Estonia: Public Expenditure Review
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Report No. 12787-EE Estonia Public ExpenditureReview Public Disclosure Authorized July 12, 1994 Europeand CentralAsia Region FOR OFFICIAL USE ONLY Public Disclosure Authorized .L- --- .ihm+ .,--., -. : -. -.. +| .........., -..,,-...L Public Disclosure Authorized !!i i aE;- - - J~~~~~~~~~~~~~~~~M 0~~~~~~~~~~~~~~~~~~~~~~ | t' E 0 5t is * * t > otew.s j :-- . - ; 1 W., tatiw. cotet may.t no0 0- ~, 't',' ~' ''=. |-';':' S , t | : . R B ' , ' - , - , v '. -, . .e-''-f.--,wOw§M,,,~~~~~~~~~~~~~~~~4 l 0 _ - BS ................... *y,> ..b,e u,.r re -7 T :~~ ~ ~ ~ ~ ~ ~~~~ra,.t1. _ o d' ww is'e '~' ~ ';>> ' ' ' ' 4 '' X . _ . , - ;,_F. :~~~~~~~~~~~~~~~Z Public Disclosure Authorized Glossary of Abbreviations ACB annual capital budget DCF discountedcash flow DEM German mark DH district heating EBF extra-budgetaryfund EBRD EuropeanBank for Reconstructionand Development EC EuropeanCommunity ECO enhancedcredit operations EEK Estonian kroon EF EnviromnentFund EEB EuropeanInvestment Bank EU European Union EU-PHARE EuropeanUnion's TechnicalAssistance Program FDI foreign direct investment FY fiscal year G-24 Group of 24 G&D generationand distribution (of heat) GDP gross domestic product IBRD InternationalBank for Reconstructionand Development IFC InternationalFinance Corporation IFI internationalfinancial institution ILO InternationalLabor Organization IMF InternationalMonetary Fund JEXIM Japan ExportImport Bank LIBOR Londoninterbank offer rate MIF Medical Insurance Fund MIGA MultilateralInvestment Guarantee Agency MIP municipal investmentplan MoEd Ministry of Education MoF Ministry of Finance MoSA Ministry of Social Affairs OECD Organizationfor EconomicCooperation and Development PER Public ExpenditureReview PIP public investmentprogram PIPWG Public InvestmentProgram Working Group PPL proposed project list PPR public/privaterole ROR rate of return RUR Russian ruble SNA systemof national accounts SSF Social Security Fund USD U.S. dollar VAT value added tax FOR OFFICIAL USE ONLY Conventions Government - Refers to the Council of Ministers. When reference is made to the Governmentof Estonia in general, the lower case "government"is used. State - Refers to the Central Government. - = zero or negligible n.a. = not available mil = million Units of Measure ha = hectare km = kilometers m = meter m2 = square meter EstonianFiscal Year national calendar year municipal April 1 through March 31 Currencies EEK 8 = DEM 1 (fixed rate since June 1992) EEK 13-14 = USD 1 (at recent DEM/USD cross rates) This documenthas a restricteddistribution and may be used by recipientsonly in the performanceof their official duties. Its contents may not otherwise be disclosed wit'noutWorld Bank authorization. COUNTRY DATA - ESTONIA GNP per capita in USD in 1992 2,750.0 General Area (thousand square km) 45.0 Population, 1992 mid-year (thousands) 1,544.0 Growth rate, 1980-90 (percent) 0.7 Density, 1992 (per square km) 35.0 Social indicators Population characteristics Crude birth rate, 1990 (per 1,000) 14.2 Crude death rate, 1990 (Per 1,000) 12.4 Health Infant mortality rate (per 1,000 live) 14.2 Life expectancy at birth, 1991 70.0 ...... ...... NATIONAL ACCOUNTS (Percent of GDP) Gross domestic product 100.0 100.0 100.0 Agriculture 15.1 12.1 9.3 Industry 43.7 40.9 33.5 Services 41.2 47.0 57.2 Consumption 73.1 71.9 79.5 Gross investment 22.5 26.2 23.6 Net trade 4.5 1.9 -3.1 Exports, GNFS .. 55.4 66.5 Imports, GNFS .. 53.5 69.6 Gross domestic savings 26.9 28.1 20.5 Memorandum items: Gross domestic product (current EEK millions) 1,991.7 13,786.0 26,274.0 Gross domestic product (current USD millions) 166.0 1,148.8 1,987.0 GDP GROWTH RATE (Percent change) Real gross domestic product -11.0 -14.2 -3.0 Real gross domestic product per capita -8.2 -13.0 -8.8 - Hii - COUNTRY DATA - ESTONIA gR', g g: Sg L 0' ;:.S'"*Sg.-............g . ........ .... ......... PRICES & WAGES (Percent change) Consumer prices 211.0 1,069.0 89.0 Nominal wage index 98.0 619.6 100.4 MONETARYINDICATORS Broad money (M2) as percent of GDP, (end-of-year) 50.3 20.8 25.4 Growtd of nominal M2 (percent) .. 196.4 95.3 GENERAL GOVERNMENTBUDGET (Percent of GDP) Currentrevenues 33.5 29.8 32.3 Currentexpenditures 26.1 27.8 30.1 Currentsavings 7.4 2.0 2.2 Capitalexpenditures 3.1 1.2 2.0 Financialbalance 4.3 0.8 0.2 Net lending 0.0 -0.3 -1.6 Fiscalbalance 4.3 0.5 -1.4 BALANCEOF PAYMENTS(USD millions) Exports (GNFS) .. 626.4 1,117.0 Merchandise .. 457.2 801.0 Imports (GNFS) .. 636.3 1,206.3 Merchandise .. 519.9 903.0 Resource balance .. -9.9 -14.0 Factor services, net .. -1.9 -29.0 Net current transfers (incl. official currenttransfers) .. 94.7 53.9 Current accountbalance (after official capitalgrants) .. 82.9 9.0 Net private foreign direct investment .. 57.9 145.0 Long-term loans (net) .. 