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Republic of Estonia: Selected Issues

Author(s):
International Monetary Fund. European Dept.
Published Date:
May 2018
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Public Investment Management in Estonia: Key Institutions and Reform Priorities1

Strong public investment management (PIM) institutions are critical to improving investment efficiency. This Selected Issues Paper (SIP) assesses key institutions involved in the PIM function in Estonia, examining salient features of these institutions against recommended practice. Several meet expected requirements, particularly those related to the implementation phase. Others could be strengthened, especially those related to the strategic planning, and resource allocation phases.

A. Background

1. Estonia plans to continue investing heavily to accelerate its development outcomes. Public investment has been kept high in Estonia over the years, with general government gross fixed capital formation exceeding 4.5 percent of GDP for more than a decade. The emphasis on investment has helped to address infrastructural impediments to competitiveness and growth, and improve social outcomes, but gaps remain. These are expected to be addressed by maintaining high levels of investment in coming years. The new government has announced additional investments of 0.5 percent of GDP annually for the next three years from 2018. A number of mega-projects are also in implementation or under consideration.2

2. This relatively high level of public investment is being implemented in the context of sustained fiscal discipline. In adherence with its fiscal rule, Estonia maintained a structural fiscal surplus since 2009 until 2016 and, despite recent loosening, the nominal deficit was contained to 0.3 percent of GDP in 2017 according to preliminary results. This has enabled it to remain the least indebted country in the EU, with gross public debt peaking at 10.7 percent in 2014 and reverting to 9 percent in 2017 (Figure 1). The commitment to preserve this strong fiscal performance, while investing heavily to accelerate development outcomes, reaffirms the importance of a supportive institutional framework for PIM.

Figure 1.Recent Trends and Developments

Sources: World Bank, Eurostat, Statistics Estonia, IMF staff calculations.

3. Several initiatives are already underway to strengthen public financial management more broadly. The legal framework has been updated, with revisions made in recent years to the State Budget Act, the State Assets Act, the Local Government Financial Management Act, and the Public Procurement Act. Most recently, the State Budget Act was amended to address previous asymmetries in the fiscal rule. Following the introduction of accrual accounting across the public sector over a decade ago, the state budget was presented on the accrual basis for the first time in 2017. Program-based budgeting is being piloted, and full implementation of performance-based budgeting is targeted for 2020. Spending reviews are also being piloted, with the aim of increasing expenditure effectiveness and supporting policy prioritization. This reform agenda signals recognition of the importance of strong fiscal institutions.

4. PIM institutions can contribute significantly to raising public infrastructure quality and boosting investment efficiency and productivity. McKinsey (2013) estimates that scaling up PIM best practices could save an average of $1 trillion a year globally in infrastructure costs, and identifies three main opportunities; (i) making better decisions about project selection; (ii) streamlining project delivery; and (iii) making the most of existing infrastructure. IMF (2015) posits that the strength of PIM institutions will influence public investment efficiency, and identifies 15 institutions through three stages of the PIM function as being critical to overall institutional strength (Figure 2). IMF (2015) also develops a PIM Assessment (PIMA) instrument, for conducting comprehensive assessments of PIM practices across these 15 institutions.3 PIMAs summarize the strengths and weaknesses of country public investment processes, and set out a prioritized and sequenced reform action plan. Over 30 PIMAs have been conducted to date, of which eight have been or are in the process of being published.

Figure 2.IMF Public Investment Management Framework

Source: IMF (2015).

5. This SIP examines key PIM institutions in Estonia, and finds that several meet expected requirements, while others could be strengthened. Guided broadly by the PIMA framework, this SIP provides a preliminary assessment of the PIM institutions involved in: national and sectoral planning; coordination within the public sector; multi-year budgeting; project appraisal and selection; transparency of budget execution; and management of project implementation; each of which could impact overall PIM outcomes. Among the stronger PIM functions in Estonia are coordination within the public sector, transparency of budget execution, and management of project implementation, with high levels of transparency and robust arrangements for project execution. Areas that could benefit most from strengthening are the planning arrangements, as well as appraising, prioritizing, and selecting of projects. Table 1 provides a summary of the main findings. This SIP is not a substitute for a full PIMA, and Estonia could still benefit from a full PIMA being conducted.4 It should also be emphasized that the institutions addressed by this SIP were selected for focus given the need to prioritize effort based on relevance in this initial effort. A comprehensive assessment of the PIM function in Estonia would require examination of the full set of institutions under the PIMA framework.

