Overview of use and preservation of state assets in Auditor General s summary of observations made in the year

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1 Overview of use and preservation of state assets in 2010 Auditor General s summary of observations made in the year Report of the National Audit Office for the Riigikogu, Tallinn 2011

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3 Overview of use and preservation of state assets in 2010 Auditor General s summary of observations made in the year Preface Last year, I told the leaders of our state that that the good state of public finance in our country would last if we focused on increasing the competitiveness of our economy and the sustainable development of various sectors; several important reforms had still not been carried out, but delaying them would have a painful effect on the state s finances and the services offered to the people; and we must look further ahead when we make decisions and take more notice of the impact of things already done. I must admit that these recommendations are still relevant today. At the time when it is still unclear how the European debt crisis will be resolved, when Estonia has assumed huge financial obligations in financial stability facilities, when our economic growth may slow down again, we have to pay even more attention to using our taxpayers money wisely and completing the necessary structural reforms. Urmas Nemvalts, Postimees When we take a look at how the state s revenue and expenditure have changed in recent years, we see that revenue has been constantly growing, but the expenditure stipulated in legislation has increased even faster. This means that the amount of money that can be flexibly used to support the long-term development of the state is relatively smaller every year. According to the forecast of the Ministry of Finance, the state will have to use most of the revenue it earns from to cover the increasing social expenses, and the budget will be balanced by freezing the expenses of maintaining the public sector and state budget Report of the National Audit Office for the Riigikogu, Tallinn

4 investments. However, if things stay like this for a long time, it may have an adverse effect on the state s development and administrative capacity. A budget policy that relies on freezing expenditure was suitable in the situation where the budgeting errors made during the boom had to be quickly corrected, but it cannot be used as a long-term measure OECD also pointed this out in its recent review of the Estonian economy. I am becoming very concerned about the future. I mean the years not covered in the forecast of the Ministry of Finance, which are really the years that we do need to think about. The population of Estonia is aging and decreasing. These impending population processes will put even more pressure on the budgets of the state and local governments in the long run and create tension in the economy, as increasing productivity and the state s revenue require qualified labour. We have to support the ability of our economy to earn income and take a look at the areas on which the state spends the most money. I am afraid that unless we review our legalised expenses, we will soon be unable to cover them due to lack of money or the investments we need for our development will have to stay on the back burner. We have to check whether our social benefits function efficiently and accurately; whether our health and education expenditure has been effective; whether the state s support to companies is the best we can give. Not all of the problems and areas are discussed in this overview, but it does contain the most important results of recently conducted audits and analyses. Similarly to the previous year, the first part of the overview once again focuses on subjects relating to the state budget, assets and economy; the second part draws attention to problems in the development of different sectors; and the third discusses issues related to local governments. Enjoy! Mihkel Oviir Auditor General Report of the National Audit Office for the Riigikogu, Tallinn

5 Table of Contents I. State assets and their use 5 The Consolidated Annual Report 2010 gives a true view of the state s financial status 5 Public finance and economy 6 Estonian economy is growing again, but the future is uncertain 6 The state s own reserves are not sufficient to cover the deficit of coming years 8 Budget expenditure would exceed revenue considerably without the Estonian Unemployment Insurance Fund 9 Increasing social expenditure leaves little money for other purposes 12 The aging of and decrease in Estonia s population puts pressure on the budget 15 Major investments need decisions and money 17 Financing of many areas depends on structural funds 17 We have to borrow ourselves if the countries we help don t perform their obligations 18 The budget policy that is based on freezing expenditure cannot be sustained for the long term 18 The action programme of the Government of the Republic does not contain plans for reforming major areas of expenditure 19 Smart decisions require timely and relevant information 20 Evaluation of the impact of legislation is insufficient and superficial 21 Information about the results of state budget usage does not give decision-makers relevant advice 24 The state s management report does not discuss the issues raised by ministries 24 II. Development and problems of the state s areas of activity 27 Changes in the education system 27 The education system is subject to constant reforms 30 The education system needs comprehensive planning of all educational levels 32 The emphasis in adult education is still on short-term courses 33 Standstill in health care 35 The hospital network still needs reforms 36 The GP system needs development 36 The state has not done everything to avoid expenditure caused by bad health 39 Supervision in the area of health needs to be perfected 39 No clarity in the energy sector 40 The state should pay more attention to heating supply 45 The electricity market is facing important changes 43 On the free market the production and price of electricity in Estonian power stations depends on the entire market region 45 The state is obliged to prepare consumers for the opening of the electricity market 47 Confusion in the collection of packaging waste 48 Packaging waste is not recovered 48 The system for collecting packaging waste is not user-friendly 50 Unsustainable forestry development plan 52 Increasing annual felling is not sustainable 52 Unsustainable cultural investments 54 Distribution of investments is not transparent 54 Investment decisions are not sustainable 55 There are less and less available funds in the cultural policy 57 Report of the National Audit Office for the Riigikogu, Tallinn

6 Survival is an effort for museums 58 III. Problems in local governments 61 There has been no progress in the division of the tasks of the state and local governments or in the organisation of financing 60 The decrease in revenue caused by the recession was replaced with an increase at the end of The expenditure of local governments is decreasing 64 Budget cuts have had an impact on the accessibility of public services 66 Local roads are not maintained according to requirements 69 The unfinished land reform obstructs the development of local governments 71 Local governments whose population is growing fast were unable to curb building activities in their territories 73 Report of the National Audit Office for the Riigikogu, Tallinn

7 I. State assets and their use Did you know that The National Audit Office s audits of the 2010 annual accounts of ministries and the lawfulness of their transactions can be found at The goal of financial audits is to ascertain whether the state has used the budget funds in compliance with laws and whether the financial statements of the state are correct. The National Audit Office audits the accounting and the lawfulness of the transactions of all ministries and constitutional institutions every year and submits the audit reports to the Riigikogu. The Consolidated Annual Report 2010 gives a true view of the state s financial position 1. The money collected from taxpayers must be used in a manner that is effective, transparent and lawful. The obligation of the National Audit Office is to help the general public understand how the governors of the state have managed to do that and to give objective advice to decisionmakers. For this purpose the National Audit Office organises financial audits, compliance audits and performance audits. 2. The National Audit Office is of the opinion that the most important economic transactions of the state in 2010 were performed in accordance with the State Budget Act and the 2010 State Budget Act. However, although erring against the State Budget Act has decreased, the main problems still remain the same. State agencies continued using the money allocated for investments to cover management costs and vice versa. This means that ministries do not incur all of their costs according to the authority granted to them by the Riigikogu and these breaches also reduce the transparency of the budget. 3. Several aspects of accounting in ministries and constitutional institutions have improved in comparison to the previous year: fewer errors are made in accounting and omissions in asset accounting have also decreased. Accounting policies and procedures and other documents that regulate accounting have generally been prepared, they are being observed and the chief accountants of ministries coordinate accounting in the entire area of government more than before. 4. However, we have to be critical of the budget execution report included in the 2010 Annual Report of the State. The data of the budget adopted in the Riigikogu, the final budget and the actual execution of the budget must be submitted in a comparable manner to ensure that use of money in the public sector is transparent and the report can be considered when new budgetary decisions are made. This would make it possible to assess whether the budgetary funds have been used for the purpose for which they were requested. 5. However, the state budget execution report for 2010 differs from the 2010 State Budget Act passed by the Riigikogu both in terms of its format and content, which means that the comparability of the State Budget Act and the budget execution report is not guaranteed. The reason for this is that the principles of state budget drafting, the execution of state budget payments and the preparation of accounting reports are different. Although the Ministry of Finance has explained the reasons for the differences to the National Audit Office, the National Audit Office is of the opinion that the budgeting principles need to be streamlined. Report of the National Audit Office for the Riigikogu, Tallinn

