveness and the conclusions of the European Council competitiveness summit2 that took place in the spring of 2008 were taken into account when compiling the plan.

In general, both the analysis of the components of economic growth and the conclusions of the commission show that Estonia has developed rapidly in recent years and the overall level of competitiveness is good. At the same time, both external and internal risks have increased significantly. In order to maintain and increase the competitiveness of the Estonian economy it is necessary to take several new steps (incl. first of all to increase export capacity and develop the skills of workers) and adopt sound policy to develop the economy. The Government sets 9 central objectives and 29 sub-objectives in the plan for the year 2011, and plans the measures, a timeline of activities and the funds necessary to achieve them.

European Council conclusions from spring 2008 and “points-to-watch” streamlined in the Commission’s 2007 Annual Progress Report form the basis of the NRP. Main objectives set and measures undertaken are directly responding to the Commission assessment. As all the objectives are measurable and measures are listed with concrete timetable and financial allocation, there was no need to compile separate action plan for “points-to-watch” implementation. In line with the new three years cycle, brand new NRP is developed. Therefore, separate reporting of ‘old measures’ is not enclosed. Relevant information on main concrete actions in 2007 and 2008 as well as status of implementation of main measures is broadly covered in situation analysis sub- chapters of the NRP and more concretely under each sub-objective.

The financial plan of the Action Plan for Growth and Jobs is in compliance with the State Budget strategy for 2009 – 2012, the 2008 State Budget Act and the draft 2009 State Budget Act presented to the Parliament by the Government. Implementation of some measures enclosed to the reform plan does not have direct budgetary implications (for example development and enforcement of legislation), in those cases finances are not foreseen in the financial plan. There

1 The European Commission brought up 6 points that the Estonian Government should pay more attention to when developing a competitiveness policy. The suggestions and recommendations were made to all the states in the report issued in December 2007 by the Commission of European Communities (http://ec.europa.eu/growthandjobs/pdf/european-dimension-200712- annual-progress-report/200712-countries-specific-recommendations_et.pdf). Estonia was one of six Member States that the European Commission did not offer official recommendations, only drew attention to certain issues. 2 The conclusions of the European Council are available at the following website: http://www.consilium.europa.eu/uedocs/cms_Data/docs/pressdata/et/ec/99426.pdf

3 are cases where final financing decisions are not yet made by the government (impact assessment is on-going), in those cases relevant columns in the financial plan are left empty and will be complemented after decisions are made. Financial costs of the measures include EU funds and are cash-based. Therefore, yearly costs are indicative and can undergo minor annual adjustments based on implementation results. Costs for the years 2010 and 2011 could be revised during annual budgetary processes. Financial plan of the NRP covers finances need for the implementation of measures in years 2008-2011, even when the implementation period of measure is longer.

Preparing the plan has involved close cooperation between Ministries and the active involvement of Government partners and experts. The completion of the Action Plan for Growth and Jobs was coordinated by the competitiveness working group3 in several Ministries put together by the Secretary of State.

The State Chancellery started coordinating the compiling the new Action Plan for Growth and Jobs in January of 2008. In the first phase, there were discussions with partners in order to map out key issues and possible solutions in the areas of macro-economics, the competitive business environment as well as education and the labour market. The timeline for the plan, initial priorities and main emphasis were introduced to the Economic Affairs Committee, Cultural Affairs Committee and Social Affairs Committee during the discussions of the opinions of the European Council in spring.

After meeting with partners, the descriptions of problem areas were prepared for each goal of the Action Plan for Growth and Jobs based on the current status of the area and the issues brought up by the partners, and measures were defined in order to find solutions. After thorough discussions and agreeing upon the key activities necessary for achieving the goals, the Action Plan for Growth and Jobs 2008 – 2011 was discussed at the Government meeting on May 22, 2008.

In June, the discussion of the action plan took place at the European Union Affairs, Social Affairs, Financial Affairs and Cultural Affairs Committee and in September at the Economic Affairs Committee. The plan, followed up by the suggestions of Parliamentary committees, was sent to the ministries and partners for a final revision. From July 1 to August 17, the Action Plan for Growth and Jobs was opened for public discussion at the participation portal4.

During the completion of the action plan several new ideas were raised for increasing Estonian competitiveness – implementing those ideas would not be rational without a thorough analysis of the effects and discussions of the details of implementation. The discussion and analysis of those ideas continues. New steps will be added to the plan next year if possible.

In addition to implementing internal measures, the Estonian Government has given more attention to developing strategic cooperation with neighbouring states. Coordinated decisions with neighbouring states in key areas help to increase the competitiveness of the entire region. In April of 2008, a joint meeting of the Estonian Research and Development Council and the Science and Technology Policy Council of Finland took place. Cooperation between Estonia and Finland in the area of research and development was discussed at the joint meeting, and several suggestions for more active cooperation were made to the Government. The Prime Minister of Estonia has commenced the development of strategic cooperation reports with Finland and Latvia.

3 Composition of the working group is available in Appendix 1 4 A more detailed activity scheme of the process of completing the Action Plan for Growth and Jobs 2008 – 2011 is available at the following website http://www.riigikantselei.ee/?id=73384

4

In June of 2008, the authors of the strategic cooperation report in Estonia and Finland (Finnish diplomat, former ambassador in Estonia, Jaakko Blomberg, and the vice president of Nordic Investment Bank, Gunnar Okk) presented the prime ministers with suggestions for developing cooperation. The main purpose of the report was to offer ideas for how cooperation between Estonia and Finland could help them manage better with challenges arising from globalisation and help each other increase their competitiveness. Public discussion of these suggestions is ongoing. At the same time, an analysis of the possibilities of implementing these suggestions is also under way. In the autumn, the Estonian Government will discuss the priorities of Estonian- Finnish cooperation and the principles of implementing the suggestions. Based on those discussions, the measures for regional cooperation will be added to the Estonian Action Plan for Growth and Jobs next year.

The objectives of the Growth and Jobs strategy are also supported by the European territorial and cross-border cooperation programmes that are financed from the European Regional Development Fund. With the help of these programmes cooperation between Estonian and neighbouring countries is enhanced in many priority areas of the Estonian Action Plan for Growth and Jobs.

The Strategy Director at the State Chancellery, who is also the coordinator of the European Union strategy for growth and jobs in Estonia, coordinates the implementation of the action plan. An overview of the implementation of the plan is presented to the Government every year before October 15. Every year, if necessary, the plan is amended based on the analyses of the effectiveness of the implementation of the plan. The effectiveness of the implementation is also assessed by the European Commission each year who presents a report to the leaders of the Member States in December.

5 1. BRIEF ANALYSIS OF THE COMPONENTS OF ECONOMIC GROWTH

The economy of Estonia has grown rapidly in recent years. We have come significantly closer to the EU average level of GDP. At the end of 2007, Eurostat assessed the level of Estonian GDP as already over 70% of the EU average.

Table 1: Estonian gross domestic product (accounting for purchasing power) for 2000–2007 2000 2001 2002 2003 2004 2005 2006 2007 G DP annual growth 92,0600% 720,701% 72,0802% 720,103% 270,504% 209,205% 21006,4% 206,307% GDP per person EU27 average 44,7% 46,2% 50% 54,5% 57,4% 62,2% 67,6% 70,8% Source: Eurostat

Since the middle of 2007, economic growth has slowed significantly. Real growth of GDP in 2007 dropped to its lowest level in 7 years. In 2008, the economic slow-down has further accelerated. According to the 2008 summer prognosis from the Ministry of Finance, real growth of Estonian GDP in 2008 is expected to be negative (–1.0%). The primary danger in the next few years is the possibility that the economic standstill in Estonia will last several years. At the same time, the basic economic situation has not significantly changed other than the increase in labour costs and the cost of capital, and broader challenges are not dependant on GDP growth in a single specific year.

Up until 2007, GDP growth in Estonia was influenced first of all by changes in employment figures and the productivity of the workforce. The growth of Estonian GDP in the last 8 years has mostly been influenced by a continual growth in productivity. During the last two years (especially 2006), GDP growth was also influenced remarkably by the sudden increase in the number of employees. As a positive sign, the productivity of the workforce also continued to grow at a greater rate compared to other EU Member States during the period of rapid increases in employment (2006 and 2007).

When analysing the strengths and weaknesses of Estonia, it is important to compare the main components that influence GDP growth with similar data on other countries (see Figures 1 and 2). The basis of the action plan is the comparison of Estonia with average EU15 indicators5. GDP growth is influenced by three main groups of factors: 1) demographic factors, 2) the level of labour utilisation (which is largely employment figures and the number of working hours) and 3) productivity. In order to provide a more precise assessment, the analysis of these factors concentrates on the following components (see Figures 1 and 2). Regarding demographic factors, the primary sub-components include the number of permanent residents, the birth rate and the size of the working age population. The main components influencing the level labour utilisation include the number of work hours per worker, unemployment and employment rates among women, men, youth and seniors. Productivity growth is mostly influenced by capital intensity, total-factor productivity (TFP) and the education of workers. Analysis of the demographic and the workforce application sub-components provide us a good overview of the Estonian situation compared to the average in EU15 countries, and in terms of changes in recent years. The productivity sub-components are less transparent because one of the

5 The EU15 average level is taken as a basis for the comparison, because the European Commission also compares the progress of the Member States with the EU15 average when analysing its Lisbon process.

6 important sub-components, total factor productivity (TFP)6, is basically not analysed using a comparative methodology across the EU member states7.

The following figures show the components influencing Estonian GDP growth in comparison with other EU Member States and the change trends in these components in recent years8.

Figure 1: Comparison of the levels of Figure 2: Comparison of the growth rates of the components of average GDP in Estonia and GDP components in Estonia and EU15 for EU15 according to 2006 data 2001–2006

Gap with EU15 in level in 2006 Growth differences vis-à-vis the EU15 2001-2006

GDP per capita GDP Demographic components Demographic components Labour market components Labour market components Labour Productivity Labour Productivity

Fertility Native Population Share of foreign population Net Migration Share of Working age Population Share of Working age Population

Youth Participation Youth Participation 25-54 Male Participation 25-54 Male Participation 25-54 Female Participation 25-54 Female Participation

55-64 Participation 55-64 Participation

Unemployment Rate Unemployment Rate

Average Hours Worked Average Hours Worked

Capital Deepening Capital Deepening

Total Factor Productivity Total Factor Productivity

Initial education (Labour quality) Initial education (Labour quality)

-60 -40 -20 0 20 40 -2 0 2 4 6 8

Source: The Commission of European Communities

Average real economic growth in the last 10 years has been approximately 7% per year. During the period 2000 – 2006, Estonian economic growth was the fastest among European Union countries – averaging around 8% per year. As a result, convergence with the average level of EU economic prosperity has also been significantly faster than expected (see Figure 2). At the same time, GDP per person compared to EU15 is still low, the main reason for

6 Factor productivity includes everything that takes place in the internal processes of economic entities (mainly enterprises). It is greatly influenced by the level of implementing technology, the economic aspects of the processes within the enterprises, the effectiveness of everyday leadership etc. 7 The analysis of economic growth is based on the analysis called “Lisbon Assessment Framework” completed by the European Commission, which aims to assess the factors influencing the economic growth of all Member States. 8 The horizontal line on the graph shows the difference between the Estonian and EU15 levels as a percentage. Data from 2006 is used because more recent comparative data for EU Member States is not yet available. Demography is the aggregate indicator of the three sub-components and demonstrates how much population processes have influenced working population figures compared to the EU15 average. Labour utilisation shows how much Estonian people work. Among other things it views how many work hours there are per worker. Total factor productivity is explained above.

7 that has been the relatively low productivity (approximately half of the EU15 average). This low productivity level is related to both low TFP as well as capital intensity, which has grown quickly compared to other EU countries, but continues to be one of the most modest in the European Union. Basically, this means that companies have invested little, considerable human resources are being consumed, relatively inexpensive products are being produced and services with low added value are being offered.

During the period 2000 – 2006, most of the components influencing Estonian economic growth have grown faster compared to average growth in EU15. Growth has been fastest for productivity components (capital intensity and TFP). Unemployment indicators have also improved rapidly. Due to the high birth rate in the 1980s, the weight of the working population has increased. During the period 2000 – 2006, the Estonian situation worsened compared to the EU15 average only in regard to the birth rate and migration. Those components also grew, but growth was faster in other EU countries compared to Estonia.

Estonia's greatest strength is labour utilisation. This is supported by both the high percentage of the working age population (which will start to decrease significantly in the coming years) as well as employment, which is higher than the European average. The high employment rate among women and seniors (aged 55–64) is especially positive, where Estonia has already achieved the ambitious goals of the Lisbon strategy. Compared to the average of EU15, there are relatively less men employed in Estonia and the rate of youth employment is also lower than the average in the EU. The latter is largely related to the high percentage of young people obtaining higher education. The decrease in the birth rate in the 1990s has not yet influenced the working age population, but its significant influence will appear in the coming years. At the same time, the proportion of non-citizens in Estonia, which is higher than the EU15 average, sets clear limits on the potential for bringing in foreign workforce, which several EU Member States have used to increase workforce capacity. The main goal is to increase the productivity of the workers, which means first of all to make better use of the current workforce. So far the growth of the Estonian working age population has been hindered by greater emigration compared to the EU15 average. In all, there are still more workers in Estonia than the EU15 average.

In addition to employment indicators, the greater number of hours worked in Estonia compared to the EU average also helps to keep the level of labour utilisation high (i.e. people work less in Western European countries). In all, this means that people in Estonia work (workers and the number of hours worked combined) around 30% more per person than is done in Western European countries on average (see Figure 1). Considering the fact that Estonians already work more every week now than the EU average, that the level of employment has increased rapidly in recent years and that the number of youth reaching working age will decrease in the next few years, it will be hard for Estonia to make any considerable increase in the level of labour utilisation in the coming years.

In order to increase prosperity in the future, first of all the productivity of Estonian enterprises must grow. It is possible to increase productivity by further developing products and services, and by offering more complex and expensive products and services in the same field (e.g. by moving up in the production value chain). In order to support this kind of development it is important to improve the investment environment in Estonia and to develop well targeted and if necessary also more specific national measures, which is one of the goals in the Action Plan for Growth and Jobs.

An important component that supports productivity growth is the level of education among workers and the development of their skills. Even though the education component in Estonia is

8 a little stronger than in EU15 countries, it is possible to improve the development of employee skills significantly. In order to do that we must make the different educational levels more compatible with the needs of the labour market and to contribute to in-service training and active labour market measures.

In developing employee skills, changes in the structure of the economy must be considered, which will take place in the processing industry in the near future, and also in the construction sector, which has grown rapidly in recent years, but will now begin to decrease. The growth of real salaries as a percentage has reached two-digit figures, and the price of other production inputs has also grown. It is likely that the economy will be restructured in favour of those economic sectors and enterprises that are capable of successfully exporting their products in spite of rising expenses. Increasing export capacity is also important in ensuring high economic growth because economic growth in recent years has been faster than expected and relied heavily on loans; in other words, foreign savings and the capacity for loans to support growth in domestic consumption has for a large part been exhausted in Estonian society. Therefore, it is important to develop employee skills, promote the establishment of companies that create higher added value and promote the reorganisation of the work of existing companies.

On the basis of this analysis of components influencing GDP growth and other important international developments, the key challenges facing the Estonian Government in ensuring continual economic development are as follows: 1) to develop education based on the needs of companies, and modernise work relations in order to increase safe flexibility of the labour market; 2) to increase the ability of research and development activities, and direct these to be more commercial; 3) to develop an economic and investment environment that supports innovation and international competitiveness of enterprises operating in Estonia; 4) to increase the use of environmentally friendly energy, and at the same time ensure the security of energy supply and the competitiveness of the energy sector.

A prerequisite for economic growth and competitiveness is a stable macro-economic environment, conservative fiscal policy and the adoption of the euro in a mid-term perspective.

9 2. MACROECONOMIC ENVIRONMENT

Economic growth in Estonia for 2005 and 2006 was around 10% – the highest figures in the last decade. In 2007, economic growth slowed to 6.3%, and according to forecasts by the Ministry of Finance, it will drop to –1.0% in 2008. The Estonian economy is rapidly adjusting from a situation of economic growth that surpassed expectations to a more sustainable level. This development is necessary and expected in order to improve macroeconomic balance; however, the correction has been faster than expected. Various institutions that provide economic forecasts have estimated the length of the adjustment period differently – some (including the Ministry of Finance) expect the adjustment to end in 2009, others believe that it will take longer.

Figure 3: Real convergence with the EU (percentage compared to the EU27 average) 80 70,8 70,5 70 67,6 62,2 57,4 60 54,5 50 50 44,7 46,2 41,9 42,4 42,4 40 38

30 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008*

GDP per capita (PPS) Labour productivity per person employed Price level

PPS - purchasing power standard Sources: Ministry of Finance, Eurostat

The exceptional economic growth of recent years was primarily supported by increases in domestic demand, the annual growth of which slowed to 7.5% in 2007, but remained higher than GDP growth. According to the 2008 summer forecast by the Ministry of Finance, domestic demand in Estonia will fall in 2008 due to decrease in both private consumption and investments. In 2009, economic growth shall increase again reaching 2.6% due to renewed growth in domestic demand and increased exports. The growth of domestic demand is supported by increased private consumption as well as by growing investments (Ministry of Finance).

According to Statistics Estonia, growth in exports was modest in 2007, and this contributed to economic growth falling to 0%. The fall in export growth was primarily caused by reduced export capacity in two categories of goods (fuel imported for processing and electrical devices). The turnover of both categories of goods has fluctuated, but has had a small impact on added value. Growth in exports of other categories continued to increase in 2007. Problems with export competitiveness have broadened in 2008. In addition to processed motor fuels, vehicles and devices, problems also appeared in several other categories, such as wood, paper and food products, which are important for Estonia. The export of services is mostly hindered by the decline in the transit industry and the supporting areas.

10 Figure 4: Real growth of domestic demand and export 30 25 20 15 10 5 0 -5 2001 2002 2003 2004 2005 2006 2007 2008* Export Domestic demand

Source: Ministry of Finance

The Ministry of Finance is expecting a slight increase in Estonian export growth figures in 2009 – 2010. In the medium term, the growth of exports appears to remain lower than the average from the last five years evidently because of problems in economic correction. In addition, the growth of foreign demand has slowed in recent years, which again has had an impact on exports.

In 2007, the current account deficit reached nearly 18% of the GDP, which is the highest in the last decade. According to forecasts, the current account deficit will decrease significantly in 2008 due to the modest increase in domestic demand and consequently imports. According to the 2008 summer forecast by the Ministry of Finance, the current account deficit will be 11.4% of GDP in 2008. Similarly, the gradual fall in the current account deficit will continue over 2009 – 2012, mostly due to the decrease in the deficit in the balance for goods and profits.

Since 2006, inflation has significantly increased in Estonia. In 2006, inflation reached 4.4% and accelerated to 6.7% in 2007. An increase in consumer prices in the first half of 2007 was caused by domestic factors; however, in the second half, external factors emerged as food and oil prices rose suddenly in the world market.

The consumer price index increased considerably last autumn due to external factors and an increase in excise rates at the beginning of 2008 resulted in inflation of more than 11% in the first and second quarter. According to the 2008 summer forecast by the Ministry of Finance, average inflation in 2008 will be 10.7% and price increases will slow to 6.3% in 2009.

Developments in the labour market have again been faster than expected in the last two years. In 2006, demand for labour increased dramatically, which in turn decreased the number of unemployed by one fifth and many non-active people returned to the labour market. In 2006, the number of employed increased by approximately 40,000 people (6.4%). A similar trend continued in 2007, when an additional 9,000 people (1.4%) entered the labour market. As a result, opportunities for employers to find additional labour have reduced, putting more upward pressure on salaries. In the first half of 2008, the number of employed has remained stable. By 2009, a slight decrease in the employment rate is expected and a 6.3% increase in unemployment accordingly (the 2008 summer Ministry of Finance forecast).

In 2006, nominal growth in wages was 15.8%. Real growth in wages reached 10.9%. In 2007, gross wages went up by 20.4% and real wages by 13%. Given the slowdown in economic growth, the growth in productivity only reached 5.6%, meaning that wages increased about twice as fast as labour productivity, which has been the case for the last two years.

11 Figure 5: Real growth in productivity and wages 14 12 10 8 6 4 2 0 2001 2002 2003 2004 2005 2006 2007 2008* Labour productivity Gross monthly wages

Source: Ministry of Finance, Statistics Estonia

Real wage growth exceeding productivity growth has a negative impact on the international competitiveness of companies, and is not sustainable in the longer term. According to forecasts by the Ministry of Finance, average real wage growth is expected to slow to 4.2% in 2008, and in the following years, we will see the conformity of wage and labour productivity growth. In the world economy, we are facing a period of slow economic growth and rapid price growth. Economic growth will slow in 2008 due to downscaling in the US, EU, Asian and Latin- American economies. According to forecasts, economic growth for Estonian trade partners is continues to be strong; however, risks have also increased on those markets. The largest contributions to export demand in Estonia come from the Baltic states, Russia, Finland and Sweden where economic growth has still been faster compared to the European average.

Medium term expectations for the Estonian economy are optimistic, although the risk of a long-term slowdown has increased. The precondition for continued long-term growth involves maintaining productivity growth. The majority of economic forecasters find Estonian companies highly capable of adapting to the economic situation and they estimate the period of economic standstill to last for one to three years. It is difficult to give exact forecasts for the near future, as the influence of the slowdown in the world economy has not affected Estonia's neighbouring markets or Estonia yet. The accuracy of forecasts depends on developments in neighbouring countries. The inflow of foreign investments may depend on the course of the Latvian economy, as Latvia is the third largest export market for Estonia. In addition, the availability of loans might decrease considerably in Estonia (as this has already happened to a certain extent) should the financial situation of the Swedish banks worsen significantly. However, the financing ability of Swedish banks has remained the same compared to banks in other countries.

The long-term aim of Estonian economic policy is to increase income level close to the level of the old EU member states. Favourable investment conditions for the private sector are necessary in order to achieve the sought after rapid growth. A moderate tax burden is one of the components of the business environment that stimulates growth while leaving sufficient funds for private investors. Such a moderate tax burden requires the general balance of Government revenue and expenditure in the medium as well as the longer term. A budget deficit policy would lead to an increase in the tax burden in the near future, or result in passing the debt burden to future and therefore smaller generations of tax payers.

The greatest challenges involved in improving Estonia's macroeconomic environment concern, first of all, enhancing balanced economic growth, including balancing labour

12 productivity and wage increases, and meeting the Maastricht criteria on price stability as a requirement for adopting the euro.

13 OBJECTIVE 1: Ensure a stable macroeconomic environment

Explanation of the Projected level Indicator indicator, including the Current level 2011 source P ublic balance T he government budgetary 2.7% (2007) 0% position as a percentage of GDP. Source: Eurostat Consumer price index Change in prices compared 6.7% (2007) 3.5% to the last 12 months. Source: Statistics Estonia

The main goal of the Government’s macroeconomic policy is to ensure macroeconomic stability as well as internal and external balance. Given Estonia's specific situation under a currency board arrangement, fiscal policy proves to be the main instrument for influencing the course of the economy and handling risks that endanger balanced economic growth. Estonia has been proceeding in this manner – domestic demand having been limited by a government surplus, which, as recommended, has been considerably larger than planned.

Figure 6: Developments of public balance (% of GDP)

4

3

2

1

0

-1

-2

-3

-4 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009*

Sources: Statistics Estonia, Ministry of Finance

The Estonian Government sector has had a fiscal surplus since 2002. The Government’s 2006 budget surplus reached 6 billion Estonian kroons, which is 2.9% of GDP. That was the first time that all levels of the government sector had a surplus. About 80% of the budgetary surplus was from the central Government, which despite a deficit in the pension insurance fund (302.4 million Estonian kroons), reached 4.6 billion Estonian kroons. The Government’s 2007 budgetary surplus reached 6.5 billion Estonian kroons, which is 2.7% of GDP. The central Government and social insurance funds both had a surplus, but there was a budget deficit for local governments of 0.5% of GDP.

The Government established a budget for 2008 with a surplus of 1.3% of GDP. Mainly due to decrease in real estate operations, which was larger than expected, and a decrease in consumption tax collected decreased at the beginning of 2008 remarkably. Thus, without cutting government

14 expenditures, the budget would not have remained balanced. Estonian Parliament passed a supplementary budget for 2008, which decreases expenditure in the state budget in order to ensure a balanced budget for the Government. A flexible re-evaluation of central Government expenditure in response to the changed economic situation has also taken place when drafting the state budget for 2009, where one of the priorities will be to cut government operational expenditure.

A surplus-oriented fiscal policy has enabled the Government to decrease the central Government’s debt burden, as a result of which total government sector debt, which had reached 4.3% of GDP at the end of 2006, fell to 3.5% of GDP at the end of 2007.

Figure 7: Government sector debt burden 8

6

4

2

0 1996 1998 2000 2002 2004 2006 2008* 2010* 2012* Central government Local government

Source: Ministry of Finance

Since the second half of 2006, inflation has been accelerating in Estonia. Since joining the EU, the rapid growth of prices is the only Maastricht criteria concerning the introduction of the euro that Estonia has failed to satisfy. Given the Estonian average harmonized index of consumer prices (HICP) over 12 months and the reference value of price stability calculated on the prognosis of the three EU member states with the lowest inflation rate as given in the forecast by the EC, Estonia is still unlikely to satisfy the inflation criteria within the next two years, and adopting the euro within the following years will be complicated.

Figure 8: Inflation in Estonia (percentage) 24 23,1 20

16 11,2 10,7 12 8,2 5,8 6,3 8 4,4 6,6 3,3 4,0 3,6 4,1 3,5 3,0 3,6 3,4 4 1,3 0 1996199719981999200020012002200320042005200620072008*2009*2010*2011*2012*

Source: Statistics Estonia, Ministry of Finance

15 Despite the fact that opportunities for satisfying the Maastricht convergence criteria are difficult to predict in the long term, adopting the euro is still one of the priorities for the Government. The Government’s Programme for 2007 – 2011 sets out that the government budget will be kept in surplus and the development of fiscal policy concerning excises and resources will focus on adopting the euro as soon as possible. Consequently, several important excise rates were increased to the minimum EU level at the beginning of 2008 in order to avoid additional administrative price pressures at the time when Estonia is more likely to satisfy the inflation criteria (See Objective 2). Thus, the Government’s decision to increase excise duty more quickly than previously planned will also affect price rises in 2008 and 2009. The consumer price index will be influenced by increased excise duties by 1.5% in 2008 and by 0.8% in 2009.

Measures

1. Prepare the state budget to ensure a balanced budget for the government sector (2008 – 2011). 2. Prepare a supplementary budget in 2008 to decrease expenditure in the state budget (2008). 3. Reduce the debt burden of the government sector (2008 – 2011). 4. In order to promote private savings and investments bring taxation conditions for private securities investments in line with those for investments by legal persons (2008 – 2009). 5. Ensure the legal and technical preconditions for adopting the euro (2009 – 2010).

16 OBJECTIVE 2: Develop a tax system that strongly promotes economic growth

Explanation of the Projected level Indicator indicator, including the Current level 20119 source L abour taxes as a C ollected labour taxes percentage of GDP. calculated as a percentage of GDP. 16,8% (2007) 16,9% Source: Ministry of Finance Consumption taxes Consumption taxes collected as a percentage of calculated as a percentage of GDP. GDP. 13,3% (2007) 11,9% Source: Ministry of Finance

Since 2000, the tax burden has been relatively stable in Estonia. The tax burden for 2008 is expected to be 32.2% of GDP and will decrease in the coming years. Decreases in the tax burden are mostly caused by changes in tax policy and decreases in the tax base in comparison to nominal GDP. Labour taxes form the largest share of the tax burden, 17.5% of GDP in 2008. Consumption taxes constitute 12.3% and capital tax 2.5% of GDP in 2008.

Figure 9: Tax burden in Estonia (percentage of GDP) 38

36

34

32

30

28 19951996199719981999200020012002200320042005200620072008*2009*2010*2011*2012*

Source: Ministry of Finance

Shifting the tax burden from taxing labour to taxing consumption and the exploitation of resources has been the goal of several successive governments. At the same time, the Government is attempting to keep the tax system stable, simple and transparent with as few exceptions as possible. The Government’s goal has been to stimulate work and increase resource efficiency. The proportion of utilisation of labour is high in Estonia compared to other European countries and during the last years, it has even improved due to the favourable economic environment. The high level of labour utilisation is supported by high employment indicators and by the large number of working hours per employee.

9 Explanatory note to the expected levels of the indicators: As a proportion of GDP the total amount of labour taxes will increase as according to the forecast of the Ministry of Finance the income of population increases more quickly than does the GDP. The level of consumption taxes decreases from the high levels of 2007 due to the fact that it can be expected that proportion of domestic consumption will not increase to the previous levels. The effective tax rates demonstrate the actual tax burdens more adequately but this data is calculated based on actual statistics and has a long time lag. It can be expected that the effective tax rates will develop in opposite direction from the indicators above (i.e. labour taxes will decrease, consumption taxes increase).

17 In the coming years, the share of labour taxes will be influenced by two different factors: the share of personal income tax will decrease and the share of social security contributions will increase. The share of personal income tax will be reduced from 6% of the GDP in 2008 to 5.1% of the GDP by 2011, the primary reasons for which are the decrease in tax burden and increase in basic exemption of the income tax. At the same time, the share of social security contributions will increase from 11.7% to 12%, primarily because of the increase in minimum social tax liabilities. Altogether, the tax burden for labour will increase from the 16.8% in 2007 to 16.9% by 2011.