Table 1.Summary Assessment
Phase/InstitutionInstitutional StrengthEffectiveness
PlanningNational and Sectoral PlanningMedium: National and sectoral plans are published, most include measurable targets, and some include costings although the public investment and overall fiscal implications are not always obvious.Low: The absence of a link between the national and sectoral plans and the fiscal framework, and the lack of a single consolidated presentation of public sector investment plans with sectoral allocations and costings of large projects, undermine the effectiveness of the planning function
Coordination within the Public SectorGood: Local governments are subject to fiscal rules, fiscal transfers are formula-based, and the state budget covers general government. The state-owned enterprise (SOE) sector enjoys autonomy, but is actively monitored.Good: Local governments comply with the fiscal rule, indebtedness is low, functional responsibilities are clear, and the level of EU-funding for investments helps with coordination. Large SOE investment projects are discussed with central government.
AllocationMulti-Year BudgetingMedium: The medium-term budget strategy and annual budget plan include projections of capital spending over a four year horizon, ceilings are binding for the budget year and indicative for outer years, but total costs of multi-year projects are not published in budget documents.Medium: Budget ceilings are not applied to grant-financed projects. This accommodates accelerated implementation, but could undermine incentives for good forecasting. The non-inclusion of total project costs in the budget documentation means that budget allocations are approved without a view of total costs for multi-year projects.
Project AppraisalMedium: Cost benefit analyses are conducted for major and externally-financed projects. Other projects are subject to qualitative appraisals within sector ministries and the ministry of finance (MoF).Low: The lack of a standard methodology and central capability to appraise projects affect the rigor of the appraisals conducted. Project-related risks should also be systematically identified and actively managed.
Project SelectionMedium: All projects are scrutinized by the MoF prior to inclusion in the budget, but there are no binding criteria to guide project selection. A project pipeline is maintained, but other projects could be included in the budget.Low: Despite MoF scrutiny, the absence of formal appraisal and binding selection criteria, and latitude to add projects from outside the process undermine effectiveness of the selection function.
ImplementationTransparency of ExecutionGood: Public procurement is open and competitive, project costs and physical progress are monitored, and financial oversight and ex post audits are conducted.Good: The e-procurement platform allows for very open access to procurement information, internal and external audit reports are produced on project implementation, and procedural violations highlighted where they occur.
Project ImplementationMedium: Individual ministries and agencies oversee implementation, project budgets typically include provisional sums to accommodate modest adjustments, and ex post reviews are done particularly in relation to externally financed projects.Medium: In the absence of central monitoring of project implementation, comprehensive data are not readily available on cost and time overruns, although anecdotal evidence suggests that cost and time overruns do occur on occasion.

B. Planning Sustainable Levels of Public Investment

National and Sectoral Planning

6. In accordance with the requirements of the legal framework, several national and sectoral plans have been prepared. The State Budget Act requires strategic development documents to be prepared, which then form the basis for the national budget strategy and annual budget plans. In keeping with these requirements, an array of national plans and sectoral strategies have been prepared. These include three horizonal longer term national strategies, along with a four-year government program derived from political commitments. At the sectoral level, 47 strategies have been developed. A number of these plans and strategies are driven by the procedural requirements of applying for financing under the EU structural and investment funds, which are a significant source of financing for public investment activity.5

7. Despite its strengths, the planning process could be improved in number of areas. Key strengths of the planning process and its outputs include: a high level of transparency with most plans being publicly available; most include costings, even though the public expenditure and investment requirements are often not obvious and individual projects are sometimes not costed; and most include an abundance of performance indicators and targets, even though the large number of targets contained in some could undermine the effectiveness of the monitoring function. More fundamentally, the plans do not have a formal link to the fiscal framework, and are not constrained by an indication of available financing. As a result, they represent more the unconstrained aspirations of the sectors rather than plans that could realistically be financed. In addition, despite the importance attached to public investment, a single consolidated view of the investment plans of the public sector or even of the general government, with details of all major projects and accompanying financial projections, is not readily available.