8 Public finance and economy The Estonian economy is growing again, but the future is uncertain 6. The small size of Estonia can be considered a significant obstacle to its development, but it also has certain advantages. Estonian companies and society have demonstrated flexibility and the ability to make and tolerate difficult decisions when coping with the recession. The gross national product is growing again after the deep 14.3% decline in 2009: GDP increased by 2.3% in 2010 and the Ministry of Finance forecasts an increase of 7% for The export figures of the Estonian economy have also grown faster than expected: a 22.5% increase in 2010 instead of the forecast 15.1%, and an expected 26.1% instead of 9% in Urmas Nemvalts, Postimees Did you know that The Ministry of Finance prepares economic and financial forecasts twice a year and the period for which the forecast is prepared is five years. Well, economy! Grow another four percent and you will see out of the hole. 7. On the other hand, the small size of Estonia means that the progress of our open economy depends largely on the events taking place in the world, especially in Europe. In its forecast prepared in summer, the Ministry of Finance admitted that uncertainty in the world economy has been growing in recent months and the coming months will show whether the growth of developed countries, which in the second quarter of 2011 was weaker than expected, and the continuing debt crisis mean a new recession or not. Estonian economy has recovered faster than expected with the support of strong foreign demand, but the growth may quickly turn into a decline should the economies of our trade partners cool down. 8. The near future must show whether or not the structure of the Estonian economy has started to generate more wealth due to the crisis and how sustainable is the growth of productivity and export. At the moment, our export records are mainly based on the successes of a few electronics companies and distribution of fuel. 9. The development of indicators that are more understandable for people, such as salary and unemployment rate, has also been better than expected (see Table 1, where the figures in brackets show the forecast made by the Ministry of Finance a year ago and the figures in front of the brackets represent the latest known information). Report of the National Audit Office for the Riigikogu, Tallinn

9 Table 1. Unemployment rate, average salary and real increase in salary according to the forecasts of the Ministry of Finance for 2010 and Unemployment rate (%) 16.9 (17.5) 12.3 (15.4) Average salary (euros) 792 (779) 831 (799) Real increase in average salary (%) 1.8 ( 3.2) 0 (0.1) The information in brackets shows the unemployment rate, average salary and real increase in salary forecast by the Ministry of Finance a year ago. Source: Economic forecasts of the Ministry of Finance There is pressure for price and salary increase in Estonia The difficult task of the Estonian economy: loan-free growth 10. We can admit that unemployment in Estonia has decreased and salaries have increased faster than forecasted a year ago. However, prices have also increased faster than expected: by 3% instead of 2.6% in 2011 and, according to the forecast, by 4.9% instead of 2.5% in Estonia being a member of the eurozone means pressure, as domestic salaries and prices should rise to the same level as in other eurozone countries and our main trade partners. At the same time, Estonian companies need to reach the same productivity as their competitors in the eurozone in order to cope with the increase in salary. 11. The main concern of entrepreneurs in increasing their competitiveness is where to find money for investments into innovation and increasing their productivity. They borrowed a lot during the boom, but many used it to earn quick profits in the construction and property sector, rather than support their long-term competitiveness. Companies are forced to use their own capital to support growth now that companies have largely exhausted their borrowing capacity and uncertainty prevails on the money market. 12. The wealth of the state depends on the state of its economy. The state s revenue increased constantly from the time Estonia regained independence until the recession, which made it possible for the state to legalise new expenditure and the need to take large loans or issue government bonds was never even discussed. There was so much money flowing into the State Treasury that in addition to the consciously formed reserves, the state could also save from the revenue the forecasters hadn t even expected the state to earn. This is why the fiscal status of Estonia was good when the recession arrived. The contributions of the state budget, local governments, the Estonian Health Insurance Fund and the Estonian Unemployment Insurance Fund must be observed when the budget of the government sector is discussed was the first period in a long while when the state spent more than it earned the total deficit of the state budget and local governments was 504 million euros, which was balanced somewhat by the aggregate surplus of the Health Insurance Fund and the Unemployment Insurance Fund in the amount of 34 million euros. The Government then started restricting its expenditure and looking for extra revenue and the deficit of the state budget and local governments in 2009 comprised 141 million euros, but the expenditure of the Health Insurance Fund and the Unemployment Insurance Fund also exceeded their revenue by 94 million euros. The unexpectedly fast recovery of the Estonian economy and the additional measures implemented by the Government resulted in a small budget surplus in 2010 (20 million euros) and the Ministry of Finance forecasts that the surplus in the government sector in 2011 should be 36 million euros. Report of the National Audit Office for the Riigikogu, Tallinn

10 The state s own reserves are not sufficient to cover the deficit of coming years 14. The Government used reserves and borrowed money to finance the expenditure that exceeded revenue in 2008 and million euros of available funds had been accumulated in the State Treasury by the end of 2007; the amount left a year later was 138 million euros (see Table 2). The Riigikogu gave its permission to pay 3.5 billion kroons from the Stabilisation Reserve Fund to the State Treasury in 2009 in order to ensure the state s ability to perform its current obligations and avoid a potential liquidity crisis. The Ministry of Finance was also granted permission to use the extraordinary reserve of the National Pension Fund to cover the current expenses of the state. Table 2. Changes in reserves administered by the State Treasury (million euros) Name of reserve Market value Stabilisation Reserve Fund 409, ,8 320,2 324,1 Cash reserve of state budget assets, incl. 957,5 528,6 903,9 683,3 788,3 cash reserve of state budget + available funds 564,1 137,9 623,1 483,8 354,2 reserve funds for ownership reform 23,8 27,3 27,9 28,2 29,9 extraordinary reserve of National Pension Fund 305,8 305,8 118,8 0 0 funds of State Treasury's clients 63,8 57,7 134,2 171,3 404,3 Reserve capital of Health Insurance Fund 29,3 30,9 52,8 53,5 53,9 Cash reserves of Health Insurance Fund 162,9 189,9 146,8 136,9 125,6 Reserve capital of Unemployment Insurance Fund 16,1 19,4 21,3 21,7 25,1 TOTAL STATE TREASURY 1 575, , , , ,9 The National Audit Office regards the amounts indicated under Cash reserve of state budget + available funds as available funds. This means the funds that are not a reserve created for a specific purpose or the funds of another institution held in the State Treasury. Source: State Treasury Department of the Ministry of Finance 15. In addition to using money from the Stabilisation Reserve Fund, the state borrowed 50 million euros from AS Swedbank and 165 million euros from the European Investment Bank (as financing for certain projects) in 2009 in order to improve its liquidity. However, the state budget deficit in 2009 proved to be smaller than feared due to the strict savings measures implemented by the state, so the debt to Swedbank was repaid in the same year and the available funds in the State Treasury increased to 623 million euros with the help of the Stabilisation Reserve Fund and the loan from the European Investment Bank. It is true though that the extraordinary reserve of the National Pension Fund decreased by almost 200 million euros in The state s reserves have decreased 16. The state did not take any loans in 2010 and financed the expenditure that exceeded revenue from reserves, which exhausted the extraordinary reserve of the National Pension Fund and reduced the available funds in the State Treasury to 483 million euros. The state has also used reserves in 2011 and, according to the latest forecast of the Ministry of Finance, will continue using them to cover the state budget deficit and financing transactions (e.g. contributions into the share capital of state-owned companies) from The Ministry of Finance estimates the financing needs of the state budget in the period from 2011 to 2015 to be approximately 1.2 billion euros. Report of the National Audit Office for the Riigikogu, Tallinn

