## 1.2 Establish 10-year public investment plans to strengthen and consolidate medium-term capital planning ## Source details **Canonical URL:** [1.2 Establish 10-year public investment plans to strengthen and consolidate medium-term capital planning](https://www.imf.org/-/media/files/publications/cr/2019/1estea2019001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2019/1estea2019001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2019/1estea2019001.pdf.json) --- ### Key findings on public investment levels and trends - General government capital expenditure has been usually well above 5 percent of GDP. - Public capital stock rose from 40 percent of GDP in 2007 to 57 percent by 2015. - Public investment grew from 13 percent of total investment in 2006 to a peak of 24 percent in 2012. - General government capital expenditure recovered to a peak of 16 percent as a share of total expenditure in 2012, having previously reached 17 percent in 2007. - Across the public sector (2017 shares): Central Government 53.1 percent, Local Government 24.3 percent, Social Security Funds 0.4 percent, Public Corporations 22.2 percent. - Public corporations (PCs) capital expenditure has consistently exceeded 2 percent of GDP, rising as high as 5.5 percent of GDP in 2013; in 2017 the PC sector accounted for 22 percent of capital expenditure by the public sector. - Externally financed expenditures (co-financed primarily from the EU) have accounted for as much as 25 percent of all public investment by the general government since 2009. - More than 75 percent of general government capital expenditure are nationally funded projects. ### Efficiency and service impact - Estonia achieved the highest score on an index measuring overall access to public infrastructure among 148 countries, across education, health, electricity, roads, and water. - For the indicator of perception of quality on its own, Estonia has an estimated efficiency gap of 13 percent. - Perception of infrastructure quality has converged toward the EU average but still lags neighboring comparators and advanced economies. - Sectoral composition of public capital stock: - Economic infrastructure 27.5 percent - Social 42.8 percent - Defense 12.0 percent - Other 17.7 percent - Advanced economy public capital stock (for comparison): - Economic infrastructure 35.1 percent - Social 34.0 percent - Defense 9.0 percent - Other 21.9 percent ### Institutional strengths - High-performing PIM institutions: several effectiveness scores are the highest among PIMA-assessed countries to date. - Implementation strengths: - Open procurement framework using an advanced e-procurement system (Public Procurement Register); 93 percent of procurement procedures were conducted through the e-Procurement Register in 2017. - Modern treasury with an effective Treasury Single Account (TSA) guaranteeing cash availability; treasury prepares annual, monthly, weekly and daily cash flow forecasts. - Asset monitoring driven by full accrual accounting and asset registries with unique serial numbers; accrual accounting introduced in 2000. - Active project management by ministries; project implementation responsibilities assigned and implementation plans prepared. - Fiscal framework: - Estonian law prohibits a general government structural deficit; Eurozone rules apply. - Gross general government debt amounted to 9 percent of GDP at the end of 2017. - Net public debt was 0.1 percent. - Maintenance funding: Institutional design — high; Effectiveness — high. ### Main areas for strengthening (three cross-cutting themes) - Formalize effective practices within institutional design to safeguard them (examples: formally require funding ongoing projects before allocating to new projects; explicitly state maintenance funding preferences in regulations). - Manage public investment projects in an integrated portfolio across the investment cycle: - Systematically identify all large investment projects at planning stage regardless of funding source and implementing modality. - Introduce a 10-year investment plan for information purposes. - Compile an investment program during budget allocation and disclose total project costs. - Subject all major projects to a standard project appraisal and select from an integrated project pipeline using standard criteria. - Strengthen fiscal risk management: - Contingent liabilities are detailed in accounting statements but are not systematically monitored centrally. - Establish a PPP policy framework to provide clarity despite few PPP projects to date. - Institute central oversight of the whole project portfolio encompassing monitoring of progress and potential risks. ### PIMA assessment highlights (selected institutional scores and priorities) - National and sectoral planning: Institutional design — medium; Effectiveness — medium; Reform priority — High. - Coordination between entities: Institutional design — medium; Effectiveness — high; Reform priority — Medium. - Project appraisal: Institutional design — medium; Effectiveness — medium; Reform priority — High. - Alternative infrastructure financing (PPPs, SOEs): Institutional design — low; Effectiveness — medium; Reform priority — Medium. - Project selection and pipeline: Institutional design — low; Effectiveness — low; Reform priority — High. - Multi-year budgeting: Institutional design — medium; Effectiveness — medium; Reform priority — Medium. - Budget comprehensiveness and unity: Institutional design — medium; Effectiveness — medium; Reform priority — Medium. - Procurement: Institutional design — high; Effectiveness — high; Reform priority — Low. - Availability of funding: Institutional design — high; Effectiveness — high; Reform priority — Low. - Portfolio management and oversight: Institutional design — medium; Effectiveness — medium; Reform priority — High. - Project implementation: Institutional design — high; Effectiveness — high; Reform priority — Medium. - Management of public assets: Institutional design — high; Effectiveness — high; Reform priority — Low. ### Reform priorities and selected recommendations (prioritized actions) - Overall focus: emphasis on nationally funded projects (accounting for more than 75 percent of general government capital expenditure). A. Planning — Investment - Recommendation 1.1: Strengthen realism of long-term (15 – 20 years) strategic plans by identifying key investment projects required to implement the strategy, with indicative costing and reconciliation with available fiscal space. - Recommendation 1.2: Establish 10-year public investment plans to improve medium-term capital planning and coordination; use the plan as basis for EU funding cycles and national budget programming. B. Appraisal, financing, selection - Recommendation 2: Adopt a standard methodology for project appraisal; subject appraisal documents for large projects to independent external review. - Priority: High - Target year: 2019 - Recommendation 5: Establish a unified pipeline of appraised projects to compare projects within and across sectors transparently; publish criteria and score projects using a standardized scorecard. - Priority: Medium - Target year: 2019 C. Fiscal risk management and PPPs - Recommendation 3: Establish a framework for monitoring and reporting of key fiscal risks, including PPPs and contingent liabilities; include a consolidated statement of fiscal risks in budget documents. - Priority: High - Target year: 2019 - Recommendation: Develop a clearly stated PPP policy framework and legal/regulatory guidance; increase oversight and transparency of SOE and PPP investments. D. Budgeting, appropriation and portfolio oversight - Recommendation 4: Strengthen capital budget planning, appropriation and implementation by introducing additional disclosures on investment projects in the budget process (disclose total project costs and life-cycle costs; differentiate current and capital spending in ceilings). - Priority: High - Target year: 2020 - Recommendation 6: Establish an electronic, central project oversight system to monitor all major projects centrally, minimizing cost/time overruns and enabling monthly reporting and quarterly portfolio reports. - Priority: High - Target year: 2019 E. Data, digitalization, and central monitoring - Recommendation 7: Use available data for more extensive disclosure and analysis (e.g., contingent liabilities, public sector balance sheet on statistical basis, portfolio oversight including project cost and time overruns, procurement patterns). - Priority: Medium - Target year: 2019 - Suggested IT enhancements: - Broaden project monitoring system user access; include SOE and PPP projects; capture concept to ex post evaluation phases; develop portfolio oversight and GIS modules; implement S-curve monitoring and Problem Identification Reports inspired by Malaysia SPPII. ### Project appraisal, readiness, and risk mitigation (detailed points) - Major projects: comprehensive technical, economic and financial analysis performed, but no single standard methodology across ministries. - Risk mitigation and contingency: financial plans include a contingency reserve of 5 percent for risk mitigation and escalation amounts for multi-year projects. - Recommended appraisal phases for large projects: Stage1 Project idea note; Stage 2 Pre-feasibility (needs, options); Stage 3 Feasibility (demand, technical, environmental, socio-economic, legal, financial, economic analysis, risk/sensitivity); Stage 4 Implementation preparation; Stage 5 Budget application. - Smaller projects: require needs assessment, terms of reference, and financial assessment only. ### Procurement, availability of funding, and implementation performance - Procurement performance (2017): - 10,375 public procurements carried out. - 12 percent were international procurements. - 12 percent of the value of signed contracts funded from European Structural Investment Funds. - 93 percent of procurement procedures conducted through the e-Procurement Register. - 66 percent of launched procedures were open tenders. - Participation: 2.8 compliant bidders per procurement on average. - Single bidding rate: about 20 percent. - Average time from tender publication to contract award: 51 days. - Treasury and cash management: - TSA collects all revenue and makes payments; only embassies may hold accounts outside the TSA. - No cash constraint on capital spending; treasury guarantees timely cash availability. - Implementation outcomes and overruns: - Roads: 7 percent of construction and reconstruction projects had cost overruns, average cost overrun 1.9 percent. - 9 percent of construction and reconstruction projects had delays, average time overrun 130 days. - NAO ex post audits for some nationally funded projects indicate an average of 20 percent cost overruns and time delays up to 50 percent for projects executed by municipalities, universities (EBFs), and SOEs. - Ex post reviews: 49 evaluations currently planned and in execution. ### Budgeting, transparency and comprehensiveness gaps - Main gap: absence of information on total project costs for multi-year projects in budget documentation presented to Parliament. - Medium-term forecasting evidence: - Expenditure in Estonia on average were more than 2 percent of GDP higher than planned (expenditure drift). - Budget codes and carry-forward rules (selected exact treatments preserved): - Budget code 10 — Estimated funds — Not subject to ministry-level ceiling. No carry-forward. - Budget code 20 — Defined funds — Subject to ministry-level ceilings. Carry-forward allowed up to 3 percent of the annual allocation. - Budget code 30 — Transferable funds — Subject to ministry-level ceilings except for national co-financing of external grants which has its own budget line under the general section. Expenditures can be carried forward subject to any limits in annual budget Act. - Budget code 40 — Revenues and revenue related costs — Expenditures related to own-source revenues can be carried forward. Expenditures related to inter-ministerial transfers can be carried forward up to 3 percent of the annual allocation. - Budget code 50 — Revenues from taxes, duties and related expenditures — Not subject to ministry-level ceilings. - Budget code 60 — Non-monetary resources — Not subject to ministry-level ceilings. No carry-forward. - Budget comprehensiveness: significant investment activity occurs outside the central budget (SOEs, foundations); total assets of the SOE sector amounted to €6.7 billion at the end of 2017. - Recommendation: present an integrated view of all capital expenditures across the public sector and publish a public sector balance sheet on a statistical basis. ### ICT systems, data management and staff capacity - High degree of digitalization and transparency: X-Road system, SAP ERP, e-Procurement, e-invoicing. - X-Road: 933 institutions and enterprises, 674 public health institutions, 52,000 organizations as indirect users, 1,074 interfaced information systems, 223 member-installed security services; performs over 500 million transactions per year. - SAP ERP: supports 176 government agencies; 200 web based standard reports, 6,000 registered and 1,400 active users. - Gaps: project monitoring relies on manual updates; current system cannot report compliance with reporting requirements; ex post evaluation phase missing from project monitoring system. - MoF staffing and capacity: - MoF has about 450 staff; 90 percent have higher education. - 71 staff in three fiscal sector departments: 48 in State Budget Department, 4 in Local Governments Financial Management Department, 19 in Fiscal Policy Department. - Recruitment generally requires a master’s degree; 64 percent of MoF staff meet this requirement and a further 24 percent have bachelor’s degrees. - Staff turnover is less than 10 percent each year; average time of service in the MoF is more than 10 years. - Recommendation: expand system functionality