In 2007, the share of consumption taxes formed 13.3% of GDP, and according to forecasts in 2008 this will reduce to 12.3% of GDP. The share of consumption taxes is negatively affected by the decrease in consumption caused by the general slowdown in economic growth, which significantly decreases the collection of VAT, as well as decreased consumption of excise goods and the consequent collection of excise duties.

Figure 10: The structure of the tax burden in Estonia 100% 80% 60% 40%

20% 0% 1995 1997 1999 2001 2003 2005 2007 2009* 2011*

Labour taxes Capital taxes Consumption taxes

Source: Ministry of Finance

Since tax collection has changed for a number of reasons (rapid wage growth, decrease in consumption in 2008 etc), the comparison of effective tax rates10 illustrates the changes more adequately. During the period 1995 – 2006, the effective tax on labour decreased by 5.3 percentage points in Estonia. At the same time, the tax on consumption has grown by 2.8 percentage points11.

Despite considerable changes in reducing labour taxation and increasing the taxation of consumption and resource exploitation, the proportions of the tax burden have not substantially changed. The main reason for this lies in the fact that labour expenses (wages) have risen rapidly during the last three years, which has in turn increased the labour related tax.

During the period of the current Government, the following essential changes have been made: o According to the amendment of 2007 in the Income Tax Act, the income tax rate will be reduced to 18% (this applies to both employees and enterprises); the income tax rate will decrease from 22% in 2007 to 21% in 2008, to 20% in 2009, to 19% in 2010, and to 18% in 2011. In September 2008, the tax reform was postponed by one year.

10 The effective tax rate is an indicator calculated as the actual income tax paid divided by net taxable income before taxes, and it reflects the net rate a tax payer actually pays (all the benefits and actual consumption structure are taken into account). For example, the actual tax burden of consumption is higher than 18% (VAT) because it includes goods that are taxed using different excise and environmental duties. 11 Source: Taxation trends in the EU, Eurostat

18 o The amendment of the Income Tax Act prescribes the increase in basic exemption to 3 000 Estonian kroons per month (2 250 EEK in 2008; 2 500 EEK in 2009; 2 750 EEK in 2010; and 3 000 EEK in 2011). Due to the postponed tax reform, there will also be a one-year delay in the plan to increase the basic exemption. o In summer 2007, the Alcohol, Tobacco and Fuel Excise Duty Act was amended prescribing the following changes for 2008: - In 2008, the alcohol excise rate will increase by an average of 20% and the tobacco excise will almost double (from the current 11 EEK to 20 EEK per a pack of cigarettes, which complies with the minimum liability of the EU). - The gasoline and diesel fuel excise rates will start increasing in 2008 in order to reach the minimum level of the EU (according to the energy taxation directive, this level will have to be reached not later than by 2010); the gasoline excise rate will increase by approximately 25% and the diesel fuel excise rate by approximately 34.5%. - The liquid gas excise rate will be increased from 1 570 EEK per 1 000 kg to 1 960 EEK per 1 000 kg in 2008. - The petrol excise rate will increase from 4 730 EEK per 1 000 l to 5 165 EEK per 1 000 l as of 2008. - Natural gas used for heat production will be taxed at an excise rate of 157 EEK per 1 000 m3 as of 2008. - Electricity will be taxed at an excise rate of 50 EEK per 1MWh as of 2008. The EU minimum excise rate for electricity is 15.65 EEK/MWh (non-profit purposes) and 7.8 EEK/MWh (business purposes).

The government plans to continue the current policy of shifting the tax burden from taxing labour to taxing consumption until 2009. For that reason they have decided to decrease VAT specifications and raise state fees.

Besides shifting the tax burden from labour taxation to higher consumption taxation, the amendments should have a positive impact on the potential adoption of the euro, and should not have long-term effect on inflation. Later, when Estonia is likely to meet the Maastricht convergence criteria there will be no additional inflation resulting from increased excise rates.

Given the large-scale changes in fiscal policy during recent years, the Government is not planning any reforms of a similar scale in the near future.

Measures

1. Reduce the income tax rate to 18% and increase basic exemption to 3 000 EEK per month (2008 – 2012). 2. Increase the VAT incentive from 5% to 9% and lose the incentives for performances and concerts, waste handling, and funeral goods and services (2008 – 2009).

19 OBJECTIVE 3: Ensuring the long-term sustainability of fiscal policies

During the last two years the largest contribution to the long-term sustainability of fiscal policies and managing the effects of the aging population has been an increase in employment rates. In short, during the past two years nearly 50 000 more taxpayers (approx. 7% of total employment) pay social taxes and so help to improve the state of the State pension insurance and the financial situation of the Estonian Health Insurance Fund. The improvement in employment rates has markedly improved the budgets of local governments and to a lesser extent that of the central government. Last year's positive trend ended in 2008 and a step-by-step decrease in the working age population can be expected in the long term.

As of 2008, the long-term sustainably of Estonian fiscal policy compared to other European Union member states is considered good.

Government sector debt is the lowest in the European Union and according to short-term plans Government sector debt will remain stable in comparison to GDP. Nearly 70% of the Government sector debt of approximately 8.3 million EEK is owed by local governments. Local government share of debt has risen since 2001.

Table 2: Government sector debt 2006 – 2012 2006 2007 2008* 2009* 2010* 2011* 2012* T otal debt (% of GNP) 4, 3% 3,5% 3, 5% 3 ,3% 3,0% 2, 5% 2,3% incl. Central Government 1,7% 1,1% 1,0% 0,9% 0,7% 0,4% 0,3% Local Government12 2,6% 2,4% 2,5% 2,4% 2,2% 2,1% 2,0% Source: Ministry of Finance

The State pension insurance fund, which is under the Central Government, has in previous years (except for 2007) been running at a deficit and will remain so in the years 2008 – 2011. As the pension index calculation policy was changed in 2007, no surplus is expected within the next few years, even with accelerated social tax receipts.

As of 2008, the pension fund deficit amounts to 1.2 million EEK and will grow rapidly within the next few years, reaching 3.1 million EEK by 2011.

It was decided to transfer 1.8 billion kroons from the 2005 surplus and 2.0 billion kroons according to the supplementary 2006 budget to the pension insurance fund reserve (includes previous year’s surplus and additional transfers made by law) in order to strengthen the financial position of the pension insurance fund. The pension insurance fund reserve was 6.1 billion kroons as of the end of 2007.

12 According to changes to the Accounting Taskforce (RT) policy no 17, which will come into effect on January 1, 2009, local governments must show in their balance sheet liabilities arising form concession contracts, due to which the debt load of local governments will increase and local government balance figures will be retroactively adjusted. The influence of this change will be approximately 2 billion kroons along with the State Realestate Ldt transactions.

20 Figure 11: State pension insurance fund financial indicators bil. EEK bil. EEK 35 35 25 25 15 15 5 5

-5 -0,3 0,4 -1,2 -2,3 -5 -3,1 -3,1 -2,9 -15 -15 -25 -25 -35 -35 2006 2007 2008* 2009* 2010* 2011* 2012* pension insurance income I pillar expenses II pillar expenses reserve balance

Source: Ministry of Finance

Despite relatively large pension insurance fund reserves, the Estonian pension insurance system is in a relatively weak sustainable financial position according to 2008 terms and conditions. According to the Ministry of Finance prognosis, today's reserves will be fully exhausted by 2010, and additional funds from the State budget will need to be utilised in order to make pension payments as planned today. The positive influence of the pension insurance II pillar on the balancing of the pension insurance fund will only be felt decades from now, due to which the pension insurance fund may need additional funding reaching tens of billions of kroons in the meantime.

As in most European states, the ratio between pension-aged people in the population (age 65 and over) and the working aged population (15 – 64 years) will change negatively in the long-term compared to today. Today there are four working age people for every pension-aged person in Estonia; however, according to the Eurostat prognosis; the ratio will be one to three by 2030.

As in many other countries, many different supplementary pension benefit terms are in general forming a larger burden for the pension insurance fund in Estonia. Nearly 320 million kroons in old-age pension supplementary benefit payments were paid in 2007 to approximately 7 600 persons of working-age, forming 2.2% of all pension fund expenses. The payment of pensions for persons of full pension age to 2 400 individuals amounted to 65 million kroons in 2007, forming only 0.5% of total pension fund expenses. Therefore, already today, supplementary pension benefit payments make up 2.7% of pension fund liabilities, forming a direct additional burden on the State budget. Additionally, reduced income for the State budget must be considered, as the payments of supplementary pension benefits reduces people's incentive to work.

In general, the financial stimuli offered to workers exceeding the retirement age are good in Estonia, as such workers still receive their pensions in the full amount. As a result, the indicators of employment among older workers are high in comparison with the European Union average. The average exit age from the labour market is also relatively high (even higher than the average retirement age of men and women).

21 Thanks to good results in the receipt of social tax, the Estonian Health Insurance Fund has ended the year 2007 with a surplus and the Ministry of Finance also forecasts a small surplus for 2008; however, in the medium term, growth in revenues shall be exceeded by growth in expenses. According to the financial rules in place today and assuming that the level of healthcare services are not changed, it is expected that the budget balance of the Estonian Health Insurance Fund will be negative throughout the period (2009–2011). The financial situation of the Health Insurance Fund will tighten also due to the recent decisions of the Government to harmonise the system of interests accumulating in different government sector institutions. For the Health Insurance Fund this means that the interests of the funds gathered from the accounts of the Health Insurance Fund will not remain automatically for their own use. Additional expenses come from the decision to reduce the special VAT rates from 5% to 9%, which affects the total prices of medicine. Taking into account also the demographic perspectives in the medium term, in order to ensure long-term financial sustainability of the health insurance system, it is important to implement further measures.

As the expenses have been lower and the receipt of premiums better than expected, the Estonian Unemployment Insurance Fund has been in surplus every year, and at the end of 2007 the volume of its accumulated reserves reached 2.8 billion Estonian kroons. At first, the surplus in the Unemployment Insurance Fund stemmed from the low level of expenses characteristic of the system’s first years of activity (the Unemployment Insurance Fund was established in 2002) and the need to create a sufficient reserve. Since then, the reason for expenses remaining below the planned level has been the continuous improvements in the labour market – the unemployment rate has decreased from 10.3% in 2002 to 4.7% in 2007, and the number of people receiving unemployment benefit has decreased steadily in recent years. When 12 200 people received unemployment benefit in 2005, the number was only 8 000 in 2007. The average period of the payment of the benefit has shortened – from 140 days in 2005 to 135 days in 2006. At the same time, the average monthly amount of the benefit has increased – from 2 116 kroons in 2005 to 2 857 kroons in 2007. The forecasts concerning the financial situation for the Unemployment Insurance Fund in the coming years largely depends on the new Employment Contracts Act, which is currently being developed and will in great likelihood establish additional obligations for the Unemployment Insurance Fund13.

The revenue base for local governments has improved rapidly in 2005–2007. In recent years, the proportion of personal income tax forwarded to local governments has been increased. In 2005, this proportion was increased from 11.4% to 11.6%, in 2006 to 11.8% and in 2007 to 11.9%. The total amount of the equalisation fund for local governments has been increased by a total of 480 million kroons in 2005–2007, including a 298 million-kroon addition in 2007. As a result of the measures listed above and good results in the receipt of taxes, the local government revenue base grew from 4.2% of GDP in 2005 to 4.7% of GDP in 2007.

The contribution of local governments to the general government’s fiscal position has thus far usually been negative. The only year when there was no deficit in the overall budget for local governments was 2006. At the same time, the inflow of revenues resulting from personal income tax and sales of assets has been good, and expenses have remained below planned levels. Therefore, the fiscal position has turned out to be better than planned in the budget. For instance, the overall budget for local governments was expected to have a deficit of 1.7 billion kroons in 2007, but the actual deficit turned out to be smaller – 0.3 billion kroons. The deficit in

13 See also two measures of the sub-objective of increasing the clarity and safe flexibility of labour relations under objective 9: 6) making the provision of unemployment benefits and active labour market measures more effective by uniting the Estonian Labour Market Board and the Estonian Unemployment Insurance Fund; 7) increasing the sums of unemployment benefits and expanding the group of their recipients to increase the safety of the labour market via the adoption of a new Employment Contract Act.

22 the budget for local governments forecast for 2008 is 0.7 billion kroons. As to the period 2009 – 2012, the Ministry of Finance presumes that the deficit in the overall budget for local governments shall remain at the level of 200 million kroons.

Sub-objective 1: Improvement of the long-term sustainability of the health insurance system

Explanation of the Indicator indicator, incl. the Current level Projected level 2011 source T he budget position of T he balance of the the Health Insurance Health Insurance 0.4% (2007) 0% Fund Fund as a percentage of GDP. Source. Statistics Estonia, Ministry of Finance Explanatory note to the expected level in 2011: in case the rules and conditions in place today remain as they are, it is expected that the budget balance of the Estonian Health Insurance Fund would be -0.2% of GDP.

In recent years the changes to improve the long-term sustainability of the health insurance have been as follows: - With the amendment to the Social Tax Act approved at the end of 2006, health insurance is granted to all officially registered unemployed persons during the period of their registration as unemployed. - Increased tax base for health insurance – by the year 2009, the basis for the minimum social tax obligation shall be increased to equal the minimum monthly wages from the previous year ( in 2008 it was still 75% of the minimum monthly wages of the previous year).

The government has also decided to move on with updating the conditions for paying social benefits to the disabled, which should improve support to the disabled who work and at the same time reduce the number of people receiving benefits.

At the same time, more efficient measures to ensure the sustainability of health insurance are substantially related to developments in the health-related behaviour of the population, and in connection with this, in summer 2008, the government approved a development program for public health for 2009 – 2020. One of the most central goals of this development program is to raise the average number of years that the Estonian population lives in good health, and to that end a number of measures have been created, which, however, are beyond the scope of the Action Plan for Growth and Jobs.

In order to achieve balanced budget of the Health Insurance Fund the Government is analysing all practical options that have positive or neutral effect on public health and therefore the list of measures may change during 2009 and 2010.

Measures

1. Increase the number of people covered by health insurance14 (2008 – 2009).

14 This means that the state would pay the heakth insurance fee of 13% for the parent receiving the parent benefit according to the parent benefit rate and thereby the family physician service and also the indemnification for the medicines would be ensured to persons without insurance.

23 2. Update the conditions for paying social allowances to the disabled (2008 – 2009). 3. Increase the transparency of financing for hospitals, calculating the price of health care services on a cost-oriented basis (2008 – 2011). 4. Amend the health insurance benefits system and update incapacity benefits towards greater own responsibility of employers and employees (2009 – 2010). 5. Make state fees cost-oriented (2008 – 2009).

Sub-objective 2: Improving the long-term resilience of the pension insurance system

Explanation of the Projected level Indicator indicator, including the Current level 2011 source B udget position of the Pension insurance as a pension fund percentage of GDP. 0.4% (2007) -0.9% Source: Statistics Estonia; Estonian Ministry of Finance Average age of those Source: Eurostat 62.6 (2006) 62.8 leaving the labour market

The long-term resilience of the pension insurance system is mostly influenced by these recent changes: - The reserves of the pension fund have been increased in the past two years by 3.8 billion EEK in addition to incoming social tax in order to strengthen the financial position of pension insurance fund. - In 2007, the pension index system was changed. Previously, an overly conservative index failed to ensure retired people sufficient living standards, and the relationship between salaries and pensions was continually dropping, making additional pension increases necessary. The former index consisted of increases in incoming social tax (50%) and increases in the consumer price index (50%). The new index consists of the same components, but their percentages are 80% and 20% respectively. As a result of this change, additional the one-off pension increases will not be necessary in the coming years. - As a result of the gradual harmonization of the retirement age for men and women, retirement age for women will reach the same level as for men (63 years) by 2016. - To find supplementary measures for financing pension (and medical) insurance in the light of the decreasing and ageing population and the resulting cost pressure, the minimum social tax obligation will be raised to the minimum monthly salary level of the previous year by 2009 (in 2008 it was 75% of the minimum monthly salary level of the previous year).

Measures

1. Reduce the number of people receiving special pensions and change the conditions (2008 – 2009) 2. Change the early retirement pension system and superannuated pension system (2008 – 2009)

24 Sub-objective 3: Enhance the effectiveness of the public sector and improve its sustainability

Explanation of the indicator, Projected level Indicator Current level including the source 2011 G overnment S alaries and administrative 6.2% (2007) 6% expenditures as a expenses in the state budget as a percentage of GDP percentage of GDP. Source: Ministry of Finance Number of Source: Ministry of Finance 8 (2007) 0 municipalities experiencing financial difficulties

Measures

1. Reduce public sector expenses (salaries and administrative expenses) (2008 – 2009)15 2. Reorganise the rules concerning financial discipline for local government (2008 – 2009). 3. Changing the proportion of environmental charges received from the state and local governments considering the exclusion of these from the equalisation fund calculations in order to ensure the stability and harmonisation of the revenue base for local government (2008 – 2009).

15 It has been agreed that from operational expenditure shall be reduced by 8% in the State budget for 2009 (exept for some of the priority areas, such as defence policy, internal security, administration of EU support measures).

25 3. COMPETITIVE BUSINESS ENVIRONMENT

OBJECTIVE 4: Increase the international competitiveness of research and development activities

Explanation of the Projected Indicator indicator, including the Current level level 2011 source E uropean Innovation E stonia’s placement and Scoreboard indicator indicator value in the placement and value European Innovation 18th place, 0.37 15th place, 0.45 Scoreboard compiled by the points (2007) points European Commission characterising the innovation capacity of 37 countries. Source: European Commission Research and Gross expenditure on development expenditure research and development as 1.15% (2006) 2.0% as a percentage of GDP a percentage of GDP. Source: Statistics Estonia

Growth in the volume of Estonia’s research and development activities (expenditures on research and development) has been the fastest in Europe (see figure 12). In the period 2000 – 2006, the average yearly growth in Estonia’s R&D investments was 22.9%. Over the six- year period, the share of expenditures into research and development have nearly doubled, from 0.61% of GDP in 2000 to 1.15% of GDP in 2006. Such rapid growth in relation to GDP took place in a situation where gross domestic product increased by 11.7% per year in real terms. However at the same time, Estonia is still far behind the European Union average of the proportion of R&D activities, being in 15th place among other Member States in 2006. To reach the average level other EU Member States, Estonia’s expenditure on research and development should increase more than 0.7% of GDP.

The growth witnessed in Estonia’s R&D investments has been mainly supported by an increase in state budget funds as well as investments from the private sector. Data from the Ministry of Fiance concludes that over the seven year period, the volume of R&D activities in the state budget has increased 3.5 times, from 373 million kroons in 2000 to 1.37 billion in 2007. Increased budgetary funds and extensive measures in support of R&D activities in the private sector starting in 2004 have also had a positive effect on investments in the private sector in recent years – in 2005 and 2006, the private sector’s expenditures increased faster than those of the public sector.

26 Figure 12: The annual growth rate of research and development expenditures and GDP, 2000 – 2006 % 30

MT 25 LV EE

20 CY

15 LT RO ES IE CZ

10 AT BG

LU PT 5 R&D ex p e n d i t u r a l gr o w h , % EU27 PL IT SE SK

% 0 0 2 4 6 8 10 12 GDP annual growth rate, %

Source: Statistics Estonia

Increases in R&D expenditure and rapid economic growth have had a positive impact on producing a more knowledge-intensive economy. The productive increase of expenditures in the coming years requires growth in the capacity of the R&D sector (first and foremost, development of human resources) and more attention paid to the resulting outcomes of this domain.

The European Innovation Scoreboard of 2007, analysing the research and development and innovation capacity of 37 countries places Estonia among the three most developed countries of the new member states. In the trend analysis, the conclusion is that Estonia, together with the Czech Republic, Lithuania and Cyprus, is one of the first transition countries to catch up with the average European Union indicator level.

In the scoreboard Estonia is above average in the ‘innovation drivers’ dimension16 and the group of indicators that describes entrepreneurship and innovation in enterprises17. We are substantially behind the European Union average in relation to innovation indicators describing the creation of new top-level knowledge and its application in society. For example, Estonia only holds the 34th place in the indicator group characterising ‘knowledge creation’,18 leaving behind only Turkey, Croatia and Slovakia. We are in a slightly better position, but nevertheless still in the second half of the table, with indicators concerning the application of innovation in the economy19 (23rd place) and the protection of intellectual property (patenting statistics) (27th place) (see figure 13). Estonia’s biggest shortcoming in absolute terms compared to the EU average concerns the protection of intellectual property, but this is a characteristic common to EU candidate countries as well as most new member states.

16 Indicators describing the prerequisites for innovation; for example, the percentage of people with higher education in the population, etc. 17 Indicators like the percentage of innovative small and medium-sized enterprises, etc. 18 Indicators like the expenditures of the public and private sector on research and development activities, the percentage of enterprises having received support from the public sector for innovation activities, etc. 19 Indicators concerning the proportion of knowledge-based economy (for example, employment) and its export.

27 Figure 13: Innovation in groups of countries Innovation leaders Innovation followers Moderate Innovation drivers innovators 0,80 Catching-up countries Estonia 0,60 0,40 Protection of Knowledge intellectual property 0,20 creation 0,00

Innovation Innovation & applications entrepreneurship

Source: European Innovation Scoreboard 2007, PRO INNO Europe

Increasing our international competitiveness in respect to R&D activities directly supports, first and foremost, the improvement of Estonia’s position in relation to several indicators of innovation drivers and knowledge creation; they are, however, also important prerequisites for improving indicators that measure innovation applications and intellectual property. Some of the measures affecting the innovation indicators in countries presented on the Innovation Scoreboard are also present among several other measures planned for the fulfilment of the objectives of the Action Plan for Growth and Jobs. In order to increase innovativeness, measures enhancing the international competitiveness and productivity of enterprises (which influence the indicators of innovation & entrepreneurship, innovation applications and intellectual property) and measures that improve the skills of the labour force (which influence the indicators of innovation drivers and applications) are the most important.

The Government aims to increase the innovativeness of the economy and improve Estonia’s position on international rankings. In order to reach a level of R&D activity suitable for a knowledge-based country, it is crucial to continue funding of this domain as a priority. In February 2007, the Riigikogu (Estonian Parliament) approved the Estonian Research and Development and Innovation Strategy 2007 – 2013, ‘Knowledge-Based Estonia’, which sets a quantitative goal of increasing R&D expenditures to 3% of GDP by 2014. In 2008, the funds budgeted for R&D activities shall increase by 58% compared to 2007, for the first time exceeding 2 billion kroons.

However, increasing financing does not guarantee good results per se. For that reason, it is extremely important to create the capacity and conditions for effective and productive utilization of these funds. To ensure that R&D activities have maximum impact on increases in economic competitiveness and changes to the economy’s structure, the Government is focusing on four priorities: · achieving greater cohesion between research and business sectors; · enhancing the quality and increasing the numbers of people working in research and development in the future; · modernizing the R&D infrastructure and developing new infrastructures; · reducing fragmentation in the funding of development and research activities.

28 One of the important challenges facing Estonia’s research and development sector, which was emphasized by businessmen as well as representatives of research institutions during the compilation of the Action Plan for Growth and Jobs20, is matching the activities of the research and development sector with the future needs of the Estonian economy and enterprises, which greatly depends on the structure of our business sector. In the Estonian economy, the proportion of fields of activity with low productivity potential is greater than in other EU Member States. In those sectors, there is not much need for R&D activities, and as a result, research institutions and enterprises have little experience in cooperation. Insufficient attention on the part of universities and research institutions given to cooperating with the private sector has evidently also influenced the development of applied research capacity in enterprises. Estonia needs to stimulate this cooperation and bring the structure of its R&D expenditures closer to that of developed industrialized countries where there is a greater proportion of such applied research and development activities (in the business sector) that is directly engaged in placing scientific accomplishments on the market. When in developed countries (for instance, Finland, Sweden and Germany) the percentage of R&D expenditures covered by enterprises is approximately 70 – 75%, the corresponding figure in Estonia was 45% in 2006. It is important to continue generously sponsoring R&D activities of a more applied nature, but this cannot be done at the expense of quality or focused fundamental and basic research, which, besides being important for scientific policy, also plays an important part in Estonia’s education policy. Therefore, the Government is developing more supportive measures than it has developed thus far, in order to bring science closer to business and create greater R&D capacity in the business sector.

Human resources are the basis for increasing the competitiveness and productivity of the research and development sector – this means the quality and motivation of the people active in this sector and the presence of a future generation. It is important to make sure that Estonian science increasingly meets the highest international requirements. Estonian researchers have been gradually more active and successful in publishing high-quality academic articles in peer-reviewed publications, which is the main indicator characterising the quality of science. In 2007, Estonian researchers published 967 articles21 in peer-reviewed publications, which is 91 articles more than in 2006. In comparison with other countries, Estonia has approached the average level with 0.26 publications per full-time researcher. However, we still remain far behind countries like Ireland (0.63), Slovenia (0.59), Sweden (0.35) and Hungary (0.34).

The quality of science and the number of researchers is directly influenced by the motivation of researchers and by whether the career of a researcher is sufficiently attractive to young and talented people. The worrying trend apparent in Estonian science domain in recent years is the low level of wages for researchers. According to an international study on the remuneration of researchers22, the wages of our researchers in current prices are among the lowest in the list of 25 Member States. We are somewhat better than Latvia, Poland and Slovakia, but we are outdone by Hungary and the Czech Republic by 67%. The main factors influencing the wage level of researchers in Estonia are the main financing instruments for science (base-line, grant and targeted financing schemes) the volume of which will also have to be increased in the future in order to remain internationally competitive.

20 See the summary of preparatory consultations with partners: http://www.riigikantselei.ee/failid/Protokoll_MTTK_arutelu_01_02_08_final2.pdf 21 Source: Estonian Ministry of Education and Research (2007). Report on the goals and implementation of the Estonian Research and Development and Innovation Strategy 2007 – 2013 ‘Knowledge-Based Estonia’ in 2007. 22 European Commission (2007). Remuneration of Researchers in the Public and Private Sectors.

29 Estonia’s biggest challenge in the context of increasing the financing of science and developing a knowledge-based industry with high added value lies in finding new researchers. The number of researchers and engineers in recent years has been characterised by a slow growth trend, which is insufficient to guarantee the sustainability of the entire sector (see figure 14). The increase in the number of researchers and engineers working in the private sector, which has been rapid thus far and was fuelled, according to initial assessments, by researchers moving from the public sector to the private sector, has also slowed down.

Figure 14: The proportion of full-time researchers and engineers in the labour force

4000 0,6 0,5 3000 0,4 2000 0,3

nu m ber 0,2 1000 0,1 0 0 % o f t he l abo u r ce 2000 2001 2002 2003 2004 2005 2006

Number of researchers (scale on the left) Percentage of the labour force (scale on the right)

Source: Statistics Estonia

In 2006, the number of researchers and engineers working on a full-time basis in the Estonian labour force was 5.4 per 1000 people. This is at the same level with the European Union average, but remains several times lower than in developed industrial countries like Finland (16.2) and Sweden (10.2). The Estonian Research and Development and Innovation Strategy sets a goal for achieving 8 full-time researchers and engineers per 1000 workers in 2013, which means hiring approximately 1500 additional full-time researchers and engineers. As the current growth rate does not secure the fulfilment of this goal, the Government is planning to implement several new measures.

In the 2006/2007 academic year, 153 people earned a doctoral degree. Although this means 10 more graduates than in 2005 (see figure 15), such a low number of students receiving this degree is insufficient to satisfy current needs as well as achieve future goals. This is also shown by the distribution of research and development personnel on the basis of their qualifications – the number of Estonian researchers and engineers has increased, first and foremost, because of people receiving a master’s, not a doctoral, degree. A survey conducted by Estonian researchers23 showed that in order to ensure that a sufficient number of people carry on research work, roughly 220 – 260 PhDs a year would have to be added to the labour force over the next 5 years in the academic sector alone. To cover the entire need, to promote knowledge-based industry and services and ensure the sustainability of R&D activities, the number of people earning a doctoral degree in one year would have to increase at least 2.5 times – that is, from 120 – 140 additional PhDs to at least 300 – 350. This goal has also been listed as an objective in the Estonian Higher Education Strategy approved in 2006.

23 Doktorikraadiga töötajate vajadus Eesti kõrgkoolides, teadus- ja arendusasutustes. (Estimating the need for PhDs in the academic sector via a survey of employers) R. Eamets, J. Masso.

30 Figure 15: The number of people earning a doctoral degree in Estonian universities, 2000/2001 – 2006/2007

180 160 153 138 143 140 118 120 105 100 82 80 62 60 40 20 0 2000/2001 2001/2002 2002/2003 2003/2004 2004/2005 2005/2006 2006/2007

Source: Estonian Ministry of Education and Research

To increase the number of PhDs, the Government is planning to gradually increase the volume of state-commissioned doctoral education. However, the fact that few doctoral candidates actually earn the degree also presents a problem. For instance, in 2006 the average ratio of people studying in doctoral programmes in Estonian universities and actually earning a doctoral degree was only 43%,24 which clearly indicates that doctoral studies are not attractive enough in Estonia and that people leave before earning their doctoral degrees. Therefore, the Government shall also implement measures to increase the graduation efficiency of doctoral studies. The Government is planning to develop a system for educating PhDs in a complex way so that it would motivate doctoral students to graduate. Components to be developed include, for example, the presence of high-quality supervisors and teaching staff, doctoral grants, social guarantees for doctoral students and the presence of post-doctoral positions.