11 17. The state s available funds are not sufficient to cover this deficit. The National Audit Office would like to point out that the increase in the state s reserves in 2011 is caused by the increase in deposits of the State Treasury s clients 1 (see Table 2), which generally cannot be used to cover the state budget deficit. The state s available funds amounted to 354 million euros as of the end of June Since this is not enough, the Government wants to use the reserves of the Health Insurance Fund and the Unemployment Insurance Fund whilst paying them interest and making them the promise that both of them can use their money at any time. This means that if the Health Insurance Fund and the Unemployment Insurance Fund decide to increase their expenditure considerably, the Government will still have to find other sources to finance its activities. 18. The reserves of the social security funds currently amount to approximately 500 million euros. The state hopes to avoid taking new loans by managing the cash flow of the state and the social security funds together. The Government of the Republic has approved the relevant draft and is now waiting for the Riigikogu s decision. Did you know that the debt of local governments in 2010 was bigger than the debt of the central government 540 and 468 million euros, respectively. 19. If the Riigikogu decides to reject the Government s draft, it would mean that the state would definitely have to borrow some money and/or use the Stabilisation Reserve Fund. Estonia s debt burden is currently the lowest in the European Union the debt of central government in 2010 amounted to 468 million euros and local governments owed 540 million euros. Budget expenditure would exceed revenue considerably without the Estonian Unemployment Insurance Fund 20. The Health Insurance Fund and the Unemployment Insurance Fund also have a significant impact on the budget position of the government sector. The Government s goal is to have a budget with a surplus by According to forecasts, social security funds, especially the Unemployment Insurance Fund, are the only parts of the government sector in a surplus by that year (see Table 3). Table 3. Budget position of the government sector, (million euros) State budget, incl pension insurance Other central government Estonian Unemployment Insurance Fund Estonian Health Insurance Fund Local governments Total Source: Ministry of Finance 1 The money of the state s foundations, the money of the European Commission and balances of the grants, securities and own revenue of state agencies. Report of the National Audit Office for the Riigikogu, Tallinn

12 Did you know that the revenue of the Estonian Unemployment Insurance Fund will exceed its expenditure by 650 million euros from 2011 to 2015? 21. According to forecasts, the government sector will have a budget surplus in 2014 because the surplus of the Unemployment Insurance Fund will be larger than the total deficit of the state budget and local governments. Social security funds are the only part of the government sector that spend less than the revenue they earn in the period from if we do not consider this year s expected surplus of local governments. The budget of the government sector recorded a surplus in 2010 also because of the Unemployment Insurance Fund the state budget expenditure exceeded the revenue by approximately 100 million euros, but the Unemployment Insurance Fund spent less than it earned. 22. This means that the Health Insurance Fund and the Unemployment Insurance Fund have helped to balance the budget of the government sector and the Ministry of Finance sees them in the same role also in the coming years. However, there are problems on the labour market and in health care, and resolving them requires reforms and/or extra money. Demographic development adds even more pressure. The next chapters speak about the need for structural reforms. The sustainability of public finance in Estonia depends on structural reforms 23. The first chapter points out that Estonian economy is facing serious challenges and we are affected by the development of the world economy, but also that we are recovering from the recession. Although the state s available resources have decreased during the recession and they are not sufficient to cover the needs of coming years, the leaders of our state have still respected the budget discipline and the state is able to provide services to its citizens at the current level for the short term. Does the state have enough money to offer security, support the elderly and people in need, the acquisition of education and health care also in the years not covered by the forecasts of the Ministry of Finance? 24. However, we have to ask how good life is for people in Estonia, how accessible are public services and is their quality high enough, and does the state have the strength required for development? Although the unemployment rate has gone down and salaries have gone up, and although Estonia belongs to the OECD and the eurozone, the purchase power of people in Estonia is approximately 65% of the EU average and salaries are still increasing slower than prices. We can be pleased and we are pleased that the leaders of our country have been responsible with the state s wallet, but if we want public finance to be in order and the state to be able to offer increasingly better services to its citizens also in 2020, 2030 and 2050, we should start tackling the challenges offered by various areas right now. Urmas Nemvalts, Postimees Still waiting for economic growth? It s been growing for quite a while now, mate. I m not talking about your economic growth. I m waiting for growth that put some money in my pocket as well. I m waiting for summer. Report of the National Audit Office for the Riigikogu, Tallinn

13 25. In order to analyse the situation in public finance, we have to take a look at what the state spends its money on, what and how much revenue the state receives, how rapidly important public expenditure will increase in the future, what difficulties the state is facing and what external influence it has to consider. 26. Although the GDP has grown faster than expected in 2010 and 2011, the Ministry of Finance has admitted in its latest forecast that the outlook of economic growth in Estonia will become worse in the coming years due to the deterioration of the situation in the world economy. The question here is not whether the economic growth will decrease, but by how much will it decrease. According to the risk scenario of the Ministry of Finance, economic growth in 2012 and 2013 will remain between 1-2.5%, or between 3-3.3% according to the main forecast. The Bank of Estonia and the Estonian Employers Confederation advise to base the budget for 2012 on the risk scenario 27. The National Audit Office can analyse the revenue and expenditure forecasts of the state on the basis of the main forecast of the Ministry of Finance, but we must keep in mind that if the development of the Estonian and world economies is worse than expected, it will reduce the state s revenue and increase people s need for support from the state. When the Ministry of Finance introduced the materials of the 2012 state budget to the Government, they emphasised that the forecasts must be regarded with caution and both the public and the private sectors must consider serious risks in their revenue forecasts. The advice given by the Bank of Estonia in their letter to the Ministry of Finance was that the budget should be prepared on the basis of the risk scenario. The Employers Confederation also believes the risks are big and advises the Ministry of Finance to consider a GDP growth of 0% instead of 3%. Urmas Nemvalts, Postimees By the way young man, Swedbank increased its forecast of economic growth in Estonia. Oh, right Are they planning to use doping? Did you know that the state s tax revenue in 2010 was 450 million euros less than in The impact of the recession hit the state budget revenue in 2009, when tax revenue decreased by more than 400 million euros in comparison to the previous year. The situation did not improve in 2010 and the state s tax revenue was smaller than in 2009 or just over four billion euros. The state decided to increase its extraordinary non-tax revenue, such as sale of state assets, dividends from state-owned companies, etc., in order to cover the budget expenditure. The state withdrew record dividends from its companies at the time when the revenue of private companies was decreasing. Receipt of increasing amounts of money from the EU Structural Funds and sale of the CO 2 quota also helped to maintain the level of revenue. VAT and consumption Report of the National Audit Office for the Riigikogu, Tallinn