and user access, discontinue manual processes, provide training, and leverage existing IT systems for portfolio oversight and analytics. ### Annex highlights — PPP good practice and project selection scorecard - PPP core features and principles: - PPPs are long-term contracts focusing on service delivery with remuneration linked to performance; private party bears significant risk; government retains some risk. - Key principles include harmonizing assessment of projects under common rules, defining PPP budgeting rules, disclosing PPP fiscal commitments, and appointing experienced financial/legal experts. - Annex II: illustrative scorecard elements for project selection include Strategic relevance, Economic appraisal and fiscal affordability, and Maturity/implementation assessment with specific checklist items for each principle (e.g., CBA requirement for medium/full appraisals; identification of recurrent costs; project manager defined; total project costs defined). _Italic: Source: IMF staff PIMA mission report (Estonia), mission visit November 28–December 12, 2018._ ### PREFACE _________________________________________________________________________________________ 6 ### PREFACE ### Mission and objectives - A FAD mission visited Tallinn, Estonia from November 28 to December 12, 2018, to undertake a Public Investment Management Assessment (PIMA). - Mission team: Christiane L. Roehler (FAD, head), Ashni Singh (FAD), Willie du Preez, Eivind Tandberg (both FAD experts), Carmen Calin and Jonas Arp Fallov (both World Bank). - Tasks: - (i) assess Estonia’s public investment management framework with the IMF’s PIMA methodology; - (ii) advise the authorities on options to strengthen further the management of public investments. ### Principal interlocutors - Meetings within the MoF included: Mr. T. Tõniste, Mr. V. Tali, Mr. M. Ross, Mr. S. Kirsipuu, Ms. M. Paas, Ms. K. Karniol, Mr. S. Liivik, Mr. P. Ristkok, Ms. I. Heldna, Mr. A. Kuningas, Mr. K. Siruli, Ms. M. Dubrovkin, Mr. R. Härginen, Mr. M. Helilaid, Ms. A. Zirk, Ms. E. Karindi-Kask, Ms. M. Tork, and other senior staff. - Other meetings: ministries of Economic Affairs and Communication, Justice, Social Affairs, Interior; Fiscal Council; National Audit Office; Statistics Estonia; Competition Authority; Technical Regulatory Authority; State Shared Service Center; State Real Estate Agency; Public Procurement Review Committee; Environmental Investment Center; Police and Border Guard; Estonia Railways AS; Association of Estonian Cities and Rural Municipalities. - Mission expressed appreciation to Joonas Pärenson and Kristiina Abel (MoF) for organizing the mission and handling requests. --- ### EXECUTIVE SUMMARY ### Key findings on public investment levels and trends - General government capital expenditure has been usually well above 5 percent of GDP. - Public capital stock has been increasing and closing a gap to comparator countries. - Planned medium-term capital expenditure is to continue at that level despite an expected decline of external grants from the EU. - More than 75 percent of general government capital expenditure are nationally funded projects. ### Efficiency and service impact - Relative to current public capital stock, Estonia achieved the highest score on an index measuring overall access to public infrastructure among 148 countries, across education, health, electricity, roads, and water. - Perception of infrastructure quality has converged towards the EU average but lags neighboring comparators and advanced economies, indicating a remaining efficiency gap in translating capital into perceived service quality. ### Institutional strengths - Estonia’s public investment management (PIM) institutions generally perform well; effectiveness scores for several institutions are the highest among PIMA-assessed countries to date. - Investment implementation is particularly strong due to: - an open procurement framework using an advanced e-procurement system; - a modern treasury employing an effective Treasury Single Account (TSA) to guarantee cash availability; - asset monitoring driven by full accrual accounting for the whole public sector; - active project management by ministries. - Other strengths: - sound macroeconomic planning with regular adherence to fiscal targets; - detailed, rolling medium-term expenditure forecasting; - emphasis on maintenance funding. ### Main areas for strengthening (three cross-cutting themes) - Formalize effectively applied practices within institutional design to safeguard them. Example: formally require funding ongoing projects before allocating to new projects; explicitly state maintenance funding preferences in regulations. - Manage public investment projects in an integrated portfolio across the investment cycle: - systematically identify all large investment projects at planning stage regardless of funding source and implementing modality; - introduce a 10-year investment plan for information purposes; - compile an investment program during budget allocation and disclose total project costs; - subject all major projects to a standard project appraisal and select from an integrated project pipeline using standard criteria. - Strengthen management of fiscal risks: - contingent liabilities are detailed in accounting statements but are not systematically monitored centrally; - establish a PPP policy framework to provide clarity despite few PPP projects to date; - institute central oversight of the whole project portfolio encompassing monitoring of progress and potential risks. ### Data, digitalization, and central monitoring - High degree of digitalization and transparency supports efficient practices. - Opportunities to use the data environment more for analysis of contingent liabilities, procurement patterns, portfolio structure evolution, and project cost/time overruns. --- ### PIMA ASSESSMENT HIGHLIGHTS (SELECTED FINDINGS FROM TABLE 0.1) ### Fiscal and planning institutions - Fiscal rules and outcomes: - Estonian law prohibits a general government structural deficit; Eurozone rules apply. - Fiscal outcomes: public debt is very low — 9 percent gross debt, 0.1 percent net debt. - Effectiveness: fiscal balance is kept within national and EU criteria. - National and sectoral planning: - Institutional design: medium — plans cover few specific investment projects and are not linked to the MTFF. - Effectiveness: medium — objectives in most long-term strategies are high-level; only some strategies have measurable output targets. - Reform priority: High. - Coordination between entities: - Institutional design: medium — information on SNG capital spending and SNG/SOE contingent liabilities is available, but no formal discussions or monitoring. - Effectiveness: high — clear assignment of responsibilities; no indications of inconsistencies between levels of government; access to capital grants is rules-based and predictable. - Reform priority: Medium. ### Project appraisal, financing, and selection - Project appraisal: - Institutional design: medium — central support exists but no standard appraisal methodology; appraisals are done for EU projects as prescribed. - Effectiveness: medium — nationally financed projects are not subjected to comprehensive appraisal across financial, economic, technical, option, and legal analysis. - Reform priority: High. - Alternative infrastructure financing (PPPs, SOEs): - Institutional design: low — no published PPP strategy/framework; no direct central oversight of SOE investments. - Effectiveness: medium — PPP-type projects are being considered to avoid the fiscal ceiling on capital expenditures. - Reform priority: Medium. - Project selection and pipeline: - Institutional design: low — no central project pipeline across sectors irrespective of funding source; major projects not reviewed centrally or by independent expert. - Effectiveness: low — no criteria for project selection nor ranking model; nationally funded projects reviewed only by the line ministry. - Reform priority: High. ### Budgeting and maintenance - Multi-year budgeting: - Institutional design: medium — medium-term budget planning well-developed but total project costs are not monitored. - Effectiveness: medium — existing projects are prioritized, but there are regular overall expenditure overruns. - Reform priority: Medium. - Budget comprehensiveness and unity: - Institutional design: medium — own investment by EBFs and SOEs significant but not included in budget documentation. - Effectiveness: medium — comprehensive view of public sector investment activity not easily obtained. - Reform priority: Medium. - Maintenance funding: - Institutional design: high — maintenance funding is costed, planned, monitored, and reported. - Effectiveness: high — maintenance funding is available in a timely manner. - Reform priority: Low. ### Implementation, oversight, and assets - Procurement: - Institutional design: high — procurement managed on a comprehensive e-procurement platform. - Effectiveness: high — procurement is transparent, competitive, speedy; complaints resolved timely. - Reform priority: Low. - Availability of funding: - Institutional design: high — cash availability managed through a TSA. - Effectiveness: high — treasury ensures cash availability; invoices paid on time. - Reform priority: Low. - Portfolio management and oversight: - Institutional design: medium — project costs and physical progress are monitored at project level but not for the portfolio; limited ex post evaluations for national projects. - Effectiveness: medium — cost and time overruns handled at project level but not systematically monitored and analyzed. - Reform priority: High. - Project implementation: - Institutional design: high — responsibilities assigned; rules for contract adjustments exist. - Effectiveness: high — implementation plans prepared; projects actively managed; audits focus on high-risk projects. - Reform priority: Medium. - Management of public assets: - Institutional design: high — system for asset management exists; assets included in financial statements. - Effectiveness: high — monitoring, valuation, and control of assets robustly implemented, driven by the accrual accounting framework. - Reform priority: Low. --- ### REFORM PRIORITIES AND SELECTED RECOMMENDATIONS (FROM TABLE 0.2) - Overall focus: highlight selected areas for improvement rather than cover all institutions; emphasis on nationally funded projects (which account for more than 75 percent of general government capital expenditure). A. Planning — Investment - Issue 1: Strategic planning is fragmented and not reconciled with fiscal space projections. - 1.1 Strengthen the realism of long-term (15 – 20 years) strategic plans, by identifying key investment projects required to implement the strategy, with indicative costing and reconciliation with available fiscal space. (Recommendations summarized here are illustrative of the report’s prioritized actions and are explained in more detail in Section V of the source document.) --- *Source: IMF staff PIMA mission report (Estonia), mission visit November 28–December 12, 2018.* ### 1.2 Establish 10-year public investment plans to strengthen and consolidate medium-term capital ### 1.2 Establish 10-year public investment plans to strengthen and consolidate medium-term capital planning ### Major governance issues and recommended actions - Issue 2: Appraisal of projects is not done uniformly and does not support stringent and consistent project selection. - Recommendation 2: Adopt a standard methodology for project appraisal to ensure that all major projects are appraised to a similar standard and subject appraisal documents to independent external review as a quality control measure. - Priority: High - Target year: 2019 - Issue 3: There is no consolidated oversight of key fiscal risks. - Recommendation 3: Establish a framework for monitoring and reporting of key fiscal risks, including for PPPs and contingent liabilities, and include a consolidated statement of fiscal risks in budget documents. - Priority: High - Target year: 2019 - Issue 4: Allocations for capital projects are appropriated on an annual basis with no clear information of the total project costs available to members of Parliament, and there is no consolidated public investment program. - Recommendation 4: Strengthen capital budget planning, appropriation and implementation by introducing additional disclosures on investment projects in the budget process. - Priority: High - Target year: 2020 - Issue 5: There is no consolidated project pipeline across sectors, and no comprehensive criteria for selection of budget-funded projects for implementation. - Recommendation 5: Establish a unified pipeline of appraised projects in order to compare projects within and across sectors in a transparent and competitive manner. - Priority: Medium - Target year: 2019 - Issue 6: Projects are monitored on an individual project level, but there is no central oversight and monitoring of the project portfolio, of project progress nor of project expenditures. - Recommendation 6: Establish an electronic, central project oversight system to monitor all major projects centrally, to minimize cost overruns, time overruns and risks that might arrive during project implementation. - Priority: High - Target year: 2019 - Cross-cutting Issue 7: There is a wealth of available data generated by different information systems, but this is not fully utilized for analysis and central monitoring. - Recommendation 7: Use available data for more extensive disclosure and analysis, e.g., of contingent liabilities, a public sector balance sheet on the statistical basis, portfolio oversight including project cost and time overruns, or procurement patterns. - Priority: Medium - Target year: 2019 ### Key trends in public investment (summary findings) - Estonia is currently in its ninth consecutive year of real economic growth