8. The authorities have recognized the need to strengthen the planning process, and have recently announced number of changes in the next planning cycle. The government has recently launched the process for preparation of the next cycle of national and sectoral plans, under the umbrella of Estonia 2035.6 In making the announcement, the authorities indicated the intention to: consolidate the strategic planning framework; avoid fragmentation and prevent inconsistencies; reduce the number of plans and bureaucracy; and ensure that the implementation of the strategy reduces the workload related to the preparation, implementation, and reporting of development plans.

9. Going forward, reform priorities could include: streamlining and simplifying the planning process to reduce the number of plans and optimize the number of indicators and targets that have to be monitored; aligning the national plan with the fiscal framework and sectoral plans with indicative resource availability; identifying clearly within each plan the implications for the public finances including, in particular, the public investment requirements of the plan and indicative costings of major investment projects; and preparing a consolidated public sector investment plan with details of major public sector projects as well as financial projections and project costings. In this regard, Ireland provides a good example of reform to strengthen the national development planning system (Box 1).

Box 1.National Development Planning in Ireland

Ireland provides an interesting comparative example, including because of size and the fact that its national development planning function has its origins in the planning cycle for EU structural funds. Ireland’s first national development plan (NDP) covered 1993–2000, coinciding with the EU cycle. Since then, the planning function has evolved considerably. Successive NDPs have served as strategic investment plans, and were costed and integrated with the budget process. Most recently, following a PIMA conducted by the IMF in 2017, Ireland concluded a new National Planning Framework, Ireland 2040, along with the new NDP 2018–27. This NDP identified the strategic priorities for public investment for all sectors, and reaffirmed the commitment to stronger coordination of sectoral strategies and more rigorous selection and appraisal of projects. It included indicative budgetary allocations to support the delivery of each national strategic outcome, and for identified strategic investment priorities under each outcome. It also included annual projections of capital expenditure by funding source, as well as annual departmental capital allocations over the life of the plan. The Irish NDP, therefore, maintains a close integration with the medium-term fiscal framework and long term fiscal projections, and connects these with the national vision and sectoral aspirations.

Sources: Government of Ireland (2018a) and (2018b).

Coordination within the Public Sector

10. Estonia has an active local government sector, through which significant public investment is executed. The local government reform reduced the number of local governments from 213 to 79, and there are plans for further reforms aimed at increasing financial autonomy, including by transferring some central government functions to local governments, along with the corresponding financing. Currently, local governments account for 25 percent of general government capital expenditure (Figure 3).

Figure 3.Public Investment by Local Governments

(€ millions)

Sources: Statistics Estonia, IMF staff calculations.

11. Local governments derive the majority of their revenue from central government transfers. The largest source of local government revenue is personal income taxes collected and transferred by the central government, comprising 11.86 percent of the incomes earned by residents within the local area (Figure 4). In addition, earmarked block grants are provided to meet recurrent costs in such areas as education and social benefits. These are calculated using more than 50 different formulas, and the central government has provided local governments with a tool to project their revenue for the coming four years. Reforms are currently being considered to eliminate earmarked transfers and improve efficiency by moving to a more performance-based system. Local governments compete for capital grants, and EU funds finance approximately one-third of their total investment.

Figure 4.Composition of Local Government Revenue

Sources: Statistics Estonia, IMF staff calculations.

12. Strict fiscal rules are in place to prohibit the incurrence of deficits, confine borrowing to investment purposes, and impose a ceiling on the level of debt. The Local Government Financial Management Act prescribes in detail the computation of the operating result of local governments, imposes the constraint that an operating deficit shall not be incurred, defines the composition of debt, and stipulates that a local government shall not incur debt in excess of either six times its operating surplus or 100 percent of its operating revenue for the current year. In addition, local governments are disqualified from receiving EU grants if they exceed the debt ceiling.