In addition to the wages of researchers, one of the important components of competitive research and development is the development of a supportive infrastructure. One of the biggest challenges facing Estonia has been the fact that our R&D infrastructure is significantly out of date, which has also been pointed out by various international assessors25. For instance, a survey carried out among researchers, teaching stuff, doctors and post-doctorate researchers clearly revealed that one of the main reasons people choose to do their research work abroad is the presence of the necessary infrastructure in the target country (the total of 47% of all target groups)26. The first coordinated and large-scale investments in scientific infrastructures were made in 2004 – 2006 when the Ministry of Economic Affairs and Communications implemented the pilot phase of the Research and Development Infrastructure Development Programme. The Government believes it important to carry on making coordinated large-scale investments, focusing, first and foremost, on the modernization of the existing infrastructure. In 2008 – 2015, the Government is planning to update old and create new facilities within research and development institutions with the help of European Union Structural Funds in the total amount of 25 000 m2, where 6000 m2 should be completed by 2010 with 200 researchers and engineers

24 The Estonian Higher Education Strategy 2006–2015. 25 See, for example, Evaluation of Estonian RTDI Policy Mix. Results of OMC Peer Review Report 2007 Country Report for Estonia. Authors: Wolfgang Polt, Per Koch, Boris Pukl, Arjan Wolters. 26 Teadlaste mobiilsus Eestis ja seda mõjutavad tegurid (Researcher Mobility in Estonia and Factors that Influence Mobility) (2006). The Department of Sociology and Social Policy of the University of Tartu. Compiled by Murakas, Toots, Kasearu, Rämmel, Lepik, Soidla, Suvi, Reinumägi, Telpt.

31 filling positions that have either been created or updated. There shall be 800 additional and updated positions by 2015.

It is possible to achieve all the afore-mentioned objectives only through clearly focused financing principles. On the international scale, the volume of the Estonian R&D sector is small. It forms one and two percent respectively of the Finnish and Swedish R&D sectors; at the same time, the Estonian population makes up one quarter of the Finnish population. The expenditures Estonia invests in research and development forms only 2 per cent of those of the largest research and development enterprise in the world. In comparison with EU enterprises, Estonia would be in the 148th place. Therefore, the international competitiveness of the Estonian R&D sector can only be enhanced with clear financing priorities and investments in areas of activity with the potential to be internationally competitive. It is quite clear that we cannot compete in the global scientific ‘landscape’ if we try to be good in all areas of research.

Sub-objective 1: Develop the human capital for research and development

Explanation of the indicator, Projected level Indicator Current level including the source 2011 N umber of full-time T he number of researchers and researchers and engineers working on a full-time basis 5.4 (2006) 7.0 engineers per 1000 per 1000 workers. workeforce Source: Statistics Estonia Number of students The number of students yearly admitted to doctoral admitted to doctoral programmes in 541 (2007/2008 550 studies (per year) Estonian universities. academic year) Source: Estonian Ministry of Education and Research Number of graduates The number of students defending of doctoral studies their doctoral theses in Estonian 153 (2006/2007 250 (per year) universities per year. academic year) Source: Estonian Ministry of Education and Research Percentage of foreign The volume of foreign doctoral doctoral students students (whose country of residence is 3.3% (2007/2008 10% not Estonia) studying in Estonian academic year) universities as a percentage of all doctoral students. Source: Estonian Ministry of Education and Research

In terms of developing the human capital in research and development, our main priority has been the enhancement of the quality and efficiency of doctoral studies. Doctoral schools (10 schools altogether) were established in 2005, doctoral grants were doubled and the group of people receiving grants was extended to all doctoral students as part of a state-commissioned education programme. In addition, the volume of state-commissioned doctoral education has been gradually increased: in the 2007/2008 academic year, it increased by 20 places – to 270. Due to the lack of financial means in the 2008/2009 academic year the state-commissioned doctoral education volume will remain the same and thus there might raise a need to amend the ambitious targets set. Since 2002, doctoral students have been given a chance to study abroad as part of the state-commissioned education programme; to this end, 81 people have received scholarships (15 of whom have defended their doctoral theses to date). In 2006, the Minister of Education and Research approved the strategy for the internationalisation of Estonian higher education for 2006 – 2015 focusing on developing a legal environment that supports internationalisation,

32 supporting the internationalisation of educational activities (increasing student mobility, involving foreign teaching staff and doctoral students and supporting the internationalisation of curricula) and the development of a support system for internationalisation. As part of the strategy, a long- term scheme bringing foreign doctoral students to Estonia and another scheme to support short- term research and studies by foreign students have already been launched. Measures promoting the emergence of newcomers have long-term effects; therefore, their impact is yet to be revealed in the coming years. The long-term effects of these measures and several factors directly independent of the Government make the Government’s objective regarding the doctoral students defending their degrees rather ambitious. Therefore, implementing the measures brought out in the Plan quickly and correctly is crucial to the achievement of the objectives.

Estonia has thus far implemented measures to develop top researchers in rather small volumes. The main strategy supporting top researchers has been the development of centres of excellence implemented in 2002 – 2007.

In order to promote the emergence of new generations of researchers, the popularization of science was supported for the first time in 2007 with 950 thousand kroons, in the 2008 budget this amount has increased to 2 million kroons. The activities supported include the popularization of science and the promotion of a scientific world-view, raising of society’s awareness of the knowledge-based economy, evoking interest in science among secondary school students, appreciating the professions of researcher, engineer and innovator. What is more, the prizes and participation of national research competitions (meant for students of basic schools, upper secondary schools and institutions of higher education) have also significantly increased in recent years. In 2008 the Young Inventors Competition was launched, and the first issue of ‘Akadeemiake’, a science magazine meant for students, was published. Under the coordination of the AHHAA Foundation, Estonia successfully takes part in the organisation of the events of the European Researchers’ Night, which has raised interest across Europe.

Measures

1. Create and implement an evaluation-based doctoral grants system. 27 (2008 – 2010). 2. Create and implement a social guarantees system (parental benefits, pension accumulation period) for doctoral students (2010 – 2011). 3. Increase state-commissioned doctoral education by means of state budget funds giving preference to studies in natural and exact sciences and technology28 (2008 – 2011). 4. Support the establishment of new doctoral schools or the strengthening of existing ones in order to enhance the efficiency of doctoral studies in Estonian universities, strengthen inter- university cooperation and improve the quality of the supervision of doctoral students (2008 – 2015). 5. Create additional places in doctoral studies for non-resident students who wish to defend their theses at Estonian universities in the priority areas listed in the Estonian Research and Development and Innovation Strategy29 (2008 – 2015).

27 The evaluation of doctoral students means an evaluation given by the university’s evaluation committee regarding the student’s progress in his/her studies as well as research work. The committee evaluates the fulfilment of the plan of studies and research work (the individual study plan) compiled by the doctoral student. The evaluation of doctoral students is performed at the end of every academic year and has to be completed at the latest by the beginning of the next academic year. At the implementation of the model, the period of the payment of doctoral grants shall also be prolonged – from ten months to twelve. All doctoral students passing the evaluation shall receive the grant. 28 Prognosis for the 2008/2009 academic year – 270, for the 2009/2010 academic year – 280. 29 In addition, we also support the studies and research work of foreign students at high-level research groups of Estonian universities lasting for 3–10-months without limitations to the subject field.

33 6. Support the studies of Estonian doctoral students abroad by enabling students, who are successful at the fulfilment of their individual study plans, to visit universities/research institutions in other countries at least once during their studies for research purposes or take courses at a foreign university/research institution with the aim of promoting information exchange and transfer and the creation of networks with other universities (2008 – 2015). 7. Create opportunities to complete doctoral studies partially outside the university in cooperation with other R&D establishments or enterprises (supporting the supervision of doctoral students) (2008 – 2013). 8. Create additional places for post-doctoral researchers (2008 – 2011). 9. Support the hiring of top scientists and top teachers as part of regular staff (for 5 years) (2008 – 2013). 10. Improve the international ‘visibility’ of Estonian institutions of higher education among the potential target group (introduce the opportunities for working and studying at Estonian institutions of higher education in the foreign media, support exhibitions at important international fairs, etc)30 (2008 – 2015).

Sub-objective 2: Develop an internationally competitive research and development environment

Explanation of the indicator, Projected level Indicator Current level including the source 2011 T he volume of updated T he area of new or updated and new R&D and infrastructure at research and 95731 m2 6000 m2 innovation development institutions created (2008) infrastructures using state funds. Source: Estonian Ministry of Education and Research R&D expenditures as a Research and development percentage of GDP expenditures financed by international financed from foreign funds or with money received on the 0.19% 0.19% sources basis of international agreements, (2006) payments received from abroad for contract work and commission work as a percentage of GDP. Source: Statistics Estonia

Towards the development of an internationally competitive R&D environment, the Government has had two main priorities: the development of a competitive infrastructure and of a support system promoting the internationalisation of R&D activities.

Towards the development of an internationally competitive R&D physical environment, our main activity has been the implementation of the pilot phase of the Research and Development Infrastructure Development Programme (2004 – 2006). As part of the programme, the development of the scientific infrastructure was supported with 440 million kroons. The money was used, first and foremost, to pay for equipment, but also to renovate rooms with special requirements meant for high-tech equipment and, to a lesser extent, to renovate office spaces. The National Institute of Chemical Physics and Biophysics, Tallinn University of Technology

30 Separate activities shall also be launched to keep in touch with Estonian researchers gone abroad. 31 An estimation, as the final reports on the implementation of the pilot phase of the Research and Development Infrastructure Development Programme (2004-2006) shall be submitted in June 2008. Some procurements concerning the 210 million kroons allocated from the supplementary budget of 2006 have still not been fulfilled because of the long-term nature of the procurements of scientific equipment.

34 (four projects), the Estonian Biocentre and the University of Tartu (two projects) received support for infrastructure development. In 2008 – 2015, we are planning to renovate existing and create new R&D infrastructures estimated at 25 000 m2 in total with the help of European Union Structural Funds based on the investment plan adopted by the Government of the Republic of Estonia.

With the aim of internationalising Estonian science, Estonian researchers take part in the work of the network of European Cooperation in the field of Scientific and Technical Research (COST), the European Organization for Nuclear Research (CERN) and the European Molecular Biology Organization (EMBO). In 2007, we signed a cooperation agreement with the European Space Agency (ESA) on space cooperation, which gives local business operators a better opportunity to participate in the Agency’s work. In Estonia, bilateral research and development agreements between countries are financed via the Estonian Science Foundation (for example, the Parrot Programme). We shall also continue our joint system of funding with the United States of America to support the development of oil shale technologies, participate in the EUROSTARS joint funding programme developing from the EUREKA network, etc.

Estonia has also been one of the most successful new member states in applying for money from the European Union framework programmes. The number of successful projects as well as the amount of support received from the European Commission have both increased. For instance, the financial support given by the European Commission to Estonian partners during the first year of the Seventh Framework Programme already exceeds 50% of all the support received during the whole duration of the Sixth Framework Programme. The success of Estonia’s applications also surpasses average success among EU Member States (EU27).

Measures

1. Launch and implement a programme of updating the infrastructure of research and development institutions and higher education necessary, with the aim of educating researchers and top specialists and ensuring the international competitiveness of our R&D activities (2008 – 2013). 2. Draft a road map for the development of equipment infrastructure for research and development (2008 – 2009). 3. Draft the concept of pan-Estonian core laboratories, the joint usage of their infrastructure and develop the network of such laboratories, concentrating, first and foremost, on the needs of the Baltic Sea region32 (2008 – 2013). 4. Promote the fulfilment of international projects and agreements by research institutions by offering co-financing and support to cover expenses related to participation in international projects (2008 – 2013).

Sub-objective 3: Ensure better focus of funding for research and development activities

Explanation of the Projected level Indicator indicator, including the Current level 2011 source N umber of high- T he number of research quality publications publications by Estonian researchers in the ISI Web of 967 (2007) 1250 Science, an internationally

32 The goal of this measure is to establish accredited laboratories and increase their ability to offer services to industrial enterprises.

35 recognised bibliometric database. Source: Estonian Ministry of Education and Research

In order to ensure better focus of financing R&D activities on the key areas presented in the research and development strategy, a programme of centres of excellence was implemented in 2001 – 2007. Within the framework of this scheme, resources were allocated for centres of excellence selected on a competitive basis; approximately 80% of the centres receiving support operated in the priority areas listed in the strategy. Support in the form of 100 million kroons was used for the development of the infrastructure of centres of excellence in 2004 – 2006.

Furthermore, the volumes of different instruments for funding science have also been steadily increased. In the 2008 state budget, expenditures on base-line, grant and targeted financing of research subjects at R&D institutions and the infrastructures of R&D institutions were increased by 30%. In addition, in 2007 the Government developed principles for drawing up national R&D programmes in the priority areas defined in the implementation plan of the Estonian Research and Development and Innovation Strategy 2007 – 2013 ‘Knowledge-Based Estonia’ and approved the Estonian energy technologies programme compiled according to those principles. National programmes aim at concentrating the critical resources necessary for high-quality research and development and channelling them into spheres of research, development and innovation important for economic development and the potential of which can help achieve important results in global ground-breaking research. The goal of Estonia’s energy technologies programme is to develop oil shale technologies unique to Estonia and new energy technologies mostly based on renewable energy sources.

Measures

1. Select and finance new centres of excellence (2008 – 2013). 2. Reorganize the research evaluation system (2008 – 2010). 3. Carry out a functionality analysis of the base-line, grant and targeted financing instruments for research, reorganize those financing instruments and increase the volume of the instruments for financing research (2008 – 2012). 4. Implement the national research and development programme for Estonian energy technologies (2008 – 2013). 5. Launch and implement the research and development programme for Estonian information and communication technologies (2009 – 2014). 6. Launch and implement the research and development programme for Estonian biotechnologies (2009 – 2014). 7. Launch and implement the research and development programme for Estonian materials technologies (2010 – 2015).

36 OBJECTIVE 5: Increase the productivity and international competitiveness of enterprises

Explanation of the Indicator indicator, including the Current level Projected level 2011 source L abour productivity E stonia’s productivity per per person employed employee as a percentage 64.7% (2007) 80% as a percentage of the of the average for the 27 EU27 average Member States of the European Union. Source: Eurostat Labour productivity Estonia’s productivity per per hour worked as a hour worked per employee 49.8% (2007) 58% percentage of the as a percentage of the EU15 average average of the 15 Member States of the European Union. Source: Eurostat

The development of the Estonian economy has been extremely rapid since 2000. A number of enterprises holding strong positions on the market have emerged and who also have a good potential for successful development in the future. The economic indicators for enterprises have improved immensely. For instance, the volume of business in Estonian enterprises has been steadily growing on domestic as well as foreign markets. The net turnover of Estonian business has more than tripled in the last ten years, exceeding 775 billion Estonian kroons in 2007 (in 2005, this figure was only 500 billion Estonian kroons). The data from Statistics Estonia shows that the export turnover for goods from Estonian enterprises has also increased – from 54 billion kroons in 2000 to 125 billion in 2007.

The distribution of enterprises according to their fields of activity has remained relatively stable in the last ten years. According to data from the Estonian Tax and Customs Board, the largest group of enterprises in 2007 was in the service sector with more than 17 600 enterprises – that is, 32% of all enterprises operating in Estonia. Manufacturing has the greatest number of employees – 27% of the entire working-age population. In comparison 2007 with 2000, the largest growth in employment has been in the accommodation, food service and business services sectors. Employment has also increased in human health activities, education, wholesale, construction and manufacturing. The number of people employed has decreased in agriculture, transport and communication, mining and quarrying, and energy and, to a lesser extent, in the retail trade sectors.

Added value created in Estonian enterprises has also increased considerably. Over seven years, the difference with the European Union average has decreased by approximately 20 percentage points. In 2007, Estonia’s productivity formed 64.7% of the European Union average per employee and 49.8% per hour worked. In recent years, one of the factors fuelling GDP growth has been domestic consumption. The following sectors have had the largest growth in added value in absolute terms: real estate, renting and business activities; wholesale and retail trade; and manufacturing (see figure 16). Taking structural changes in employment into consideration as well, fields of activity connected with electricity, gas and water supply, mining and quarrying and the wholesale and retail trade have had the largest added value growth by percentage (see figure 17).

37 Figure 16: Added value created in the Estonian economy (millions of kroons)

40000

35000

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25000

2000 20000 2006

15000

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0 F i s h ng E du c at i on C o n s t r u c i on Manu f a c tu r i ng fo r e s t ry s u p ly a c t i v es d e fen ce c o mm u n i at on w o r k a c t iv i es M i n ng a nd q u r y b u s i ne ss a c t v es a n d pe r s on l e v i ce T r an s p o t, to ag e and H ote l s and r e tau ants A g r i c u l tu e , h unt n a nd R ea l e s tate, r nt i ng a nd F i na n c a l nte r m e d t on O th e r c o mm u n i t y , s al E l e c t r i y , g a s nd w ater H u m a n h ea l th d s o c i al P ub li c a d m i n s t r at o and W h o l e s a an d r eta il t de Source: Statistics Estonia

Figure 17: Productivity per employee (in million kroons per year)

0,8

0,7

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2000 0,4 2006

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0,2

0,1

0 F i s h ng E d u c a t i on H o t e l s a nd r e s t au an ts F i nan c al C o n s t r u c i on t r ade M anu f a c t u r i ng a c t i v es i n t e r m ed a on and f o r e s t ry w a t e r s upp ly and bu s i n e ss and de f en ce s e r v i c a t es O t h e r c o m u n i y, T r an s p o t , a ge A g r i c u l t e , hun ng E l e c t r i y , g a s nd H u m an hea l t h and s o c i a l nd p e r nal an d c o mm un i a t on R e a l s t , r en i ng W h o l e s a nd r t il s o c i a l w r k t v es M i n g an d qu a rr y ng P ub li c a d m i n s t r on Source: Statistics Estonia

Today, productivity in the important branches of the economy, such as the knowledge-intensive supply of services and manufacturing, is still several times lower than in the richest countries of the European Union. For example, our productivity in the business services sector forms 21% of the level of Ireland and Denmark and 30% of the level of Finland. Of different areas of activity, the largest productivity gap is apparent in manufacturing, primary industry, the energy sector and construction, where added value forms only 7 – 18% of that of EU Member States with a higher level of income. In comparison with other EU Member States, our productivity in manufacturing remains modest: for example, Sweden surpasses us by 5.5 times, Finland by 6.9, Ireland by 14.9, Slovenia by 2.2 and Poland by 1.61 times. In manufacturing, the increase in added value is

38 connected with the sector’s structure where, despite rapid developments, enterprises concentrating on subcontracting resulting in relatively low added value dominate. Academics at the University of Tartu33 have declared that if every sub-branch of the Estonian manufacturing sector was to attain the same productivity level per employee as the respective sub-branches in the most developed countries of the European Union, while the distribution of employees between different branches remains the same in Estonia, Estonia’s productivity would only reach 56% of Ireland’s, 78% of Germany’s, 80% of Finland’s and 90% of Denmark’s level.

In terms of macroeconomic developments, the competitive position of enterprises is influenced by Estonia’s overall convergence with the European Union – above all, rises in the cost of production inputs. In January 2008, producer and export prices for enterprises increased by 8.3% and 6.7%, respectively, compared to January 2007. In the context of rapid growth in labour costs, labour productivity has indeed increased in many industries, but the profit margins have clearly decreased. In order to restore growth of added value and enhance competitiveness, abovementioned industries need extensive investments in knowledge, product development, new technologies. Marketing and management quality are also crucial from the point of view of the development of an enterprise.

Both the number of innovative enterprises and the investments enterprises make into innovation have increased in Estonia. Supported by rapid growth in the innovativeness of small and medium-sized enterprises and the service sector, the proportion of innovative enterprises grew from 36% in 2000 to 48.1% in 2006, exceeding the European Union average (44%). The main innovation activity in Estonian enterprises lies in obtaining and employing new equipment, which makes up roughly 87% of all innovation expenses. Significantly fewer investments were made in in-house as well as outsourced development activities and the creation of new knowledge (guidance, consultations, acquisition of patents or licences).

Roughly 350 enterprises are active in research and development in Estonia (data from 2005). Less than 50% of those enterprises are engaged in manufacturing (production of electronic and optical products, chemical industry, food industry). When talking about services sector (210), the largest number of enterprises engaged in R&D operates in the field of information and communication technologies. The modest number of enterprises having invested in R&D reflects Estonia's economic structure – thus far, the raising of production volumes and the introductions of new technologies have been the priorities. Product and technology development as one of the guarantees of competitiveness has clearly been not prioritised.

In a situation where the production costs of Estonian enterprises are approaching the level of developed countries, the only way to maintain or improve the international competitive position of an enterprise is to increase its productivity. Today, most enterprises in Estonia are engaged in serving the local market – exporting enterprises make up only 14.7% of all enterprises. In 2006, the percentage of exporting industrial enterprises was 41%. The average annual growth rate of Estonian exports in 2000 – 2006 was 13% (the average GDP growth in current prices was approx. 13.6% per year in the same period). The export of goods has increased faster (on average 14.7% a year) and the export of services slower (on average 9.5% a year) than the total volume of exports.

Estonia’s largest group of export goods has been machinery and mechanical appliances, the percentage of which in total exports volume decreased in 2000 – 2006 from 37% to 25%. The largest growing group of goods has been the export (that is, mainly transit) of mineral products –

33 Varblane, U. et al (2008). Eesti majanduse konkurentsivõime hetkeseis ja tulevikuväljavaated (The Current Status of Competitiveness and Future Prospects in the Estonian Economy). Estonian Development Fund.

39 in 2006, it made up approximately 16% of total export volumes, but only 2% in 2000 (see figure 18). At the same time, the growth of export is impressive even without the export of mineral products. In 2000 – 2006, exports increased 11.7% a year on average. In terms of services, in 2006 the main export articles were transport and tourism. Therefore, the growth of Estonian exports has been relatively stable and there have not been any notable changes in the structure of exports in the direction of products based on higher added value. Exports from high and medium-high technology industries decreased from 25% in 2000 to 8% in 2006.

Figure 18: Exports of Estonian goods in groups of goods

35 000 000 000

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20 000 000 000 2000 2006 15 000 000 000

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0

Other products Mineral products Vegetable products Arms and ammunition

Wood and articles of wood Works of art and antiques Textiles and textile products Metals and articles of metal Other manufactured articles Live animals; animal products Animal or vPergepaetarbedle ffoaodts santudff so;ils beverages Pulp; paper and paperboard waste

Products of chemical or allied industries Footwear, headgear and similar products

Articles of stone, plaster, cement or similar materials Plastics and articles thereof, rubber and articles thereof Vehicles, aircraft, vessels and other transport equipment Raw hides and skins, leather, fur skins and articles therPeofearls, precious or semi-precious stones, precious metals Machinery and mechanical appliances; electrical equipment Optical, photographic, measuring, medical and other similar ...

Source: Statistics Estonia

Figure 19: Exports of Estonian services by areas of activity

14000

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Air transport Rail transport Road transport Travel services Maritime transport Insurance services Operating leasing Construction services Commercial services Other types of transp o rt Communication services Royalties and licence fees

Cultural and entertainment services Miscellaneous business services Computer and information services Financial services (except insurance)

Government services not included elsewhere

Source: The Bank of Estonia

40 Considering the small size of Estonian economy, it is also important to pay attention to foreign direct investments made into Estonia. As of the first quarter of 2008, 176 million kroons worth of foreign investments had been placed in Estonia, which forms approximately 70% of Estonia’s gross domestic product. The largest foreign direct investments have been made in Estonia from Sweden (39.7%) and Finland (24.6%). In terms of different areas of activity, the largest volumes of direct investments had been channelled into financial intermediation (31.3%) and real estate (29.3%) as of the end of 2007.

The Government has concentrated on two main directions in developing Estonian enterprises. Firstly, the creation and support of enterprises that invest in research, development and innovation; and secondly, the motivation of enterprises not yet active in research, development and innovation. The enterprises of tomorrow have to be more open to innovations, more productive and profitable than those of today, and their activities need to be aimed at the creation of higher added in order to be competitive in the global markets. In this context, it is important to develop the right capital market, support investments made in new as well as existing technologies, train the employees and managers of enterprises, support exports and take in international investments.

Sub-objective 1: Develop strategic competencies in enterprises

Explanation of the Projected level Indicator indicator, including the Current level 2011 source P ercentage of innovative E nterprises engaged in enterprises innovative activities 48.1% (2006) >45% (enterprises active in the acquisition of knowledge, machinery and equipment; R&D activities, etc). Source: Community Innovation Survey (CIS) Number of full-time The total full-time researchers and engineers equivalent of researchers 1.8 (2006) 3.3 in the business sector per and engineers per 1000 1000 employees employees in the business sector. Source: Statistics Estonia Percentage of enterprises Source: Ministry of 39% (2005) having trained at least Economic Affairs and 2008 results to 45% half of their staff in the Communications34 be revealed in last 12 months the autumn

In order to develop the knowledge and skills of business operators, the training, in-service training and retraining of business managers and employees and the involvement of external consultants has been supported since 2001. A mentor programme was launched in 2004 enabling start-up enterprises to find supervisors among experienced business operators or experts in their particular field of activity. Management quality is also being developed involving the training of top and middle managers, the distribution of novel administrative principles, the guidance of small and medium-sized enterprises towards management involving greater awareness and the

34 ‘Eesti väikese ja keskmise suurusega ettevõtete arengusuundumused’ (the development trends of Estonian small and medium- sized enterprises), a survey ordered by the Ministry of Economic Affairs and Communications. Indicator levels are published in 2008 and 2010, not yearly. The survey’s sample includes enterprises with less than 250 employees.

41 elaboration of tools necessary for the systematic development of management quality. In 2005 – 2007, innovation audits were carried out in 150 Estonian enterprises with the help of Enterprise Estonia aiming at raising the innovation awareness of the managers of the enterprises and motivating them to initiate, support and realize innovative activities in their companies. The experiences received shall be employed to develop a basic diagnostics service for enterprises.

Measures

1. Support the use of the training and consultation services intended for business managers and employees to a greater extent by supporting longer-term training and development plans (2008 – 2013). 2. Develop the accreditation system of business consultants and the network of consultants to improve the quality of the consultation service and make good-quality consultation services accessible (2008 – 2013). 3. Procure and intermediate training services offered by Enterprise Estonia in fields of activity where the market does not offer training services of sufficient quality, including the training of beginning exporters, the basic training of start-up business operators and courses organized in cooperation with professional associations, the development of consultants network to improve the quality and access to enterprise counselling services, develop and offer business diagnostics and audit schemes to enterprises (2008 – 2013). 4. Develop and implement a recruitment scheme for development workers (researchers and engineers, designers, marketing managers, managers of development projects from Estonia as well as abroad) (2008 – 2013).

Sub-objective 2: Support the internationalisation of enterprises

Explanation of the indicator, Projected level Indicator Current level including the source 2011 T he export of goods T he export of the goods and and services as a services of Estonian enterprises 72.8% (2007) 75% percentage of GDP (including exports to EU countries as well as third countries) as a percentage of GDP. Source: Estonian Tax and Customs Board

Enterprise Estonia offers business operators internationalisation-related information services (intermediation of inquiries and business contacts, data bases concerning exports and investments). Business operators are advised and assisted in investing in other countries and finding production inputs and technologies. KredEx, the Credit and Export Guarantee Fund, offers business operators an export guarantee, ‘insuring’ the credit risks of exports and enabling the business operators to offer their customers better terms of payment and enter new markets. Besides short-term export guarantees (3 – 6 months), medium- and long-term guarantees are also offered. Enterprise Estonia also intermediates the counterpurchases of military procurements (advises the party liable to make a counterpurchase concerning its Estonian partners; audits, monitors and handles the reporting of counterpurchasing transactions).

42 Measures

1. Expand the target group of marketing support provided for enterprises to execute the export plan, including, among others, enterprises just getting involved in exports (2008 – 2013). 2. Offer support for participation in trade fairs to business operators who wish to take part in fairs either alone or with a joint booth or to visit fairs collectively (2008 – 2013). 3. Offer joint marketing support to business operators wishing to organise marketing events together (under the direction of an overarching body) (2008 – 2013). 4. Expand the scheme of medium- and long-term export guarantees to offer a significantly larger volume of guarantees35 (2009 – 2013). 5. Substantially increase the amount of information offered to business operators as part of the internationalisation information service and raising the awareness of the target group (2008 – 2013).

Sub-objective 3: Promote foreign investments

Explanation of the Indicator indicator, including the Current level Projected level 2011 source F oreign direct E stonia’s position among investments as a the 27 EU Member States Third position– Maintenance of the percentage of GDP based on foreign direct 72.7% (2006) position among the investments as a three top countries percentage of GDP. Source: Eurostat

Along with its partners, Enterprise Estonia organises seminars and events to inform investors and provide them with useful contacts, and compiles and distributes information materials. The distribution of information and materials to enterprises and investors is mostly proactive; the inclusion of different parties in contact-finding events has thus far been of a reactive nature. According to the development plan of the foreign representatives of Enterprise Estonia approved at a Cabinet meeting in April 2006, the foundation’s foreign representatives network has representatives in 9 countries (Finland, Sweden, Russia, Germany, United Kingdom, Ukraine, Japan, USA, China).