since Estonia’s 2009 economic crisis with an average growth rate of 3.5 percent, exceeding the EU average by 1.8 percentage points. - Public investment has been protected over the years, far exceeding 8 percent of total general government expenditure in most years, and it is expected to continue to be a policy priority. - The national reform program Estonia 2020 (expires soon) emphasizes strategic investment in public assets, raising the quality of public infrastructure, green objectives in investment decisions, and efficient administration; preparation of its successor, Estonia 2035, has begun. - Data environment: - Ministry of Finance (MoF) provides government sector accrual accounting data and balance sheets on virtually a real-time basis through an open data portal. - Statistics Estonia provides comprehensive general government fiscal statistics consistent with EU standards. - Differences in measurement and recognition rules across accounting and statistical sources complicate estimation of public investment and public assets. - For the PIMA, data approximations are used where needed; regular publication of bridge tables between statistical and accounting data is recommended. ### Public investment levels, composition, and financing - Public investment contribution to total investment: - Public investment grew from 13 percent of total investment in 2006 to a peak of 24 percent in 2012. - Public capital stock: - Public capital stock rose from 40 percent of GDP in 2007 to 57 percent by 2015. - General government capital expenditure: - Capital expenditure recovered to a peak of 16 percent as a share of total expenditure in 2012, having previously reached 17 percent in 2007. - Sectoral composition: - Economic and social infrastructure account for over 60 percent of Estonia’s public investment and 70 percent of its public capital stock. - Estonia’s public capital stock shares: Economic infrastructure 27.5 percent, Social 42.8 percent, Defense 12.0 percent, Other 17.7 percent. - Advanced economy public capital stock (for comparison): Economic infrastructure 35.1 percent, Social 34.0 percent, Defense 9.0 percent, Other 21.9 percent. - Estonia’s economic infrastructure assets are at 28 percent of the total public capital stock, below the advanced economy average of 35 percent; social sector assets are 43 percent (advanced economy average 34 percent). - Institutional actors and shares: - Local governments account for approximately a quarter of public investment in the general government sector. - Public corporations (PCs) have made a very important contribution outside the general government sector; PC capital expenditure has consistently exceeded 2 percent of GDP, rising as high as 5.5 percent of GDP in 2013. - In 2017 the PC sector accounted for 22 percent of capital expenditure by the public sector. - Across the public sector, the central government conducts just over half of public investment activity (2017 shares: Central Government 53.1 percent, Local Government 24.3 percent, Social Security Funds 0.4 percent, Public Corporations 22.2 percent). - External financing: - Externally financed expenditures (co-financed primarily from the EU) have accounted for as much as 25 percent of all public investment by the general government since 2009. - EU co-financing cycles cause cyclicality; EU financing for the 2021–27 programming cycle is expected to decline as Estonia converges toward EU averages, but new amounts are still under negotiation. - Public-Private Partnerships: - Estonia has only a few PPP arrangements, reflecting a cautious approach to assuming fiscal risks. ### Efficiency and impact findings - Infrastructure access and quality: - Sustained investment has helped reduce gaps in access and quality, with notable improvements in roads and electricity since the 1990s. - Public health infrastructure per capita has declined, possibly reflecting reduced length of stay in hospitals and expanded gatekeeping by general physicians in the private sector. - Perceptions of infrastructure quality have converged toward the EU average but still lag neighboring comparators and advanced economies. - Perceived quality variability: - Perceived quality of economic infrastructure has fluctuated over time and still lags comparator countries significantly in electricity and roads. - Perception measures use the World Economic Forum Global Competitiveness Index scale of 1 to 7. _Italic: Source — 1estea2019001 - 1.2 Establish 10-year public investment plans to strengthen and consolidate medium-term capital planning (PDF chapter)._ ### 12. Although Estonia’s institutions fare very well in delivering public infrastructure in ### 1estea2019001 - 12. Although Estonia’s institutions fare very well in delivering public infrastructure in ### Infrastructure efficiency and quality - The IMF methodology estimates public investment efficiency as the relationship between the value of the public capital stock at different income levels and measures of quantity and quality of infrastructure assets. - A frontier is estimated from countries with similar income levels achieving the highest level of outcome per unit of input, comparing 148 countries. - Estonia is on the frontier when measured against access to infrastructure and when using a hybrid indicator of access to and perception of quality of infrastructure. - For the indicator of perception of quality on its own, Estonia has an estimated efficiency gap of 13 percent, suggesting that "13 percent of public investment spending did not result in the improvement of quality of infrastructure that would have been achieved by the most efficient country." ### Implications for project selection and impact focus - Observations indicate room to improve efficiency particularly related to perceived infrastructure quality. - Strengthening PIM institutions should focus on selecting projects most relevant to remaining infrastructure gaps and citizen needs, and on ensuring implemented assets are managed effectively. - The report proceeds to address key PIM institutions and identifies potential opportunities for strengthening. ### The PIMA framework (Purpose and structure) - PIMA assesses the quality of public investment management (PIM), identifies strengths and weaknesses of institutions, and presents practical recommendations to increase public investment efficiency. - The tool evaluates 15 institutions across the three stages of the public investment cycle: - Planning of investment levels and projects across public-sector entities; - Allocation of resources to appropriate sectors and projects; - Delivery of productive and durable public assets. - For each of the 15 institutions three indicators are analyzed and scored: institutional design, effectiveness, and reform priority. - Institutional design: average score of three criteria; possible scores: high, medium, low. - Effectiveness: average score of three criteria; possible scores: high, medium, low. - Reform priority: indicates importance of improving issues within the institution for Estonia. ### Estonian context for PIM - Estonia operates a modern Public Financial Management (PFM) system implementing many recommended practices, including: - State Budget Act and Local Government Financial Management Act provide comprehensive legal framework. - Clear fiscal rules to ensure fiscal discipline and sustainability. - Well-defined roles: ministries for policy and supervision; subordinated agencies for implementation; public corporations expected to operate commercially. - Medium-term budgeting and accrual accounting are well established; elements of accrual budgeting were recently introduced. - Effective treasury single account (TSA) arrangement. - High degree of digitalization, transparency, widespread use of competitive procedures, and focus on accountability for performance. - Reforms underway: - MoF initiated actions to strengthen performance orientation. - Performance budgeting being introduced in 2020. - Spending reviews are being piloted. ### Overall assessment of PIM institutions - Many PIM institutions in Estonia are effective. - Estonia’s access to infrastructure is the best observed in a sample of 148 countries, given its capital stock and income level. - Strong PIM processes include: - Adherence to fiscal targets and rules. - Availability of funding and maintenance funding. - Procurement, project implementation, and monitoring of assets. - PIM is decentralized and somewhat fragmented, but with clear accountabilities and extensive use of competitive processes. - Digitalization facilitates strong information sharing despite decentralization. ### Key areas for strengthening PIM - Three overarching themes for improvement: - Formalizing effective practices in institutional design. - Comprehensively managing public investment in an integrated portfolio. - Strengthening fiscal risk management. - Specific improvements suggested: - Streamline strategic planning and prepare an investment plan. - Make all major projects subject to standardized project appraisal. - Disclose and monitor the total cost of investment projects. - Use standard criteria for project selection. - Strengthen central oversight of the project portfolio during implementation. - Implementation approach: - Many improvements can be achieved by making planning frameworks, project appraisals and other practices more explicit and binding and by leveraging existing IT systems. - A light touch is recommended given Estonia’s small size; digitalization can support efficient procedures. ### Investment planning — Fiscal principles or rules (Strength—High; Effectiveness—High) - State Budget Law: general government structural balance shall be zero or positive at the time of budget approval. - Exception: if there is an accumulated surplus in the structural balance after 2014, the budget may target a deficit not greater than 0.5 percent. - Rules include corrective mechanisms if breached. - Deficit rule in Estonian law is stricter than the Euro-zone Fiscal Stability Pact lower limit of 1.0 percent structural deficit for Estonia. - No explicit debt limit in Estonian law, but bound by the 60 percent debt limit in the Eurozone’s Fiscal Stability Pact. - Structural balance target is translated into a nominal target used for in-year budget management. - Fiscal outcomes and public debt: - Estonia has very little public debt. - Gross general government debt amounted to 9 percent of GDP at the end of 2017. - Net public debt was 0.1 percent. - Structural balance outturn compliance: - Only year non-compliant: 2017, structural balance amounted to -0.3 percent of GDP in spring 2018 evaluation and -0.7 percent in fall 2018 re-estimation. - Table 3.1 Targets and Outturns (Structural / Nominal): - 2013: Targets 0.1 / -0.7 ; Outturn 0.4 / -0.2 - 2014: Targets 0.7 / 0.0 ; Outturn 1.3 / 0.6 - 2015: Targets 0.2 / -0.5 ; Outturn 1.0 / 0.4 - 2016: Targets 0.6 / -0.1 ; Outturn 0.7 / 0.3 - 2017: Targets 0.2 / -0.5 ; Outturn -0.3 (-0.7) / -0.3 (-0.4) - Note: 2017 outturn includes both spring 2018 evaluation and August 2018 re-estimation figures. - The medium-term State Budget Strategy provides a medium-term fiscal framework (MTFF) specifying planned current and capital spending. - Capital spending is allocated by ministries, by main funding source and by major programs and projects. - The Budget Strategy describes decisions on ongoing and new investment projects, but it does not clearly specify budget allocations to existing and new capital projects in the published State Budget Strategy; these allocations are specified in underlying medium-term estimates provided by ministries to the MoF. - Current fiscal principles and practices ensure stability of public investment spending. ### Investment planning — National and sectoral plans (Strength—Medium; Effectiveness—Medium) - Estonia has comprehensive planning framework; long-term plans provide limited guidance for specific public investments. - Overarching national strategies: Sustainable Estonia 21 (2005–30), Estonia 2030 Spatial Planning Strategy (2005–30), National Reform Program Estonia 2020 (covering 2011–20). - Number of sectoral strategies dropped from 119 in 2005 to 47 in 2018. - Most long-term plans provide high-level outcome targets and priorities but not specific investment projects; some sector strategies (transport, energy) specify major projects with indicative costs and expected outputs/outcomes. - Operational Program for Cohesion Policy Funding (2014–20) identifies programs/projects for EU financing with output and result indicators. - Four-year Government Action Plans (updated every second year) and State Budget Strategies/ministry Development Plans provide four-year perspectives and descriptions of expected outputs and outcomes. - Weaknesses: - Long-term plans and sector strategies have not been reconciled with fiscal space and have had limited impact on prioritization of investment projects. - Planning framework has been fragmented, though improving. - Many strategies have been general, costing limited, and not reconciled with available fiscal space. - Cross-cutting, medium-term plans have been more concrete, realistic, and better aligned with funding. - Authorities’ intentions: - Consolidate the strategic planning framework under Estonia 2035. - Avoid fragmentation and inconsistencies; reduce number of plans and bureaucracy. - Ensure implementation reduces workload related to preparation, implementation, and reporting of development plans. - Proposed new framework highlights: - Consolidate long-term plans in Estonia 2035. - Supplement with 10-year public investment plans designed to provide sufficiently long outlooks and serve as basis for EU funding planning and national budget programming. - 10-year investment plans refreshed ahead of the next EU budgeting cycle. ### Investment planning — Coordination between entities (Strength—Medium; Effectiveness—High) - Local