14 taxes were also increased. This is why the state s total revenue didn t actually decrease during the recession (see Figure 1). 29. The Ministry of Finance says that state budget revenue has improved in However, it is clear that major non-tax revenue cannot be generated for a long time, which means that the increase in total state budget revenue will remain relatively modest from Figure 1. State budget revenue from and forecast of Ministry of Finance for (million euros) Non tax revenue Taxes and social security payments Source: Ministry of Finance 30. The biggest sources of taxes for the state budget are social tax, VAT and excise duties. The revenue generated from all types of taxes, except gambling tax, is expected to increase in 2010 according to forecasts. Social tax and excise duties should generate 28% and VAT 29% more revenue by 2015 than in Revenue generated from electricity excise duty, packaging excise duty and heavy goods vehicle road tax is not expected to increase. Increasing social expenditure leaves little money for other purposes 31. The clear goal of the Government of the Republic in fiscal policy is to achieve and maintain a budget surplus in the government sector. This means that the state does not spend more than it earns in the medium term. The goal is to save for reserves, which means that not all of the revenue is used. 32. However, Figure 2 shows that state budget revenue and expenditure have both increased consistently and according to forecasts will also continue increasing in coming years. Report of the National Audit Office for the Riigikogu, Tallinn

15 Figure 2. State budget revenue and expenditure from and forecast of Ministry of Finance for (million euros) Revenue Expenditure Note: The forecast for was taken from the State Budget Strategy (prepared in April 2011), because the Ministry of Finance does not forecast state budget expenditure directly. Source: Ministry of Finance The state will balance its budget by freezing management costs in the public sector and budgetary investments Did you know that budgetary investments in 2012 will exceed the budgetary investments made in 2011 by three million euros? Source: Explanation to the Draft State Budget Act of 2012 The expenditure that is defined with legislation and other fixed expenditure have increased rapidly 33. Irrespective of the increase in economy and revenue, the Ministry of Finance said the following in its Guidelines for Preparation of the State Budget Strategy : Saving money and setting priorities in area policies are the primary and the only considerable measures for covering new activities from the budget. In the situation where operating expenses are frozen and no new investments are initiated (and only previously approved projects are completed), we can expect the budget deficit to increase in 2012 and decrease in 2013 and This means that freezing the maintenance costs of the public sector and budgetary investments is the measure that will help to balance the budget. The reason behind the guideline of the Ministry of Finance is that there is expenditure that the state is obliged to incur pursuant to law or that has been determined in any other manner and that has increased faster than revenue. This is why the state has less money that can be flexibly used for the development of the state. 35. According to the Ministry of Finance, approximately 75% of state budget expenditure in 2011 is directly associated with the performance of legislation and maintaining the state. The same indicator five years ago was 61%. Whilst the increase in state budget revenue by 2010 is 29% (1.27 billion euros) when compared to 2006, the increase in fixed expenditure in the same period was 62% (1.6 billion euros). See Table 4. Report of the National Audit Office for the Riigikogu, Tallinn

16 Table 4. Increase in state budget revenue and fixed expenditure Increase in fixed expenditure, % Increase in state budget revenue, % ,5 20, ,4 3, ,7 0, ,8 2,4 Increase in 2010 in comparison to Source: National Audit Office on the basis of data from the Ministry of Finance 36. This means that the state is spending increasingly more money on the performance of its obligations and less money can be flexibly used to support the state s development. Another question is whether there will be enough money for the performance of the currently effective obligations in the long run, and how can the state offer services in the future in terms of accessibility and quality. 37. The biggest items in state budget expenditure are state pension insurance, health insurance and social benefits, which according to the estimates of the Ministry of Finance comprise one-half of the total state budget expenditure by 2015 and increase by 516 million euros or approximately 23% in comparison to 2011 (see Figure 3). Figure 3. Social expenditure in the state budget (share and absolute amount, million euros) 100% 80% 60% 40% 20% 0% Other expenditure Health insurance Social benefits Source: State Budget Strategy However, there is not enough money for the increasing social expenditure. The only year in the recent past when the revenue generated from social tax covered the expenses of state pension insurance was in 2007 and the surplus has increased in every subsequent year. The state will have to find 279 million euros for pension payments from other revenue in 2011, and already as much as almost half a billion euros in The financial situation of the health system is seemingly better, but the Government s cost-cutting in the years of recession has led to the emergence of problems that need to be resolved fast, and reduced the accessibility and quality of medical care (see item 104 jj). In its latest expenditure forecast, the Health Insurance Fund indicates that it needs to spend more than it earns in the coming years. Report of the National Audit Office for the Riigikogu, Tallinn

17 The aging of and decrease in Estonia s population puts pressure on the budget 40. However, the pressure to increase social expenditure will grow considerably in the years not covered by the forecasts of the Ministry of Finance, which means that their impact on the budget does not show yet. Similarly to the rest of Europe, the population of Estonia will decrease and age over the next ten years, probably even longer. Forecasts vary considerably depending on the methodology. Statistics Estonia, for example, has several forecasts none of which predict an increase in the population of Estonia (see Figure 4). Figure 4. Forecasts of the population of Estonia (thousand people) National Audit Office Statistics Estonia Eurostat The forecast of the National Audit Office proceeds from the average age coefficients of the death rate and birth rate of recent years. Source: National Audit Office 41. Forecasts indicate that the share of people aged 65 and over will increase from the current 17% to approximately 22% by The generation of year-olds are currently at their peak in the structure of the population as well as in terms of their number, and will remain there for the next few years. The number of working age people will decrease rather rapidly in the coming years: about 13,000 people less by 2015, followed by the loss of approximately 35,000 people in the next five years and then the loss of another 35,000. This means that instead of the current 830, year-olds, the number of these people in 2025 will be 740, ,000 a loss of 70,000-90,000 people. Long-term unemployment rate in Estonia is among the highest in Europe 42. Long-term and structural unemployment is becoming a problem in Estonia due to the decreasing number of working age people and lack of jobs, which will inevitably have an impact on the economy. Although people in Estonia are rather highly education on the average and the indicators that characterise the quality of education are good, there is a significant gap between the skills employers need their employees to have and the skills that employees actually have. This gap is one of the reasons for structural unemployment. The long-term unemployment rate in Estonia was 7.7% in The only EU country where this rate was even higher is Latvia (8.4%). Report of the National Audit Office for the Riigikogu, Tallinn