13. Otherwise, local governments enjoy complete autonomy over their expenditure, including capital expenditure, in the functional areas for which they are responsible. The functional responsibilities of local governments are stipulated by law, and include certain social and welfare services, basic education, and primary healthcare. Within the boundaries of their functional responsibilities, local governments have complete latitude on their investment decisions, and no consultations with the central government are required. While coordination between central and local government is generally recommended, the fact that most large projects are financed by EU grants in which the central government is involved, along with the clarity in respective responsibilities, and the strict enforcement of the fiscal rule, combine to ensure that public investment activity is coordinated at the aggregate level. In addition, the institutional perimeter of the state budget, and against which the fiscal rule and medium term budgetary objective is applied, is the general government. This also ensures coordination at the aggregate level of the general government, even if not at the individual project level.

14. Outside general government, but still within the public sector, the state-owned enterprise (SOE) sector is also a source of significant investment activity. There are currently 29 entities that are legally constituted as SOEs, amongst which 5 are statistically classified as general government because of the nature of their activities including the state real estate company. The latter provides an interesting model for managing public investment in real estate and the associated portfolio of real estate assets (Box 2). The other 24 operate on a commercial basis with the state as shareholder. Some SOEs have been implementing large investment projects. Property, plant and equipment held by Eesti Energia, for example, has doubled since 2010 (Figure 5), although the rate of growth has slowed in recent years as revenue has fluctuated. Total assets of the SOE sector exceeded €6 billion at the end of 2016.

Figure 5.Eesti Energia AS

(In millions of Euros)

Source: Eesti Energia.

15. SOEs enjoy a high level of autonomy, including over their investment activities, and reforms are underway to further strengthen SOE governance. The ownership model currently in place in Estonia is decentralized, with SOE ownership distributed amongst six sector ministries. The MoF performs a coordinating role pursuant to the provisions of the State Assets Act, developing SOE governance principles, and preparing an annual consolidated report on the sector. The recent establishment of nomination committees with private sector representation, for the purposes of appointing SOE supervisory boards, should result in stronger corporate governance in the sector. Additionally, consideration is being given to centralize the ownership function at the MoF, with clearly defined roles for the sector ministries. SOEs are required to conduct their operations in a manner aimed to achieve their targeted rate of return, and investment decisions are made on a purely commercial basis. No formal consultations are required or conducted with the central government on investment projects, although in practice there are discussions on large projects with public interest considerations.

Box 2.The State Real Estate Company—Riigi Kinnisvara AS (RKAS)

RKAS has its origins in the Estonia Privatization Agency, and was established legally as a company in 2001 to provide real estate development and management services to state agencies. Through the progressive transfer of real estate assets to RKAS, the state undertook to unify the management of these assets, aiming at more effective management and value maximization. Currently, RKAS develops real estate for state agencies, provides facilities management services, and conducts project management activities as needed on behalf of state agencies.

In relation to new real estate development, ministries or agencies that would like to propose new real estate developments propose these projects to the MoF by way of project memoranda, prepared with support from RKAS. Once a particular new development is approved via the budget process, RKAS is mandated to execute the project. Upon completion, the constructed asset is owned by RKAS and occupied at an agreed rental by the client ministry. Currently, state agencies comprise 95 percent of the tenancy of RKAS’s property portfolio. Annual investments by RKAS in recent years have been between €60 and €100 million. In addition, to new properties, RKAS also invests in value added investments in its existing portfolio.

RKAS’s current holdings comprise 700,000 square meters of real estate, 124,000 square meters are owned by government, but under facilities management contracts with RKAS, a further 670,000 square meters comprise assets still owned by government and likely to be transferred to RKAS (such as properties owned by the ministry of education), while a further 570,000 square meters are owned by government and are unlikely to be transferred to RKAS (comprising strategic assets, such as defense and heritage properties). RKAS is currently inventorizing all properties owned or occupied by the state, including preparation of valuations and a conditions survey aimed at determining investment needs where relevant. When completed later in 2018, this exercise will provide a full picture of the state’s real estate assets and other properties it is occupying throughout the country.