governments: - Carry out approximately 25 percent of public investment. - Receive rules-based grants and their capital spending is compiled and published. - Can apply for capital grants from 15–20 different schemes (some EU-funded, others national). - Many schemes open to private and public corporations and central government entities as well as local governments. - Grant schemes generally operate on a reimbursement basis. - Approvals of projects are not linked to the budget calendar and may occur any time during the year; local governments accommodate funds via budget amendments or scheduling in subsequent years. - Local government budgets submitted to MoF by November 1 each year, compiled and presented on MoF website. - There is no discussion between MoF and each local government on their budget; local budgets are not subject to central approval. - Processing of reimbursements and cash settlement of approved claims appears smooth. - Mechanisms exist for handling local governments in financial difficulties, including development of resolution plans; these mechanisms have been applied in some cases. - Table 3.2 Local Government Capital Spending and Main Sources (million Euros): - Capital expenditures LG (ESA): 2010 151 ; 2011 187 ; 2012 307 ; 2013 341 ; 2014 253 ; 2015 279 ; 2016 248 ; 2017 402 - Earmarked grants for investments: 2010 85 ; 2011 108 ; 2012 169 ; 2013 161 ; 2014 103 ; 2015 126 ; 2016 41 ; 2017 95 - Of which EU grants: 2010 64 ; 2011 79 ; 2012 128 ; 2013 118 ; 2014 62 ; 2015 106 ; 2016 25 ; 2017 83 - Other sources: 2010 66 ; 2011 79 ; 2012 138 ; 2013 180 ; 2014 150 ; 2015 153 ; 2016 207 ; 2017 307 _Italic source attribution: Source: IMF staff estimates; IMF, 2015, Making Public Investment More Efficient; IMF, 2018, Public Investment Management Assessment: Review and Update; MoF budget strategies 2013 - 2017, State budget 2019, Fiscal council reports 2014-18, IMF staff estimates._ ### 30. Contingent liabilities from local governments, SOEs and PPP capital projects are ### 30. Contingent liabilities from local governments, SOEs and PPP capital projects are ### Disclosure of contingent liabilities - Contingent liabilities from local governments, SOEs and PPP capital projects are disclosed in notes to their financial statements and consolidated reports are prepared, but they are not systematically analyzed and published in budget documents. - All the entities produce accrual accounts according to accounting standards consistent with International Public Sector Accounting Standards (IPSAS), which require disclosure of any significant long-term commitment or contingent liability. - The consolidated public accounts summarize this information, but it is not disclosed in the government budget or discussed in fiscal policy documents. - The MoF indicates that disclosure of these contingent liabilities could be misinterpreted as a signal that the central government would accept responsibility for the liabilities; they referred to a recent case of liabilities of a liquidated airline company where the government remained strict about not assuming this liability. ### Coordination between central and local government, and PCs - Coordination mechanisms between government institutions and with PCs are consistent with Estonia’s decentralized management approach and there are no indications of inconsistencies in investment priorities between levels of government. - The Local Government Organization Act (2014) provides a clear delineation of responsibilities between central and local government. - Central government influences local priorities through earmarked grant schemes. - There could be benefits to a more active dialogue between the central and local governments regarding major investment projects, which will often have broad impacts outside the local government in question. - For SOEs, letters of shareholder’s interest and the government representatives on SOE boards communicate the government’s expectations for each of its SOEs. ### Fiscal risk management gaps and recommendations - Coordination may be inadequate for fully effective fiscal risk management. - A more proactive approach to identifying contingent liabilities in local governments and public corporations would facilitate the determination of systemic patterns and possibly earlier detection of broader or systemic risks. - This can be done without undermining the statutory independence of local governments and SOEs, and without giving the impression that the central government is responsible for such liabilities. --- ### 4. Project Appraisal (Strength—Medium; Effectiveness—High) ### Current appraisal practices and coverage - Major projects are subject to comprehensive technical, economic and financial analysis, but there is no standard methodology that is applied by all Ministries. - Distinctive differences exist between the legal appraisal requirements for EU co-funded projects and nationally funded projects. Comprehensive appraisals are mandated for EU projects and are in practice applied for major nationally funded projects. - Different appraisal procedures exist across ministries and subsectors (e.g., real estate, ICT, transportation, laboratory equipment). - The National Audit Office (NAO) monitors appraisals for the largest projects and may conduct audits at the appraisal stage if it has reservations about their integrity. - Results of appraisals of EU projects are published at the bidding stage; results for nationally funded projects are not published. - Example: The appraisal for the Eastern Border Development Program had a value of Euro 250 million and included a technical analysis, options analysis, design iterations, financial analysis, risk analysis, external expert review, legal analysis and an environmental analysis. - Estonian Railways conducts an extensive feasibility analysis before project financing approval. ### Project readiness, financial planning and risk mitigation - Project readiness and a detailed financial plan for major projects are achieved prior to inclusion in the budget but are less rigorous for nationally funded and smaller projects. - Project budgets are approved in two stages: first for the appraisal process, and second for project implementation. - Ministries with regular infrastructure projects have central capacity for managing the appraisal process. - Not all recommended elements of an appraisal are regularly conducted for nationally funded major projects. - Risk assessments are included in the project appraisal, and mitigation plans are developed and costed for all major projects. - Financial plans include a contingency reserve of 5 percent for risk mitigation, and escalation amounts are provided for projects executed over multiple years. - Operational and maintenance cost estimates are made for all major projects. - A higher percentage of cost overruns for small and medium sized projects, and those executed by foundations and local governments indicate less rigorous appraisals. ### Suggested standardization and minimum appraisal elements - A standardized methodology should be applied in all appraisals including nationally funded projects to ensure quality and comparability across sectors during project selection. - The Ministry of Economic Affairs and Communications has started to harmonize methodologies across the roads and railways subsector. - Regulations for appraisals for nationally funded projects could be developed using the EU requirements as a guideline, scaled to project size and administrative capacity. - Recommended project appraisal process phases and elements for a large project include: - Stage1: Project idea note - Stage 2: Pre-feasibility: Needs and demand analysis with specified outputs; Option analysis - Stage 3: Feasibility: Demand analysis; Technical engineering analysis; Environmental analysis; Socio-economic analysis; Legal and regulatory due diligence; Financial analysis (investment and maintenance/operating phases); Economic analysis (CBA, economic impact); Risk assessment and sensitivity analysis - Stage 4: Implementation preparation: Detailed implementation plan and readiness confirmation; Institutional capacity; Procurement plan - Stage 5: Budget application: Project concept note (summary of appraisal information to apply for funding) - Requirements for medium-sized projects indicated by items marked with an asterisk (*) above; small projects require needs assessment, terms of reference with description and key outputs, and financial assessment. --- ### 5. Alternative Infrastructure Financing (Strength—Low; Effectiveness—Medium) ### Market structure and regulatory environment - Estonia draws extensively on the private sector for public service delivery with effective competition in telecommunications, energy, transport and water. - Main regulators: Competition Authority (market conditions and prices) and Technical Regulatory Authority (technical and safety aspects, allocation of bandwidth in telecommunications). - Regulatory institutions have statutory independence and set prices and other conditions in regulated markets without political interference; regulatory decisions do not need political confirmation. - Government provides subsidies and public service payments in some regulated markets (renewable energy, railroad infrastructure and railroad passenger services) that do not distort competition and are consistent with EU state aid and procurement rules. - Key market features include: - Telecoms: 3 mobile phone providers; 40 network providers; mobile service band-width allocation based on auctions; price regulation in some minor sub-markets. - Energy: Electricity generation public and private; Electricity transmission public; Electricity distribution public and private; District heating private; Natural gas transmission public; Natural gas distribution private; Regulation of transmission and distribution tariffs; Concessions for distribution of electricity, district heating and gas. - Transport: Roads operated by state authority; Railroad infrastructure public and private; Railroad operations public and private; Airports publicly owned; Ports publicly and privately owned; Ferry services public and private; Airlines public and private; State subsidies to public railroad infrastructure company; Public service agreement with public railroad operator; Concessions for airports and ports; Public service agreements for ferry services. - Water: 60 percent local government companies; 40 percent private companies; Concessions for water supply; Regulation of water tariffs. ### PPP experience, oversight and recommendations - There is no specific PPP legislation and no stated government policies for PPPs. - In central government, the State Real Estate Company (RKAS) is the only institution that has taken an active role in developing PPPs. - Some interest in PPPs exists among local governments (water, industrial parks, real estate, schools). - The MoF State Asset Department is responsible for financial oversight of public corporations, including building-related PPPs of central government. - Very few PPP projects in Estonia so far; MoF reports four central government PPP projects to date, including: - A contract for design, construction and operation of the main office building for the central government, based on a 20-year lease to the government. - Three smaller office building PPPs. - The MoF’s financial analysis of the main government office building project indicates the PPP contract entails higher overall costs than traditional procurement, but this is justified because the building is outside the government balance sheet and the investment is not included in government expenditures when assessing the fiscal balance against Fiscal Stability Pact targets. This assessment is not in line with good practices for analysis and decisions regarding PPPs. - There is ambiguity about whether these projects actually constitute PPPs according to IPSAS rules. - Oversight of SOE investments is exercised through general letters of shareholder interests, board members and financial oversight by the MoF. - The number of SOEs has been significantly reduced and now comprise 29 corporations. - Six of the corporations, including RKAS, are classified as belonging to the general government sector. - MoF State Asset Department is responsible for financial oversight of the corporations. - Roles as owner and regulator are separated within line ministries (different departments or entities). - Board nomination committees with private sector representation have been established to appoint SOE supervisory boards; supervisory boards should have a majority of independent board members but it remains common to appoint two government representatives (one from the line ministry and one from the MoF). - MoF oversight focuses on financial performance and prospects, summarized in an annual report; oversight includes discussion of financial impacts of major investment projects but does not involve detailed scrutiny of these projects. - Recommendation: A clearly stated PPP policy framework and more comprehensive oversight of major investment projects implemented by PCs would enhance transparency and facilitate effective fiscal risk management. - The PPP policy framework should specify policy intentions and priorities for PPPs and the procedures to apply when analyzing and assessing potential PPP projects. - The Government’s cautious approach towards PPPs could be emphasized in the policy framework. - The MoF could put more emphasis on a dedicated discussion of major investment projects implemented by public corporations and include a separate statement on this in the annual oversight report. --- ### E. Investment Allocation ### 6. Multi-year Budgeting (Strength—Medium; Effectiveness—Medium) - Multi-year budgeting is well established in Estonia; budget documentation includes comprehensive and detailed multi-year projections, including on