Measures

1. Assemble the inquiries and information of the investor service and incorporate them in the solution for a single contact point for business operators (2009). 2. Reorganise the activity of Estonia’s foreign representatives network to allow them to offer services with a suitable orientation and volume to Estonian exporters and foreign investors (2008-2013). 3. Strengthen the foreign representatives network of Enterprise Estonia with the aim of offering proactive solutions to involve foreign investors in Estonia’s priority sectors (2009 – 2013). 4. Creation of a concept paper analysing the possibility and creation of a flexible combination of support schemes for large investors (starting from a certain amount of investment) (2009).

35 Include the increase of the endowment of KredEx from 100 million kroons to 500 million kroons and the alteration of the mechanism of compensating for potential losses.

43 Sub-objective 4: Support investments in the development of technologies, products and services

Explanation of the Projected level Indicator indicator, including the Current level 2011 source I nnovation expenditures I nnovation expenditures in enterprises (percentage (acquisition of knowledge, of turnover) machinery and equipment, 4.6% (2006) 2.2% R&D activities inside and outside the enterprise) as a percentage of turnover. Source: CIS Private sector R&D Internal R&D expenses expenditures as a % of financed by the business 0.53% (2006) 1.05% GDP sector as a percentage of GDP. Source: Statistics Estonia Sales revenue from new Sales revenue from products products as a percentage and services new to the 9.3% (2006) 12.8% of the total turnover enterprises as a percentage of total turnover of enterprises. Source: CIS

To support the investments of enterprises, the enterprises are offered loan guarantees and support for the development of their infrastructure. The offering of loan and leasing guarantees and guarantees for bank guarantees shall also continue in the future. The updating of the business infrastructure has been supported by financing the projects of enterprises as well as investing in industrial areas established by local governments. A programme with the same purpose shall not be continued in the future. Within the framework of the research and development programme, 160 preliminary and applied research projects and product development projects have been supported in 2004 – 2007, and the programme shall continue in much greater volumes in 2008.

Measures

1. Increase the volume of the support programme for R&D activities in enterprises and research and development institutions, focusing on supporting preliminary and applied research projects and product development projects36 (2008 – 2013). 2. Launch of a technology transfer support programme with the aim of supporting the employment of new technologies in industrial enterprises (2008 – 2013). 3. Improve the competitiveness of enterprises processing wood by supporting investments in new products, processing methods and technologies (2008 – 2013). 4. Launch a support programme to develop the equipment and technologies necessary for the production of agricultural products and non-wood forest products (2008 – 2013). 5. Implement a mezzanine-financing scheme by offering equity loans worth 1 – 16 million to high growth small operating enterprises (2007 – 2013).

36 The programme is used to support the development of new products, services and technologies; product development processes or the perfection of existing processes.

44 Sub-objective 5: Promote innovation-related cooperation and joint activity among enterprises

Explanation of the indicator, Projected Indicator Current level including the source level 2011 R evenues of R&D T he income of universities and institutions acquired research and development 130.4 million Growth 10% from institutions resulting from the kroons a year commercialisation of commercialisation of intellectual (2005/2006) intellectual property property they have created and from contract work done for enterprises. Source: Ministry of Economic Affairs and Communications Percentage of The percentage of enterprises enterprises engaged engaged in innovation-related 39.5% 42% in innovation-related cooperation of all innovative (2006) cooperation enterprises. Source: CIS

Competence Centres represent the most important state measure for stimulating the cooperation between research institutions and enterprises. On the grounds of the Competence Centre Programme approved by the Government in 2002, five Competence Centres have been established operating in the fields of biotechnology, food technology, electronics and information technology. Via the SPINNO support programme, Enterprise Estonia has already supported the development of know-how related to the transfer of knowledge and technology and the development of support structures in R&D institutions since 2001. This programme aims at creating a favourable and motivating environment in institutions of higher education and research to promote cooperation with enterprises, providing support services needed for technology transfer and ensuring good cooperation and exchange of experiences concerning knowledge and technology transfer with local as well as foreign partners.

Measures

1. Support the establishment of new Competence Centres and continuing supporting the activity of existing centres at the launching and carrying out of long-term and market- oriented cooperation projects (2008 – 2013). 2. Renew the SPINNO programme by increasing the proportion of intellectual property protection and business training in the programme (2008 – 2013). 3. Develop a programme of innovation vouchers and implement this with the aim of promoting and facilitating the beginning of cooperation between small and medium-sized enterprises and R&D institutions (2008-2013). 4. Launch and support a programme of promoting the joint activity of enterprises and the development of economic clusters37 (2008 – 2013). 5. Launch and support a programme to increase the capacity of business organisations and develop branch organisations (2008 – 2010).

37 The following activities are supported through the programme: training and consultation, access to technological information, launching of joint projects of technological development or employment of technology, joint marketing of the cluster, sharing of orders and creation of export consortiums.

45 Sub-objective 6: Support enterprises with high growth potential

Explanation of the Projected Indicator indicator, including the Current level level 2011 source E arly stage venture capital Early stage (seed and start-up investments as a stages) venture capital percentage of GDP investments (investments in 0.031% (2006) 0.06% equity capital) as a percentage of GDP. Source: EVCA Growth in the turnover of The annual growth in the the tenant companies in turnover of tenant companies 89% (2005) Average science and technology at Estonian science and growth 40% parks and incubators technology parks and incubators. Source: Ministry of Economic Affairs and Communications

The Government has supported the development of the infrastructure of science and technology parks with the view to improving the operative environment of knowledge- and technology- intensive enterprises with high growth potential. Business incubators have been supported in terms of the development of their infrastructure as well as the development and provision of good-quality services. The state has also created the Estonian Development Fund in order to support enterprises with high growth potential and develop the Estonian venture capital market.

Measures

1. Support early-stage equity capital investments to alleviate the capital requirements of research- and technology-intensive start-up enterprises (2008 – 2013). 2. Promote cooperation with international companies and their involvement in the science technology parks; support the development of multi-purpose testing and semi-industrial laboratories, preferably in the science and technology parks (2009 – 2013). 3. Support existing incubators and those yet to be established, focusing on expanding the selection of services and support offered to enterprises and raising the qualifications of the employees (2008 – 2013).

46 OBJECTIVE 6: Develop a business environment favourable to enterprise and entrepreneurship

Explanation of the indicator, Projected level Indicator Current level including the source 2011 P lacement in the A comparison of the regulations rankings of the favouring and restricting the 22nd 14th place World Bank’s survey business environment in 181 (2008) Doing Business countries Source: World Bank survey Doing Business Number of Source: Estonian Tax and Customs 36.6 (2006) 39 operating Board enterprises per 1000 inhabitants

In Estonia, the regulatory environment for businesses is very flexible and business operator-friendly. Doing Business, the World Bank’s analysis comparing the business environments of different countries, places Estonia in 22nd place among 181 countries. In comparison with the last years (2007) survey Estonia has given up four places, but keeping in mind the regional competitive situation of the European Union Estonia is still placed on a high 8th position. World Bank’s analysis does underline some notable shortcomings: insufficient flexibility of labour market regulations, the regulations connected with closing of an enterprise’s activities (the ease of closing a business) and the options for obtaining credit (first and foremost, for small and medium-sized enterprises). The protection of investors and opportunities for enforcing contracts are areas that Estonia needs to develop in comparison with other countries. It must also be mentioned that in the last report Doing Business 2009 Estonia for the first time over many years is not highlighted as a substantial reformer in any of the categories.

The Estonian business environment has also received good results in other international surveys. For example, the global competitiveness survey for 134 countries organised by the World Economic Forum has placed Estonia in 32nd place. A similar analysis of the competitiveness of countries organised by the Institute for Management Development in Lausanne (IMD), published in 2007 gave Estonia the 22nd place.

Among other things, our positive business environment is characterised by rapid growth in the number of enterprises over the last ten years. This growth has been influenced by the overall health of the Estonian economy as well as an increase in domestic consumption.

47 Figure 20: Changes in the number of Estonian enterprises by size groups of enterprises (1999 – 2006)

45000 40000 35000 30000 25000 20000 15000 10000 5000 0 1999 2000 2001 2002 2003 2004 2005 2006 micro-enterprises 20541 23429 25532 27508 29770 32910 36008 40757 small enterprises 6215 6106 6134 6225 6241 6360 6621 6951 medium-sized enterprises 1203 1128 1135 1158 1186 1197 1255 1293 large enterprises 178 177 159 159 155 160 167 175 unspecified enterprises 1398 506 219 114 102 72 61 61

Source: Estonian Tax and Customs Board

Mostly, the number of micro-enterprises38 has increased over ten years, which is evidence of the fact that besides a positive economic situation, the entrepreneurial activity of Estonian inhabitants has also improved and there are no major obstacles to business activity. At the same time, a great number of micro-enterprises have focused on the needs of the domestic market, and thus final conclusions cannot be drawn based only on the data from this a period mainly of economic growth. It must also be kept in mind that the number of enterprises in Estonia has not yet reached the average level of EU Member States.

Figure 21: The number of small and medium-sized enterprises per 1000 inhabitants (EU27, 2006) 100

75

50

25

0 CZ PTEL IT ESSECYHUNOLU SIEU- BEDKPLFR FI ATBGNL EELTLVUK IE DEROSK 27

Source: Eurostat

The number of small and medium-sized enterprises (SMEs) in Estonia is relatively small for the size of our population compared to other European countries. This indicates that there is a need to stimulate the entrepreneurial activity of Estonian inhabitants, make the establishment of enterprises easier and support enterprises in the first years of their operations.

38 Enterprises with up to 9 employees.

48 The increase of entrepreneurial activity is also supported by the reduction of administrative burdens accompanying legislation. Business organisations consider it important to reduce the administrative burdens accompanying the existing legislation; at the same time, they stress the importance of establishing an effective system of evaluating the administrative burdens produced by new legislation. As a bottleneck, the business operators underlined problems arising at the implementation of legislation – in certain cases the officials do not take the needs of business operators and the specifics of business activity into consideration. Many legislative instruments bring with them administrative burdens that significantly influence, above all, small and medium-sized enterprises. Because of that, the Government wishes to pay more attention to the implementation of the principle 'first think small' in the coming years.

In terms of the supervision of competition, the powers of Estonian administrative agencies have thus far been more limited than in many other EU Member States, for we do not have a leniency programme, which has great importance in many countries at the discovery of cartels. Also a survey of small- and medium size enterprises by the Ministry of Economic Affairs and Communication found that large majority of small businesses (84%) has had no interaction or has no information about the activities of the Competition authority. Large part of the respondents found that competition surveillance in Estonia needs to be enhanced. Compared to other EU Member States, Estonia’s activity in developing the business environment and promoting competition can still be regarded more supportive than average. In Estonia, there is less state aid directed at specific areas of activity or enterprises than average, there is no tax differentiation for single enterprises or groups of enterprises and a great part of the state’s contracts are awarded as a result of public procurement. The SME survey that was referred to concludes that only 4% of all enterprises consider the regulatory environment in Estonia as something that hinders competition and 53% of the competition environment to be good in Estonia.

The development of public e-services promotes business activity and entrepreneurship. Estonia’s success in developing an information society has been highlighted in several international surveys and rankings, including the Information Society Benchmarking Report (2005) compiled by the European Commission and the Global Information Technology Report (2007–2008) issued by the World Economic Forum. Reports reveal a harmonious development of all factors influencing the development of the Estonian information society. In the Global Information Technology Report, Estonia is in the top 30 regarding all indicator groups among 127 countries. Estonia has achieved its highest results in the indicator groups showing the Government’s usage of information services (2nd place) and the Government’s readiness. However, we have not done so well with relation to the business readiness (31st place) and individual readiness (26th place) components.

The implementation of information and communication technologies and the development of the telecommunications network in Estonia’s has been extremely rapid: most Estonian schools, public sector institutions and enterprises have an Internet connection, 98% of the Estonian population live in areas with access to broadband connections and good Wi-Fi networks. In 2007, the number of Estonian computer users rose to 709 000 people in the 15 – 74 age group – that is, 68% of the entire population. The percentage of Internet users has reached 66% – approximately 687 000 people. Roughly 49 000 new computer users and 64 000 Internet users have been added to the total number in the past year. The percentage of families with an internet connection is also increasing – in 2007, every second Estonian family had an internet connection at home, which makes up 51% of all families or 298 000. Compared to the previous year, nearly 55 000 new families have been added to the number of internet connection owners.

49 Estonia has always been one of the leading countries in Europe as well as the world when it comes to the availability of public e-services. According to Eurostat, Estonia held the second place after Austria in terms of the availability of important public e-services in 2006. In 2007, Estonia dropped a few places, but still substantially exceeded the EU average. So far, Estonia’s activities connected with information politics have focused, first and foremost, on the development of the information and communication technologies infrastructure and the creation of systems necessary for the realisation of sectoral policies.

Tallinn’s remoteness (in terms of time as well as distance) from the major centres of the European and world economy, and the low development level of the local transport infrastructure compared to Western European countries have proved to be important shortcomings in the development of an infrastructure supporting business activity. The use of air transport has grown rapidly in recent years. The number of passengers passing through Tallinn Airport remained just below one million in 2004; in 2007 the airport already served 1.7 million passengers, exceeding the planned maximum capacity of the airport constructed in the 1990s. In connection with the carriage of goods, the largest challenge facing transport enterprises operating in Estonia is the shift from handling the westbound transit of mineral fuels, the export of which is diminishing, to east- and southbound container transport. Today, the handling capacity for container transport remains below the potential requirements at ports as well as on rail.

Sub-objective 1: Increase entrepreneurship and support small enterprises

Explanation of the Projected level Indicator indicator, including the Current level 2011 source N umber of enterprises T he number of operating established in a year enterprises established in a 6687 (2006) 6700 year. Source: Estonian Tax and Customs Board Entrepreneurial The percentage of Estonian activeness among inhabitants that prefer to be 40% (2006) 45% Estonian inhabitants business operators themselves. Source: Eurobarometer

In order to raise entrepreneurship awareness, www.aktiva.ee, an information portal intended for business operators has been open since 2001. Development centres operating in all counties offer consultations and business-related guidance. Based on the activities and initial results of the previous years of the entrepreneurship and innovation awareness programme, a preliminary survey shall be conducted, which shall be used to establish the full concept for the programme in its next period. The Government has offered start-up assistance to starting business operators since 2002. During that time, it has supported the commencement of 1 227 business operators. In 2008, the start-up assistance package for starting business operators shall be improved and the annual volumes of financial support issued as direct monetary support and loan guarantees shall be increased.

The single contact point for business operators in Estonia functions in the form of notaries. A single digital contact point for business operators is being developed, which shall make the basic business-related information easily accessible to local business operators as well as other citizens of the European Union. The single contact point shall lay down the foundation for the state’s

50 interoperable information networks, which shall ensure the presence of important business- related information, its constant updating and the accessibility of services offered by the state and the improvement of their quality.

Measures

1. Support the compilation of teaching materials promoting practice-oriented entrepreneurship to enhance learning opportunities and supplement study programmes (2009 – 2010). 2. Upgrade and implement the entrepreneurship and innovation awareness programme39 (2008 – 2013). 3. Develop a single digital contact point to carry out business-related operations (2009 – 2010). 4. Increase and reorganise start-up assistance and growth assistance aimed at starting business operators40 (2008 – 2013). 5. Support the investments of micro-enterprises to diversify their economic activity in rural areas (2008 – 2013). 6. Launch and implement a national programme of start-up loans and micro-loans aimed at business operators who are either just starting their operations or have a short credit history and the value of whose collateral it is difficult to assess or it is not sufficient to issue a bank loan (2008 – 2013). 7. Analyse the possibility to decrease the minimum amount of share capital needed for the set- up of a limited-liability company and its reporting obligations (2009).

Sub-objective 2: Develop the business-related regulatory environment

Explanation of the Projected Indicator indicator, including Current level level 2011 the source T he maximum number of S ource: World Bank days it takes to establish an survey Doing Business 7 (2008) 1 enterprise Proportion of business Based on the 7.47 7.6 operators who think that the assessment of business 4th result (2007) 4th result regulatory environment does operators. not hinder business activity Source: IMD

In order to improve the regulatory environment, several assessments of administrative burdens have been launched, which have thus far focused on specific priority areas. With regard to the laws and other legislation currently in force, the need for a more systematic reduction of the administrative burden to enterprises has been established in cooperation with representatives of business operators in the spheres of environmental law, building and planning law, economic administrative law and social law. In these spheres, the Government has set a goal of creating uniform codes of laws by 2011 at the latest, during the compilation of which opportunities for simplifying and reducing administrative burden shall also be separately assessed. The Government is not planning to assess the administrative burdens of the entire legislation in force in Estonia. A reorganization of the system of regular impact analyses of legislation has been

39 This programme has two goals: firstly, increasing the awareness and knowledge of starting and already operating business operators, business managers, investors and engineers with relation to spheres important from the perspective of promoting the competitiveness of their enterprises; and secondly, enhancing the entrepreneurship- and innovation-related knowledge of researchers, teachers, lecturers and other educational personnel and changing their attitude towards entrepreneurship and innovation by offering training courses and additional information. 40 In programmes launched since 2008, start-up business operators are able to apply for a loan guarantee from KredEx in addition to start-up assistance with the same application.

51 launched as a separate development activity. During the development of this system, minimum requirements shall be established for assessing the administrative burden for those drafting legislation.

Measures

1. Develop a reorganisation procedure and enact the appropriate legislation (2008 – 2009). 2. Develop and launch a system for the conciliation procedure (2009 – 2011). 3. Review legislation regulating intellectual property and simplify and update the regulations (2009 – 2011). 4. Reduce the number of areas of activity that require business operators to obtain activity licences and authorizations, and simplify the procedures for obtaining licences; codify the entire economic administrative law (2008 – 2010). 5. Codify and simplify social law (the social code) (2008 – 2010). 6. Codify and simplify environmental law (the environmental code) (2008 – 2010). 7. Codify and simplify the building and planning law (the building code) (2008 – 2009). 8. Develop a system of assessing the impacts of legislation, including the integration of the rules for assessing the administrative burdens created for business in the minimum requirements of the analysis of the impact of legislation (2008 – 2010). 9. Update the guidelines for public procurement to stimulate increased demand for new technologies (concerning, for instance, transport, energy, environment, health, education and communications) and launch an appropriate training programme (2009 – 2010).

Sub-objective 3: Guarantee competition

Explanation of the indicator, Projected Indicator Current level including the source level 2011 C ompetition-related The composite indicator 26 .39 (2007), 27 regulatory includes 4 indicators based on including environment the IMD’s survey (the impact of subsidies 6.25; subsidies on competition, the competition efficiency of competition legislation 6.00; legislation, the impact of price price controls controls, the impact of 7.68; regulation regulatory intensity on the intensity 6.46. competitiveness of enterprises). The maximum possible assessment score given by business operators is 40. Source: IMD The competitive The effectiveness of 53% (2008) 54% situation of small and competitiveness has been medium-sized assessed on the basis of the enterprises in Estonia survey of SMEs41. The percentage of enterprises Source: Ministry of Economic Affairs and Communications

41 Questions in the survey of SMEs: 20. Assess the functioning of competition in your enterprise’s sphere of activity: 1) competition functions smoothly; 2) the functioning of competition is hindered by legal constraints; 3) the functioning of competition is hindered by monopolies ruling the market; 4) other (specify).

52 To ensure more efficient state supervision and better employment of existing resources, several institutions exercising state supervision were united in 2007. The Communications Board, the Competition Board, the Energy Market Inspectorate, the Technical Inspectorate and the Railway Inspectorate were united into two new establishments: the Estonian Competition Authority and the Estonian Technical Surveillance Authority. As a result of the unification of different inspectorates, the quality of competition analyses shall improve, which, in turn, shall help improve the conditions of competition. The supervision capacity aimed at ensuring safety in technical spheres shall also increase: the gathering of institutions exercising technical supervision in different spheres into one supervisory institution shall make the adoption of best practices and the harmonisation of supervisory procedures easier. It is also possible to offer more efficient services to the public due to a decrease in general expenses resulting from the unification of the institutions.

The completion of the formation of the Estonian Competition Authority and the Estonian Technical Surveillance Authority shall continue in 2008 and 2009, as will the enhancement of the capacity of the new institutions. The priority is, on the one hand, to develop the methodical competence of the supervision of competition and, on the other hand, to organise additional training for public prosecutors and officials of the Estonian Competition Authority with the right to carry out proceedings to improve the capacity as regards criminal proceedings of competition offences according to the provisions of the Anti-Corruption Strategy 2008 – 2012.

A lot can still be done in spheres regulated by the state by opening up the market; among others, the electricity and postal markets have not yet been opened. Legislative amendments necessary for the opening of the postal market have already been initiated at the beginning of 2008. According to the conditions of the treaty of accession to the European Union, Estonia has until 2013 to open up the electricity market. By that time, Estonia shall open up its entire electricity market to the producers of the European Union. The electricity market shall already be partially (by 35%) open at the beginning of 2009.

Measures

1. Develop and implement a leniency programme (2008 – 2009). 2. Develop new methodologies for competition supervision analyses (2008 – 2009). 3. Open up the postal market (2008 – 2009). 4. Making preparations for opening the electricity market (2008 – 2011).

Sub-objective 4: Enhance the availability and quality of public e-services

Explanation of the indicator, Projected level Indicator Current level including the source 2011 P roportion of A n internet user is defined as a internet users person 15 – 74 years of age who has used the internet within the 66% 70% last 6 months. (2007) Source: survey by the Ministry of Economic Affairs and Communications Availability of public The availability of 20 of the e-services most important public services 70% 80% via the internet. (2007) Source: Eurostat Enterprise sector The satisfaction of Estonian

53 satisfaction with enterprises with e-services 90% (2007) 93% public e-services provided by the public sector. Source: Ministry of Economic Affairs and Communications Number of The number of enterprises that enterprises using the have made inquiries via the services of the single single contact point being 0 (2007) 10 000 contact point developed for enterprises. Source: Ministry of Economic Affairs and Communications

In recent years, Estonia has continued the rapid development of public e-services. In 2007, the Government adopted the Estonian information society strategy, which listed the priorities of the information society development and the resources to be allocated to carry out those activities until 2013. Public e-services have been significantly improved using the potential of the state’s central information technology solutions (the X-Road system; Kodanikuportaal, an e-services portal for citizens; the e-ID card). The main improvements have taken place in the social and legal spheres where the E-Health and E-Case projects have been launched.

In its action plan for 2007 – 2011, the Government of the Republic has set a goal of using the potential offered by information and communication technologies even more effectively. The Government is planning to make interaction between business operators and the state fast and user-friendly by employing different technological possibilities to the maximum and significantly reducing the administrative burdens caused by bureaucracy.

Measures

1. Launch a programme to raise the awareness of the information society (2008 – 2009). 2. The transition of state authorities to e-transactions (2008 – 2010). 3. Develop the e-statistics module of Statistics Estonia to reduce the administrative burden of enterprises and data duplication in the government (2007 – 2011). 4. Develop a fully automatic e-procurement system (2007 – 2009). 5. Employ the E-Health system to offer e-services to health operators (the development of the Digital Prescription and the cross-usage of health data between different institutions) (2008 – 2011). 6. Create a complete solution for the E-File client system (2008 – 2012).

Sub-objective 5: Improve international transport links

Explanation of the Projected level Indicator indicator, including the Current level 2011 source S atisfaction of business A ssessment of business operators with the operators on a 10-point 6.7 (2007) 7 infrastructure necessary scale. for the transportation of Source: IMD’s goods and services competitiveness ranking Annual number of international air Source: Tallinn Airport Ltd. 1.7 million 2.5 million passengers travelling (2007) through Tallinn Airport

54 During the development of the transport infrastructure, the Government’s priorities focus on developing public transport (including passenger train traffic), increasing traffic safety and improving international transport links. Among other things, the need to improve the connections between major highways and international ports and the airport has been highlighted.

In recent years, the capacity of roads belonging to the pan-European transport corridors (including the Tallinn–Ikla and Tallinn–Narva roads) has been improved. During that process, great attention has been given to the development of other connecting roads in order to improve the access of all areas to the main international transport links. In 2008, the extension to the Tallinn Airport will be completed, as a result of which the airport will be able to serve at least 2.5 million air passengers a year. In spite of considerable investments, several critical bottlenecks are still present. The construction of the Koidula railway border crossing point will have to be completed, the speed and quality of passenger rail traffic needs improving, there is still no direct rail connection with Riga and from there with other European countries. Special attention shall be given to evaluating the options for accessing Tallinn Airport and the Tallinn passenger port using public transport for Estonian inhabitants living outside Tallinn. With relation to roads, the connections with major cities and important highways – including bypasses for Tallinn, Pärnu, and Tartu – present an important problem. The capacity of ports shall also have to be switched from handling westbound transit of mostly mineral fuels to handling container transport.

Measures

1. Expand the passenger terminal and airside area of Tallinn airport (2007 – 2008). 2. Develop Tartu airport (2008 – 2009). 3. Improve the Tallinn-Tartu and Tallinn-Narva road connections with the port of Tallinn and Tallinn airport42 (2009 – 2012). 4. Eliminate the bottlenecks on the Tallinn-Ikla and Tallinn-Narva roads43 (2008 – 2011). 5. Reconstruct and develop the Rail Baltica railway line between Tallinn and Tartu and Tartu and Valga (2009 – 2011). 6. Establish the Koidula rail border crossing in South-Eastern Estonia (2008 – 2011). 7. Develop the infrastructure necessary for an increase in the capacity of container transit at the port of Tallinn (2008 – 2010).

42 Concrete investments under this measure: the Ülemiste intersection, Põhjaväil and the Russalka intersection; renovation of the Tallinn bypass. 43 Concrete investments under this measure: construction of the Pärnu bypass, construction of the Väo–Maardu road section and the Kukruse–Jõhvi road section.

55 OBJECTIVE 7: Ensure the security of energy supply and develop a competitive and environmentally-friendly energy sector

Explanation of the indicator, Projected level Indicator Current level including the source 2011 T he share of T he share of renewable energy in total renewable energy energy consumption 17.5% (2006) At least 19.8%44 in total energy Source: The Ministry of Economic consumption Affairs and Communications, Statistics Estonia The energy Defined as net imports of energy 33.5% (2006) At least the level of dependence rate divided by gross energy consumption. 2006 Source: Eurostat Trade related CO2 The total of the quota trade related The exact level will be emission quota CO2 emission per year (million clarified after the tonnes) 15.7 (2007) decision of the Source: Statistics Estonia, Ministry of European Court45 the Environment

The development of the Estonian energy sector must be guided by three issues – the security of the energy supply, the environmental impact of energy production and the price of energy. The following graph illustrates the assessment of the energy situation in Estonia and in the European Union in respect to those three components.

Figure 22: Energy situation in Estonia

Energy security 10 8 6 4 2 0

Environmental sustainability Competitiveness

Estonia’s energy EU energy

Source: The Ministry of Economic Affairs and Communications

Compared to other EU member states, the situation in regard to energy security and competitiveness (the price of energy) is good in Estonia. However, not all these issues are balanced. Compared to the EU average, Estonia has invested significantly less in the environmental sustainability of energy production. This situation has to a great extent been

44 According to the draft of the EC Directive on Renewable Energy. 45 The EC set Estonia a quota limiting of 12.7 tonnes of carbon dioxide emissions annualy for the period 2008-2012, which is about a half of the quota that Estonia requested. Estonia has filed an action to the European Court to contest the decision of the EC.

56 caused by the specific nature of Estonia’s energy production, but in the coming years there is need to pay more attention to increasing the environmental sustainability of energy production. At the same time, energy security and competitiveness must not decrease significantly.

The security of energy supply

Figure: Energy dependence of European countries

Energy dependence rate of European countries in 2006 120,0

100,0

80,0

60,0

40,0

20,0

0,0

-20,0 Italy

EU27 Malta Latvia Spain Ireland Poland France Austria Estonia Finland Greece Cyprus Sweden Bulgaria Belgium Slovenia Hungary Slovakia Portugal -40,0 Denmark Romania Germany Lithuania

Netherlands Luxembourg

-60,0 United KingdomCzech Republic

Source: Eurostat

Compared to other EU member states, the energy dependence rate is currently low in Estonia. The share of Estonian domestic energy sources in the primary energy supply is over 70%, where oil shale constitutes 80% and wood 14%. Imported fuels constitute approximately 30% of primary energy supply, mostly natural gas from Russia and oil from Lithuania and Russia. This means that Estonia is largely dependent on Russian suppliers. Despite the strong electricity transfer structure within the Baltic states (there is no power deficit), the security of the electricity supply is decreasing due to the lack of connections with Central European energy networks. The only connection with other European networks is the HVDC submarine cable Estlink with a capacity of 350 MW between Estonia and Finland that was taken into service at the end of 2006. Estonia is located in the area of the Baltic energy market that partly includes Russia as well as Finland. A similar situation dominates in the natural gas network – Estonia only has connections with Russia and Latvia. Since there are no connections with other EU member states, the only source of supply is Russia.

Environmental sustainability of energy

Estonian domestic energy is mostly based on fossil fuels, and therefore, the environmental impact of energy production and consumption is high. Like many other European countries, Estonia is making an effort to develop environmentally friendly energy production and to increase energy efficiency. Enhancing the environmental sustainability of oil shale energy, increasing the share of renewable energy and improving energy efficiency are crucial points for Estonia.

57 Improving energy efficiency means investing in both environmentally friendly energy (more efficient energy consumption - reduced environmental impact) and higher security of energy supply (reduced energy consumption - less need for imported energy).