Since 2008, in accordance with Eurostat and Statistics Estonia standards, RKAS’s operations have been classified as part of the central government. As a result, its budget is reviewed within the central government budget process, and its operations are incorporated into the fiscal outcomes of the central government, despite its legal form as a company.

Source: RKAS.

16. Although there might be some room for improving coordination, existing arrangements are generally strong. It might be possible to coordinate investment planning more closely between the central government, local government, and SOE sectors. However, given the autonomy enjoyed by these sectors and the existing arrangements to coordinate at the aggregate level, the returns to any such efforts are likely to be marginal. Instead, emphasis should be placed on advancing existing initiatives, such as reforming and simplifying the fiscal transfer arrangements with local governments without undermining the fiscal discipline that has been achieved by the sector, and concluding consideration of whether to centralize the SOE ownership function at the MoF. At the same time, preparation of a single consolidated public-sector investment plan, including investments by the local government and SOE sectors, would be useful.

C. Ensuring Public Investment is Allocated to the Right Sectors and Projects

Multi-Year Budgeting

17. Multi-year budgeting is long established and deeply entrenched in Estonia. The State Budget Act requires the government to prepare and approve, no later than the end of May, a State Budget Strategy addressing the coming budget year plus three forward years. This document reflects the medium-term fiscal framework, and includes the financial plan underlying the state budget strategy for the period concerned. It also includes budget ceilings by agency. These ceilings are aggregated at ministry level, and are revised annually. Grant-financed expenditure is not subject to the ceiling, in order to allow flexibility in the event a project is implemented more quickly than anticipated. While this builds in flexibility to accelerate execution of grant-financed projects, it could undermine the incentives for reliable forecasting of the activities of these projects. Certain other expenditure mandated by law are also excluded from the ceilings, such as pension payments. The budget includes an appendix with detailed multi-year projections of capital expenditure by agency and major project.

18. The main gap in the multi-year budgeting arrangements, is the absence of data on total project costs for multi-year projects. Current budget documentation does not provide the parliament with total project costs when seeking approval of budget allocations, either on the first or any subsequent occasion. This is particularly an issue for those projects whose implementation period will exceed the projection period covered by the budget. While alternative documentation on total project cost might be available, particularly in the case of mega-projects which have high visibility, the budget documentation should include on a systematic basis the latest estimate of total project cost for multi-year projects. This will ensure that the parliament is informed of total projected cost when approving the first and subsequent allocations for the project.

Project Appraisal and Selection

19. Major projects are subject to comprehensive feasibility studies, and to scrutiny by EU authorities when financed by them. EU-financed projects comprise around 20 percent of total general government capital expenditure (Figure 6), including most large projects. Feasibility studies are prepared for these and scrutinized by EU authorities and, in the case of the mega-projects, are publicly available.7

Figure 6.Composition of Capital Expenditure by Funding Source

(In millions of Euros)

Source: Authorities data, IMF staff calculations.

20. Other projects are subject to a more qualitative appraisal, prior to inclusion in the budget. All other investments are appraised by the sector ministries and the MoF according to universal qualitative criteria such as whether the project: is related to the relevant sectoral development plan; has positive impact on other fields/areas; helps to increase the quality and accessibility of public services; is sustainable and cost effective; etc. A universal template is applied by the MoF for appraisal of requests for project funding in the budgetary process, and different appraisal and selection procedures are applied for real estate, information and communication technology, transportation, and other investments. There is no formal guidance on cost-benefit analysis or cost effectiveness analysis methodologies.8

21. The processes and methodologies by which projects are appraised could be strengthened, and should be applied to all projects irrespective of funding source. Larger or more complex projects above a specified size threshold or meeting other specified criteria should be subject to more sophisticated cost benefit analysis or cost effectiveness analysis, while smaller projects could be subject to simpler qualitative analysis. The objectives of such arrangements are that all projects are subject to a minimum, but sufficiently robust prescribed standard of scrutiny and analysis, and that no project can be otherwise introduced into the budget. The UK Green Book and Ireland’s Public Spending Code provide good examples of detailed guidance issued by governments on preparing project appraisals, including guidance on the methodology and assumptions to be used, requiring explicit adjustment for optimism bias, and requiring risk and sensitivity analysis to be integrated into the appraisal.9

22. As with project appraisal, arrangements for project selection can also be strengthened. While all projects are scrutinized by the sector ministries and the MoF prior to inclusion in the budget, the rigor of that scrutiny could be strengthened with more formal guidance on the appraisal thresholds that should be met before a project is considered for inclusion in the budget, as well as by the development and application of formal and transparent criteria for project selection. Furthermore, while the MoF maintains a database of projects, current arrangements do not prevent the introduction of other projects into the budget.