capital spending. - The State Budget Act requires the government to prepare and approve, usually no later than end-April, a State Budget Strategy covering the upcoming fiscal year plus three out years. This document reflects the MTFF and includes multi-year projections of total spending, spending by ministry and by various spending categories, including capital spending. - A detailed annex includes multi-year projections of ministry capital spending by ministry, broken down by financing source and types of investment, including IT-investment, machinery and equipment, transport vehicles etc. - Projections are based on detailed forecasts of individual projects and groups of projects in the budgeting system. Large projects tracked through specific object codes are shown individually in the budget documents. ### Annual budget structure and impending reforms - The State Budget Act requires line ministries to submit budgets with an overall break-down by revenue, expenditure (various current expenditure), investment and financing transactions (increases or decreases in assets and liabilities that do not affect the overall budget position). - Expenditures and financial transactions are further broken down into economic subcategories, with a requirement to further break down investments. - The structure of the budget presentation is anticipated to change in 2020 with the forthcoming performance-budgeting reform, which will present the budget by programs and is planned to include depreciation in expenses by program. - In current pilot programs investment expenditure are shown in one block for the whole ministry; in the final design they are expected to be included in each program. - The budget strategy contains indicative multi-year estimates by ministry. A system of four-year rolling budget estimates is in place. Planning ceilings are set annually based on the rolled-forward and adjusted estimates from the previous year. - Ceilings split the available fiscal envelope determined in a top-down MTFF and provide predictability for line ministries, though they are not binding for the four-year period. ### Budget appropriations and carry-forward treatments - Even in the annual budget, only operational expenditures, capital expenditures, and inter-ministerial transfers are subject to hard ministry-level appropriation limits. - Grant-financed expenditures, including from EU-funds, are excluded from ministry-level ceilings to allow flexibility in case a project is implemented more quickly than anticipated; however, an open-ended authority to increase spending could undermine incentives for reliable management and forecasting. - Table 3.4 (Budget Types and their Treatment) — selected entries and exact treatments: - Budget code 10 — Name: Estimated funds. Includes mandatory expenditures such as pensions and various social benefits. Not subject to ministry-level ceiling. No carry-forward. - Budget code 20 — Name: Defined funds. Includes operational expenditures such as wages, rental payments, maintenance etc. Subject to ministry-level ceilings. Carry-forward is allowed up to 3 percent of the annual allocation. - Budget code 30 — Name: Transferable funds. Includes capital expenditures as well as national co-financing of external grants (31 and 32) and expenditures associated with financial leasing (33). Subject to ministry-level ceilings except for national co-financing of external grants which has its own budget line under the general section of the budget. Expenditures can be carried forward subject to any limits in annual budget Act. - Budget code 40 — Name: Revenues and revenue related costs. Includes revenues and related expenditures from grants, inter-ministerial transfers and own-source revenues (44). Expenditures related to own-source revenues can be carried forward. Expenditures related to inter-ministerial transfers can be carried forward up to 3 percent of the annual allocation. - Budget code 50 — Name: Revenues from taxes, duties and related expenditures. Includes revenues from taxes and duties as well as earmarked expenditures financed from such taxes or duties. Not subject to ministry-level ceilings. - Budget code 60 — Name: Non-monetary resources. Includes expenditures related to depreciation of assets. Not subject to ministry-level ceilings. No carry-forward. *Italic: IMF country report content as provided in the supplied PDF excerpt.* ### 46. There is some evidence of an upward drift in expenditure (Figure 3.3). An analysis of ### There is some evidence of an upward drift in expenditure (Figure 3.3) ### Expenditure drift and medium-term forecasting - Medium-term forecast of total general government expenditure shows that expenditure in Estonia on average were more than 2 percent of GDP higher than planned. - This indicates that the medium-term planning framework is not fully binding and creates risks for possibly overcommitting on investment projects. ### Multi-year budgeting and project cost disclosure - Main gap: absence of information on total project costs for multi-year projects in budget documentation. - Current budget documentation does not provide the Parliament with information on total project costs when seeking approval of budget allocations. - Alternative documents with total project costs may be circulated in government (especially for mega-projects), but the budget documentation should include the latest estimate of total project cost for multi-year projects. - Systematic breakdowns of annual capital expenditure by projects would enhance informativeness of budget documents and improve basis for MoF oversight. ### Budget comprehensiveness and unity (Strength—Medium; Effectiveness—Medium) - Significant public investment activity is carried out by extra-budgetary and other public sector entities outside the budget; a comprehensive view of all public-sector investment activity is not easily obtained. - The budgetary central government usually accounts for less than 40 percent of consolidated public sector investment expenditure. - Extra-budgetary and public-sector entities include SOEs, foundations and some entities established by their own act. - 29 entities are legally constituted as SOEs, amongst which 5 are statistically classified in general government and included in deficit calculations, including RKAS. - All SOEs operate on a commercial basis with the state as shareholder. - Total assets of the SOE sector amounted to €6.7 billion at the end of 2017. - RKAS is currently the only SOE whose capital investments are disclosed in the budget documentation; its budget is reviewed within the central government budget process and its operations are incorporated into the fiscal outcomes of the central government. ### Budget presentation and performance-based budgeting - Both capital and current expenditures are budgeted in an integrated process and presented in detail in the budget documentation, although not by functional or programmatic classifications. - The MoF is the sole ministry responsible for coordinating the budget process. - Budget documentation includes detailed annexes showing ministry-level expenditures by economic classification, budget types and object codes. - Current budget strategy includes elaborate performance information by 24 performance areas government-wide, but this information is not yet integrated with information on costs and estimates. - With the introduction of performance-based budgeting in 2020, performance and financial information will be presented in an integrated fashion using a six-tier program classification. - The classification is expected to consist of: “performance area,” “program,” “measure,” “program activity,” “service” and “activity.” - For strategic planning purposes, focus will be on the first four levels, while the last two (“service” and “activity”) will be used mainly for costing at the agency level. ### Need for integrated capital expenditure information - Effective PIM would be better supported with comprehensive information on all capital expenditure in the public sector, regardless of financing or responsible public entity. - An integrated presentation of all capital expenditures would better inform decision-makers and oversight bodies on proposed investment allocations and trade-offs within and across sectors, supporting high-impact interventions and fiscal sustainability. ### Budgeting for investment (Strength—Low; Effectiveness—Medium) - Allocations for capital projects are appropriated on an annual basis with no clear information of the total project costs available to members of Parliament. - This increases the risk of underestimating costs when starting new projects, especially those extending well beyond the four-year medium-term budget framework. - Appropriating the full project outlays—or getting Parliamentary approval of incurring the total project costs—in the first year of the project would strengthen information on longer term commitments for allocation choices. - Transfers of funds between capital and current spending during the fiscal year are generally not permitted without specific Parliamentary approval; under certain circumstances virement from capital to current spending can be done with MoF approval. - There is no formal mechanism for protecting the funding of on-going projects during annual budget preparation, but in practice completion of on-going projects is given priority over starting new projects. - The lack of a formal protection mechanism creates a risk of not allocating adequate funds to ensure timely implementation of projects started in previous years. - This risk is moderated in Estonia by: - detailed forecasts of the medium-term budget framework in a shared IT infrastructure between MoF and ministries; - budget update discussions between the MoF and ministries about 5 times per year; - the possibility of carry-forward of budget appropriations by one year if projects progress slower than anticipated. - That degree of budget flexibility combined with weak monitoring of total project costs could result in overall over-commitment for projects relative to the fiscal envelope, resolvable only through inefficient measures like slowing project implementation. - The timely completion of on-going projects could be formalized in the State Budget Act through an explicit requirement for line ministries to ensure sufficient funding within their ceilings for such projects. ### Maintenance funding (Strength—High; Effectiveness—High) - Routine and capital maintenance are estimated both during project design and regularly during budget preparation; together with operating cost estimates they are included in the medium-term budget estimates. - Budget estimates are based on historical cost data from previous years, uplifted by cost increase factors, and the quality levels of the service specifications. - Maintenance needs are determined using sector-appropriate methodologies and systematic physical monitoring; budget planning regulations set out the details. - Example: Estonian Road Administration maintains a database of 16,600 km of national roads; physical road condition inspections and electronics testing methods are conducted at regular intervals to determine maintenance requirements. - Estimates include reconstruction/maintenance of road surfaces, lighting, pedestrian walkways, bridges, reconstruction of hazardous areas, and other items such as road furniture and road markings. - All costs for routine and capital maintenance are calculated per item as per object type in a standardized template. - Maintenance of public assets is prioritized over new construction. - Seventeen road maintenance contracts (to ten contractors) have been signed for routine maintenance on the road network to maintain service levels. - Estonian Railways has five out of seven projects dedicated to maintenance and renovations. - Comprehensively providing for routine and capital maintenance ensures physical assets reach their expected lifespan; capital maintenance projects can extend lifespan at low cost and contribute significantly to efficient and effective provision of public infrastructure. ### Project selection (Strength—Low; Effectiveness—Low) - Each ministry scrutinizes and selects its own projects; ministries develop projects to meet Sector Development Plans, which are generally approved by the ministry and sometimes Parliament. - Each ministry reportedly has its own selection criteria, but these criteria are not published. - Nationally funded projects are not reviewed by an independent agency or experts prior to inclusion in the budget. - Projects in a ministry compete for budget funding within that ministry's budget ceiling. - There is no comprehensive pipeline of appraised projects and no central gatekeeping over new projects. - Each Ministry has a separate pipeline of projects, but appraised projects are not compiled into a comprehensive pipeline from which projects can be selected based on published criteria. - The MoF requests information about new projects for budget strategy discussions, but does not systematically obtain information about new projects outside of the budget process. - The operating programs for EU co-funded projects broadly meet national priorities; authorities ensure alignment during negotiations of the Partnership Agreement and design of the operating programs. - New projects are reviewed and selected when preparing the four-year budget strategy, but projects are sometimes added during the approval of the annual budget. - Current project selection process: - Overall priorities agreed in Government Action Plan and at meetings with Prime Minister - First informal selection between officials inside the ministry - Second selection done between line ministry and MoF - Final selection in Government - Enacted by Annual State Budget Law - Compilation of criteria for project selection and establishment of a pipeline of appraised projects is a