18 Urmas Nemvalts, Postimees Yo, guys! Are you unemployed like me? No, we have a lot of experience in unemployment, but you re still learning. 43. The lack of employees with the required vocational skills could be overcome with re-training and in-service training, but the audit conducted by the National Audit Office in 2010 indicated that our adult education is not aimed at the improvement of vocational skills or learning a new profession (see also item 99 jj). Structural unemployment could be reduced faster if the state made significant changes in the training it offers and the employees showed more willingness and readiness to develop themselves or learn a new profession, the employers participated more in the process, and there was more money for these activities. However, learning a new profession or improving one s skills in an existing one cannot be a quick process. The decrease in working age people has an impact on the economy s competitiveness 44. Whilst the rate of structural unemployment is unlikely to decrease in the nearest future, the lack of qualified labour in various specialties is increasing. This puts entrepreneurs under the pressure to pay higher salaries to their employees, which calls for an increase in the company s productivity. If companies are unable to adapt, it may increase people s dissatisfaction with their salaries and encourage them to go abroad. 45. This demographic development means that tension on the labour market (lack of employees, salary pressure) and in the social system keeps building. The number of taxpayers decreases and there will be a relative increase in the number of people who need the state s support. The population in rural areas is aging faster, as the people who move from the country to cities and towns are mainly young. This in its turn means that the share of people who need social welfare and health services is increasing in rural areas. 46. People will expect local governments to do more and the pressure on their budgets will increase as a result of these demographic processes. There are currently no financial forecasts that look as far ahead as the years when demographic process will start having a significant impact on public finance. However, the challenges in various areas and financial possibilities should already be regarded in the context of the demographic developments. Report of the National Audit Office for the Riigikogu, Tallinn

19 When we have to invest taxpayers money, we have good reason to ask what the company will give us in return. Juhan Parts, Äripäev, However, the explanatory memorandum enclosed with the drat of the 2010 State Budget Act only provides the following explanation to giving 150 million euros to Eesti Energia: The planned financing transactions of the Ministry of Economic Affairs and Communications in 2012 include 156,391,165 euros for subscription of shares in companies. Major investments need decisions and money 47. When we analyse the sustainability of public finance, we have to look at the increasing social expenses alongside the other expenses that demand or may demand money from the state budget. Investments are an expense the state is likely to incur and they are financed either directly from the state budget or by giving share capital to state-owned public limited companies. For example, the forecast of the Ministry of Economic Affairs and Communications indicates that Eesti Energia will need an extra 1.15 billion euros for investments from , but one billion euros of this amount have not been considered in the budget forecasts prepared by the Ministry of Finance. However, the National Audit Office is yet to see a clear explanation of what Eesti Energia plans to do with the 150 million euros already allocated in the state budget and the missing one billion. The future of the energy sector has still not be explained to the general public or discussed properly in the Government (see also item 135 jj). Urmas Nemvalts, Postimees Yes, the minister would certainly be happy to comment on the issues concerning Eesti Energia if he was not so busy enjoying his holiday I m sure you can hear him splashing in the sea. 48. The development plans and capital needs of the airline Estonia Air, which the state acquired last autumn, are also not clear. The general public have been given some information about the aircraft the company needs, but the National Audit Office believes that there is no clear, government-approved strategy to explain how the state as the owner sees the future of the company, and how much extra capital it needs, if any. Did you know that the share of budget expenditure covered with foreign support pursuant to the 2011 State Budget Act is 44% in the area of government of the Ministry of Economic Affairs and Communications and 32% in the Ministry of Education and Research? 80% of the expenditure in the area of government of the Ministry of Environment is covered with foreign support and the proceeds earned from sales of CO 2 quota. 49. Large investments that have not been approved yet (the new building of the Estonian Broadcasting Company, the Estonian National Museum, the Tallinn Prison and an icebreaker) are still up as potential state budget expenditure. They have not been fully considered in budget forecasts, but ministries have requested the money. Financing of many areas depends on structural funds 50. The financing needs of areas that are largely financed from the EU Structural Funds or sales of CO 2 quota at present may also put pressure on the budget in the future and restrict the Government s freedom of making fiscal decisions. Estonia will receive approximately 3.4 billion euros from the EU Structural Funds from , which will be used for environmental, energy, educational, cultural, social, transport and other investments. There are areas that are almost fully dependent on this support, such as business support, in-service training and retraining, and Report of the National Audit Office for the Riigikogu, Tallinn

20 science. State-owned and private companies both have received or will receive money for investments. Are we ready for focussing or decrease in the EU Structural Funds? 51. Many areas receive support from structural funds in the current budget period and the state has sometimes used it for the expenditure determined with legislation (e.g. financing road management on the basis of the Road Management Act, provision of employment services), but the principles of the European Union budget period that will start in 2014 have not been decided yet. It may happen that the Member States will only be given money for financing a few priorities. This means that financing in the areas that currently depend largely on foreign support, but will not be seen as priorities in the new period, should be significantly reduced or the state will have to give them more from its own revenue. We have to borrow ourselves if the countries we help don t perform their obligations 52. The financial contribution that Estonia will have to make to help guarantee the financial stability of Europe is also unknown. As far as we know at present, Estonia is expected to pay million euros into the European Stability Mechanism (ESM) and 48,000 euros into the European Financial Stability Facility (EFSF). These amounts have been considered in the state s fiscal forecasts. The state has also entered into the obligation to guarantee the principal amount of the EFSF s debt obligations to the extent of two billion euros, which constitutes potential state budget expenditure if the debtors fail to perform their obligations. Urmas Nemvalts, Postimees There should be enough of these at any time in case another member state soils itself. The budget policy that is based on freezing expenditure cannot be sustained for the long term 53. The situation in public finance at present and in the nearest future is such that the state s maintenance expenses must be frozen due to the increased fixed expenditure in order to balance the budget and according to the Minister of Finance, ministries must find money for new initiatives by saving some of the money allocated to them or by reviewing their priorities. The state s administrative capacity will suffer if this situation is allowed to last a long time and not enough money is invested in the state s development, which may lead to the state abandoning the balanced budget principle. Report of the National Audit Office for the Riigikogu, Tallinn

21 54. In order to maintain a balance in public finance in the long term, the state has to pay considerably more attention to all major areas of expenditure, and analyse and review their principles, objectives and financing. The expenditure determined with legislation is increasing faster than revenue and in the long run, the state will not have enough money to support these massive areas of expenditure without reforms. The state needs to evaluate whether the use of money in important areas, such as health, social benefits and education, has been effective and how it could save more money and improve its effectiveness and efficiency. Such and analysis could be prepared and decisions could be made without rushing and all political forces could be involved in the process. It would make it possible to achieve a broad-based agreement in the long-term key issues of public finance in Estonia. 55. The state should also seek opportunities to increase its revenue, primarily by supporting the increase in the competitiveness of its economy. The relatively good public finance and macroeconomic indicators are not sustainable if they are mainly based on the budget policy aimed at freezing expenditure and maintaining the status quo. This approach was suitable in the situation where the budgeting errors made during the boom had to be quickly corrected, as the OECD also pointed this out in its recent review of the Estonian economy 2. A budget policy that is based on freezing expenditure may not be sufficient to maintain a good financial position in the future and take advantage of development advantages. The action programme of the Government of the Republic does not contain plans for reforming major areas of expenditure 56. The state has two options in order to cope with the increasing expenditure: to find ways for increasing its revenue, i.e. increase taxes, or to make extensive changes in the policies of expensive areas. The National Audit Office analysed the Government s Action Programme for (hereinafter the EGAP) in order to ascertain the problems that the Government of the Republic sees in different measures and learn about the measures the state intends to take to resolve problems in highly expensive areas. Urmas Nemvalts, Postimees Oh, what s that over there? Bright future? Election promises have started to take shape. 2 Estonian Economic Review. OECD, 2011, pp Report of the National Audit Office for the Riigikogu, Tallinn