The potential for energy efficiency has not been entirely utilised in Estonia – efficiency in terms of total consumption as well as in the production and transmission of energy. Estonia’s energy consumption has increased by 20% over the period 2000 – 2006. On the one hand, the demand for energy has increased due to rapid economic growth; on the other hand, the potential for energy savings in consumption has not been utilised entirely. The Estonian energy system has indeed become more efficient in recent years – compared to year 2000, losses in transport, storage and distribution have decreased 15% for electricity and 18% for thermal energy. However, the losses for electricity and thermal energy reached 11% of all electrical and thermal energy produced.

According to data for 2006, the largest energy consumers were households, industry and transport sectors, 41%, 21% and 20% accordingly. This indicates the growing impact of these sectors on total energy consumption figures. At the same time, the potential for energy saving has not been entirely utilised in industry and transport sectors. While energy consumption has decreased a little in households (3%) in the period 2000 – 2006, in the transport sector, fuel and energy consumption has grown over 60% and in industry nearly 20% over the last seven years.

Figure 24: Changes in total energy consumption in different sectors

Change in consumption in 2000-2006, %

Households -3.15

Business and public services 53.53 sector

Transport 63.57

Agriculture and 62.30 Firshing industry

Industry 19.79

Final consumption 19.29

-10.00 0.00 10.00 20.00 30.00 40.00 50.00 60.00 70.00

Source: Statistics Estonia

Several factors impede the enhancement of energy efficiency. For example, so far, the issue of energy efficiency has not been taken into account in state aid schemes and procurements. Another problem is the lack of energy efficiency experts and the lack of awareness of energy saving measures among energy consumers.

Combined heat and power stations would enhance the efficiency of energy production. In combined heat and power stations, the thermal energy resulting from the production of energy is also being used and there is less pollution than in the separate production of electricity and heat. Another advantage of combined production is the higher efficiency of energy commutation than in the separate production of electricity and heat. Currently, 12 – 14% of electricity is produced using combined production of electricity and heat in Estonia.

58 Today, there is a considerable environmental burden from Estonian energy production because the energy is mostly produced from fossil fuels. Burning oil shale accounts for 90% of all electricity produced. Oil shale guarantees our electricity supply and independence from imports. But using oil shale causes several environmental problems starting from the high level of greenhouse gas emissions and finishing with the waste (including dangerous waste) generated from using oil shale. The waste from oil shale mining, oil shale energy production and industry make up 61.4% of all waste generated. The majority of Estonian air pollution and greenhouse gas emissions come from oil shale energy production or from the use of fossil fuels.

Figure 25: The emission of air pollutants (per year)

120

100

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40

20

0 2000 2001 2002 2003 2004 2005

Sulphur dioxide Nitrous oxides Volatile organic compounds

Source: Statistics Estonia

Mostly due to large changes in the structure of the industry, the emission of greenhouse gases in Estonia has significantly decreased over the last decade. In 1990, the total emission was 43,594 tonnes of CO2 equivalent, whereas in 2005, it was 20,658.29 tonnes of CO2 equivalent, which indicates a decrease in emissions by 52.6%. This reduction is significantly greater than the EU aim of 20%, or the Kyoto protocol and EU sustainable development strategy aim of 8%. Nevertheless, Estonian energy is relatively carbon dioxide intensive.

Figure 26: CO2 emission per year (in thousands of tonnes)

20000

15000

10000

5000

0 2000 2001 2002 2003 2004 2005 -5000

-10000

-15000

The total emission of CO2 Emission of CO2 from fuel burming Emission of CO2 from industrial processes Absorption of carbon by natural ecosystems

Source: Statistics Estonia

59 According to the EU Energy Package, the target level for renewable energy in Estonia by 2020 is 25% of gross consumption. During recent years, the share of renewable energy in Estonian energy consumption has been around 16-18%, thus, achieving the aim set by the EU is realistic. In electricity production, the use of renewable energy sources is low. In 2006, it constituted 1.7% of total domestic energy consumption. The share of electricity produced using renewable energy sources has increased in recent years mostly due to the active installation of wind parks in coastal areas.

It is crucial to invest in the development of energy technology in order to enhance environmentally friendly energy production. The development of energy technology makes it possible to expand the use of renewable energy sources and to make oil shale based energy production more sustainable as well as more energy efficient. In addition, the development of energy technology helps to increase energy efficiency.

Competitiveness

Increasing the environmental sustainability of energy production directly affects the price of energy, which is highly important in respect to the competitiveness of economy. On the one hand, the price of energy has to motivate energy efficiency. However, on the other hand, high energy prices hinder the competitiveness of the economy. The rapidly increasing prices may cause a significant decrease in competitiveness in energy-intensive economic sectors and directly affect employment. Moreover, this has a direct impact on inflation and also significantly affects other sectors via the more expensive production input.

Currently, energy prices are low in Estonia compared to other European countries. The price of electricity is below the EU average and the price of gas for industrial consumers is the lowest in Europe.

Figure 27: Electricity and gas prices for industrial consumers in European countries in 2007

0,12 14

0,1 12

10 0,08 8 0,06 6 0,04

4 G as p r i ce ( E U R /G J) E l e c t r i y p ce ( U R /G W h) 0,02 2

0 0

Italy Latvia Spain EU 27 EstoniaPolandFranceFinland Croatia Austria Bulgaria Lithuania SwedDenenmaSrklovenia Hungary RomanPiaortugBalelgium SlovaGkiaermany Netherlands Luxembourg Czech Republic United Kingdom

Price of electricity Price of gas

Source: Eurostat

60 Environmentally friendly transport

Accounting for high energy prices and different forecasts that claim there will be further price rises as well as the potential that environment taxes will also be increased in European countries, sustainable and environmentally friendly transport is also becoming an important issue in respect to competitiveness in Estonia

Public transport is a considerably more efficient way of commuting than using an automobile, and in the same way rail is more efficient than road transport. The use of public transport has been gradually decreasing in Estonia as the number of cars has increased; however, it is still above the EU average. In Estonia, the use of public transport constitutes 30% of domestic transport, while the EU average is approximately 25%. There are many things one can do to make public transport services more attractive in Estonia (and as a result impede the decrease in the share of public transport in all domestic transport), since today, there is no integrated public transport system and the development of public transport services (itinerary planning and ticket booking information systems) has been uneven.

In respect to the discussion of the European Union single climate policy, Estonia has to develop measures to promote the use of environmentally friendly fuels. Today, the share of bio-fuels is under 1% of all motor vehicle fuels being consumed. In addition, more attention should be paid to furthering the development and implementation of environmentally friendly transport technologies. Also, car owners should change their consumption habits because the average CO2 emission in new cars sold in Estonia is significantly higher than in other EU member states.

Sub-objective 1: Ensure the security of energy supply

Explanation of the Indicator indicator, including the Current level Projected level 2011 source T he capacity of E lectricity production in E stonia is capable of E lectricity produced in electricity Estonia satisfies demand in satisfying domestic Estonia at least produced in any given period. demand for electricity satisfies domestic Estonia Source: The Ministry of (in 2006, production demand. Economic Affairs and exceeded consumption Communications, Statistics by approximately 25%) Estonia The level of gas Gas supply satisfies annual Gas supply satisfies Gas supply satisfies supply domestic demand. annual domestic domestic demand. Source: The Ministry of demand (in 2006, the Economic Affairs and supply of natural gas Communications exceeded consumption by about six times)

In 2006, an HVDC submarine cable Estlink (350 MW) between Estonia and Finland was taken into service. It connects Estonia to the electricity networks of Nordic Countries. Energy trade through Estlink started on 4 January 2007.

Significant projects have been carried out to modernize and develop the national grid. Among them, the capacity of the Tallinn-Narva direction has been increased. In 2006, new high-pressure gas pipes and distribution plants were built in Pärnu County and Rapla.

61 Estonia contributes to energy collaboration among the Baltic states. By the end of 2006, the common energy strategy for the Baltic states was developed, which provides an overview of the situation in the energy sector in the Baltic states, and defines strategic targets for integrating the electricity and gas supplies with EU energy systems. Regarding the preparation of the new national energy development plan and the electricity sector development plan, a public debate has been initiated to discuss which options for electricity production Estonia should use in the future. The final structure of the production of electricity in Estonia will be agreed by the end of 2008 when compiling of both development plans will be completed.

Estonia values the export of energy know-how (especially regards to oil shale energy). For example, in a development project for building the first oil shale based power plant in Jordan, Estonian oil shale processing know-how is used.

Estonia finds that establishing interconnections with Central European electricity networks is extremely important and therefore, Estonia aims to join the UCTE46.

Measures

1. Carry out the necessary preparation work for the undersea cable, Estlink II, between Estonia and Finland (environmental impact assessment) (2008 – 2011) 47 2. Compiling the environmental impact assessment of the gas pipeline between Estonia and Finland (2008 – 2011)48 3. Investments to update and develop the national grid49 (2008 – 2010). 4. Establishing a power station as a reserve substation with a planned capacity of 100 MW (2011 – 2012). 5. Preparations for making the decision whether to participate in the Ignalina nuclear power station in Lithuania and finalise this decision (2006 – 2011). 6. Preparations for making the decision whether to participate in a nuclear power station in Finland and finalise this decision (2007 – 2011). 7. Carry out research on the viability and justification of building a nuclear power station in Estonia. (2009 – 2012). 8. Map out the necessity for nuclear energy related legislation (2009).

Sub-objective 2: Develop environmentally friendly energy sector

Explanation of the indicator, Projected level Indicator Current level including the source 2011 T he share of T he share of renewable energy in 1 .7% (2007) A t least 6%50 renewable energy in gross electricity consumption gross energy Source: The Ministry of Economic consumption Affairs and Communications, Statistics Estonia

46The "Union for the Co-ordination of Transmission of Electricity" (UCTE) is the association of transmission system operators in continental Europe. The prospective date for joining the UCTE is estimated to be after 2020. As a prerequisite the reconstruction of Lithuanian-Polish transmission systems is required. 47 Estlink II will be the second direct current electric power connection to the Finnish network.. The cable should be ready by 2013. 48 Eesti Gaas is planning to make this investment decision in 2011. 49 More demanding undertakings involve the continous renovation and building of 110 kV and 330 kV substations, for example, the construction of Aruküla 110/330 kV hub substation. 50 According to the Estonian development plan for the electricity sector (2006) 5% of electricity will be produced using renewable energy sources in 2015.

62 The emission of The emission level of the SO2 70,980 t SO2 45,000 t polluting following pollutants are being NOx 30,830 t NOx 31,000 t substances in observed: sulphur dioxide (SO2), NH3 9,380 t NH3 7,000 t tonnes (all types of nitrous oxide (NOx), ammonia VOCs 34,970 t VOCs 35,000 t pollution) (NH3), volatile organic (2006) compounds (VOCs) Source: Statistics Estonia

The amendments in the Electricity Market Act, which took effect on 1 May 2007, prescribed a new scheme for supporting renewable energy sources and combined production. In addition, higher support rates were established. According to the new regulation, the producers are allowed to sell electricity at a fixed purchasing obligation price, to receive sales support and to sell electricity at market price. According to the amendment, starting from 2009, the producers of wind energy will be able to use the purchasing obligation arrangements and support within a certain production capacity. The funding for purchasing obligation arrangements and sales support will be effected through the national grid.

The physical and social environment development implementation plan 2007 – 2013 enhances renewable energy production through structural funds. Within the framework of the implementation plan, approximately 1.36 million kroons is planned for the development of the energy sector and the alleviation of climate change. These funds will be used for making electricity consumption more efficient, expanding the use of renewable energy sources and decreasing the emission of polluting substances resulting from the energy system.

The new Environmental Charges Act entered into force on 1 January 2006, with the purpose of guiding entrepreneurs (including energy entrepreneurs) to increasingly apply environmental protection measures, to use natural resources more sustainably and to decrease environmental pollution.

To enhance energy technologies, the Government approved the Estonian programme of energy technologies which will be a framework for supporting the development of energy technologies in two main fields: oil shale technologies and new energy technologies that are mainly based on renewable energy sources. Thereby, energy efficiency and environmental sustainability are considered as the main development criteria.

Measures

1. Support for investments in constructing thermal and/or power plants and boiler plants that use renewable energy sources (except hydroelectric plants, wind parks (with more than one wind generator), large combined heat and power plants and district heating boiler plants 51(2008 – 2013). 2. Support for the application of environmentally friendly technologies in energy production (2008 – 2013)52. 3. Support for investments in producing biomass, bio-fuel and/or bio-energy in the agricultural sector (2008 – 2013). 4. Increase the efficiency of the system for issuing and supervising pollution permits and integrated environmental permits in order to be in compliance with the limits on emissions of pollutants as given in the NEC directive53 (2009 – 2010).

51 Combined heat and power plants with installed power of more than 2 MW and district heating boiler plants with installed power of more than 4 MW. 52 Within the framework of the Energy Technologies Programme.

63 5. Set out stricter limits on the sulphur content in fuel (2009). 6. Shut down the oil shale boilers in the Ahtme power plant (2008 – 2010) and construct a combined heat and power plant running on biofuel, peat and natural gas (2009 – 2011)54. 7. Test opportunities for combined burning of renewable fuels, waste and oil shale, and applying suitable solutions in order to bring the oil shale boilers at the Sillamäe Thermoelectric Power Station to integrated burning mode (2008 – 2012). 8. Prepare an environmental impact study and establishing new energy blocks at Narva Elektrijaamad AS (Joint Stock Company Narva Power Plants) (2009 – 2013). 9. Supplying the 2-3 unrenovated energy blocks at AS Narva Elektrijaamad with a sulphur capture device (2010 – 2015). 10. Provide the legal basis for the construction of off-shore wind parks (2008 – 2009). 11. Bring large combustion plants into compliance with EU environmental standards (2008 – 2009). 55 12. Develop technologies for CO2 capture and storage (2008 – 2011) . 13. Carry out research on storage technologies for oil shale cinder (2008 – 2009).

Sub-objective 3: Increase energy efficiency

Explanation of the Indicator indicator, including the Current level Projected level 2011 source E lectricity losses E lectricity losses in relation from the network to gross production (i.e. 11.07% (2006) 9% and from including power stations’ company auxiliary system) equipment. Source: Statistics Estonia, electricity balance sheet The volume of the The ratio of primary energy 0.967 0.842 toe/MEUR (-13% demand for supply to GDP. toe/MEUR56 compared to 2006) energy in GDP Source: Eurostat (2006) The energy saved The energy saved due to Energy savings Energy savings by by implementing the energy conservation by implementing implementing planned energy measures implemented by planned energy energy conservation conservation both public and private conservation measures 1000 TJ. measures in sector TJ. measures 5 TJ Estonia. Source: The annual report of (2007).57 the Energy Efficiency Plan 2007 – 2013”

In November 2007, the Estonian Government approved the Energy Efficiency Plan 2007 – 2013, which provides the measures for making information about energy conservation more accessible, enhancing the efficiency of energy and fuel production and consumption and increasing the number of energy efficiency experts. Measures concerning the improvement of the energy efficiency of buildings are included in the National Housing Development Plan 2008 – 2013 approved by the Government in January 2008.

53 Directive 2001/81/EC of the European Parliament and of the Council of 23 October 2001 on national emission ceilings for certain armospheric pollutants (SO2, NOx, VOC and NH3). 54 Until the opening of the new plant, the heating demand will be met by the construction of a gas boiler plant and by liquid fuel boilers that are to be opened in summer 2008. 55 There is research under way to find out how and to what extent CO2 can be combined with oil shale ash. 56 toe = tonne of oil equivalent, euros calculated by reference to the currency in 1995. 57 The result of investment in the energy conservation programme supports local authorities.

64 On 1 January 2008, the amendments to the Alcohol, Tobacco, Fuel and Electricity Excise Duty Act entered into force, according to which, the excise duty for gasoline and diesel fuel was increased in 2008, and individual and business consumers were prescribed the same electricity excise duty of 50 Estonian kroons per MWh. The electricity excise duty was imposed before the date stipulated in the EU directive on tax on energy products.

Measures

1. Improve the availability of energy efficiency information, and guarantee the availability of energy saving skills and expertise (2008 – 2013). 2. Support the execution of energy certification and energy auditing in apartment buildings and the renovations and reconstructions of apartment buildings that were built before 1990 (2008 – 2013). 3. Develop legislation for implementing the energy conservation requirements for energy enterprises58 (2008 – 2009). 4. Support investments in the renovation of old heating pipelines in district heating networks (2008 – 2013). 5. Develop guidelines for environmentally protective public procurement for encouraging the usage of energy efficiency criteria in public procurement process (2008 – 2011).

Sub-objective 4: Promote the use of environmentally friendly transport

Explanation of the Projected level Indicator indicator, including the Current level 2011 source T he use of public T he use of public transport transport measured as a percentage of 34% (2006) 34% passenger kilometres Source: Statistics Estonia The average CO2 181 g/km 170 g/km emission rate in new Source: Estonian Motor Vehicle (2007) automobiles Registration Centre

The Government set two main courses of action to promote the use of environmentally friendly transport when it approved the Transport Development Plan 2006 – 2013. Firstly, broadening the opportunities to use environmentally friendly fuels, and secondly, promoting public transport, especially rail transport. In order to promote the use of passenger rail, the Government has decided to improve the speed of trains on the Tallinn-Tartu-Valga and Tallinn-Narva lines, which should provide rail traffic a better position than bus traffic. They are aiming to promote public transport by improving cooperation between the providers of different types of transport and the providers of public transport in different areas, thereby creating an integrated itinerary planning and ticketing information system. The city of Tallinn has started to envisage a new public transport centre, but they have not progressed further than general spatial planning. To promote the use of environmentally friendly fuels, the excise duty exemption remains in force until summer 2011; however, this has not increased biofuel use to more than 0.1% of gross consumption of motor fuels.

58 There is a plan to require energy enterprises to contribute to the energy saving activities of consumers, for example, by supporting energy conservation projects.

65 Measures

1. Support for the development of environmentally friendly transport technologies (2009 – 2013). 2. Increase the quality of passenger rail traffic 59 (2009 – 2012). 3. Create a public transport information system and an integrated itinerary planning and ticket booking system (2009). 4. Review the excise concession system for bio fuels and develop new measures (2010 – 2012).

59 Including a new rolling stock for the companies that provide railway passenger transport services in Estonia and improvement of the waiting platforms at the railway stops.

66 4. EDUCATION AND LABOUR MARKET

In order to adjust to the effects of globalisation, EU Member States face the challenge of implementing the principles of flexicurity in their labour market in order to enable entrepreneurs to react rapidly and flexibly to economic changes while maintaining employment security for their employees. Updating labour legislation and making labour relations more flexible is balanced by social security systems and the propagation of active labour market measures and lifelong learning to ensure competitiveness.

The European Commission has proposed four pathways to achieve flexicurity. These are: 1) Fighting the fragmentation caused by different contractual systems through lifelong learning, increasing social security and making active labour market policy more effective. This approach suits those countries where the protection and security of an employee is based on termless contracts or on the security of work relations. Numerous contracts with fixed termination dates are used in order to make the labour market more flexible. This results in a low unemployment benefit and undeveloped social security systems. 2) Improving flexibility and security within enterprises and guaranteeing security of employment and transfer. This approach suits those countries where changing jobs is rather uncommon. 3) Levelling the skills and opportunities for workers by improving in-service training and vocational education and by making the active labour policy and social security system more effective. These measures are most effective in countries where contractual systems are flexible and employment is generally high, but doesn’t include all groups (problematic unemployment for risk groups). 4) Creating more options for allowance beneficiaries and people working unofficially by developing active labour market policy and lifelong learning system and by combining these with sufficient unemployment benefits. This is important in countries where the number of long-term compensation beneficiaries, whose return to the labour market is complicated, is high.

At the same time, the European Commission and EU Member States take the position that every Member State must find its own balance in implementing flexicurity. Thanks to the modernization of the active labour market policy at the beginning of 2006, Estonia has managed to develop high-quality labour market services for unemployed people in recent years. Therefore, the social guarantees and security for workers in the labour market have improved remarkably. Increasing the flexibility of the labour market has so far been of secondary importance compared to increasing security.

Due to the rapid economic growth of recent years, Estonia’s employment indicators have improved and the objectives concerning employment set by the European Commission for the year 2010 have been either achieved or almost achieved. In 2006, Estonia’s labour resource utilisation60 exceeded the EU15 average by more than 30%. At the same time, the labour productivity per person employed formed only 61.7% of the EU27 average in 2006 (64.7% in 2007), though it had been growing continuously. In the coming years, two of the most important challenges Estonia faces are adapting to changes in the economic structure and increasing productivity. The Estonian Government therefore, is primarily concerned with developing the skills of our workforce through an effective and adaptable education system as well as lifelong

60 The main factors influencing labour resource utilisation are the number of working hours per employee; unemployment and employment rates for women, men, youth and elderly workers.

67 learning methods that help to achieve the necessary flexibility in the labour market and in work relations, as well as reducing the gender pay gap without endangering the security of employees in order to adapt to economic changes and support an increase in productivity.

68 OBJECTIVE 8: Improve the skills of the labour force

Explanation of the Projected level Indicator indicator, including the Current level 2011 source E mployment rate Em ployment rate of the (aged 15 – 64) working age population (aged 15 – 64). 69.1% (2007) 70.5% Source: Statistics Estonia, labour force survey Percentage of adults Number of people aged 25 – participating in 64 who have participated in lifelong learning training or formal education 7.0% (2007) 12.5% (aged 25 – 64) 4 weeks prior to the survey in relation to the general mass of people aged 25 – 64. Source: Statistics Estonia, labour force survey

The knowledge, skills and experience of employees form the main prerequisites for increasing competitiveness. The Centre for European Policy Studies (CEPS) estimates that high employment and increases in productivity are not so much hampered by labour market structures than by insufficient labour skills. By the international standards Estonia’s education on basic school level is considered to give a strong bases for the further life. Based on PISA 2006 results our 15-years-old pupils were in second place in scientific literacy, ninth in mathematical literacy (third in Europe) and twelfth in reading literacy (seventh in Europe) among all participating countries. It can also be pointed out that the results of our students did not vary remarkably depending of the region of a school. Thus, there is a strong starting point for developing a quality labour force. However, in the rapidly changing economic space, it is important to keep up with changes in the labour market and to concentrate on developing specific skills that correspond to the needs of employers. This has to be done both in higher and vocational education. The Global Competitiveness Report 2007 – 2008 by the World Economic Forum considers Estonia’s main problem to be the fact that employers consider the preparation of their employees too low or insufficient – 23.4% of Estonian employers pointed this out as the main obstacle. In order to create the necessary preconditions for the emergence of a high-tech and knowledge-capacious business sector, the education system should be our primary concern, since it is possible to reorganize work and therefore to increase productivity only when a labour force of the necessary quality is available.

The employment rate in Estonia was 69.1% in 2007, so it is nearing the targets set in the Lisbon Strategy. The unemployment rate in 2007 (4.7%) was the lowest in the last 15 years. Also, unemployment in different risk groups (i.e. non-Estonians, long-term unemployed) has decreased almost twice compared to 2005. Compared to other EU Member States, the Estonian labour market is characterized by low youth participation in employment, but at the same time youth unemployment (10.0% in 2007) is considerably lower than the EU average (15.3% in EU27 in 2007). The main reason for their low participation in employment as well as low unemployment rate is their considerable participation in formal education. For employers and employees alike it is important that people enter the labour market with the necessary skills, so supplementary measures need to be taken for young people with a low education level (ISCED 0-2) in order to favour their employment and to prevent their unemployment.

69 Better correspondence of education and labour market

All educational levels will be affected by a decrease in student numbers due to the aging population and reduced numbers of young people in the population in the coming years (see figure 28). In the past three years (from autumn 2004 to autumn 2007) the number of students in schools of general education has diminished by 30 000 students – this is equal to 16% and it also includes an 8.5% decrease in daytime secondary school students. According to projections, the number of students in schools of general education will diminish by another 15 000 students by 2012 and then it will remain at the level of 140 000 students (in the 2007/2008 academic year there were 155 071 students). The continuous decrease in the number of students will mainly affect gymnasium level in general education schools (upper secondary general education). We can predict that in the 2012/2013 academic year only 7 740 students will enter upper secondary level in general education schools, which is already 35% less than today. This means that in the nearest future one of the main challenges for Estonia will be to reorganise the network of schools of general education and to also ensure learning opportunities outside the main centres.

Figure 28: Division of population (based on age at 1 January) into possible educational levels in 2007 and 2013

2nd level of higher education (aged 22-24)

1st level of higher education (aged 19-21)

4th level of school (aged 16-18)

3rd level of school (aged 13-15)

2nd level of school (aged 10-12) 2013 1st level of school (aged 7- 2007 9)

0 10000 20000 30000 40000 50000 60000 70000

Source: Eurostat 17.01.2008, Action Plan of Estonian Ministry of Education and Research 2009- 2012

In 2007 Estonia was in second place among EU Member States in terms of the share of total population (25 – 64 age group) having completed at least upper secondary education (Estonia 89.1%; EU27 70.8%). However, the situation is substantially different in the 20 – 24 age group (see figure 29). Compared to Nordic countries and the other Baltic States, Estonia is only ahead of Latvia and Denmark. Young people without an upper secondary education cause the growth of people with a low level of competitiveness in the Estonian labour market. A large percentage of workers with low qualifications means extra costs for the employer when implementing new technologies (hiring new workers, more supplementary training) and this hampers the rapid increase in productivity. Therefore, the Estonian Government aims to focus even more on preventing young people from leaving school early, and on ensuring they continue their studies lifelong.

70 Figure 29: Percentage of young people (aged 20 to 24) having completed at least upper secondary education in 2007 100 EU27 average 90

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40 I t a ly M a l ta S pa in L a t v ia P o l and I r e l and F i n l and F r a n ce C y p r us A u s t r ia E s t on ia G r e ce B e l g i um B u l g a r ia P o r t ug al S l o v a k ia S l o v en ia S w eden H ung a ry R o m an ia D en m a rk L i t h uan ia G e r m a ny N e t he r l a nds L u x e m bo rg U n i t e d K gdom C z e c h R epub lic Source: Eurostat

The percentage of early school leavers (young people aged 18 – 24 with at most lower secondary education and not in further education or training) has remained almost the same for 2000–2006, with only minor occasional alternations. In 2007, this figure has risen to 14.3%, staying a little below EU average (see figure 30). In countries similar to Estonia in terms of background and educational system (e.g. other Baltic and Eastern European countries) and in Nordic countries, the share of early school leavers is lower than in Estonia (with the exception of Latvia).

Figure 30: Early school leavers in EU countries, 2007 45 EU27 average 40

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0 I t a ly M a l ta La t v ia S pa in A u s t r ia I r e l a nd F r ance P o l a nd C yp r us G r eece F i n l a nd E s t o n ia S w ed en S l o v a k ia H u n ga ry B e l g i um B u l ga r ia P o r t ug al S l oven ia G e r m a ny L i t h u an ia D e n m a rk R o m a n ia N e t he r l an ds L uxe m bo u rg C zech R e pu b lic U n i t e d K gd om Source: Eurostat

71 As much as 0.7%61 of all students decided to drop their pursuit of basic education before reaching adulthood during the 2005/2006 and 2006/2007 academic years. In total 3.0% of students fell out of the general education system in 2006/2007, most of them (55%) being students of evening schools and extension courses. The Estonian Government will therefore continue to consider the prevention of students dropping out of school as one of its priorities.

Diminishing numbers of students (due to demographic processes) also has a remarkable affect on the number of students pursuing vocational education. Whereas about 63% (average from the last 4 years) of students who graduate from basic school enter secondary school, the number of those who enter vocational secondary schools will have dropped from the current 5 300 to 3 500 in 2012/2013. At the same time, the Estonian labour market more than ever demands specialists with good vocational skills as well as technicians and qualified workers, who are trained on the basis of vocational secondary education and professional higher education. The preference for general secondary education and academic higher education has caused insufficient numbers for groups in certain fields at vocational schools. About 85 – 90% of state-commissioned places are filled, but the places that are not filled are in fields that are especially desirable and important from an entrepreneurial point of view. For example, the lack of welding equipment operators in vocational education level is an acute problem in the mechanical industry. According to the Federation of Estonian Engineering Industry, the number of engineers graduating from institutions of professional higher education is 4 times less than the actual need for these specialists.

In 2007, only 29.6% of students who graduated from daytime study in basic school continued their education in vocational schools, and among students graduating from daytime study in upper secondary school, the figure was a little less than 10%. The number of upper secondary school students continuing their education in vocational schools has continued to diminish in recent years. Vocational education has been successfully reformed in recent years, and a lot has been achieved. In addition to increasing co-operation between employers and educational institutions, which helps to ensure the quality of both curricula development and practice, one of the most important objectives is to keep popularizing vocational education.

In 2007, there were 68.2 thousand students pursuing higher education in total – 33.5% of them in institutions of professional higher education, 40.9% in bachelor studies and 21.9% master studies62. In 2007, 65% of people aged 20 – 24 were students of tertiary education. Considering the structural labour shortage and sharply decreasing number of young people, it is important to include foreign top specialists into our research and development activity and labour market. In 2004/2005, the number of foreign students formed 1.3% of our total number of students in tertiary education.

For higher education institutions the main problem is the quality of studies, which is occasionally low, and the low number of fields of study at a good international level. So, in the coming years one of Government’s priorities will be to create the conditions necessary for establishing strong universities offering high quality education. By 2011, the aim is to reach the situation where every university in Estonia issues only nationally approved diplomas. Following suggestions by OECD experts in 2007, the system for securing the quality of studies will be updated on the basis of the compulsory and regular external evaluation of curricula and of higher education institutions. A new independent Quality Assurance Agency for Higher Education will also be created.