13.2 86.4 Official Private Othercapital (net, includingerrors and omissions) .. 83.4 -73.0 Changein net reserves (- = increase) -202.9 -142.0 - iv - COUNTRY DATA - ESTONIA DIRECTION OF TRADE (Percent of Totals) Main export markets Former Soviet Union(FSU) 94.8 47.0 43.2 Russia 56.5 20.8 22.9 Others 38.3 26.2 20.3 Non FSU 5.2 53.0 56.8 Finland 2.3 21.1 20.9 Others 2.9 31.9 36.0 Main import markets Former Soviet Union (FSU) 84.7 47.3 26.4 Russia 45.9 28.4 16.0 Others 38.8 18.9 10.4 Non FSU 15.3 52.7 73.6 Finland 2.0 22.9 36.4 Others 13.3 29.8 37.2 v PREFACE This report was producedby the World BankPublic ExpenditureReview mission that visited Estonia in October and November 1993. Membersincluded John Hansen (team leader), Rajesh Dewan (budgetprocesses), Tapio Saavalainen(resource availabilities) and Milan Vodopivec(labor markets). The principal authors of the report were: John Hansen, Chapters 1 and 3; Tapio Saavalainen,Chapter 2; and Rajesh Dewan, Chapter 4. Milan Vodopivec prepared the sections of Chapter 2 on social safety net issues. Chapter 3 draws heavily on materials prepared by sectoral experts in the EC4 Sector Operating Divisionsof the World Bank. Sectoral backgroundpapers were prepared by Aaron Adiv (transport); EustaciusBetubiza and Eric Peterson (housing);Anna Bjerde (energy);John Flora (municipaltransport); Simo Juva (education);and Milan Vodopivec(labor). Carlos Hinayonassisted with modeling resource availabilitiesand prepared the projects list on Annex A. Ibrahim Akoumprepared the charts and graphs for Chapter 3. Maha Armaly prepared a note on procurementfor Chapter 4. The report was prepared under the general direction of Adil Kanaan (Division Chief) and Basil Kavalsky(Director). The missionteam wishes to thank the Estonianauthorities for their excellent supportand cooperation,including importantdiscussions and commentson an earlier draft of this report. - vi - ESTONIA: PUBLIC EXPENDITUREREVIEW TABLE OF CONTENTS Executive Summary .................................................. x CHAPTER1. Strategic Prioritiesfor InvestmentProgram Design ................... 1 A. Introduction. B. EconomicStabilization and the InvestmentProgram5 Total Feasible InvestmentLevel. 5 Government's Role in Total InvestmentActivity. 6 Financial Resources Availableto the Public Sector. 7 Resource Requirementsof the Proposed Project List. 8 C. StructuralReforms and Sectoral Investments .11 Economic Strategy for Public Investment.12 Role of Public Investmentby Sector .13 Sectoral Allocationof Proposed Project List .14 Binding Constraints on EconomicGrowth .15 Regional Development .18 D. ProjectPrioritization within Sectors.23 Rates of Return. 23 Maintenanceand Repair .23 Energy Efficiency.24 Completion of Ongoing Projects.24 Future Operating Costs.25 E. Conclusionsand Agenda for Action .26 Agenda for Further Action .26 CHAPTER2. ResourceProspects ......................... 29 A. Introduction.29 B. Recent Fiscal Patterns.30 Expenditures.30 Sources of Revenue.31 Overall Fiscal Balanceand Macro Stabilization.34 C. Major Issues in RecurrentExpenditures .34 Financingthe Social Safety Net .34 Public Sector Salaries.42 Extraordinary Transition Expenditures.43 D. ResourceProspects over the MediumTerm .44 Real GDP Growth .44 Net Resources Availablefor InvestmentExpenditures .44 Government Revenuesand Expenditures.45 Government Borrowing .47 - vii - CHAPTER 3. Preliminary Assessment of Proposed Projects ..... ................. 52 A. Introduction .............................................. 52 B. Public Sector Domain (Group 1) ......... ........................ 53 Education .............................................. 53 Environment ............................................. 54 Government Administration ............ ........................ 56 Highways .............................................. 57 Labor/Employment Services ........... ........................ 58 Municipal Streets and Lighting .......... ........................ 59 Public Safety and Defense . ..................................... 59 C. Public Sector Majority (Group 2) ................................ 60 Air Transport ............................................. 60 Culture .............................................. 60 District Heating and Energy ........... ........................ 61 Forest Resource Management ........... ........................ 61 Health and Social Assistance Services ............................. 62 Municipal Solid Waste ........................................ 64 Municipal Transport . ....................................... 64 Port Infrastructure . ......................................... 64 Railways .............................................. 65 Water Supply and Sewerage ............ ........................ 66 D. Private Sector Majority (Group 3) ..............................