22 57. The National Audit Office finds that the goals of the EGAP are aimed at preserving the current situation instead of reviewing and reforming important areas of expenditure. The EGAP offers general descriptions of initiating activities or drafting/amending legislation, but it does not present the Government s position with regard to important areas of expenditure health and social welfare. In many cases, the EGAP mentions the development of an action plan, operational programme, report or another document as the activity required for the achievement of a goal, but the need for reforms has not been identified. 58. Also, as explained further in this report (see item 77 jj), the opinion of the National Audit Office is that action plans do not play an important role in making decisions about expenditure. Also, the financial plans included in development plans do not characterise the actual need for or allocations of money, as was clearly demonstrated by the events concerning the development plan of the Estonian Enterprise Policy in spring The National Audit Office is therefore not sure that carrying out the activities specified in the EGAP would resolve any significant problems in various areas. It is also notable that there is no comprehensive overview of the expenditure required for the implementation of the EGAP by the time this overview is published. Smart decisions require timely and relevant information 59. The Riigikogu, the Government and also the general public need good and up-to-date information about the impact of policies and the results of the Government s activities in order to identify significant problems without delay and distribute money from the budget in the most optimal manner. Being aware of the impact the activities of the Government have should be the basis for reforming various policy areas. A lot of information is collected and processed in the public sector for this purpose, which should help the decision-makers improve and make quality decisions. The two processes for the collection and processing of information that are closest to the distribution of money are state budget drafting and assessment of the impact of legislation. The system of strategic planning also deserves a mention as a process of collecting and using information. On one hand, strategic planning should determine the general goals of the state and on the other hand, it should give information about the impact of policies 4. 3 The Government approved the updated Estonian Enterprise Plan in January 2011, which promised to support the area with 335 million euros in the period, although the amount of money actually available was just 57 million euros. The Government corrected the financial plan in March by changing the accounting bases used in the financial plan of the development plan, and the amount of the money to be allocated to the area increased on paper. It is notable that whilst the financial plan of the development plan was largely changed, there was no correction of the activities, objectives and indicators of the development plan. The Ministry of Finance could not explain to the National Audit Office how much money the area needs from the state budget according to the new development plan miljardit-krooni-rohkem-toetusi/. 4 Regulation No 302 Types of Strategic Development Plans and the Procedure for Preparation, Updating, Implementation, Assessment of and Reporting on Strategic Development Plans issued by the Estonian Government on 13 December Report of the National Audit Office for the Riigikogu, Tallinn

23 Evaluation of the impact of legislation is insufficient and superficial 60. In 2011 the National Audit Office organised an audit, which focussed on the following question: are the people who adopt laws aware of the impact their decisions have? The current organisation of the assessment of the impact of legislation was reviewed in the course of the audit. The audit included a comparison of the results of forecasting the impact and implementation of the legislation, an analysis of the information given in the explanatory memoranda of legal acts and legislative drafting in ministries. The National Audit Office also checked whether enough attention had been paid to participatory democracy and the costeffectiveness of legislative drafting in the development of legislation The regulation of the Government of the Republic Rules of Legislative Drafting of Legislation of General Application (hereinafter the Rules of Legislative Drafting) 6 stipulates that the direct and indirect impact of legislation must be analysed in at least eight areas before its adoption. An assessment of the impact of an act must be given in the chapter Impact of the Act in the explanatory memorandum of the draft act. The potential impact of draft acts on the following areas must be assessed: the social sphere; national security; international relations; economy; environment; regional development; organisation of work in state and local government agencies, including the training needs resulting from the implementation of the act; and the other direct or indirect consequences of the adoption of the act. 62. The National Audit Office assessed whether or not the impact of draft acts had been explained in the explanatory notes to legislation in the manner that would give those who pass the act information about the possible consequences of regulation, including the costs involved. The explanatory memorandum would meet all requirements if the impact on all eight areas or the lack thereof is highlighted. The National Audit Office did not assess whether or not the impact analysis is sufficient, but checked whether all of the areas had been considered in the chapters on the impact of the act and on the costs required for its implementation. 5 The audit Organisation of the Assessment of the Impact of Legislation completed by the National Audit Office. 6 Regulation No 279 Rules of Legislative Drafting of Legislation of General Application issued by the Estonian Government on 28 September Report of the National Audit Office for the Riigikogu, Tallinn

24 63. The audit indicated that none of the explanatory memoranda included in the random sample had analysed the impact of legislation to the required extent. 64. Assessments of the legislation s impact on one or another area was missing in 56% of the cases (see Figure 5). The impact on the organisation of work in state and local government agencies, social impact and economic impact had usually been discussed in the explanatory memoranda. The impact on regional development, international relations and the environment is usually not assessed, or no mention is made of the lack of such impact if this is the case. Figure 5. Frequency of assessment of the impact of legislation in the chapters Impact of the Act and Costs Required for Implementation of the Act and Expected Revenue from Implementation of the Act of the explanatory memorandum Number of audited explanatory memoranda Environment 24% Area of impact Social impact 72% International relations 20% National security 24% Economy 68% Regional development 16% Organisation of work in sate and local government agencies 84% Other signifing consequences 40% Source: National Audit Office 65. At the same time, most of the impact assessments did not include substantive analyses or descriptions of the methods used. This means that the reliability of the impact assessment could not be ascertained in most cases. The inadequate system for assessment of the impact of legislation does not support the making of budgetrelated decisions with the necessary information 66. Every legal act has an impact on the state budget. It is therefore necessary to make sure that the explanatory memorandum of a draft act contains a list of the implementation costs covered from the state budget including their amounts, the reasons why these costs have to be incurred and the sources from which they will be financed as well as the expected revenue to the state budget and the impact on the budgets of local governments. Such revenue and expenditure can usually be measured in money. The explanatory memoranda included in the random sample showed that the expenditure and revenue resulting from the adoption of an act for the state budget as well as any other parties are basically not recognised. More than a half of the explanatory memoranda did not include a financial assessment regarding the state budget, or it was simply limited with the mention that no additional state budget expenditure would be incurred or that the adoption of the act would not cause any additional expenditure for the state. Such a general reference or discussion of additional expenditure alone does not give the persons who pass the legislation and the interest groups a comprehensive view of all of the expenditure associated with the adoption of the legislation. The situation is even worse in the recognition of state budget revenue or the Report of the National Audit Office for the Riigikogu, Tallinn