61 In the academic year of 2005/2006 946 students (their average age being 16,6) dropped out of all forms of general education, in 2006/2007 the number was 849 and average age 16,4. Also the ones, who left their school with promises to continue their studies, but who never got to the next school (who are in the EHIS (Estonian Education Information System) waiting list). 62 Source: Statistics Estonia.

72 The development of a knowledge-based society demands a substantially higher share of science and technology. The EU has set a goal, according to which the number of tertiary graduates in science and technology63 should increase by at least 15% by 2010. In 2005, the EU average (EU27) of 12.9 people per thousand aged 20 – 29 had graduated in science and technology fields of tertiary education, whereas in Estonia the figure was 12.1 (see figure 31). By 2007, this indicator had risen to 13.3 in Estonia (so far there is no data for the EU average).

Figure 31: Number of tertiary graduates in science and technology per 1 000 of population aged 20-29 years in 2005 30 EU27 average

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0 It a ly M a l ta S p a in L a t v ia I r e l a nd F r an ce A u s tr ia P o l a nd C y p r us G r ee ce F i n l a nd E s t o n ia S w ed en P o rt u g al B e l g i um S l o v a k ia B u l ga r ia H u n g a ry S l o v e n ia G e r m a ny L i t h u a n ia D en m a rk R o m a n ia N e t h r l an ds C z e c h R p u b lic U n i t e d K g om Source: Eurostat

In the 2006/2007 academic year, the share of graduates of science and technology fields formed 21.1% of total graduates at higher education level. In recent years, the share of state commissioned places for science and technology areas has been increased (36% of students in state commissioned places studied science and technology in the 2006/2007 academic year), but science and technology fields in general are characterised by a considerable withdrawal from school and insufficient completion of study groups. The situation is similar in most European countries and demonstrates low interest and a lack of enthusiasm among young people to study and work in the field of sciences and technology. As these spheres form the basis of the development of an innovation-based economy, it is important that the willingness and readiness to choose the career of a scientist or engineer already find solid support in basic and secondary schools.

63 Graduates from science and technology, mathematics and computing, engineering and engineering trades, manufacturing and processing, architecture and building fields on the ISCED levels 5-6.

73 Improving the qualifications of working-age adults through lifelong learning and by helping risk groups

In light of Estonia’s aging population, the addition of educated young people to the labour market is not sufficient to adjust to the economic changes and reorganize the economy. There is a mismatch between employers’ demands for qualification and the actual skill levels of the older people of the working-age population. Therefore it is also necessary to update the knowledge and skills of people who already participate in labour market.

European Union has set a goal of increasing the number of participants in lifelong learning to at least 12.5% by 2010. In Estonia the adult participation rate (aged 25 – 64) in lifelong learning has been quite steady, varying between 5.4 – 6.7% in the years 2001 – 2006. In 2007, the number of participants in lifelong learning rose to 7%. In the first half of 2008, this rate has even grown above 10% (1st quarter of 2008 11.6%; 2nd quarter 10.1%). Nevertheless, Estonian indicators are remarkably lower compared with some other EU countries, notably the Nordic countries (their respective figures in 2006 were close to 30% or even higher). The rather modest participation in lifelong learning creates problems mainly for people with lower education levels and for those who belong to risk groups – in other words those who most need supplementary training due to their outdated professional skills and the structural changes in economy (see figure 32).

Figure 32: Participation in lifelong learning (aged 25 – 64) 2001 – 2008 by education level 20 18,9 18 16,7 16

14 12,3 12 11 11,4 11,3 10

% 10 9,1 8,7 9,6 8 7,8

6 4,8 4,8 4,9 4,6 4,7 5,5 3,8 4 1,6 2,1 2 1,1 1,1 1,3 1,5 2,2 0,6 1,2 0 2001 2002 2003 2004 2005 2006 2007 2008 I qtr 2008 II qtr Below upper secondary education Upper secondary education and post-secondary non-tertiary education Tertiary education

Source: Statistics Estonia

At the beginning of 2008, a new initiative in financing adult education was approved – State financing of in-service training in vocational schools for working-age people. Offering free in- service training helps update the knowledge of workers with low levels of education, and this therefore prevents unemployment. The share of adult education has increased in vocational schools. Whereas in 2006 only 13 997 people participated in professional training courses in vocational schools, in 2007 the number was already 20 281. We can also point out positive changes in the number of adult students pursuing formal higher education. In 1993, 22% of the university students were over 25 years old; by 2005 this number had grown to 38%. Even though the main focus in the nearest future will be on updating the qualifications of the working age population via vocational education (with the help of state funds), in the longer run it is also important to include higher education in adult education.

74 According to Statistics Estonia, 56% of enterprises offered their workers in-service training options in 2005, which is 9% more than in 1999. Whether enterprises offer such courses or not depends mainly on the size of the company. In 2005, less than two thirds of enterprises with 10 – 49 workers offered their staff in-service training, but among companies with 50 – 249 workers the number was 84% and almost all (96%) of the companies with more than 250 employees offered their workers further training options. Therefore, the State should channel its financial support resources towards compensating supplementary courses organized in small and medium- sized companies and invest in training to raise the productivity and competence of their workers.

Besides helping the unemployed (mainly those belonging to risk groups), the Estonian Labour Market Board has also found a new focal point – raising the qualification of employed and inactive people. Starting from 2008, they will be partially included in the active labour market measures.

Working aged people often cannot achieve optimal self-realisation due to insufficient skills in the official language. A survey conducted in 2005 demonstrated that 42% of non-Estonians judged that they manage well or very well in the Estonian language64. Estonian language skills have remained stable among adult non-Estonian speakers and grown among young people in recent years. Still their participation rate in lifelong learning (for Estonians 8.2%, for non-Estonians 4.8% in 2007) and unemployment rate (6.9% among non-Estonians in 2007) are worse than for Estonians. But as the employment rate for non-Estonians is equal to that for Estonians, this shows that their higher level of unemployment is caused rather by their greater readiness to search for jobs and to define themselves as unemployed instead of being inactive. However, in order to improve their competitiveness on the labour market, it is important to develop their Estonian language skills in addition to raising their professional competence. In the next few years, we plan to implement Estonian language training, Estonian language schooling integrated with professional training and labour force exchange programs.

According to the labour force survey, 250 700 people or 27.4% of the working-age population (aged 15 – 64) were inactive in 2007; 40.5% of them were men and 59.5% women. With these figures Estonia is placed somewhere near the middle of a comparative list with other EU Member States. Over half (51.2%) of inactive people are young (aged 15 – 24), who are primarily engaged in studies. In the 25 – 49 age group the main reason for being inactive is maternity leave or child care leave (38%), illness, injury or disability (28%) and the obligation of caring for children and other family members (17%). Therefore, the objective in the next few years is to bring disabled people or those who have remained inactive to care for a family member back into the labour market.

The Estonian Government is aiming to increase the employment rate of disabled people and/or people with long-term health problems to 50% in the next 15 years (it was 32.6% in 2006). Their currently low level of employment is partly caused by the prevalence of only medicine-centred rehabilitation services for disabled people. However, there is insufficient availability of home care services, residential care as well as children care and day care services, as proven by the large number of people who stay out of labour market to care for children and other family members. Though the number of discouraged people (7 300 in 2007) and long-term unemployed (2.3% in 2007) have continually decreased in recent years, it is still necessary to invest in solving social problems and offering addiction rehabilitation treatment or psychological counselling if needed before starting to offer them active labour market measures to integrate them into labour market

64 M. Pavelson, I. Proos, I. Pettai, et al. (2006). Integration monitorning 2005. Research report. Tallinn: Integration Foundation, page 20.

75 In the rapidly changing economic climate it is important to react flexibly to the entrepreneurial need for a supplementary labour force. Often their need for employees with specific professional skills is more urgent than our education system or adult supplementary training could possibly satisfy. One of the solutions to this problem is a temporary foreign workforce with the right qualifications. The Estonian Labour Market Board conducted a survey at the beginning of 2008, which revealed that 24% of enterprises that participated in the survey are interested in hiring foreign workers65. Mainly they desire to recruit skilled workers and specialists, primarily from Ukraine and Russia. More than half of the businesses that had already used foreign workers justified their decision because of the lack of appropriate specialists in the Estonian labour market. The importance of migration in Estonian economic growth remained below the EU15 average in 2001 – 2006. Low immigration is caused by a rigid legal system, salaries that are lower than the European average and language difficulties, which reduce the attractiveness of the Estonian labour market for both EU citizens and workers from third countries. In 2006, the limit on immigration to Estonia66 was set at 675 people, of which 87% were filled. In 2007, the limit was 686 people, which was 100% filled. At the beginning of 2008, several amendments to the law were implemented, which substantially facilitate importing qualified foreign workers to Estonia (among other things the immigration limit was raised from 0.05% to 0.1% of the permanent Estonian population)

Active use of the new and attractive opportunities for the free movement of labour inside the EU has characterized the Estonian labour market in recent years. According to World Bank data, in 2004-2005 a little more than 1% of the Estonian working age population went to work in the three countries that opened their labour markets in 2004 (see figure 33). This is a substantially lower percentage than occurred in the other Baltic States, but it doesn’t include Estonians who work in Finland (mainly commuting workers). In ten years time Estonia will have to deal with a massive decrease in young people entering the labour market. For example, Statistics Estonia predicts that in 2015 approximately 25 000 less people (aged 20 – 24) will enter the labour market than in 2008. The 15 – 19 age group is projected to have decreased by 36 000 people in 2015. This is why it is extremely important that people that have gone abroad to gather knowledge and experience return to the Estonian labour market. The Estonian Government plans to implement different measures to spread information and share knowledge to facilitate and promote their return.

65 1000 companies with more than 20 employees participated in the survey all over Estonia. 66 0.05% of Estonia’s permanent population. Starting from 14.06.2008 0.1% of Estonia’s permanent population.

76 Figure 33: Outflow of labour from EU8, May 2004 – Dec 2005 (% of working age population of the country of origin)

4

United Kingdom Ireland Sweden

3

2

1

0 L a t v ia P o l a nd E s t o n ia C z e ch H u n g a ry S l o v a k ia S l o v e n ia R e p ub l ic L i t h u a n ia Source: World Bank EU8 Quarterly Economic Report PART II: Special Topic September 2007

To summarize the abovementioned, the priorities of the Estonian Government for the coming years are to raise people's qualifications and their sense of security by making the education system more effective, by intensifying lifelong learning, by focusing on preventing withdrawals from school, by promoting science and technology fields of study to help ensure competitiveness and by helping risk groups to enter the labour market. Besides ameliorating people’s skills it is also important to encourage workers to return to Estonia.

Sub-objective 1: Ensure better conformity between the labour market and education

Explanation of the Projected Indicator indicator, including the Current level level 2011 source E mployment rate among people aged 25 – 64 with a Source: Statistics Estonia 89.4% (2006) 89.9% higher education. Percentage of vocational People employed half a year school graduates entering the after graduation from labour market vocational schools as a 72% (2007) 75% percentage of all graduates of the same year. Source: Estonian Ministry of Education and Research Percentage of young (aged 15 Young people (15 – 24) – 24) unemployed among all unemployed as a percentage of population in the same age- all people aged 15 – 24. 3.8% (2007) 3.5% group Source: Statistics Estonia Percentage of people aged Young people (aged 20 – 24) 20 – 24 with upper secondary who have completed at least 81.1 (2007) 85% education qualification upper secondary education. (general education or Source: Statistics Estonia vocational secondary education).

77 Number of non-Estonian The percentage of non- speaking students in the Estonian speakers studying in 21.1% (2007) 26% Estonian-speaking education Estonian-speaking schools and system language immersion programmes as a percentage of all non-Estonian students of basic education. Source: Estonian Ministry of Education and Research

In the summer of 2007, the Estonian Government approved an action plan for 2006 – 2009 within the Estonian Strategy for Higher Education 2006 – 2015, which aims for strengthen the international competitiveness of Estonian higher education sector. In 2007, a support framework was created for educational institutions to reform curricula to bring them in line with learning outcomes and qualification frameworks. Curricula development will also be continued in the coming years. Another important change is the forthcoming funding system of three-year result- based contracts for higher education institutions.

Universities have started to offer master's curricula in English as well as to co-operate with foreign universities in order to start using common curricula. The Estonian Ministry of Education and Research supports the establishment of international master’s curricula in the period 2008 – 2011 to promote Estonian higher education, make it more attractive and competitive in the world and to support provision of programs in English. In the coming years it is planned to continually invest in measures that encourage more foreign master’s students to continue their studies in Estonia and that offer them working opportunities in the areas of labour shortage.

The past few years have also seen the creation of the APEL system for accrediting prior experiential learning, which initially started to operate at the higher education level. In October 2006, amendments to the law concerning universities and professional higher education institutions were approved that stipulated implementing APEL according to uniform principles. This change already helps specialists in the workforce to more easily commence supplementary studies. However, this system needs to be rooted in the vocational education level as well.

In 2006, the OECD conducted an international comparative PISA survey in 57 countries. Its results indicted the high level of Estonian students – in science Estonian students achieved 5th place, 13th in reading and 14th in maths. However, it is important to update the national curriculum for basic and secondary school in order to remain at this high level and to update general education – this has been planned for 2009. Work on the new curriculum started in 2005. Now a new project for the national curriculum for basic and secondary school has been prepared, as well as several versions of course descriptions for subjects. The new curricula aim to create systematic connections between subjects, to increase freedom of choice for students and to focus more attention to topics related to entrepreneurship.

The Government will continue to invest in broadening the reach of e-learning by developing learning software, updating study methods, complementing hardware and improving teacher qualification in the use of e-learning. A wider use of e-learning will develop young people's knowledge of information and communication technologies, improve their competitiveness and also enable flexible participation in this field for those who lack access via the traditional methods (for example home-schooled children).

In the 2007/2008 academic year, we also embarked on the gradual transition to education in the Estonian language in non-Estonian speaking state and municipal secondary schools (grades 10 –

78 12). The goal is to reach 60% instruction in Estonian at the secondary school level in non- Estonian speaking schools by 2011. To ensure a smooth transition we are focusing on training the teachers and on developing a motivation system for teachers as well as formulating curricula and instruction/study materials.

Concerning the vocational education system, we have finished optimizing the network of vocational education institutions over the past 7 years (31 institutions instead of the former 62, in addition to which there are another 3 municipal institutions). In 2006, supplementary measures were implemented to strengthen vocational education – its share of general expenditure on education was increased and new curriculum group coefficients were brought into use. The basic cost of one study place was increased more quickly than in general education. In 2007, the relationship between the average cost of a study place in vocational education and general education was 1.28 in favour of vocational education (in 2005 they were equal). The aim is to raise this figure to 1.5 in favour of vocational education.

Measures

Formulate studies and state-commissioned education in order to satisfy the needs of the labour market: 1. Prepare highly skilled specialists by supporting Estonian master’s students in their studies abroad (2010 – 2013). 2. Support education institutions to enable international student on master and PhD level to study in Estonia; encourage them to stay longer in Estonia and to forge ties with the Estonian labour market (especially in research and development work) after they finish their studies (2008 – 2013). 3. Popularise vocational education among young people through youth skills competitions (2008 – 2013). 4. Formulate and implement a system for analysing and forecasting in order to improve the ability to consider changes in the labour market when formulating the volume and structure of specialist fields in higher, vocational and adult education (2009-2010).

Curricula development: 5. Develop curricula in higher education by supporting internal quality management and creating and supporting a network of consultants for curricular development (2008 – 2011). 6. Develop the vocational education curricula so they correspond better with the needs in the labour market by increasing employer involvement (2008 – 2013) and by establishing APEL (VÕTA) – the system for accrediting prior experiential learning – in the vocational education system (2010). 7. Update state curricula at basic and secondary school levels67 to increase the freedom of choice for secondary school students and the relative importance of sciences and entrepreneurship education (2007 – 2011). 8. Switching gradually to Estonian instruction in non-Estonian speaking schools at upper secondary school level and promoting the supplementary study of Estonian in language immersion programs (2008 – 2013).

Capacity development of educational institutions: 9. Update the higher education financing system by the transfer to 3-year result-based contracts that define the institution’s more concrete tasks and development goals as well

67 Ordering an expert evaluation of the primary task of the curriculum, monitoring the implementation of curricula, preparing teachers and school teams through supplementary training for the implementation of the curricula.

79 as the number of graduates, and also clearly define the responsibility of the higher education institution in strategic and quality-related questions (2008 – 2009). 10. Strengthen the institutional capacity of higher education institutions, by relicensing of institutions, modernising the accreditation system in higher education and changing the principles for the national recognition of diplomas (2008 – 2012). 11. Formulate and implement an accreditation system for vocational education institutions and tie it to the system of updated education licenses (2008 – 2013). 12. Conduct a profound analysis of the effectiveness of learning and financial efficiency including factors of influence in general education institutions (basic schools, secondary schools) and in vocational education institutions in order to rearrange the general education institution network (2008 – 2011). 13. Analyse the effects of separating the upper secondary school level from the basic school level (2010). 14. Support the professional development of teachers and vocational teachers through supplementary training and updated qualification requirements; apply a special allowance to young teachers graduating from teacher training programmes and going to work in rural areas and smaller towns (2008 – 2013).

Improve infrastructure and e-learning: 15. Increase funds for updating the infrastructure (classrooms, learning equipment, dormitories) of vocational education institutions (2008 – 2013). 16. Increase funds for updating the infrastructure (classrooms, learning equipment) of higher education institutions (2008 – 2013). 17. Increasingly develop learning software by promoting e-learning, updating teacher knowledge, acquiring modern hardware and supporting existing regional e-learning support centres (2008 – 2013). Ensure better access to education: 18. Refine the principles of the study support system at the higher education level to ameliorate access to higher education (2008-2010). 19. Reorganise the study support system in vocational institutions, so it is based on actual needs (2010).

Sub-objective 2: Popularize sciences and technology

Explanation of the Projected level Indicator indicator, including the Current level 2011 source P ercentage of students N umber of graduates from graduating from science and technology 21.1% (2007) 22.5% sciences and technology fields at the higher fields at the higher education level (ISCED 5-6) education level among total graduates.

Source: Estonian Ministry of Education and Research Number of tertiary Number of graduates from graduates in science and science and technology 13.3 (2007) 15.0 technology per 1 000 of fields at the higher population aged 20-29 education level (ISCED 5-6) years per 1000 young people (aged 20 – 29).

80 Source: Estonian Ministry of Education and Research Number of secondary Number of secondary Mapping the Projected level will be schools that have schools that have at least study fields available from developed separate 50% science and technology November study fields for natural subjects among freely sciences, exact sciences, chosen subjects in their technical science and/or curricula. technology. Source: Estonian Ministry of Education and Research

To encourage student research work, the Students’ Scientific Society (Õpilaste Teaduslik Ühing, ÕTÜ) was reactivated, and the Estonian Student Research Competition is held every year. The Gifted and Talented Development Centre at Tartu University has longstanding traditions which have also helped to raise interest among young people. Tallinn University of Technology has also established its own Technology School, and Tallinn University its Student Academy. The AHHAA Scientific Centre and the Technical and Scientific Centre of Tallinn organise regular interactive exhibitions and other events for young people as well as for wider target groups. The Science Bus project that the Estonian Physics Society is managing, has visited many Estonian schools and has even found support in Europe as well. Professors and students of Tartu University have also organised theatrical performances exploring physics and chemistry themes, which have become immensely popular. There is also a system of Olympiads to develop children who are talented in the natural and exact sciences, and opportunities to participate in research competitions or other national or international competitions.

At the same time it should be said that the popularisation of natural and exact sciences and technology has so far progressed mostly on a project basis (e.g. the Environmental Investment Centre’s environmental awareness programme has supported different projects in the field of environmental education). Therefore, the Government is now aiming to deal systematically with the promotion of formal studies in the science and technology field, to raise the relative importance of the field, diversify methods for studying and organise special-purpose scholarships.

Measures

1. Popularise natural and exact sciences subjects in formal studies by raising the relative importance of science subjects in the curriculum by offering corresponding subjects as optional subjects in secondary and vocational schools, by implementing new learning methods68 and diversifying the study environment69 and by developing curricula for specialist technical and science hobby schools and acquiring equipment (2009 – 2013). 2. Create educational material for the natural and exact sciences field in co-operation with scientists and teachers and use learning materials based on information and communication technology in classes (2009 – 2013) 3. Formulating principles for supporting natural and exact sciences subjects at all educational levels in order to raise interest among young people and to support these study fields (2008). 4. Popularise science in the community through science centres, museums and scientific societies; competitions and campaigns; supporting the dissemination of science and technology related knowledge via the internet and news and science and technology related TV shows and articles in the media (2009 – 2013).

68 For example discovery learning, problem and context based study. 69 Classes in the nature, in support centres, scientific institutions and enterprises.

81 Sub-objective 3: Reducing the number of early school leavers

Explanation of the indicator, Projected level Indicator Current level including the source 2011 E arly school leavers S hare of young people aged 18 – 24 with a basic education or less and not 14.3% (2007) 10% in further education or training

Source: Statistics Estonian Share of drop-outs Source: Estonian Ministry of 1.59% (2006) 1.2% in grades 7 – 9 in Education and Research basic school Share of drop-outs Source: Estonian Ministry of 1.36% (2006) 1.1% in the first year of Education and Research upper secondary school (grade 10).

In recent years the Government has applied several measures to reduce the number of school drop-outs, which mainly alleviate dropping out of school for material reasons. We have implemented a boarding school programme for children from struggling families, where the domestic situation does not support the child’s studies. The state allocates transport support and financial aid for the acquisition of study aids and textbooks. Starting from 1 January 2006, a free school lunch is ensured to students from grade 1 to grade 9. From 1st September of the same year, the state has guaranteed at least one hot meal per day for students in vocational secondary schools. In the nearest future, the aim is to implement educational measures to help students in danger of dropping out to continue their studies (support systems, such as pedagogic- psychological counselling, more efficient and increased numbers of assistant teachers). There are continuously numerous challenges in counselling children with learning difficulties and special educational needs as it does not always reach every student in need.

Measures

1. Support the implementation of a national curriculum in pre-school institutions and organise the teaching of Estonian as a foreign language in order to prepare children better for school (2008 – 2011) 2. Relate hobby education to formal education; support individual and group study among children with special educational needs (2009 – 2011) 3. Formulate and establish an assistant teacher system (2010 – 2011) 4. Develop counselling networks (study aid centres, counselling commissions) and an integrated counselling model (local pedagogical-psychological and career counselling systems) (2008 – 2011) 5. Organise project competitions and support youth associations70 to recognize youth work and increase their motivation to learn as well as improve their study results in the formal education system (2008 – 2013).

70 Allowances for activities of hobby schools and hobby groups, open youth centers, youth associations, youth councils and camps, student councils.

82 Sub-objective 4: Encourage lifelong learning

Explanation of the Projected Indicator indicator, including Current level level 2011 the source P articipation in lifelong learning among adults (aged 25 – 64) with Source: Statistics 1.6% (2007) 2.5% an ISCED 0-2 education level. Estonia Participation in lifelong learning among adults (aged 25 – 64) with Source: Statistics 5.5% (2007) 8% an ISCED 3-4 education level. Estonia Share of those who have received Percentage of the career counselling from the clients who have Estonian Labour Market Board received career 20.6% (2007) 40% within one year.71 counselling by means of the Estonian Labour Market Board, out of all the clients of institution. Source: Estonian Labour Market Board

At the beginning of 2008, the Estonian Government approved new principles for financing adult education. One of the important new initiatives is creating opportunities for working people to attend in-service training at vocational education institutions free of charge. Also the means for the in-service training and re-education of unemployed people has increased as well as the volume of compensation for entrepreneurs to train their staff.

An important step on the way to integrating different career counselling systems that have thus far functioned separately, has been the co-operation contract between the Estonian Ministry of Education and Research and the Estonian Ministry of Social Affairs signed in March 2008. This ensures an integrated career counselling system for young people as well as adults, which functions methodically according to uniform principles. The Innove Foundation will be responsible for the methodical development of this integrated system, training bidders and the constant evaluation and analysis of the service. An integrated career service will also help to distribute information on labour market needs to basic and secondary school levels of the general education system.

The Estonian Labour Market Board, in addition to placing people in employment, has also turned its attention to preventing unemployment. One significant change is that the Estonian Labour Market Board widened its career counselling service in 2008 to include not only unemployed people, but employed and inactive people as well. This option did not exist before, and the European Committee for Social Rights (European Social Charter) referred to this flaw in its conclusions in 2007. In addition to broadening access to career counselling, there is also a plan to offer some of active labour market measures to employed people from 2008 in order to maintain competitiveness and prevent unemployment.

71 Remark: 20.6% is the percentage of the unemployed people registered in the Estonian Labour Market Board, who have received career counselling out of all the registered unemployed. There is a difference between this and the indicator of 2011, because the new indicator counts for all the clients of Estonian Labour Market Board and their numbers will grow due to new European Social Fund programme period, which means that not only the registered unemployed won’t be taken into account in 2011 but job-seekers and employed persons as well.

83 Measures

1. Offer working adults free in-service training and retraining in vocational education institutions, professional higher education institutions and informal education centres (2008 – 2011). 2. Include employed people in risk groups (elderly, disabled people, people who have received the notice of redundancy etc) in the target group benefiting from labour market training normally only offered to unemployed people (2008 – 2009). 3. Popularise lifelong learning and inform the adult population of study opportunities (2008 – 2011). 4. Enlarge the target group of the people who can receive career counselling service from the Estonian Labour Market Board from unemployed persons to employed people and members of inactive population (2008 – 2009). 5. Further develop an integrated career counselling service in order to create a standard methodology, a training system for counsellors and proven quality of service (2008 – 2013). 6. Update the qualification system to better reflect labour market needs and relate this to the 8-level comparative European Qualification Framework (2008 – 2013). 7. Examine competence, skill levels and the needs of the adult population (2009 – 2013).

Sub-objective 5: Bring risk groups to the labour market

Explanation of the indicator, Current Projected level Indicator including the source level 2011 E mployment rate of Em ployed people with long-term people (aged 15 – 64) health problems and/or with long-term health disabilities as a percentage of the 32.6% (2006) 36% problems and/or working-age population (15-64) disabilities. of the target group. Source: Statistics Estonia Employment rate of Employed elderly people (aged elderly people (aged 55 – 64) as a percentage of all 59.5% (2007) 60% 55 – 64) people in their age group. Source: Statistics Estonia Long-term Long-term unemployed unemployment rate (unemployed for more than 12 months) as a percentage of the 2.3% (2007) 1.9% labour force (aged 15 – 74). Source: Statistics Estonia Share of registered People who have been directed to unemployed active measures within the last participating in active year (except those summoned to labour market labour market training because of 26.9% (2007) 35% measures an overlap with those sent to career counselling services and labour market training) as a percentage of all registered unemployed72. Source: Estonian Labour Market Board

72 Due to a technical problem one person can be represented several times in this indicator, so actually the real indicator could be lower by a few percentage points.

84 Employment rate Employed non-Estonians in the among non- working age (15-64) population as 69.0% (2007) 70.5% Estonians (aged 15 – a percentage of the target group. 64) Source: Statistics Estonia

At the beginning of 2006, a new law – The Labour Market Services and Benefits Act – took effect, which resulted in the reform of active labour market measures. As a result of this amendment, six new labour market services were added to the existing active labour market measures, four of which were directed primarily at the disabled unemployed. The active job- search requirement and legalisation of the individual job-search action plan resulted in an important increase in quality. In 2007, the focus was making the Estonian Labour Market Board more known among the inactive population. Also the European Social Fund programme “Increasing the Supply of Qualified Labour Force” was prepared to extend the existing labour market services from the beginning of 2008 to those inactive or employed people in need.

An amendment to the Social Benefits for Disabled Persons Act was prepared in 2006. In December 2007, the Riigikogu (Estonian Parliament) approved the amendment to the law, according to which the principles for paying allowances to working-aged disabled persons were changed. According to the amendment, starting from October 2008, the size of the allowance for a working-aged disabled person will depend not on his/her degree of disability, but on his/her extra costs. A new type of allowance – a working allowance – was also created, which will be paid to employed disabled persons, who are at least 16 years old and who have extra costs related to their jobs conditioned by their disabilities (for example transport costs, greater necessity for an assistant or support person etc).

Measures

1. Broaden the range of active labour market measures for inactive people and employed disabled persons (2008 – 2009). 2. Develop measures to support national labour market services (such as social rehabilitation, career-related psychological counselling, job clubs) and implement them for risk groups (e.g. young people, long-term unemployed etc) of the unemployed and job-seekers (2008 – 2009). 3. Formulate a mechanism to compensate for additional work-related expenditure (including transport) and implement it for disabled people (working allowance) (2006 – 2008). 4. Create a disability-related information and technical aid centre; create and develop counselling centres for people with special needs and those close to them (2007 – 2009). 5. Reform the rehabilitation system for disabled people to encourage employment (2008 – 2009). 6. Develop an integrated care system, creating a solid network of nursing homes and formulating social services, including day centres, child day care and nursing care, in order to enable working-age people with a care giving responsibility to enter the labour market (2007 – 2009). 7. Increase the competitiveness of non-Estonians living in Estonia by ameliorating their language skills (Estonian language lessons, Estonian language lessons integrated within vocational in-service training and re-education, labour force exchange programs etc) (2008 – 2010).

85 8. Conduct a political analysis to prepare to reform the system of social, employment and healthcare73 services, and allowances and benefits that encourage employment (2009).