23. Going forward, reform priorities should include: requiring mandatory appraisal of all public investment projects before inclusion in the budget, taking into account capacity to conduct such analysis, and accommodating more basic analysis for projects below a specified size threshold if needed; developing standard guidance on conducting such appraisals; developing standard criteria and guidance for prioritizing and selection of projects; and progressively building capacity to conduct project appraisal and selection, with the possible establishment of a core team within the MoF to lead and roll-out this practice across the public sector.

D. Delivering Productive and Durable Public Assets

Budget Execution and Project Implementation

24. Estonia has a well-established, open, competitive public procurement system, based largely on an e-procurement platform. The procurement system in Estonia is governed by the Public Procurement Act, and is overseen by the MoF which provides guidance on public procurement policy, advice and training, and administers the electronic procurement system. An e-procurement register and portal are maintained, through which the public has access to procurement notices, bid documents, and final awards made. Tenderers can also submit their bids, and receive notification of the basis for the final awards. In 2017, 93 percent of all public procurement was conducted through the e-procurement portal, comprising approximately 10,000 transactions with a total value of €2 billion. The MoF also produces an annual report on public procurement activities.

25. There are multiple layers of project monitoring, both of physical progress as well as financial costs. Responsibility for monitoring physical and financial progress of projects rests with the respective ministries and agencies. In addition, within the MoF, the financial control department serves as the audit authority for EU-financed projects and conducts ongoing audit and verification of financial transactions incurred by these projects. For each audit conducted, the department issues a specific report, and an annual report is also issued. Corrective action is taken on these reports, and there have been instances where costs have been deemed ineligible on grounds of procedural non-compliance.

Box 3.Project Cost and Time Overruns

Eastern Border

The Easter Border project was initially presented to Cabinet in February 2015 at an estimate of €79 million. In February 2018, the Police and Border Guard Board (PPA) presented estimates to the Ministry of the Interior that the project would now cost 2.5 times more at €197 million. A subsequent internal audit identified lack of information on factors that could affect construction price, like construction volumes and geology, at the time of planning the project. In addition, it was explained that the PPA had only one and a half months to present their initial assessment. Weak planning and monitoring were also identified as other contributory factors for the cost overrun.

Auvere Power Plant

The construction of the Auvere power plant began in 2011 by Eesti Energia AS. The plant began producing electricity in 2015, but in the commissioning phase it appeared that under higher production capacities the plant’s particle emissions exceeded regulatory limits. To reduce particle emissions, in 2017 the general contractor, General Electric, undertook to build additional fabric filters and ancillary equipment. Since August 2017, the builder has been adjusting the plant and the fabric filters and conducting tests, the results of which confirm that after the installation of additional equipment the emissions of the plant remain within regulatory limits. Due to the deferral of commissioning, the final delivery of the power plant is expected to take place in the second quarter of 2018. In 2016, General Electric and Eesti Energia signed an agreement under which General Electric undertook to pay Eesti Energia liquidated damages for the delay in the delivery of the plant until its full delivery. For 2017, General Electric had to pay €30.9 million euros of which €21.9 million was settled by the year end. The budget of the project is €638 million, of which €568 million of this was invested up to the end of 2017.

Source: Eesti Energia SA 2017 Annual Report, mission discussions.