high priority. - Projects should be scored according to a standardized scorecard (Annex II) and this should be required for all infrastructure projects. - A ranking system reflecting government policy priorities and differentiating projects according to priority rating, and financial and economic efficiency is of utmost importance. - Selecting projects that receive the highest ranking from an appraised pipeline will ensure effective spending of infrastructure funds. - Without a scoring system, the most impactful or economical projects ready for execution might not be included in the budget. - International experience suggests that projects not appraised and selected through selection criteria have a severe risk for cost and time overruns. ### Cost overruns evidence (Australian example) - Over 15 years, 542 projects were completed, and 294 projects were cancelled. During the same period the cost overruns were 24 percent of the originally estimated cost ($28 billion). - Study findings on appraisals and cost overruns: - 90 percent of cost overruns were attributable to only the 17 percent of projects with very large cost overruns. - 74 percent of cost overruns were attributable to the 32 percent of projects where costs were announced prematurely without completion of a full appraisal. - Only 11 percent of cost overruns were attributable to changes in scope, while 89 percent were attributable to other causes. - Cost overruns by project size: - Projects greater than $600 million – 55 percent - Project larger than $300 million – 47 percent - Projects less than $300 million – 30 percent ### Procurement (Strength—High; Effectiveness—High) - Estonia has a well-organized public procurement system; the Public Procurement Act adopted in June 2017 transposes the EU Directives for public procurement. - The MoF provides policy, regulatory, advisory and supervision functions and maintains the Public Procurement Register (the e-Procurement system). - The Public Procurement Register covers all functionalities of a modern e-Procurement system (Box 3.6) and ensures transparency, standardization and statistical reporting. - Complaint mechanism: making a complaint to the independent Public Procurement Review Committee (proceedings organized by the MoF) is the mandatory first step to settle disputes as stipulated in the Public Procurement Act; its decisions are binding unless challenged in courts, providing a three-level dispute resolution mechanism. - The NAO and the Audit Authority perform ex post control on the legality of award and execution of contracts, based on specific provisions governing the funds. - e-Procurement usage and 2017 statistics: - 10,375 public procurements were carried out in 2017. - 12 percent were international procurements. - Twelve percent of the value of signed contracts were funded from European Structural Investment Funds which represents about 25 percent of the total procurement value carried out in 2017. - Ninety-three percent of the procurement procedures were conducted through the e-Procurement Register. - Improved functionalities were introduced in 2018, while others are planned for 2019. - In October 2018 the use of the e-Procurement became mandatory under the relevant EU directive. - Some contracting authorities use the e-Procurement system even for small value contracts. - Possible future functionalities and interconnections to consider: - eInvoicing – automated issuing, sending, receiving and processing of invoices (data exchange) - ePayment – digital financial payment transaction (data exchange) - Enhanced data analytics and reporting of key performance indicators to analyse duration of procedures, competition patterns, reasons for complaints, typology of organizations submitting complaints, and contracting authorities that receive sanctions. - Market intelligence analyses to understand how Contracting Authorities spend public money, which suppliers they use, and what goods and services are bought, enabling collaborative procurements and detection of expenditure patterns meriting further investigation. *Source: IMF staff estimates; Estonian Road Administration; Authorities; Grattan Institute, 2017.* ### 65. The public procurement system in Estonia is generally efficient and effective with ### 1estea2019001 - 65. The public procurement system in Estonia is generally efficient and effective with ### Public procurement: performance and outcomes - Contracts largely competitively awarded and in a timely manner. - About 66 percent of the launched procedures were open tenders. - Overall rate of cancelled procedures is 14 percent (with 9 percent of procedures above the EU thresholds). - Cancelled procedures for high value works contracts: less than 1 percent. - Participation in electronic tenders: 2.8 compliant bidders per procurement procedure. - Single bidding rate: about 20 percent, an increase of 3 percent compared to 2016. - No express preference for local providers; most contracts awarded to local companies. - About 6 percent of the tenders were won by international bidders. - Participation of small and medium enterprises (SMEs) is high: - Success rate of 87 percent of the total number of contracts. - Authorities attribute participant numbers and high local success rate to: - Small size of Estonia’s market and need for local knowledge during contract implementation. - Contracting authorities’ decision timing: - On average only 51 days between publication of the tender notice and contract award. - Challenges and review: - About 2 percent of the procedures are challenged by economic operators (generally concerning evaluation results). - Review Committee decisions must be issued within 30 days and are usually handed down within 20–25 days. - Only about 10 percent of the decisions are appealed in court; court proceedings generally confirm the Review Committee’s rulings. ### Recommendations to strengthen procurement performance and monitoring - Establish more systematic performance reporting. - Conduct better market analysis and develop key performance indicators (KPIs). - Use the Public Procurement Register to implement performance reporting and enhanced market intelligence to identify priorities for improvement of system performance, sectors, or individual contracting authorities. - Assign a specific central responsibility within the MoF for market intelligence and analysis to ensure an overview of key trends and findings from procurement data and other information. - Develop additional sets of KPIs to measure and benchmark market performance of public procurement more broadly and systematically. - Align performance reporting with the European Commission initiative on preliminary conditions for the next long-term EU budget 2021–27. ### Availability of funding and Treasury Single Account (TSA) - Estonia operates a modern TSA, which holds all cash reserves, receives all revenue and makes all payments. - Treasury operations and rules: - Treasury holds all state cash balances in pooled accounts linked to form the TSA. - All revenue, including external funding for specific projects, is deposited into the TSA. - Treasury manages payments for ministries, state agencies and state foundations through the TSA. - Only embassies are allowed to have bank accounts outside the TSA. - Treasury pays interest on cash balances to foundations and social insurance funds, but not to ministries and state agencies. - Treasury covers bank payment fees; entities cover other fees (e.g., bank cards, payment terminals). - Cash availability and forecasting: - No cash constraint on capital spending nor on budget execution more broadly; Treasury guarantees timely cash availability. - Treasury prepares annual, monthly, weekly and daily cash flow forecasts updated on a rolling basis. - Cash reserve system comprises a liquidity reserve and back-up credit lines adequate to meet minimum liquidity requirements that replicate the 2009 shock scenario, plus a stabilization reserve (used once in 2009). - Investment requirements are conservative; liquidity, currency, interest rate, and credit risks are actively managed. - When the budget is approved, the full annual budget allocation is available to line ministries for use immediately; there is no in-year budget or cash release system. - Treasury makes payments when requested, with the only restriction that agencies enter payment requests two days in advance of requirement. - No issues of delayed payments or accumulation of arrears on account of cash availability. - Recommendation: - Conduct a periodic review of the minimum level of cash reserves to be held, taking into account both liquidity requirements and the cost of unutilized cash reserves to inform future adjustment of the cash buffer. ### Portfolio management and oversight - Central oversight: - There is no central oversight of the total portfolio; project oversight is conducted at project level by line ministries. - MoF obtains information on investment and project progress routinely only through monitoring of expenditures and may query unusual developments during budget review discussions. - Little consolidated data on extent to which projects are implemented within original cost estimates and time frame. - Reallocations and monitoring: - Funds may be re-allocated between projects with approval of the relevant ministry and between programs (for ministries using program budgeting) with Parliament approval. - MoF can monitor reallocations through IT systems. - Ex post reviews and evaluations: - Ex post reviews are conducted as prescribed for EU co-funded projects and for some major nationally funded projects. - 49 evaluations are currently planned and in execution. - Ex post evaluations are conducted by external experts from universities and external consultants; results are discussed between the MoF and Ministries. - Completion reports are prepared for nationally funded projects; some sectors (e.g., roads) also conduct ex post reviews. - Officials in several sectors stated they value and use these reviews to enhance planning and execution of future projects. - Project overruns (observed outcomes): - Roads: 7 percent of construction and reconstruction projects had cost overruns, with an average cost overrun of 1.9 percent. - 9 percent of construction and reconstruction projects had delays, with an average time overrun of 130 days. - Main reasons for cost overruns: unforeseen conditions during implementation; weather conditions for time overruns. - Recommendation: - Introduce a central electronic monitoring system for all major projects and institutionalize arrangements for investigating cost and time overruns to enable early identification and timely interventions. - Use available data in existing IT systems to prepare purposeful reports and analyses to detect systemic patterns and portfolio-level changes. ### Tools, best practices and implementation planning - Box 3.7: Minimum information required for portfolio management decision making (listed elements preserved as required): - Project number - Project description - Project status – preliminary design, detailed design or execution - Project commencement date - Contractual project completion date - Expected completion date - Percent of physical progress on site - Percent of budget spent - Percent of time lapsed - Are cost overruns expected? - Risk in upcoming period and possible mitigation measures - S-curve chart: - Recommended as a simple early-warning tool to monitor whether projects are on track based on cash flow forecasts, with lower and higher bounds for expected project expenditure during implementation timeframe; contractors requested to provide regular updates to cash flow forecasts. - Project Implementation Plans: - Implementation plans are prepared for all EU co-funded projects, and for nationally funded roads and railway projects, prior to final budget approval. - Box 3.8: Typical elements of a Project Implementation Plan (listed elements preserved as required): - Description of Project Management Approach - Scope statement - Work breakdown structure (WBS) - Cost estimates, scheduled start dates and responsibility assignments - Performance measure baselines for schedules and cost - Major milestones and target dates for each milestone - Key staff required - Key risks ### Management of project implementation, audits and controls - Monitoring and rules: - Multiple layers of project monitoring by senior officials for physical progress and financial costs. - Financial Control Department within MoF serves as the Audit Authority for EU-financed projects and conducts verification of financial transactions; issues specific reports and an annual report. - Rules for project cost adjustment defined in the Public Procurement Act 2017: - Project costs for infrastructure projects may be adjusted by a maximum of 15 percent of the original contract value, and under unforeseeable circumstances by a maximum of 50 percent of the original contract value, without changing the scope of the original contract. - National Audit Office (NAO) activity: - NAO conducts ex post and ex ante regulatory and compliance and some performance audits for nationally funded projects on a selective sample basis; findings submitted to parliament. - NAO selects projects/groups according to risk and stakeholder interests; conducts audits of large or high-risk projects in appraisal and implementation stages. - Under NAO’s audit strategy for 2019–20, audit of major investments is identified as a priority. - Audit reports are examined by the State Budget Control Committee of parliament; once a year this Committee/the Auditor General reports on activities to parliament. - Ex post audits completed for 10 projects indicate an average of 20 percent cost overruns on projects executed by municipalities, universities (EBFs), and SOEs, with time delays of up to 50 percent. - NAO noted that EU co-funded projects normally appear