Sub-objective 6: Simplify the use of highly qualified foreign labour and invite Estonians working abroad to return

In 2006 and 2007, a collection of amendments to the law was prepared aimed at simplifying the procedures for foreigners (non-EU citizens) working in Estonia. These amendments shortened procedural deadlines and reduced bureaucratic obstacles for registering a foreign national for short-term work in Estonia, and for applying for the residence permit necessary for long-term employment. The simplified rules now make hiring foreign labour considerably faster and more flexible and reduce the administrative burden in enterprises while hiring employees. Foreign labour is encouraged especially in the field of qualified labour, and salary norms have been established to ensure this. The amendments to the law were approved by Parliament in March 2008.

Since the beginning of 2007, a counsellor of the office of the Minister for Population and Ethnic Affairs now officially acts to liaise between the Estonian Government and organisations of Estonians abroad, exchanging information and offering the necessary information for their return to Estonia. However, this initiative is mainly aimed at people of Estonian origin who are living permanently abroad, not employees who have gone to work abroad in recent years. Therefore, in the coming years it is important to focus more on inviting those people who have gone to work abroad to return and to facilitate their return, as well as to simplify the integration of new immigrants.

Measures

1. Simplify the procedures related to foreign labour force (2007 – 2008). 2. Facilitate the integration of new immigrants by formulating and implementing language training, societal integration programmes and support person services (2008 – 2010). 3. Disseminate information about opportunities for employment in the Estonian labour market to encourage the return of Estonian workers abroad (2008 – 2011).

73 Mapping out employment support measures implemented in the area of the responsibility of the Ministry of Social Affairs. Both active and passive labour market measures will be included in the analysis, as well as rehabilitation services, social security measures, health insurance etc

86 OBJECTIVE 9: Increase the flexibility of the labour market and improve the quality of working life

Explanation of the Indicator indicator, including the Current level Projected level 2011 source E stonia’s position among other EU Source: World Bank Among the 10 most countries comparative survey 22nd place74 flexible countries in the according to the “Doing Business 2009” (2008) EU index of employment rigidity Number of lost working days due Source: Labour 20 (2007) 19 to on-the-job Inspectorate accidents per 100 employees.

Rigidity of labour legislation and combining work- and family life

There have been several reforms in the field of labour market security (implementing unemployment insurance benefits from 2002; adding six new active labour market measures and updating the principles of providing them in 2006) and the sense of security has increased among working-age people. However, as far as flexibility of the labour market is concerned, Estonia is still characterized by rather rigid and outdated labour legislation and very low use of flexible forms of work (e.g. part-time job, telework). The biggest problems in the current labour relation regulations concern the termination of employment and high redundancy costs for employers, contradictions between different acts of law, limited options for agreement in work relations between employers and employees and partly unnecessary administrative burden (146.7 million EEK in 2006). The International Monetary Fund highlighted the problem of rigidity in Estonian labour legislation compared to other countries in its mission report in 2007, and the European Commission made similar conclusions during the process of evaluating the Action Plan for Growth and Jobs. The OECD has also drawn attention to the problem.

International comparisons (Global Competitiveness Report by the World Economic Forum75 and Doing Business by the World Bank76) have considered Estonia’s main weakness in the context of its rigid labour legislation to be the high costs for entrepreneurs when firing workers and the non-wage labour costs. At the same time, state benefits for people terminating a working relation are low in Estonia. Estonia’s unemployment trap indicates this in comparison to the EU15 average. However, it is important to point out that against the background of international comparisons, several EU directives (for example those dealing with work hours and overtime) also partly influence the rigidity of the labour market in EU Member States. For example, the Doing Business 2009 by the World Bank places Denmark, a flagship of flexible labour markets, in 10th position; United Kingdom in 28th place and Ireland in 38th place. Among EU Member States, Estonia is one of the countries with high rigidity of labour market (see figure 34).

74 Among 25 EU Member States Estonia is in 22nd position. There is no data available for Malta and Cyprus. 75 Global Competitiveness Report 2007–2008 http://www.gcr.weforum.org/ 76 Doing Business 2009 http://www.doingbusiness.org/

87 Figure 34: Rigidity of Employment Index in the EU77 70

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0 It a ly L a t v ia S p a in I r e l a nd A u s tr ia F r an ce P o l a nd G r ee ce F i n l a nd E s t o n ia S w ed en B e l g i um B u l ga r ia H u n g a ry S l o v a k ia P o rt u g al S l o v e n ia G e r m a ny D en m a rk L i t h u a n ia R o m a n ia N e t h r l an ds L u x e m b o rg C z e c h R p u b lic U n i t e d K g om Source: World Bank survey “Doing Business 2009”

In 2007 8.2% of employed people (aged 15 – 74) were working part-time. This figure has increased in the past few years, but is still considerably lower than the EU average (EU27 in 2006 was 18.1%). The reasons for choosing part-time work can be divided into two categories: voluntary decision or personal reasons (studies; illness, injury or disability; taking care of children or adult family members; no desire to work full time) and employer's decision or the absence of the option to work full time (the person has not found a full-time job or there is lack of work or orders). Considering this division (see figure 35), the number of people working part-time at their own free will or for personal reasons is increasing and instances of an absence of options or where the employer demands working part-time are decreasing. The number of underemployed78 people has continued to decrease in the 15 – 74 age group (e.g. 2.2% in 2004; 1.1% in 2007). The Estonian work culture and insufficient income from part-time work are also influencing the instances of part-time work.

Other atypical forms of work are also poorly spread in Estonia. The Estonian labour force survey in 2007 revealed that the rate of teleworking79 among employees was 4.6%; 97.7% of employed people have permanent work and only 2.3% have temporary jobs. Just 5.3% of employed people do home work occasionally or often.

77 The figure does not give information about Malta and Cyprus. 78 Underemployed – part-time workers who would like to work more and who are ready to accept supplementary work right away (within two weeks). Source: Statistics Estonia 79 Teleworking – working outside the usual working space of the employer (whether at home or in a distant office), but being in contact with the employer at the same time through modern info-technological and telecommunicational means. Source: Estonian Statistical Office

88 In order to increase the share of flexible work forms we have to invest more in informing both employees and employers. The European Commission has highlighted this need during the evaluation of the Action Plan for Growth and Jobs. While promoting flexible work forms it is important to focus on people that find it impossible to reconcile normal working hours and a full-time job with their other obligations (e.g. disabled people, parents of small children, elderly people etc). Flexible work forms enable them to enter the labour market more successfully or to remain there. At the same time, it is important to ensure that the number of part-time workers does not increase in place of full-time employees, which would raise the number of underemployed people.

Figure 35: Main reasons for working part-time in Estonia 2001-2007

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Studies Caring for children or adults Other personal reasons (illness, injury or disability) Caused by employer (not enough orders or work) Has not found full-time employment Does not wish to work full-time

Source: Statistics Estonia, survey on Estonian labour force

Promoting flexible work forms is an important factor in helping to make working life and family life more compatible. In Estonia, the employment rate among women is above the average compared with other EU Member States (Estonia 65.7% in 2007; EU27 58.3% in 2007). Women mainly work full-time in Estonia (only 12.1% of women aged 15 – 74 worked part-time in 2007). At the same time, the pace of life and opportunities of returning to worklife is problematic for women with small children. It is not just the low use of flexible work forms that hinder this, but also insufficient child-care options etc. There is a lack of kindergarten places (see table 3) and alternative child-care service providers. In January 2008, there were queues for kindergarten places in 40% of all local municipalities80. Therefore, it is continuously important to increase the capacity of child-care services in order to make it easier for women to return to the labour market if they wish to work either part-time or full-time.

80 Ainsaar, M.; Soo, K. (2008) "Support from local municipalities to families with children in 2007", University of Tartu.

89 Table 3: The percentage of children in children’s day-care institutions by age group, 2007. Age of children 1 2 3 4 5 6 7 Overall 14 267 13 893 12 934 12 902 12 504 12 909 12 029 number of children Number of 1 560 8 330 11 840 11 795 11 665 11 245 2 460 children in children’s day-care institutions Percentage 10,9 60,0 91,5 91,4 93,3 87,1 20,5 Source: Statistics Estonia

The harmful effects of the working environment on health

The influence of the working environment on people’s health, and thereby also on productivity can be deduced from a fact that about 2/3 of the Estonian population spend the largest part of their day in a work environment, in contact with different physical, chemical and psychosocial risk factors. Inadequacy of the working environment is the main cause of accidents at work, occupational diseases and work-related illnesses. In 2007, there were 74 cases of occupational diseases registered at the Labour Inspectorate, which is 43 less than in 2006. According to different surveys the standard of the Estonian work environment is still considerably below the EU average. In 2007, the number of accidents at work resulting in death was 3.2 per 100 000 employees. Most of the severe accidents at work happened in the building sector, where the number of accidents at work has been increasing by 20% a year for the past 3 years.

Figure 36: The number of accidents at work resulting in death per 100 000 employees in Estonia and the EU1581

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81 The comparison with the EU15 is due to technical reasons: Eurostat gives information on accidents at work after a 2-year delay.

90 According to a survey of European working conditions conducted in 2005, about 60% of Estonian employees believe that their job endangers their health, and about 40% of workers consider their job dangerous. In the EU15 the corresponding indicators were 30% and 25%. Occupational health and safety directly influences productivity – for example, employees who have contact with psychosocial risk factors have a 25% likelihood of staying home with health problems, whereas the respective number for employees not in contact with such risk factors is only 7%.

The fact that employers are poorly motivated to improve the working environment continues to be a problem. The main reason for this is the lack of occupational health and safety insurance. This type of insurance would motivate both employers and employees to register occupational diseases and accidents at work more and therefore they’d be motivated to invest more in making the work environment safer in order to reduce the payments. In addition to surveillance by the Labour Inspectorate, this same institution should have a larger role in informing employers and raising their awareness in order to reduce the number of accidents at work and to improve working conditions.

Figure 37: Employee evaluations of the effects of their work on their health, 2005 Greece Poland Latvia Slovenia Estonia Sweden Romania Lithuania Slovakia Malta Bulgaria Hungary Denmark Cyprus Finland Portugal Italy Czech Republic Spain EU27 Luxembourg Austria Belgium France Ireland Netherlands Germany United Kingdom

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Source: Fourth European Working Conditions Survey 2005

As a separate target group the attention should be turned to raise the awareness of the self- employed. The increase of accidents at work of self-employed is caused by the increase of their number and by the enlargement of their activities into fields where the working environment is dangerous (such as building, carpentry, forestry, transport). According to EU statistics, accidents at work resulting in death occur 2.5 times more often among the self-employed than among employees working on contracts. Based on the indirect estimations of the Labour Inspectorate, the self-employed are quite negligent when it comes to matters of occupational safety – this is caused both by ignorance and by a lack of motivation to spend money ensuring their safety. At the same time, ignoring occupational health and safety regulations increases the expenditures on medical insurance and social security, and in general it is costly for the community.

91 Sub-objective 1: Increase the secure flexibility and transparency of labour relations

Explanation of the indicator, Current Projected level Indicator including the source level 2011 S hare of part-time S hare of part-time employed workers (aged 15 – 74) among all employed people (aged among all employed 15 – 74) 8.2% 8.5% people Source: Statistics Estonia (2007) Share of children (from 3- years old to school age) 89% (2007) 90% covered with Source: Statistics Estonia kindergarten places82.

In recent years, Estonia has been actively preparing a new Employment Contracts Act, which aims to make the labour market more flexible and maintain the sense of security among employees. At the beginning of 2008, the Ministry of Social Affairs presented draft legislation to the various social partners, which was followed by negotiations between labour market participants and government representatives. On 23 April 2008, the government representatives and social partners approved the draft of the new Employment Contracts Act in regard to all the principal issues. In the session on 12 June 2008, the Estonian Government approved the draft and handed it over to Parliament.

In the context of a new Employment Contract Act it is also important to update current public service legislation in order to increase flexibility and adaptability of the public sector to face with changes. Changing the Public Service Act in conformity with the principles of the new Employment Contract Act helps to minimise unequal treatment of employees in public and private sector (eg more favourable redundancy provisions in the public sector) and further encourage the mobility between sectors.

At the beginning of 2007, a new amendment to the Social Welfare Act was put into effect, which stipulated the requirements for child care services and babysitters, and a regulation was set forth for issuing licenses.

Measures

1. Simplify the regulations for individual work relations and update them as part of the civil legislation, legalise rental work and change the conditions of temporary work contracts to make them more employee-friendly by adopting the new Employment Contracts Act (2007 – 2010). 2. Disseminate information among employers and contractors about the new Employment Contracts Act coming into effect in 2010 (2009 – 2010). 3. Adjust the Public Service Act to the principles of the new Employment Contracts Act (2008 – 2010). 4. Make active labour market measures and unemployment benefits more efficient by amalgamating the Estonian Labour Market Board and the Estonian Unemployment Insurance Fund (2008 – 2011).

82 In 2007 – 2008 this indicator includes only children who go to kindergarten; starting from 2009 it will also include children covered by child care services, as the information systems have been improved.

92 5. Increase unemployment benefits rates (unemployment insurance benefit and unemployment allowance) and broaden the range of beneficiaries through new Employment Contracts Act in order to increase the security of the labour market (2010). 6. Raise the awareness of different options for arranging flexible work relations (telework, rental work, part-time work etc) and implement the Employees’ Representatives Act in a more efficient manner (2007 – 2008). 7. Formulate further principles to help reconcile work and family life (2009). 8. Create supplementary kindergarten places to help reconcile work and family life (2008 – 2011). 9. Pay a per-capita allowance to parents of kindergarten children to finance childcare services and pre-primary education by local municipalities that do not guarantee kindergarten places (2009).

Sub-objective 2: Ensure a working environment that supports the health of employees

Explanation of the Projected level Indicator indicator, including the Current level 2011 source N umber of accidents at N umber of accidents at work resulting in work resulting in 4.5 (2003-2007 3.9 death per 100,000 death per 100,000 employees average84) workers (or engaged people83) Source: Labour Inspectorate

In 2007, amendments to the law concerning employee health care and job safety came into effect. To ensure efficient accident prevention, employers are now obliged to register all “potential accidents at work” (breakdowns and emergency situations that could have led to an accident at work). The definition of an accident at work was also specified, and the organisation of safety and accountability was specified for situations where employees of several employers work at the same workplace. In addition to amendments to the law, the supervision methodology was analyzed thoroughly, and as a pilot project implemented rapid inspections of the work environment with the aim of ensuring that more workplaces benefit from supervision.

In 2007, the structure and tasks of the Labour Inspectorate were analyzed. This resulted in a transition from the previous county-based structure to a regional structure in February 2008 – instead of 14 former county inspectorates there are now 4 regional inspectorates. Restructuring the inspectorate enabled more efficient use of resources and more effective supervision.

Measures

1. Create occupational health and safety insurance to reduce the number of accidents at work (2008 – 2011). 2. Raise the awareness of health and safety in the work environment among employers and the self-employed (2007 – 2008). 3. Develop and implement a training programme and uniform methodology to train work environment specialists and work environment representatives85 (2007 – 2013)

83 A person who 1) works at the time of study and is paid for it either as a contract-based employee, entrepreneur or free-lance worker 2) works in a family business or his/her own farm without getting paid 3) doesn’t work temporarily. 84 The level of the indicator 3.2 in 2007 was exceptionally low. To illustrate the situation in a more adequate manner, a 5-year average (2003-2007) has been taken as a basis.

93 4. Increase the management capacity of the Labour Inspectorate by developing a competence model for labour inspectors and by conducting in-service training (2008 – 2011). 5. Conduct a comparative international analysis concerning occupational health care and safety legislation and the resulting necessary regulations in order to update and optimize work environment regulations (2008 – 2011)86.

85 There is a plan to offer full-time training (125 hours) for work environment specialists to 800 new work environment specialists starting from 2009 as well as specific supplementary training (60 hours) in economics to up to 50% of existing work environment specialists. 86 Update the current regulation by conducting a legal analysis and analysis of the effects of the laws concerning occupational health and safety as well as regulations based on them. The current work environment regulations will be comparatively evaluated and potential for simplifying will be mapped out. Potential solutions for creating a safe and healthy work environment will be clarified.

94 APPENDICES

Appendix 1: The composition of the working group co-ordinating the Estonian Action Plan for Growth and Jobs 2008 – 2011

Head of the working group

Keit Kasemets - Director of the Strategy Office at the State Chancellery

Members of the working group

Aare Järvan - Advisor to the Prime Minister Kairit Peterson - Deputy director of the Strategy Office at the State Chancellery Gert Antsu - Director for EU Affairs at the State Chancellery Ülo Kaasik - Director of the Economics Department, Bank of Estonia Heli Aru - Counsellor for Education and Labour Market, Ministry of Education and Research Indrek Reimand - Head of the Research Policy Department, Ministry of Education and Research Urmas Volens - Deputy chancellor of the Legal Policy Department, Estonian Ministry of Justice Allan Gromov - Deputy Secretary General for International Cooperation, Ministry of the Environment Ahti Kuningas - Deputy Secretary General of Economic Development, Ministry of Economic Affairs and Communications Andrus Säälik - Head of the Economic Analysis Department, Ministry of Finance Ivar Sikk Deputy Secretary General of the State Budget and Governance Policy Department, Ministry of Finance Keit Fomotškin - Counsellor and head of the office of the Minister for Population and Ethnic Affairs, Urve Palo Eedi Sepp - Regional Policy Bureau Adviser, Regional Development Department, Ministry of the Interior Janno Järve - Deputy Secretary General on Labour Policy, Ministry of Social Affairs Kaja Tael - Undersecretary of European Union Affairs, Ministry of Foreign Affairs

Replacement members of the working group

Eve Vahter - Counsellor of the EU Secretariat of the State Chancellery Andres Pung - Head of the Vocational and Adult Education Department, Ministry of Education and Research Rein Kaarli - Counsellor of the Research Policy Department, Ministry of Education and Research Karmen Vilms - Director of the Legislative Drafting and Legal Language Division, Estonian Ministry of Justice Tiina Pedak - Counsellor of the Foreign Financing Department, Ministry of the Environment Mihkel Randrüüt - Head of the Economic Policy Division, Ministry of Economic Affairs and Communications Erki Lõhmuste - Head of the Macroeconomy Division, Economic Analysis

95 Department, Ministry of Finance Ermo Liedemann - Head of the Development division, State Budget Department, Ministry of Finance Kairit Pihlak - Counsellor to the Minister for Population and Ethnic Affairs, Urve Palo Ene Padrik - Head of the Regional Policy Bureau, Regional Development Department, Ministry of the Interior Kerstin Peterson - Adviser to the Labour Market Department, Ministry of Social Affairs Keit Parts - First secretary in the 3rd Division of the European Union Department, Ministry of Foreign Affairs

96 Appendix 2: Financial Plan by Measures for the Estonian Action Plan for Growth and Jobs 2008–2011

97 FINANCIAL PLAN FOR THE PART "MACROECONOMIC ENVIRONMENT" BY MEASURES FOR THE PERIOD 2008-2011 2008 2009 2010 2011 Responsibility OBJECTIVE 1: Ensure a stable macroeconomic environment 1. Prepare the state budget to ensure a balanced budget for the 0 0 0 0 Ministry of Finance government sector (2008-2011). 2. Prepare a supplementary budget in 2008 to decrease 3 215 000 000 Ministry of Finance expenditure in the state budget (2008). 3. Reduce the debt burden of the government sector (2008- 363 000 000 113 000 000 88 000 000 60 000 000 Ministry of Finance 2011). 4. In order to promote private savings and investments bring 0 0 195 000 000 185 000 000 Ministry of Finance taxation conditions for private securities investments in line with those for investments by legal persons (2008-2009). 5. Ensure the legal and technical preconditions for adopting the 0 0 0 Ministry of Finance euro (2009-2010). OBJECTIVE 2: Develop a tax system that strongly promotes economic growth 1. Reduce the income tax rate to 18% and increase basic 1 410 000 000 1 460 000 000 3 355 000 000 5 285 000 000 Ministry of Finance exemption to 3 000 EEK per month (2008 – 2012).

2. Increase the VAT incentive from 5% to 9% and lose the 0 +416 000 000 +481 000 000 +521 000 000 Ministry of Finance incentives for performances and concerts, waste handling, and funeral goods and services (2008 – 2009). OBJECTIVE 3: Ensuring the long-term sustainability of fiscal policies Sub-objective 1: Improvement of the long-term sustainability of the health insurance system 1. Increase the number of people covered by health insurance 0 109 000 000 115 000 000 119 000 000 Ministry of Social Affairs (2008-2009). 2. Update the conditions for paying social allowances to the 0 0 Ministry of Social Affairs disabled (2008-2009). 3. Increase the transparency of financing for hospitals, 0 0 Ministry of Social Affairs calculating the price of health care services on a cost-oriented basis (2008-2011). 4. Amend the health insurance benefits system and update 0 0 0 Ministry of Social Affairs incapacity benefits towards greater own responsibility of employers and employees (2009-2010). 5. Make state fees cost-oriented (2008-2009). 0 +216 000 000 +200 000 000 +200 000 000 Ministry of Finance Sub-objective 2: Improving the long-term resilience of the pension insurance system 1. Reduce the number of people receiving special pensions and 0 0 Ministry of Social Affairs change the conditions (2008-2009). 2. Change the early retirement pension system and 0 0 Ministry of Social Affairs superannuated pension system (2008-2009). Sub-objective 3: Enhance the effectiveness of the public sector and improve its sustainability 1. Reduce public sector expenses (salaries and administrative 0 +752 000 000 Ministry of Finance expenses) (2008-2009). 2. Reorganise the rules concerning financial discipline for local 0 0 Ministry of Finance government (2008-2009). 3. Changing the proportion of environmental charges received 0 0 Ministry of Finance from the state and local governments considering the exclusion of these from the equalisation fund calculations in order to ensure the stability and harmonisation of the revenue base for local government (2008-2009). FINANCIAL PLAN FOR THE PART "COMPETITIVE BUSINESS ENVIRONMENT" BY MEASURES FOR THE PERIOD 2008-2011 2008 2009 2010 2011 Responsibility OBJECTIVE 4: Increase the international competitiveness of research and development activities Sub-objective 1: Develop the human capital for research and development 1. Create and implement an evaluation-based doctoral grants system (2008 – 30 000 000 62 000 000 84 500 000 Ministry of Education and Research 2010). 2. Create and implement a social guarantees system (parental benefits, pension 0 0 0 0 Ministry of Education and Research accumulation period) for doctoral students (2010 – 2011). 3. Increase state-commissioned doctoral education by means of state budget 1 500 000 1 375 000 4 500 000 5 500 000 Ministry of Education and Research funds giving preference to studies in natural and exact sciences and technology (2008 – 2011). 4. Support the establishment of new doctoral schools or the strengthening of 30 000 000 30 000 000 30 000 000 Ministry of Education and Research existing ones in order to enhance the efficiency of doctoral studies in Estonian Implementing body: Archimedes universities, strengthen inter-university cooperation and improve the quality of Foundation the supervision of doctoral students (2008 – 2015). 5. Create additional places in doctoral studies for non-resident students who 3 000 000 8 750 000 16 750 000 27 000 000 Ministry of Education and Research wish to defend their theses at Estonian universities in the priority areas listed in Implementing body: Archimedes the Estonian Research and Development and Innovation Strategy (2008 – Foundation 2015). 6. Support the studies of Estonian doctoral students abroad by enabling 3 750 000 11 250 000 15 000 000 15 000 000 Ministry of Education and Research students, who are successful at the fulfilment of their individual study plans, to Implementing body: Archimedes visit universities/research institutions in other countries at least once during Foundation their studies for research purposes or take courses at a foreign university/research institution with the aim of promoting information exchange and transfer and the creation of networks with other universities (2008 – 2015).

7. Create opportunities to complete doctoral studies partially outside the 1 000 000 3 000 000 5 000 000 7 000 000 Ministry of Education and Research university in cooperation with other R&D establishments or enterprises Implementing body: Archimedes (supporting the supervision of doctoral students) (2008 – 2013). Foundation

8. Create additional places for post-doctoral researchers (2008 – 2011). 3 000 000 18 600 000 31 200 000 40 920 000 Ministry of Education and Research Implementing body: Estonian Science Foundation 9. Support the hiring of top scientists and top teachers as part of regular staff 5 250 000 21 250 000 40 250 000 55 500 000 Ministry of Education and Research (for 5 years) (2008 – 2013). Implementing body: Estonian Science Foundation and Archimedes Foundation 10. Improve the international ‘visibility’ of Estonian institutions of higher 1 000 000 3 000 000 3 000 000 3 000 000 Ministry of Education and Research education among the potential target group (introduce the opportunities for Implementing body: Archimedes working and studying at Estonian institutions of higher education in the foreign Foundation media, support exhibitions at important international fairs, etc) (2008 – 2015).

Sub-objective 2: Develop an internationally competitive research and development environment 1. Launch and implement a programme of updating the infrastructure of 126 823 530 519 667 313 267 900 000 317 400 000 Ministry of Education and Research research and development institutions and higher education necessary, with the Implementing body: Archimedes aim of educating researchers and top specialists and ensuring the international Foundation competitiveness of our R&D activities (2008 – 2013).

2. Draft a road map for the development of equipment infrastructure for 0 0 Ministry of Education and Research research and development (2008 – 2009). 3. Draft the concept of pan-Estonian core laboratories, the joint usage of their 0 53 000 000 53 000 000 53 000 000 Ministry of Education and Research infrastructure and develop the network of such laboratories, concentrating, first Implementing body: Archimedes and foremost, on the needs of the Baltic Sea region (2008 – 2013). Foundation

4. Promote the fulfilment of international projects and agreements by research 12 600 000 15 120 000 18 144 000 21 772 800 Ministry of Education and Research institutions by offering co-financing and support to cover expenses related to Implementing body: Archimedes participation in international projects (2008 – 2013). Foundation

Sub-objective 3: Ensure better focus of funding for research and development activities 1. Select and finance new centres of excellence (2008 – 2013). 60 000 000 80 000 000 100 000 000 12 000 000 Ministry of Education and Research Implementing body: Archimedes Foundation 2. Reorganize the research evaluation system (2008 – 2010). 0 0 0 Ministry of Education and Research Implementing body: Archimedes Foundation 3. Carry out a functionality analysis of the base-line, grant and targeted financing 777 881 000 777 881 000 980 371 000 1 102 920 000Ministry of Education and Research instruments for research, reorganize those financing instruments and increase the volume of the instruments for financing research (2008 – 2012). 4. Implement the national research and development programme for Estonian 5 000 000 25 000 000 25 000 000 25 000 000 Coordinator: Ministry of Economic energy technologies (2008 – 2013). Affairs and Communications 5. Launch and implement the research and development programme for 5 000 000 25 000 000 25 000 000 Will be launched in 2009 Estonian information and communication technologies (2009 – 2014). 6. Launch and implement the research and development programme for 5 000 000 25 000 000 25 000 000 Will be launched in 2009 Estonian biotechnologies (2009 – 2014).

7. Launch and implement the research and development programme for 5 000 000 25 000 000 Will be launched in 2010 Estonian materials technologies (2010 – 2015). OBJECTIVE 5: Increase the productivity and international competitiveness of enterprises Sub-objective 1: Develop strategic competencies in enterprises 1. Support the use of the training and consultation services intended for 10 500 000 41 000 000 37 500 000 37 000 000 Ministry of Economic Affairs and business managers and employees to a greater extent by supporting longer-term Communications training and development plans (2008 – 2013). Implementing body: Enterprise Estonia

2. Develop the accreditation system of business consultants and the network of 1 000 000 1 000 000 1 000 000 1 000 000 Ministry of Economic Affairs and consultants to improve the quality of the consultation service and make good- Communications quality consultation services accessible (2008 – 2013). Implementing body: Enterprise Estonia

3. Procure and intermediate training services offered by Enterprise Estonia in 8 773 916 49 826 084 61 600 000 71 200 000 Ministry of Economic Affairs and fields of activity where the market does not offer training services of sufficient Communications quality, including the training of beginning exporters, the basic training of start- Implementing body: Enterprise Estonia up business operators and courses organized in cooperation with professional associations, the development of consultants network to improve the quality and access to enterprise counselling services, develop and offer business diagnostics and audit schemes to enterprises (2008 – 2013).