26. Ex post audits are also conducted and the findings submitted to the parliament for consideration. The National Audit Office of Estonia (NAOE) conducts ex post audits of projects on a selective sample basis. In addition to its ex post audits, the NAOE is seeking new audit products to enable it to provide the parliament with more timely information on matters within its purview. Under the NAO’s audit strategy for 2014–20, audit of major investments is identified as a priority area for attention. Audit reports produced by the NAOE are examined by the State Budget Control Committee, which monitors implementation of the state budget and use of budget funds and state assets. Once a year, this Committee reports on its activities to the parliament. Amongst the audits recently concluded by the NAOE was one on Rail Baltic, which raised concerns about lack of clarity on Estonia’s financial obligations under the project agreement, burden-sharing amongst the national parties to the agreement, and risks that are faced by Estonia in event of reduced availability of external financing for the project or withdrawal by any of the other parties. Ex post reviews of projects are also sometimes conducted, especially of EU-financed projects.10

27. Individual ministries manage and control projects during execution, but central capabilities for managing the overall portfolio could be strengthened. While individual ministries and agencies assign personnel to manage projects during implementation, central capability to oversee the whole portfolio could be strengthened. For example, matters previously raised regarding developing and administering guidance on project appraisal and selection and ensuring compliance with these will probably need to be driven centrally, as would the overall oversight of the whole portfolio.

28. An example of a gap arising from the absence of such central capability, is the lack of data on cost and time overruns. Time and cost overruns are a significant risk faced in implementation of infrastructure projects. Despite the existence of this risk, there is little consolidated data on the extent to which projects are implemented within their original cost and time budgets, and reliance has to be placed on anecdotal accounts which suggest that this risk is non-trivial (Box 3). While some ministries indicate success in managing project costs to keep them within the budget, more systematic monitoring and reporting, and institutionalized arrangements for investigating any cost and time overruns beyond specified thresholds, would be useful.

29. Possible areas for strengthening could include: establishing a modest centralized public investment management capability within the MoF (possibly by expanding the mandate of one of the existing departments), tasked with leading the project appraisal and selection function including setting standards for project appraisals and monitoring compliance with same; monitoring project implementation in collaboration with responsible ministries and agencies, and institutionalizing audits of cost and time overruns above specified thresholds; and providing overall leadership on public investment management issues (Box 4).

Box 4.Alternative Approaches to Central Public Investment Management Units

Ireland

The Irish Government Economic and Evaluation Service (IGEES) provides central support for the application of the project appraisal methodologies across government. It does this through formal capacity building and on-call assistance. During 2016, IGEES trained around 200 officials from departments and local authorities in the appraisal and evaluation techniques in the Public Spending Code. IGEES economists are also seconded to departments to provide expertise in economic analysis of projects, as well as other aspects of economics. The Common Appraisal Framework for Transport, for example, was developed by the Department of Transport, Tourism, and Sport in collaboration with IGEES.

New Zealand

New Zealand’s National Infrastructure Unit was established in 2009 within the Treasury (Ministry of Finance) to deliver the government’s objectives relating to infrastructure. Its responsibilities include: formulating, and monitoring progress on the 20-year National Infrastructure Plan; establishing robust and reliable cross-government frameworks for infrastructure project appraisal and capital asset management, and monitoring the implementation and use of those frameworks; and providing support to, and acting as a secretariat for, the National Infrastructure Advisory Board. The Unit does not duplicate the role of other infrastructure-related government agencies, but works in cooperation with other government agencies and takes a cross sector, high level view of New Zealand infrastructure. The National Infrastructure Board consists of members from the private sector and outside central government, and was established to provide the National Infrastructure Unit and the Minister of Finance with advice and perspectives on infrastructure project appraisal, capital asset management issues and the development of the New Zealand Infrastructure Plan. A key role for the Board is to engage with the private sector, local government and other stakeholders.

Australia

Australia has gone one step further and has established Infrastructure Australia, an independent statutory body with a mandate to prioritize and progress nationally significant infrastructure. They provide independent research and advice to all levels of government as well as investors and owners of infrastructure, and are responsible for strategically auditing Australia’s nationally significant infrastructure, and developing 15-year rolling Infrastructure Plans that specify national and state level priorities. Their role is defined in the amended Infrastructure Australia Act which states that the Minister must not give directions about the content of any audit, list, evaluation, plan or advice provided by Infrastructure Australia. Major reports published include Infrastructure Audits and Australian Infrastructure Plans. The first Australian Infrastructure Plan was released in February 2016. It is Australia’s first 15-year rolling infrastructure plan. Infrastructure Australia also determines which nationally significant projects should be included on the Infrastructure Priority List. This is a rigorous prioritization process that ensures there is a highly credible pipeline of nationally significant infrastructure projects. The latest Infrastructure Priority List was delivered in February 2017. The revised version is due to be published in March 2018.