better managed than nationally funded projects. - Project control outcomes and capacity building: - Projects in the implementation stage generally well controlled and managed; line ministries manage projects to stay within cost limitations and cost adjustment rules. - Estonian Roads Authority: low percentage of projects with cost and time overruns. - Control and management of nationally funded projects and smaller projects at municipalities and universities show higher cost and time overruns and could be improved. - Recommendation: consider additional central support and training for project managers at smaller entities (municipalities and universities). ### Monitoring of public assets and accounting - Accrual accounting and asset registers: - Estonia introduced accrual accounting for government in 2000; all government assets appropriately recorded and accounted for in financial statements. - National accounting standards based on IPSAS and cover all material parts of these standards. - By law, all government assets are identified by unique serial numbers and included in government asset registries. - Asset values are reviewed and updated annually; depreciation schedules adjusted when capital maintenance projects are undertaken. - Accounting systems and consolidation: - All central government entities (approximately 150) do accounting through a common accounting application managed by the Shared Service Center under the MoF; depreciation computed monthly based on entity-determined rates following central guidelines. - All other general government and public sector entities (approximately 850) use separate accounting applications but submit monthly accounting reports in a pre-defined format for consolidation with central government reports. - Audit findings: - NAO reports confirm government accounting and financial statements are comprehensive and of high quality. - Financial statements consolidated and reported at three different levels: Central government, local government, and consolidated public sector (including corporations controlled by central or local government entities). - Consolidated statements provide necessary detail for reconciliation and elimination of internal transactions; reports do not include transaction-level data. - For the 2016 accounts, the State Audit Office found that the accounts generally gave a fair and true value of financial transactions and values; one observation related to inability to confirm recorded value of assets in the Railway Infrastructure Company given negative developments in the railway freight market. - RKAS role and investments: - RKAS established in 2001 to provide real estate development and management services to state agencies; develops real estate, provides facilities management and project management services as needed. - For new real estate development, ministries/agencies propose projects to MoF via project memoranda prepared with RKAS support; once approved, RKAS implements the project. - Upon completion, constructed asset is owned by RKAS and occupied at an agreed rent by the client ministry. - Annual investments by RKAS in recent years have been between €60 and €100 million. *Source: 1estea2019001 - 65. The public procurement system in Estonia is generally efficient and effective with (PDF chapter/section).* ### 84. Estonia is at the forefront of international good practices for accounting for public ### Estonia is at the forefront of international good practices for accounting for public ### Public assets and balance sheets - Estonia applies accrual principles and accounting standards consistently, with very comprehensive coverage of government and public accounts, well-designed information system infrastructure for accounting and reporting, and well-formulated mechanisms for accounts reconciliation and elimination of internal transactions. - State Audit Office observations confirm the strong accounting practices. - Valuation rules for fixed assets in the ESA 2010 statistical methodology applicable in Estonia are based on market values rather than historic or other accounting values; therefore balance sheets in fiscal statistics differ from balance sheets in the financial statements. - Recommendation / finding: For a complete and consistent set of fiscal statistical data, Estonia should consider preparing a public sector balance sheet in addition to the general government balance sheet it already publishes. ### IV. Cross-cutting issues — A. ICT Systems and Data Management - The IT Environment - ICT governance: Public Information Act (2007); General Part of the Economic Activities Code Act (2014); Principles for Managing Services and Governing Information (2017). - ICT development aligned with Digital Agenda 2020 and Vision 2020 of the Estonian Information Society. - E-government milestones (establishment of systems listed by year): 1996, 1999, 2001, 2002, 2005, 2007, 2008, 2014, 2015, 2016 (systems include E-banking, Online tax declaration, X-road, E-signature, Online company registration, Mobile ID, E-prescriptions, E-residency, Service owners concept, Zero bureaucracy). - X-Road system (one data principle) - Encompasses 933 institutions and enterprises, 674 public health institutions, 52,000 organizations as indirect users, 1,074 interfaced information systems and 223 member-installed security services. - Provides over 2,000 or 99 percent of state services online and performs over 500 million transactions per year. - Described as “the busiest highway in Estonia.” - SAP ERP as unified accounting system - Backbone of consolidation of state support services. - Provides financial, personnel and payroll accounting for all government agencies (176). - e-invoicing system (outsourced); agencies can issue e-invoices for sale. - Self-service portal for employees (e-documents), web-based reporting. - SAP ERP metrics: 200 web based standard reports, 6,000 registered and 1,400 active users. - Box 4.1 components (modules): Logistics (Material management, Sales and distribution); Human resources (Personnel management, Payroll, Travel management, Training management); Finance (Financial accounting, Controlling, project system, Funds/Grants management); Treasury and Risk Management. ### IT Support for Public Investment Management (PIM) - Despite extensive ICT infrastructure and data, gaps remain in project monitoring and in actual data usage and analytics. - Updating project information relies on manual processes; reporting (six-monthly and end-of-year) under the manual project reporting system has not always been complied with, and non-compliance appears to continue under the more automated system. - The system cannot currently report on compliance with reporting requirements; functionality and user access may need expansion to the wider project implementation level. - Recommendations / findings: - Discontinue present manual processes to improve compliance; expand system functionality and user access; provide further training and outreach. - Consider lessons from countries with more developed project monitoring systems (examples cited: Malaysia, Indonesia, Korea). - Malaysia SPPII (Box 4.2) — summary of capabilities (as context for lessons): - Generates monitoring reports for weekly, monthly, yearly use; monitors financial and physical progress; identifies project risks monthly. - Uses California Expenditure Curve (S-curve) principle to indicate percent of time lapsed versus percent of money spent. - Contains GIS module for project geographic location. - Generates Problem Identification Report and lessons-learned matrix. - Reports are simple to interpret by technical, financial personnel and politicians. - Expansions suggested for Estonian PIM system: - Broaden user access and comprehensiveness; include investment projects by SOEs and PPPs at national and local government levels. - Include projects from concept and prefeasibility phases (currently projects are entered when approved for the medium-term investment plan). - Include ex post evaluation phase (currently missing). - Develop a module for portfolio oversight; enhance reporting and project/portfolio management functionality. - Substantially involve line ministries and provinces in system development. ### B. Legal and Regulatory Framework - Main legal framework: State Budget Act (enacted in 2014). - Establishes fiscal rules, including adjustment and compensation mechanisms, to ensure compliance with the Fiscal Stability Pact provisions. - Regulates elaboration of Development plans and State Budget Strategies, annual State Budgets, procedures for budget approval and amendments. - Regulates financial relationships between the state and local governments, state borrowing, guarantees, cash management, budget execution, control and reporting. - State Assets Act (enacted in 2015) - Provides rules for administration and use of state assets, including transfer and sale. - Requires all state assets be registered in databases and establishes a consolidated register for state real estate. - Assessment and recommendations: - Legal environment provides a comprehensive and consistent basis for efficient PFM, including public investments; no obvious shortfalls that hamper project implementation. - Areas for improvement via formalization of existing practice: e.g., formal rule that completion of ongoing investments should be prioritized before initiating new projects. - Need to strengthen project appraisal and selection; suggested reflection of these improvements in updated legislation and regulations. - Recommendation: establish a clearly stated PPP policy framework, including development of an appropriate legal framework, to enhance transparency and fiscal risk management. ### C. Staff Capacity - Ministry of Finance (MoF) staffing - MoF has about 450 staff; 90 percent have higher education. - 71 staff in three departments of the fiscal sector: 48 in the State Budget Department, 4 in Local Governments Financial Management Department, 19 in the Fiscal Policy Department. - Recruitment to professional level generally requires a master’s degree; 64 percent of MoF staff meet this requirement and a further 24 percent have bachelor’s degrees. - Staff turnover is less than 10 percent each year. - Average time of service in the MoF is more than 10 years. - Salary policy: offer salaries equivalent to the median of similar positions in the private sector. - Capacity assessment - Staff capacity in MoF is high in numbers, skills and experience; similar strengths appear in other agencies involved in PIM. - MoF has a higher staff complement than many Finance Ministries in the Nordic countries; fiscal policy and budget functions have staff numbers similar to these countries. - MoF staff are highly educated and many have long experience; they are highly regarded in other government and private sector organizations. - No apparent capacity gaps within the MoF that hamper efficient PIM. - MoF and the government’s shared service center provide training to other ministries and agencies. - Continued learning and development recommended to support improvements in public investment practices; MoF has a record of interest and ability to improve practices and strengthen capacities. - MoF has contributed to training staff in other ministries and organizations (including procurement and performance budgeting). ### V. Reform priorities and recommendations - A. Investment Planning Institutions - Issue 1: Strategic planning is fragmented and not reconciled with fiscal space projections. Long-term strategic plans do not identify major investment projects and are not reconciled with projections of available fiscal space. EU funded projects and national budget funded projects are planned and managed through separate processes. - Recommendation 1.1: Strengthen the realism of long-term (15–20 years) strategic plans by identifying key investment projects required to implement the strategy, with indicative costing and reconciliation with available fiscal space. - Establish Estonia 2035 as the main, long-term national strategy, incorporating key elements of sustainability strategy and spatial planning strategies. - Identify investment projects of national importance and include these in the strategy. - Include indicative costing of key programs and investment projects. - Estimate available fiscal space for 2020–2035 and reconcile the strategy with this fiscal space. - Recommendation 1.2: Establish 10-year public investment plans to improve medium-term capital planning and coordination. - Create a consolidated, 10-year public investment plan collecting information on major projects regardless of funding source. - Use this public investment plan as the basis for EU funding cycles and for national budget planning. - Consolidate and reduce the number of sector strategies, to coincide with the planned performance areas in the new performance budgeting framework. - Ensure realism of sector strategies by costing all key elements and reconciling with expected fiscal space. - Issue 2: Appraisal of projects is not done uniformly and does not support stringent and consistent project selection. EU funded projects are appraised per EU Rules; nationally funded projects lack a standard methodology and independent review. - Recommendation 2: Adopt a standard methodology for project appraisal and subject appraisal documents to independent external review as quality control. - Develop a standardized methodology for appraisal across all ministries, regardless of funding source (external funding requirements to continue where relevant). - Apply comprehensive appraisal to medium-sized, large and mega-projects only; cost of appraisal should be consistent with project size; smaller projects require more limited appraisal. - Appraisal documents for large projects and mega-projects must be subjected to an independent external review. - Issue 3: No consolidated oversight of key fiscal risks. Fiscal