25 lack thereof only one-fifth of the explanatory memoranda mention potential revenue or the lack thereof. The situation in legislative drafting has not improved in four years 67. Follow-up assessment of the impact of legislation is not a mandatory part of the legislative drafting process at present. It is therefore difficult to give a quality assessment of the functioning of the acts that do create large fixed expenditure in the state budget and the resolution of problems may be too late, or an incorrect way may be chosen for solving them. 68. The questions raised by the National Audit Office have been discussed before. In 2007 the Ministry of Justice prepared an overview of the analysis of the impact of the legislative drafting of ministries and the main problem highlighted in the overview is that the quality of impact assessments is very poor. We have to admit that this problem has still not been resolved and the quality of impact assessments, involvement of interest groups and the quality of distributing information to the regulator has not improved. 69. The reasons why the situation has not improved in four years are the political differences about the objective and scope of the impact assessment; the general attitude that impact assessment is a waste of time and an impossible task; and the overly lenient attitude of the Riigikogu towards the quality of impact assessment and the lack of clarity among officials about what should be assessed according to the effective requirements and how it should be done. 70. An important event concerning the improvement of assessing the impact of legislation occurred in spring 2011, when the 11 th Riigikogu made its last resolution and adopted the policy document Legal Policy Development Trends 2018, thereby giving a clear signal that the quality of legislative drafting, incl. impact assessment, must be significantly improved. However, implementation of the Riigikogu s resolution requires updating the rules of impact assessment, actual use of impact information in the identification of the needs and options of regulation and making decisions concerning the state budget; and politicians and the general public should demand an understandable and thorough presentation of the impact of legislation. 71. In the opinion of the National Audit Office, the biggest problems in improving the quality of impact assessment are the facts that 1) impact information is not considered important in decision-making; 2) there is not enough skills or money for systematic impact assessment; and 3) there is no functioning support structure for impact assessment, which would also ensure that the agreed impact assessment rules are adhered to. 72. All in all, the organisation of impact assessment of legislation does not guarantee that members of the Riigikogu receive reliable information about the impact of intended legislation. This is why the results of impact assessment cannot be used in state budget drafting. It forces those who plan the budget to make one-off, often subjective, decisions about state budget revenue and expenditure, which increases the inaccuracy of revenue and expenditure forecasts. Report of the National Audit Office for the Riigikogu, Tallinn

26 Information about the results of state budget usage does not give decision-makers relevant advice 73. Inspecting the execution of the state budget is an important task of the Riigikogu, which guarantees the Government s responsibility in using the state s money. Such inspection requires reliable information about the use of the state budget. The general public have been expecting more than the knowledge that the transactions performed with money from the state budget have been lawful and correctly recognised in accounting for a long time now. The fact that everything is in order in financial accounting is considered obvious. What raises more questions is the wish to learn whether the expenditure incurred actually helps to achieve the expected results or impact. The Government has created procedures for obtaining this information, where the central role is played by the action plans of ministries and the reports on the performance of these action plans. 74. Every year after the adoption of the state budget, the Government approves the action plans of ministries, which stipulate what will be done with taxpayers money and what are the results that should be achieved. After the end of the year, every ministry prepares a report in order to explain to the general public how well they managed to achieve their goals and explain why they could not stick to their plans. The Ministry of Finance assembles the reports of the ministries into an overview of the Government s activities, which is added to the state s annual report as the Management Report. The state s management report does not discuss the issues raised by ministries 75. The National Audit Office analysed the information about the action plan performance reports of the Ministry of Social Affairs, the Ministry of Economic Affairs and Communications, the Ministry of the Environment, the Ministry of Education and Research, and the Ministry of Internal Affairs that is included in the state execution report or the state s management report. We found out that although all of these ministries had highlighted significant goals and activities in their action plan performance reports for 2010, which were not achieved or carried out, the management report in the state s annual report for 2010 only mentions a couple of the concerns or problems raised by the ministries. Highlighting the positives alone creates a biased picture of the Government s activities and means that the Riigikogu and the general public don t have reliable information to assess the activities of the Government. Also, if the taxpayers and the Riigikogu do not get comprehensive information about what the Government does with the money, it is difficult for them to participate in discussions concerning the use of money and in decision-making. Report of the National Audit Office for the Riigikogu, Tallinn

27 Performance information is not used in state budget negotiations The National Audit Office regards performance information as knowledge of the impact the state s past activities have had on the goals it has set for itself. The use of performance information means considering the past as well as the expected impact of activities in decisionmaking. 76. As we said before, a transparent and true report on the Government s activities is just one side of the coin, as the reports must also be used and the experience gained must be used to make wise and effective decisions. The Ministry of Finance also believes that the action plan execution report is one of the most important sources of information, which is also used in the preparation of the budgets for subsequent years. However, the National Audit Office did not find any references to the use of performance information (not just the information obtained from the action plan execution report) in making budgetary choices. Also, the independent paper published in autumn 2011 indicated that members of the finance committee of the Riigikogu do not use performance information in budgetary decision-making and discussions However, the plans and reports prepared in the course of budget drafting would give enough material for negotiations. In the action plan execution reports prepared in 2010, the ministries presented rather clear signals of financing problems and their impact on the achievement of goals. For example, the Ministry of Education and Research finds that its execution of the action plan for 2010 was satisfactory, but adds that limited resources and reduced staff have made it difficult to achieve results as expected. It also admits that the administrative capacity problems arising from cutbacks in the public sector curb the use of EU Structural Funds. 78. The reports of many other ministries also refer to administrative capacity concerns, as they mention problems in the use of structural funds, delays in legislative drafting, etc. This has a direct negative impact on the so-called real life, the state s ability to provide services, achieve goals and carry out activities. For example, the Ministry of Education and Research referred to the lack of resources and found in the 2010 action plan execution report that adjusting the levels of goal achievement should be considered. The Ministry of Finance analysed the report and found that no changes should be made for this reason. Again, we have to ask the same questions: which goals and activities of the state are important; which action plan or development plan are the ones that agencies proceed from and how are choices made. The analysis conducted by the National Audit Office indicates that ministries themselves should also think about these questions: The relevant indicators are the instruments of the relevant ministries in negotiations about resources and proving their need for resources, but the Ministry of Finance gives them very little consideration, and the methods or reasons for selecting the factors that are taken into consideration are not explained or introduced. Source: Response of the Ministry to the questions about budgetary choices and use of performance information The bases and manner of decision-making must be clear to the general public as well as the decision-makers themselves 79. There is no doubt that the public sector must function efficiently and attempts to increase efficiency should continue, but it is difficult to believe that the budgets of ministries are like an endlessly stretching rubber band that can be used to finance everything that is written down in development documents, the provision of quality public services, analyses of past activities and carrying out reforms. However, the bases 7 Report of the National Audit Office for the Riigikogu, Tallinn

28 and manner of decision-making must be clear to the general public as well as the decision-makers themselves Planning the budget wisely means that the minister uses the performance information in the distribution of the budget funds, but certainly also in negotiating the amount of these funds with the Ministry of Finance, at the level of the Government and in the Riigikogu. 80. The connection between the state s maintenance costs and administrative capacity must also be analysed and acknowledged; and the results of budgetary decisions must be accepted in public. The lawfulness and effectiveness of the use of taxpayers money both depend on the capacity and competence of the public sector: constant reassurance that the money spent does have the desired effect and helps to achieve goals. Wise decisions, however, require that officials do their preliminary work well. And wise decisions are the safest guarantee of the sustainability of public finance, which is discussed in the next chapters of the report. Urmas Nemvalts, Postimees Well, guys, seems like we re done with the cutbacks for now. I wonder when the next lot will be made? Report of the National Audit Office for the Riigikogu, Tallinn

29 II. Development and problems of the state s areas of activity Changes in the education system 81. The main problem in the area of education since Estonia regained its independence is how to optimise the school network and guarantee quality education when there is little money and the number of students is decreasing. 82. General, vocational and higher education have adapted differently to the decrease in the number of students. The number of students in general education has decreased faster than the number of schools. The number of schools in vocational education has decreased considerably, mainly as a result of the reorganisation of public vocation schools, but the number of students has remained unchanged. The number of vocational students has not changed considerably. Higher education underwent a quick expansion after Estonia regained its independence and the number of schools offering higher education multiplied. However, the number of institutions of higher education has started to decrease again by now. The number of students has still been growing slightly, but the demographic situation indicates that their number will start going down soon. Table 5. Overview of changes in the number of students and education institutions, 2001/ / / / / / / / / / / / 11 No. of general education schools No. of schools offering vocational education* No. of schools offering higher education* No. of students in general education schools No. of vocational students Number of students in higher education * The number of schools offering vocational education does not offer the number of vocational schools and the number of schools offering higher education does not equal the number of institutions of higher education, because some vocational educational institutions also offer higher education and some institutions of professional higher education also offer vocational education. Source: Ministry of Education and Research Report of the National Audit Office for the Riigikogu, Tallinn