Sources: IMF (2017), http://igees.gov.ie/,http://www.infrastructure.govt.nz/, http://infrastructureaustralia.gov.au/

E. Conclusions

30. Estonia’s PIM arrangements meet most expected requirements, but some institutions can be further strengthened. Among the stronger aspects of the PIM function are central government coordination with local governments and SOEs at the aggregate level, and the transparency of budget execution. Among the areas that could benefit most from strengthening are the planning function and the arrangements for appraising, prioritizing, and selecting projects.

31. A prioritized plan to further strengthen PIM in Estonia could comprise the following actions:

  • As the first priority, strengthening project appraisal and selection arrangements:

    • Phased introduction of mandatory appraisals of all public investment projects before inclusion in the budget, taking into account capacity to conduct such analysis, and accommodating more basic analysis for projects below a specified size threshold if needed.

    • Developing standard guidance on conducting such appraisals.

    • Developing standard criteria and guidance for prioritizing and selection of projects.

    • Progressively building capacity to conduct project appraisal and selection, with the possible establishment of a core team within the MoF to lead and roll-out this practice across the public sector.

  • In anticipation of the next planning cycle leading to preparation of the Estonia 2035 plan, streamlining the planning process and improving its alignment with the fiscal framework:

    • Simplifying the planning process to reduce the number of plans and optimize the number of indicators and targets that have to be monitored.

    • Ensuring that the entire national planning framework is aligned with the fiscal framework and sectoral plans with indicative resource availability.

    • Ensuring that each plan clearly identifies its implications for the public finances including, in particular, the public investment requirements of the plan and indicative costings of major investment projects.

    • Preparing a consolidated public-sector investment plan with details of major public-sector projects as well as financial projections and project costings.

  • In parallel, advancing the rest of the reform agenda to strengthen public financial management and PIM, most of which is already underway:

    • Roll out the implementation of performance-based budgeting.

    • Advance the piloting and full implementation of spending reviews.

    • Simplify the local government transfers arrangements, including by eliminating earmarking and introduce performance monitoring with a view to eventually developing a performance-based system.

    • Conclude the decision on SOE oversight, whether to centralize the ownership function, and implement decision.

32. A comprehensive agenda such as this could be consolidated into a full-fledged PIM reform strategy, and would position Estonia as a good example of an advanced economy with systems that are already strong, undertaking the next generation of reforms to further strengthen its institutions.

References

Prepared by Ashni Singh. The author would like to thank the Estonian authorities and colleagues in the IMF’s Fiscal Affairs Department, particularly Carolina Renteria and Christiane Roehler, for helpful comments.

These include Rail Baltic, whose capital cost is projected at €5.8 billion (25.2 percent of Estonia’s 2017 GDP), of which Estonia’s share is expected to be €1.35 billion (5.9 percent of GDP) partly to be met by EU grants under the Connecting Europe Facility.

The PIMA framework was very recently updated. While the new framework streamlines and realigns some of the PIM institutions and the levels of expected practice, the general thrust of the original framework remains unaltered.

If Estonia were to have a PIMA conducted, it would be the second advanced economy to do so after Ireland (IMF 2017). The preliminary assessments reported in this SIP would be subject to revision by a full PIMA, given the more comprehensive nature of that exercise.

During the 2004–06 and 2007–13 periods, respectively, Estonia received €368 million and €3.4 billion of support under EU Structural and Investment Funds. During the 2014–20 cycle, Estonia is expected to receive €4.4 billion of support from these Funds.

For example, Ernst & Young (2017).

OECD (2017) also points out that the absence of a coherent framework to assess the value-for-money and socioeconomic impacts of planned investment makes it challenging to correctly identify and prioritize the most productive infrastructure projects in Estonia.

For example, Praxis (2017).

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