risks from PPPs, contingent liabilities of SOEs and local government investment projects are not systematically identified, monitored and reported. - Recommendation 3: Establish a framework for monitoring and reporting of key fiscal risks, including PPPs and contingent liabilities, and include a consolidated statement of fiscal risks in budget documents. - Develop methodologies for identification of fiscal risks, estimation of probabilities that risks will materialize and potential impacts. - Augment budget documents’ risk discussion with disclosure and analysis of other key fiscal risks, including PPPs and contingent liabilities. - Establish a clear PPP policy framework spelling out policy intentions, priorities and procedures for analyzing potential PPP projects; define methodologies for value-for-money analyses of PPP proposals and make these analyses publicly available. - B. Investment Allocation Institutions - Issue 4: Capital projects are appropriated on an annual basis with no clear information on total project costs available to Parliament; no consolidated public investment program; no separation of capital and current budget ceilings and no formal protection of ongoing projects. - Recommendation 4: Strengthen capital budget planning, appropriation and implementation by introducing additional disclosures on investment projects in the budget process. - Differentiate current and capital spending in budget planning ceilings. - Identify new projects in budget documents and establish a formal rule to prioritize ongoing projects in budget allocation. - Disclose total project costs in budget documents, as well as lifecycle costs. - Prepare and report a consolidated public sector investment program, including public corporation investments. - Issue 5: No consolidated project pipeline across sectors and no comprehensive criteria for selection of budget-funded projects; national budget projects lack stringent selection criteria and project selection is fragmented with limited cross-sector consideration. - Recommendation 5: Establish a unified pipeline of appraised projects to compare projects within and across sectors transparently and competitively. - Selection should be of appraised projects only. - Compile a unified pipeline across all sectors. - Rank projects across sectors using a ranking scoring mechanism. - Publish the criteria for project selection for transparency. - C. Investment Implementation Institutions - Issue 6: Projects are monitored at project level, but there is no central oversight and monitoring of the project portfolio, progress or expenditures; central monitoring would help detect early cost/time overruns and other risks and identify systemic shortcomings. - Recommendation 6: Establish an electronic, central project oversight system to monitor all major projects centrally, minimizing cost overruns, time overruns and risks. - All major projects should be subject to central oversight where progress and expenditure are monitored on a monthly basis with a report created on a quarterly basis. - Central oversight should be supported by an electronic reporting platform where project information is uploaded monthly from the project level to ensure real time availability of risks, progress and other non-financial information and facilitate integration with expenditure reporting. - D. Cross-cutting Issues - Issue 7: Large volumes of data generated by different information systems are not fully utilized for analysis and central monitoring. - Recommendation 7: Use available data for more extensive disclosure and analysis. - Strengthen central oversight of the public investment program and portfolio by pulling together information from the budget database and entity-level project databases. - Provide a public sector balance sheet, based on statistical concepts, and include it in the budget documents to support macro-fiscal analysis. - Strengthen fiscal risk management: for contingent liabilities, draw on the existing compilation of notes to the financial statements; for capital project time and cost overruns, draw on project-coded information contained in the budget database. - Further enhance procurement quality through analysis of procurement and market data to identify procurement patterns across entities and options for collaborations. *Source: IMF staff summary of Estonia public investment management assessment (excerpts).* ### Annex I. Good Practice of Managing PPPs ### Annex I. Good Practice of Managing PPPs ### Definition and core features - A PPP is a long-term contract between two or more public and private parties, for providing a public asset or service. - The focus of the PPP is on delivering services at agreed levels whereas the remuneration is linked to performance. - The private party bears significant risk and management responsibility. Nevertheless, the government always bears some risk. - Profits on PPPs can vary depending on the assumed risks, the level of competition and complexity and scope of the project. ### Key principles for a balanced PPP approach - Only consider the PPP modality for projects that are prioritized by the Government regardless of procurement and funding modalities. - Harmonize the assessment and prioritization of all public investment projects under a common set of rules and regulations, with the addition of the evaluation of the possible advantage of using a PPP option; - For each relevant project, scrutinize whether the best available PPP procurement option can provide enough efficiency gains from private management to compensate for the additional financing costs associated with private financing and the risks and constraints created by long-term contracting. - Define specific rules for the budgeting of PPP projects, considering their long-term nature and the absence of government payments during the initial years; - Disclose PPP fiscal commitments in a transparent manner to ensure that costs and fiscal risks across the life of the contract are fully reported; - Appoint experienced and knowledgeable financial and legal experts to assist government in the decision-making process, during the development and procurement stage of the PPP Project; - Focus on performance requirements that are output based and relatively easy to monitor; - Continuously manage PPP fiscal risks, e.g. by a dedicated risk management team. ### Differences from traditional public procurement and fiscal considerations - All public investment projects, whether implemented through a PPP or through a public procurement contract, aim to support the creation of economic infrastructure (roads, airports and railways) or provide social infrastructure and public services. - A traditional public investment project involves a capital budget allocation up front, while the costs of a PPP are distributed over a long-time horizon and payments by the Government are often not required until the facility starts operating. - PPPs generally involve higher financing costs for the government due to the higher risks on private entity’s side for which corresponding compensation is covered by the contract. ### Benefits of well-designed, implemented and managed PPPs - Private sector participation can bring more efficient management over the lifetime of assets and more innovative solutions. - Risks are appraised early to determine project feasibility and the private sector may serve as a check against unrealistic government premises or expectations. - Operational and project execution risks are typically transferred from government to the private sector, which usually has more experience in cost containment. - Because PPP contracts involve a significant part of the life cycle of the project, high quality standards are expected to be better obtained and maintained over time. - PPPs may contribute to faster project completion and reduced delays by including time-to-completion as a measurement of performance and therefore the profit. ### Potential risks and practical constraints - Development, bidding and ongoing costs in PPP projects are likely to be greater than for traditional government procurement processes. - Limited numbers of capable private entities can limit competitiveness required for cost-effective partnering. If the expertise in the PPP lies heavily on the private side, the government may be at an inherent disadvantage (for example, it might be unable to accurately assess the proposed costs). - Private finance will be available only where operating cashflows of the project company are expected to provide a return on investment (i.e., the cost has to be borne either by the customers or the government through subsidies, etc.). - Private entities will be cautious about accepting major risks beyond their control, such as exchange rate risks/risk of existing assets; this will be reflected in cost. - Government will continue to be accountable to the citizens for the quality of utility services. Incentives and performance requirements need to be clearly set out in the contract to ensure that services are delivered at the requested quality. - The private sector is likely to have more expertise and may have an advantage in processing information related to the project. Clear and detailed reporting requirements imposed on the private entity might reduce this potential imbalance. - Governments may need to assume direct commitments to pay the cost of service provision wholly or in part, where projects are not financially viable through user charges alone, or where user charging is not desirable or practical. Governments may also sometimes accept contingent liabilities to achieve an appropriate risk allocation—ensuring that each party bears the project risks they are best able to manage efficiently. - Given the long-term nature and complexity, it is difficult to identify all possible contingencies during project development; events and issues may arise that were not anticipated in the documents or by the parties at the time of the contract. - PPP contracts embed fiscal risks, e.g. associated with private sector bankruptcy, inability to provide the expected performance, or policy changes that negatively affect the project. ### Legal, regulatory and capacity implications - A clear legal and regulatory framework is crucial to achieving a sustainable solution. - Government will need to retain sufficient expertise to be able to understand the PPP arrangements and manage them over time, to carry out its own obligations under the PPP agreement and to monitor performance of the private sector and enforce its obligations. ### Annex II — Elements of a Scorecard for Project Selection (illustrative items) - Principle 1: Strategic relevance assessment - 1.1: Strategic fit of the project to the National Strategy - 1.1.1: Does the project fit to any of the priorities — Responsible Unit: MoFTBD - 1.1.2: Does the project fit to any of the strategic objectives in the National Strategic plan — Responsible Unit: MoFTBD - 1.2: Strategic fit of the project to the sector strategy - 1.2.1: Does the project fit to any of the sector strategies? — Responsible Unit: MoFTBD - 1.3: Strategic fit of the project to annual policy priorities decision of the Government - 1.3.1: Does the project fit to the annual policy priorities decision of the Government? — Responsible Unit: MoFTBD - Principle 2: Economic Appraisal and Fiscal Affordability - 2.1: Current situation and rationale for investment - 2.1.1: Is there description of the current situation (including problems)? — Responsible Unit: MoFTBD - 2.1.2: Is the rationale for investment provided? Are the project outputs defined? — Responsible Unit: MoFTBD - 2.2: Investment options/Cost Benefit Analysis (CBA required for medium and full appraisal) - 2.2.1: Were investment options prepared? OR Was CBA prepared? Do the results make sense? (required for medium and full appraisal) — Responsible Unit: MoFTBD - 2.3: Environmental/social/other impact (required for medium and full appraisal) - 2.3.1: Is the environmental impact described? Is assessment by the Ministry of Environment required? Was obtained? — Responsible Unit: MoFTBD - 2.3.2: How will project uplift the community? — Responsible Unit: MoFTBD - 2.3.3: Is any other impact described? — Responsible Unit: MoFTBD - 2.4: Impact on recurrent costs, i.e. operational and maintenance costs - 2.4.1: Are recurrent costs (operational and maintenance) recognized and identified? — Responsible Unit: MoFTBD - Scores to be determined by authority - Principle 3: Maturity / Implementation Assessment - 3.1: Risks that may impact project implementation - 3.1.1: Are the project risks identified? — Responsible Unit: MoFTBD - 3.1.2: Are the actions to minimize the impact of the risks on the project described? — Responsible Unit: MoFTBD - 3.2: Project management and organization arrangements - 3.2.1: Is project manager defined? — Responsible Unit: MoFTBD - 3.2.2: Are project organization arrangements explained? — Responsible Unit: MoFTBD - 3.3: Project plan/pre-feasibility study/feasibility study/other economic/financial analyses - 3.3.1: Is project implementation plan developed? — Responsible Unit: MoFTBD - 3.3.2: Is pre-feasibility study developed? — Responsible Unit: MoFTBD - 3.3.3: Is feasibility study developed? — Responsible Unit: MoFTBD - 3.3.4: Are any other economic/financial analysis prepared? — Responsible Unit: MoFTBD - 3.4: Project implementation phase and financial plan - 3.4.1: Are start and end dates of project implementation phase set? — Responsible Unit: MoFTBD - 3.4.2: Are investment costs defined? Are the total project costs defined? Are the sources of funds defined? — Responsible Unit: MoFTBD - Financing/source abbreviations shown: A (Budget), B (EU), HCE (PPP), G (Bilateral loans), DF (SOE), O (Other - Specify) *Annex I. Good Practice of Managing PPPs — 1estea2019001* --- _Source: https://www.imf.org/-/media/files/publications/cr/2019/1estea2019001.pdf_