4. Develop and implement a recruitment scheme for development workers 10 000 000 60 000 000 75 000 000 65 000 000 Ministry of Economic Affairs and (researchers and engineers, designers, marketing managers, managers of Communications development projects from Estonia as well as abroad) (2008 – 2013). Implementing body: Enterprise Estonia

Sub-objective 2: Support the internationalisation of enterprises 1. Expand the target group of marketing support provided for enterprises to 125 000 000 100 000 000 60 000 000 60 000 000 Ministry of Economic Affairs and execute the export plan, including, among others, enterprises just getting Communications involved in exports (2008 – 2013). Implementing body: Enterprise Estonia

2. Offer support for participation in trade fairs to business operators who wish 8 000 000 15 000 000 15 000 000 19 000 000 Ministry of Economic Affairs and to take part in fairs either alone or with a joint booth or to visit fairs collectively Communications (2008 – 2013). Implementing body: Enterprise Estonia

3. Offer joint marketing support to business operators wishing to organise 5 000 000 5 000 000 5 000 000 5 000 000 Ministry of Economic Affairs and marketing events together (under the direction of an overarching body) (2008 – Communications 2013). Implementing body: Enterprise Estonia 4. Expand the scheme of medium- and long-term export guarantees to offer a Ministry of Economic Affairs and significantly larger volume of guarantees (2009 – 2013). Communications Implementing body: Kredex

5. Substantially increase the amount of information offered to business operators 2 000 000 2 000 000 2 000 000 2 000 000 Ministry of Economic Affairs and as part of the internationalisation information service and raising the awareness Communications of the target group (2008 – 2013). Implementing body: Enterprise Estonia

Sub-objective 3: Promote foreign investments 1. Assemble the inquiries and information of the investor service and 1 000 000 1 000 000 1 000 000 1 000 000 Ministry of Economic Affairs and incorporate them in the solution for a single contact point for business operators Communications (2009). Implementing body: Enterprise Estonia

2. Reorganise the activity of Estonia’s foreign representatives network to allow 27 000 000 30 000 000 30 000 000 31 000 000 Ministry of Economic Affairs and them to offer services with a suitable orientation and volume to Estonian Communications exporters and foreign investors (2008-2013). Implementing body: Enterprise Estonia

3. Strengthen the foreign representatives network of Enterprise Estonia with the 9 000 000 10 000 000 12 000 000 10 000 000 Ministry of Economic Affairs and aim of offering proactive solutions to involve foreign investors in Estonia’s Communications priority sectors (2009 – 2013). Implementing body: Enterprise Estonia

4. Creation of a concept paper analysing the possibility and creation of a flexible Ministry of Economic Affairs and combination of support schemes for large investors (starting from a certain Communications amount of investment) (2009). Sub-objective 4: Support investments in the development of technologies, products and services 1. Increase the volume of the support programme for R&D activities in 198 411 792 298 000 000 300 754 104 305 754 104 Ministry of Economic Affairs and enterprises and research and development institutions, focusing on supporting Communications preliminary and applied research projects and product development projects Implementing body: Enterprise Estonia (2008 – 2013). 2. Launch of a technology transfer support programme with the aim of 110 000 000 285 000 000 285 000 000 0 Ministry of Economic Affairs and supporting the employment of new technologies in industrial enterprises (2008 – Communications 2013). Implementing body: Enterprise Estonia 3. Improve the competitiveness of enterprises processing wood by supporting 18 000 000 18 000 000 18 000 000 18 000 000 Ministry of Agriculture investments in new products, processing methods and technologies (2008 – Implementing body: PRIA 2013). 4. Launch a support programme to develop the equipment and technologies 564 000 000 324 000 000 324 000 000 324 000 000 Ministry of Agriculture necessary for the production of agricultural products and non-wood forest Implementing body: PRIA products (2008 – 2013). 5. Implement a mezzanine-financing scheme by offering equity loans worth 1 – Ministry of Economic Affairs and 16 million to high growth small operating enterprises (2007 – 2013). Communications Implementing body: Kredex Sub-objective 5: Promote innovation-related cooperation and joint activity among enterprises 1. Support the establishment of new Competence Centres and continuing 565 320 000 340 500 000 30 000 000 23 000 000 Ministry of Economic Affairs and supporting the activity of existing centres at the launching and carrying out of Communications long-term and market-oriented cooperation projects (2008 – 2013). Implementing body: Enterprise Estonia

2. Renew the SPINNO programme by increasing the proportion of intellectual 40 000 000 10 000 000 10 000 000 40 000 000 Ministry of Economic Affairs and property protection and business training in the programme (2008 – 2013). Communications Implementing body: Enterprise Estonia

3. Develop a programme of innovation vouchers and implement this with the 10 000 000 5 000 000 Ministry of Economic Affairs and aim of promoting and facilitating the beginning of cooperation between small Communications and medium-sized enterprises and R&D institutions (2008-2013). 4. Launch and support a programme of promoting the joint activity of 6 000 000 29 000 000 29 000 000 29 000 000 Ministry of Economic Affairs and enterprises and the development of economic clusters (2008 – 2013). Communications Implementing body: Enterprise Estonia

5. Launch and support a programme to increase the capacity of business 3 740 000 2 920 000 1 340 000 State Chancellery organisations and develop branch organisations (2008 – 2010). Sub-objective 6: Support enterprises with high growth potential

1. Support early-stage equity capital investments to alleviate the capital 20 000 000 20 000 000 20 000 000 20 000 000 Estonian Development Fund requirements of research- and technology-intensive start-up enterprises (2008 – 2013). 2. Promote cooperation with international companies and their involvement in 0 110 000 000 100 000 000 0 Ministry of Economic Affairs and the science technology parks; support the development of multi-purpose testing Communications and semi-industrial laboratories, preferably in the science and technology parks Implementing body: Enterprise Estonia (2009 – 2013). 3. Support existing incubators and those yet to be established, focusing on 28 000 000 500 000 500 000 31 000 000 Ministry of Economic Affairs and expanding the selection of services and support offered to enterprises and Communications raising the qualifications of the employees (2008 – 2013). Implementing body: Enterprise Estonia

OBJECTIVE 6: Develop a business environment favourable to enterprise and entrepreneurship Sub-objective 1: Increase entrepreneurship and support small 1. Support the compilation of teaching materials promoting practice-oriented Ministry of Economic Affairs and entrepreneurship to enhance learning opportunities and supplement study Communications programmes (2009 – 2010).

2. Upgrade and implement the entrepreneurship and innovation awareness 22 975 000 22 950 000 31 500 000 23 995 000 Enterprise Estonia programme (2008 – 2013). 3. Develop a single digital contact point to carry out business-related operations 2 800 000 3 600 000 3 400 000 0 Ministry of Economic Affairs and (2009 – 2010). Communications Implementing body: Estonian Informatics Centre 4. Increase and reorganise start-up assistance and growth assistance aimed at 28 139 500 21 000 000 21 000 000 21 000 000 Enterprise Estonia starting business operators (2008 – 2013). 5. Support the investments of micro-enterprises to diversify their economic 505 800 000 150 000 000 78 800 000 150 000 000 Ministry of Agriculture activity in rural areas (2008 – 2013). Implementing body: PRIA 6. Launch and implement a national programme of start-up loans and micro- 25 000 000 25 000 000 15 000 000 15 000 000 KredEx loans aimed at business operators who are either just starting their operations or have a short credit history and the value of whose collateral it is difficult to assess or it is not sufficient to issue a bank loan (2008 – 2013). 7. Analyse the possibility to decrease the minimum amount of share capital 0 0 0 Ministry of Economic Affairs and needed for the set-up of a limited-liability company and its reporting obligations Communications (S2009ub-o). bjective 2: Develop the business-related regulatory 1e.nv Dieveronlopm ea ntreorganisation procedure and enact the appropriate legislation 66 148 0 Ministry of Justice (2008 – 2009). 2. Develop and launch a system for the conciliation procedure (2009 – 2011). 0 0 Ministry of Justice

3. Review legislation regulating intellectual property and simplify and update the 50 000 0 Ministry of Justice regulations (2009 – 2011). 4. Reduce the number of areas of activity that require business operators to 1 725 000 1 200 000 0 Ministry of Justice obtain activity licences and authorizations, and simplify the procedures for obtaining licences; codify the entire economic administrative law (2008 – 2010).

5. Codify and simplify social law (the social code) (2008 – 2010). 950 000 4 225 000 4 203 000 Ministry of Justice 6. Codify and simplify environmental law (the environmental code) (2008 – 1 800 000 3 250 000 3 250 000 Ministry of Justice 2010). 7. Codify and simplify the building and planning law (the building code) (2008 – 1 425 000 4 328 000 0 Ministry of Justice 2009). 8. Develop a system of assessing the impacts of legislation, including the 1 700 000 3 300 000 1 000 000 Ministry of Justice integration of the rules for assessing the administrative burdens created for business in the minimum requirements of the analysis of the impact of legislation (2008 – 2010). 9. Update the guidelines for public procurement to stimulate increased demand 0 0 0 Ministry of Finance for new technologies (concerning, for instance, transport, energy, environment, health, education and communications) and launch an appropriate training programme (2009 – 2010). Sub-objective 3: Guarantee competition 1. Develop and implement a leniency programme (2008 – 2009). 250 000 Developer: Ministry of Justice Implementing body: Competition Authority and Prosecutor's Office

2. Develop new methodologies for competition supervision analyses (2008 – 360 000 40 000 Ministry of Economic Affairs and 2009). Communications 3. Open up the postal market (2008 – 2009). 0 0 Ministry of Economic Affairs and Communications 4. Making preparations for opening the electricity market (2008 – 2011). 0 0 0 0 Ministry of Economic Affairs and Communications Sub-objective 4: Enhance the availability and quality of public e- 1. Launch a programme to raise the awareness of the information society (2008 8 000 000 10 000 000 Ministry of Economic Affairs and – 2009). Communications 2. The transition of state authorities to e-transactions (2008 – 2010). Ministry of Finance 3. Develop the e-statistics module of Statistics Estonia to reduce the 2 900 000 2 400 000 Statistics Estonia administrative burden of enterprises and data duplication in the government (2007 – 2011). 4. Develop a fully automatic e-procurement system (2007 – 2009). 1 500 000 7 800 000 6 100 000 3 600 000 Ministry of Finance 5. Employ the E-Health system to offer e-services to health operators (the 11 700 000 7 000 000 41 000 000 73 000 000 Ministry of Social Affairs development of the Digital Prescription and the cross-usage of health data between different institutions) (2008 – 2011). 6. Create a complete solution for the E-File client system (2008 – 2012). 38 240 622 57 034 684 41 280 152 16 738 667 Ministry of Justice Sub-objective 5: Improve international transport links 1. Expand the passenger terminal and airside area of Tallinn airport (2007 – 302 390 000 Ministry of Economic Affairs and 2008). Communications 2. Develop Tartu airport (2008 – 2009). 58 000 000 59 000 000 Ministry of Economic Affairs and Communications 3. Improve the Tallinn-Tartu and Tallinn-Narva road connections with the port 10 000 000 194 000 000 298 000 000 Ministry of Economic Affairs and of Tallinn and Tallinn airport (2009 – 2012). Communications 4. Eliminate the bottlenecks on the Tallinn-Ikla and Tallinn-Narva roads (2008- 215 000 000 300 000 000 88 500 000 Ministry of Economic Affairs and 2011). Communications 5. Reconstruct and develop the Rail Baltica railway line between Tallinn and 151 000 000 477 000 000 474 000 000 34 000 000 Ministry of Economic Affairs and Tartu and Tartu and Valga (2009 – 2011). Communications 6. Establish the Koidula rail border crossing in South-Eastern Estonia (2008 – 114 000 000 645 000 000 1 100 000 000 1 000 000 000Ministry of Economic Affairs and 2011). Communications 7. Develop the infrastructure necessary for an increase in the capacity of 54 000 000 250 000 000 57 300 000 Ministry of Economic Affairs and container transit at the port of Tallinn (2008 – 2010). Communications OBJECTIVE 7: Ensure the security of energy supply and develop a competitive and environmentally-friendly energy Ssecubt-orobjective 1: Ensure the security of energy supply 1. Carry out the necessary preparation work for the undersea cable, Estlink II, Financed by the transmission system between Estonia and Finland (environmental impact assessment) (2008 – 2011). operator OÜ Põhivõrk

2. Compiling the environmental impact assessment of the gas pipeline between Financed by AS Eesti Gaas / AS EG Estonia and Finland (2008 – 2011). Võrguteenus 3. Investments to update and develop the national grid (2008 – 2010). Financed by the transmission system operator OÜ Põhivõrk 4. Establishing a power station as a reserve substation with a planned capacity of Financed by the transmission system 100 MW (2011 – 2012). operator OÜ Põhivõrk 5. Preparations for making the decision whether to participate in the Ignalina 0 0 Ministry of Ministry of Economic nuclear power station in Lithuania and finalise this decision (2006 – 2011). Affairs and Communications 6. Preparations for making the decision whether to participate in a nuclear power 0 0 Ministry of Ministry of Economic station in Finland and finalise this decision (2007 – 2011). Affairs and Communications 7. Carry out research on the viability and justification of building a nuclear Financed by AS Eesti Energia power station in Estonia. (2009 – 2012). 8. Map out the necessity for nuclear energy related legislation (2009). 0 0 Ministry of Ministry of Economic Affairs and Communications Sub-objective 2: Develop environmentally friendly energy sector 1. Support for investments in constructing thermal and/or power plants and 0 50 000 000 150 000 000 300 000 000 Ministry of Environment, Ministry of boiler plants that use renewable energy sources (except hydroelectric plants, Economic Affiars and wind parks (with more than one wind generator), large combined heat and Communications, Environmental power plants and district heating boiler plants (2008 – 2013). Investment Centre

2. Support for the application of environmentally friendly technologies in energy 0 7 000 000 10 000 000 12 000 000 Ministry of Ministry of Economic production (2008 – 2013). Affairs and Communications 3. Support for investments in producing biomass, bio-fuel and/or bio-energy in 45 200 000 70 000 000 70 000 000 70 000 000 Ministry of Agriculture the agricultural sector (2008 – 2013). 4. Increase the efficiency of the system for issuing and supervising pollution 0 2 000 000 2 000 000 2 000 000 Ministry of Environment permits and integrated environmental permits in order to be in compliance with the limits on emissions of pollutants as given in the NEC directive (2009 – 2010). 5. Set out stricter limits on the sulphur content in fuel (2009). 0 0 Ministry of Environment 6. Shut down the oil shale boilers in the Ahtme power plant (2008 – 2010) and Financed by AS Eesti Energia construct a combined heat and power plant running on biofuel, peat and natural gas (2009 – 2011) . 7. Test opportunities for combined burning of renewable fuels, waste and oil Financed by Sillamäe SEJ AS shale, and applying suitable solutions in order to bring the oil shale boilers at the Sillamäe Thermoelectric Power Station to integrated burning mode (2008 – 2012).

8. Prepare an environmental impact study and establishing new energy blocks at Financed by AS Eesti Energia Narva Elektrijaamad AS (Joint Stock Company Narva Power Plants) (2009 – 2013). 9. Supplying the 2-3 unrenovated energy blocks at AS Narva Elektrijaamad with Financed by AS Eesti Energia a sulphur capture device (2010 – 2015). 10.Providethelegalbasisfortheconstructionofoff-shorewindparks(2008– 0 0 Ministry of Ministry of Economic 2009). Affairs and Communications 11. Bring large combustion plants into compliance with EU environmental Financed by enterproces with large standards (2008 – 2009). combustion plants 12. Develop technologies for CO2 capture and storage (2008 – 2011). Financed by AS Eesti Energia 13. Carry out research on storage technologies for oil shale cinder (2008 – 2009). Financed by AS Eesti Energia

Sub-objective 3: Increase energy efficiency 1. Improve the availability of energy efficiency information, and guarantee the 7 600 000 8 900 000 12 000 000 33 700 000 Ministry of Ministry of Economic availability of energy saving skills and expertise (2008 – 2013). Affairs and Communications

2. Support the execution of energy certification and energy auditing in apartment 8 900 000 9 800 000 8 900 000 13 200 000 Ministry of Ministry of Economic buildings and the renovations and reconstructions of apartment buildings that Affairs and Communications, Kredex were built before 1990 (2008 – 2013).

3. Develop legislation for implementing the energy conservation requirements 300 000 650 000 700 000 700 000 Ministry of Ministry of Economic for energy enterprises (2008 – 2009). Affairs and Communications 4. Support investments in the renovation of old heating pipelines in district 0 9 500 000 9 500 000 9 500 000 Ministry of Environment, Ministry of heating networks (2008 – 2013). Economic Affiars and Communications, Environmental Investment Centre encouraging the usage of energy efficiency criteria in public procurement 100 000 0 0 0 Ministry of Environment process (2008 – 2011). Sub-objective 4: Promote the use of environmentally friendly 1. Support for the development of environmentally friendly transport 0 40 000 000 40 000 000 40 000 000 Environmental Investment Centre technologies (2009 – 2013). 2. Increase the quality of passenger rail traffic (2009 - 2012). 0 424 500 000 147 700 000 97 500 000 AS Eesti Raudtee, AS Eletkriraudtee

3. Create a public transport information system and an integrated itinerary 11 800 000 9 800 000 4 800 000 Majandus- ja planning and ticket booking system (2009). Kommunikatsiooniministeerium, Autoregistrikeskus 4. Review the excise concession system for bio fuels and develop new measures 0 300 000 0 0 Rahandusministeerium, Majandus- ja (2010-2012). Kommunikatsiooniministeerium

Blue background - investments financed by enterprises, not from state budget FINANCIAL PLAN FOR THE PART "EDUCATION AND LABOUR MARKET" BY MEASURES FOR THE PERIOD 2008-2011 2008 2009 2010 2011 Responsibility OBJECTIVE 8: Improve the skills of the labour force Sub-objective 1: Better correspondence of education and labour market Formulate studies and state-commissioned education in order to satisfy the needs of the labour market:

1.PreparehighlyskilledspecialistsbysupportingEstonianmaster’sstudentsintheirstudiesabroad 0 3 750 000 3 750 000 3 750 000 Ministry of Education and Research (2010 – 2013). 2. Support education institutions to enable international student on master and PhD level to study 3 000 000 8 750 000 16 750 000 27 000 000 Ministry of Education and Research in Estonia; encourage them to stay longer in Estonia and to forge ties with the Estonian labour market (especially in research and development work) after they finish their studies (2008 – 2013).

3.Popularisevocationaleducationamongyoungpeoplethroughyouthskillscompetitions(2008 – 3 902 799 4 945 596 5 692 328 5 177 264 Ministry of Education and Research 2013). 4. Formulate and implement a system for analysing and forecasting in order to improve the ability Ministry of Education and Research, Ministry of to consider changes in the labour market when formulating the volume and structure of specialist Social Affairs, Ministry of Economic Affairs and fields in higher, vocational and adult education (2009-2010). Communications

Curricula development: 5. Develop curricula in higher education by supporting internal quality management and creating 7 494 163 39 830 000 48 735 000 48 672 000 Ministry of Education and Research and supporting a network of consultants for curricular development (2008 – 2011). 6. Develop the vocational education curricula so they correspond better with the needs in the 8 071 775 29 484 394 29 821 116 30 653 472 Ministry of Education and Research labour market by increasing employer involvement (2008 – 2013) and by establishing APEL (VÕTA) – the system for accrediting prior experiential learning – in the vocational education system (2010).

7. Update state curricula at basic and secondary school levels to increase the freedom of choice for 2 000 000 2 000 000 2 000 000 2 000 000 Ministry of Education and Research secondary school students and the relative importance of sciences and entrepreneurship education (2007 – 2011). 8. Switching gradually to Estonian instruction in non-Estonian speaking schools at upper secondary 47 100 000 45 600 000 over 50 000 000 over 50 000 000 Ministry of Education and Research school level and promoting the supplementary study of Estonian in language immersion programs (2008 – 2013).

Capacity development of educational institutions: 9. Update the higher education financing system by the transfer to 3-year result-based contracts Ministry of Education and Research that define the institution’s more concrete tasks and development goals as well as the number of graduates, and also clearly define the responsibility of the higher education institution in strategic and quality-related questions (2008 – 2009). 10.Strengthentheinstitutionalcapacityofhighereducationinstitutions,byrelicensing of Ministry of Education and Research institutions,modernisingtheaccreditationsysteminhighereducationandchangingtheprinciples for the national recognition of diplomas (2008 – 2012). 11. Formulate and implement an accreditation system for vocational education institutions and tie Ministry of Education and Research it to the system of updated education licenses (2008 – 2013). 12. Conduct a profound analysis of the effectiveness of learning and financial efficiency including 150 000 1 260 000 670 000 320 000 Ministry of Education and Research factors of influence in general education institutions (basic schools, secondary schools) and in vocational education institutions in order to rearrange the general education institution network (2008 – 2011). 13. Analyse the effects of separating the upper secondary school level from the basic school level Ministry of Education and Research (2010). 14. Support the professional development of teachers and vocational teachers through 98 871 746 109 191 747 103 191 747 103 191 747 Ministry of Education and Research supplementary training and updated qualification requirements; apply a special allowance to young teachers graduating from teacher training programmes and going to work in rural areas and smaller towns (2008 – 2013). Improve infrastructure and e-learning: 15. Increase funds for updating the infrastructure (classrooms, learning equipment, dormitories) of 302 941 176 205 000 000 671 508 980 982 333 271 Ministry of Education and Research vocational education institutions (2008 – 2013). 16. Increase funds for updating the infrastructure (classrooms, learning equipment) of higher 126 823 530 757 591 343 349 349 145 657 804 647 Ministry of Education and Research education institutions (2008 – 2013). 17. Increasingly develop learning software by promoting e-learning, updating teacher knowledge, 6 935 909 35 014 480 36 554 360 33 595 280 Ministry of Education and Research acquiring modern hardware and supporting existing regional e-learning support centres (2008 – 2013). Ensure better access to education: 18. Refine the principles of the study support system at the higher education level to ameliorate Ministry of Education and Research access to higher education (2008-2010). 19. Reorganise the study support system in vocational institutions, so it is based on actual needs Ministry of Education and Research (2010). Sub-objective 2: Popularize sciences and technology 1. Popularise natural and exact sciences subjects in formal studies by raising the relative importance 0 52 000 000 92 000 000 Ministry of Education and Research of science subjects in the curriculum by offering corresponding subjects as optional subjects in secondary and vocational schools, by implementing new learning methods and diversifying the study environment and by developing curricula for specialist technical and science hobby schools and acquiring equipment (2009 – 2013).

2. Create educational material for the natural and exact sciences field in co-operation with scientists Ministry of Education and Research and teachers and use learning materials based on information and communication technology in classes (2009 – 2013). 3. Formulating principles for supporting natural and exact sciences subjects at all educational levels Ministry of Education and Research in order to raise interest among young people and to support these study fields (2008). 4. Popularise science in the community through science centres, museums and scientific societies; Ministry of Education and Research competitions and campaigns; supporting the dissemination of science and technology related knowledge via the internet and news and science and technology related TV shows and articles in the media (2009 – 2013). Sub-objective 3: Reducing the number of early school leavers 1. Support the implementation of a national curriculum in pre-school institutions and organise the 77 575 000 77 575 000 91 163 000 96 357 000 Ministry of Education and Research teaching of Estonian as a foreign language in order to prepare children better for school (2008 – 2011). 2. Relate hobby education to formal education; support individual and group study among children 4 225 341 2 730 000 2 730 000 2 730 000 Ministry of Education and Research with special educational needs (2009 – 2011). 3. Formulate and establish an assistant teacher system (2010 – 2011). 0 0 100 000 000 225 000 000 Ministry of Education and Research 4. Develop counselling networks (study aid centres, counselling commissions) and an integrated 3 791 005 10 660 803 11 689 031 10 811 623 Ministry of Education and Research counselling model (local pedagogical-psychological and career counselling systems) (2008 – 2011). 5. Organise project competitions and support youth associations to recognize youth work and 9 000 000 9 000 000 9 000 000 9 000 000 Ministry of Education and Research increase their motivation to learn as well as improve their study results in the formal education system (2008 – 2013). Sub-objective 4: Encourage lifelong learning 1. Offer working adults free in-service training and retraining in vocational education institutions, 36 986 194 54 868 582 52 909 120 52 682 120 Ministry of Education and Research professional higher education institutions and informal education centres (2008 – 2011). 2. Include employed people in risk groups (elderly, disabled people, people who have received the 2 570 000 3 793 000 Ministry of Social Affairs notice of redundancy etc) in the target group benefiting from labour market training normally only offered to unemployed people (2008 – 2009). 3. Popularise lifelong learning and inform the adult population of study opportunities (2008 – 2 703 924 6 786 332 6 608 031 4 306 131 Ministry of Education and Research 2011). 4. Enlarge the target group of the people who can receive career counselling service from the 4 040 000 2 610 000 Ministry of Social Affairs Estonian Labour Market Board from unemployed persons to employed people and members of inactive population (2008 – 2009). 5. Further develop an integrated career counselling service in order to create a standard 3 797 018 12 746 338 12 230 089 6 261 555 Ministry of Education and Research methodology, a training system for counsellors and proven quality of service (2008 – 2013). 6. Update the qualification system to better reflect labour market needs and relate this to the 8- 6 620 188 7 853 400 8 087 400 9 067 700 Ministry of Education and Research level comparative European Qualification Framework (2008 – 2013). 7. Examine competence, skill levels and the needs of the adult population (2009 – 2013). 954 040 1 060 000 8 922 620 13 614 620 Ministry of Education and Research Sub-objective 5: Bring risk groups to the labour market 1. Broaden the range of active labour market measures for inactive people and employed disabled 48 499 000 49 820 000 Ministry of Social Affairs persons (2008 – 2009). 2. Develop measures to support national labour market services (such as social rehabilitation, 4 317 000 3 523 000 Ministry of Social Affairs career-related psychological counselling, job clubs) and implement them for risk groups (e.g. young people, long-term unemployed etc) of the unemployed and job-seekers (2008 – 2009). 3. Formulate a mechanism to compensate for additional work-related expenditure (including 50 400 000 Ministry of Social Affairs transport) and implement it for disabled people (working allowance) (2006 – 2008). 4. Create a disability-related information and technical aid centre; create and develop counselling 5 760 000 6 617 000 Ministry of Social Affairs centres for people with special needs and those close to them (2007 – 2009). 5. Reform the rehabilitation system for disabled people to encourage employment (2008 – 2009). 2 150 000 2 450 000 Ministry of Social Affairs 6. Develop an integrated care system, creating a solid network of nursing homes and formulating 2 490 000 2 690 000 Ministry of Social Affairs social services, including day centres, child day care and nursing care, in order to enable working- age people with a care giving responsibility to enter the labour market (2007 – 2009).

7. Increase the competitiveness of non-Estonians living in Estonia by ameliorating their language 25 894 582 37 944 706 25 046 557 Office of the Minister for Population and Ethnic skills (Estonian language lessons, Estonian language lessons integrated within vocational in-service Affairs, Ministry of Education and Research, training and re-education, labour force exchange programs etc) (2008 – 2010). Ministry of Social Affairs

8. Conduct a political analysis to prepare to reform the system of social, employment and 3 000 000 Ministry of Social Affairs healthcare services, and allowances and benefits that encourage employment (2009). Sub-objective 6: Simplify the use of highly qualified foreign labour and invite Estonians working abroad to return 1. Simplify the procedures related to foreign labour force (2007 – 2008). Ministry of the Interior 2. Facilitate the integration of new immigrants by formulating and implementing language training, 1 500 000 0 1 000 000 1 000 000 Office of the Minister for Population and Ethnic societal integration programmes and support person services (2008 – 2010). Affairs, Ministry of Education and Research 3. Disseminate information about opportunities for employment in the Estonian labour market to Office of the Minister for Population and Ethnic encourage the return of Estonian workers abroad (2008 – 2011). Affairs, Ministry of Social Affairs OBJECTIVE 9: Increase the flexibility of the labour market and improve the quality of working life Sub-objective 1: Increase the secure flexibility and transparency of labour relations 1. Simplify the regulations for individual work relations and update them as part of the civil 500 000 3 400 000 3 400 000 3 400 000 Ministry of Social Affairs legislation, legalise rental work and change the conditions of temporary work contracts to make them more employee-friendly by adopting the new Employment Contracts Act (2007 – 2010). 2. Disseminate information among employers and contractors about the new Employment 2 000 000 3 000 000 Ministry of Social Affairs Contracts Act coming into effect in 2010 (2009 – 2010). 3. Adjust the Public Service Act to the principles of the new Employment Contracts Act (2008 – Ministry of Justice 2010). 4. Make active labour market measures and unemployment benefits more efficient by Ministry of Social Affairs amalgamating the Estonian Labour Market Board and the Estonian Unemployment Insurance Fund (2008 – 2011). 5. Increase unemployment benefits rates (unemployment insurance benefit and unemployment 686 001 000 761 708 000 Ministry of Social Affairs allowance) and broaden the range of beneficiaries through new Employment Contracts Act in order to increase the security of the labour market (2010). 6. Raise the awareness of different options for arranging flexible work relations (telework, rental 500 000 2 000 000 2 000 000 2 000 000 Ministry of Social Affairs work, part-time work etc) and implement the Employees’ Representatives Act in a more efficient manner (2007 – 2008). 7. Formulate further principles to help reconcile work and family life (2009). Ministry of Social Affairs 8. Create supplementary kindergarten places to help reconcile work and family life (2008 – 2011). 74 250 000 0 200 000 000 200 000 000 Ministry of Education and Research 9. Pay a per-capita allowance to parents of kindergarten children to finance childcare services and Ministry of Education and Research pre-primary education by local municipalities that do not guarantee kindergarten places (2009). Sub-objective 2: Ensure a working environment that supports the health of employees

1. Create occupational health and safety insurance to reduce the number of accidents at work (2008 Ministry of Social Affairs – 2011). 2. Raise the awareness of health and safety in the work environment among employers and the self- 900 000 Ministry of Social Affairs employed (2007 – 2008). 3. Develop and implement a training programme and uniform methodology to train work 1 500 000 10 500 000 10 500 000 10 500 000 Ministry of Social Affairs environment specialists and work environment representatives (2007 – 2013). 4. Increase the management capacity of the Labour Inspectorate by developing a competence 0 1 500 000 1 500 000 1 500 000 Ministry of Social Affairs model for labour inspectors and by conducting in-service training (2008 – 2011).

5. Conduct a comparative international analysis concerning occupational health care and safety 0 1 800 000 1 800 000 1 800 000 Ministry of Social Affairs legislation and the resulting necessary regulations in order to update and optimize work environment regulations (2008 – 2011).