30 The education system is subject to constant reforms 83. Streamlining the general education system was the main focus in The Ministry of Education and Research prepared an extensive reorganisation of general education schools, which prescribed that basic schools were to be separated from upper secondary schools and considerably stricter requirements were to be established for the size of upper secondary schools. However, the Riigikogu did not approve the amendment of the Basic Schools and Upper Secondary Schools Act to such an extent and the planned changes to the school network were not made. The plan for the creation of state-owned upper secondary schools was developed next, but this has also been put on hold for now. There is still a lot of uncertainty about the future of general education in 2011 and the reform of the general education network, which everyone agrees is unavoidable, has once again ground to a halt. Reforms are incomplete and insufficiently prepared Did you know that 63% of state-commissioned study places in priority areas, such as natural and exact sciences, technology, production and construction, are filled; 59% of state-commissioned places in doctoral studies are filled. Source: Analysis conducted by the Ministry of Education and Research on the basis of the data of students who graduated in the 2008/2009 academic year 84. The National Audit Office is of the opinion that the reasons why both reform plans have come to a halt are omissions in preparations and lack of clear goals. The decision-making and financing principles had not been thought through and it was also unclear how the planned changes were going to help solve the problems that had been raised. Little attention was paid to the broader impact of the changes, i.e. the improvement of the overall quality of secondary education, during the preparatory process. 85. In 2011 the Ministry of Education and Research started to reform higher education and prepared the drafts of the new Universities Act, Institutions of Professional Higher Education Act and drafts for amendment of other acts. The Minister of Education and Research phrased the objectives of the reform as follows: to carry out the transfer to free higher education set forth in the coalition agreement; to improve the quality of higher education, increase the responsibility of institutions of higher education and reduce the fragmentation of higher education; and to make the functioning of the higher education system more fair The draft act with amendments had been presented to the Riigikogu by the time this report was completed, but it had not yet been adopted. The most important change is that state-commissioned education in its present format would be abandoned and institutions of higher education would be the ones to decide how many students they admit and in which specialties. The financing of universities, which appeared to be based on state-commissioned education, will depend on the quality and effectiveness of study work. For this purpose, universities would be financed for periods of three years and on the basis of performance contracts that are annually renewed. The contract stipulates the main quantitative and qualitative indicators of the university s activities as well as all important admission indicators. 8 Speech of the Minister of Education and Research Jaak Aaviksoo at the development conference of the Tallinn University of Technology on 8 June Report of the National Audit Office for the Riigikogu, Tallinn

31 Urmas Nemvalts, Postimees We will get his gold coins, he will learn that coins don t grow into trees Is this what you call paying for higher education? Read more The National Audit Office s audit Statecommissioned Higher Education, completed in 2008 The law already permits the state to enter into performance contracts 87. The National Audit Office pointed out that the current system was ostensible and actual financing was not based on graduates, but previously established financing proportions between institutions of higher education, in its audit State-commissioned Higher Education completed in The analyses conducted by the Ministry of Education and Research in later years also confirmed that institutions of higher education owe graduates to the state in the basis of the contracts entered into with them. The problems with graduates are the biggest in the specialties to which the state has contributed the most, which are specialties related to natural and exact sciences, technology, production and construction. Results in doctoral studies have also remained poor. 88. The intended amendments of the Universities Act and other related acts are unlikely to lead to an increase in the number of graduates any time soon, but they release universities from the threat that their financing is cut if the fail to fill the required state-commissioned study places. However, the planned higher education reform does set a challenge to the Ministry of Education and Research that has to develop and implement a system of performance indicators, which guarantees that the financing of institutions of higher education is fair and transparent, and also reflects the interests of the state. It must be pointed out that for some reason, no attention has been paid to the fact that the current Universities Act also stipulates the obligation to enter into performance contracts with universities, which in addition to the number of graduates also set requirements for the quality of the education given, the accessibility of counselling and support services to students, etc. The amendments required for entering into performance contracts were made only in There is still no clear overview of whether and how the financing system that is based on performance contracts actually works and how the amendments submitted to the Riigikogu would improve the situation. 89. The National Audit Office believes that abandoning statecommissioned education in its present format does not mean that it would no longer be necessary to ascertain how many graduates the state needs and in which specialties, because considering the choices of students alone does not make it possible to regulate admission to institutions of higher education. It will always be impossible for the University of Tartu to admit everyone who wants to study law, economics or medicine, or for the Estonian Academy of Music and Theatre to admit everyone who loves drama, because it is impossible to admit an unlimited number of Report of the National Audit Office for the Riigikogu, Tallinn

32 students and offer them quality education. This means that the need to determine the number of study places will always be there and certain admission barriers must always be set, but the responsibility will shift from the Ministry of Education and Research to institutions of higher education themselves. The education system needs comprehensive planning of all educational levels 90. Although the different levels of the education system are closely related to each other, the state has developed educational levels separately. The state has separate development plans for general education, vocational education, higher education and adult education. A separate report about the execution of these plans is also prepared every year. The planned reforms and the legislative amendments associated with them are also tackled separately. There have been attempts to develop a single strategic document for the education system, but none have been adopted so far. The National Audit Office does not think that a single document is essential, but planning all educational levels in a uniform manner is unavoidable. Did you know that there were 224 upper secondary schools in Estonia in the 2010/2011 study year, which means that the average number of students studying at the upper secondary school level is 120? The average number of students in vocational educational institutions in the same study year was 620. Source: Ministry of Education and Research The problems in higher education stem from general education Did you know that 4,837 people took the state examination in mathematics in 2010 (i.e. 41% less than in 2004, for example)? 1,617 of those who took the exam scored less than 50 points. The average score in recent years has been between 52 and 58. Source: National Examinations and Qualifications Centre 91. All levels of the Estonian education system are struggling with the same problems: the number of students is decreasing and there is a shortage of qualified teachers/lecturers. At the same time, there is still no decision on what the general network of general education schools in Estonia should look like in the future and whether basic schools and upper secondary schools can operate under the same roof or whether they should be separated. The changes in the upper secondary school network will have a direct impact on vocational schools. At the time when upper secondary schools are fighting for students, the Ministry of Education and Research has forecast that the number of students in vocational educational institutions will increase or undergo a minimal decrease. Although vocational educational institutions managed to avoid a massive decrease in the number of students last year (mainly on the account of vocational education acquired after secondary education), a look the number of future basic school graduates shows that the number of people continuing their education in upper secondary schools and vocational schools will be less than forecast. The upper secondary schools and vocational schools that compete for the same students cannot carry on with the same numbers as before. The in-service training and retraining of adults, which is financed with EU support, has given a lot of work to vocational schools in recent years. Adults were more interested in studying at the time of recession. However, it is uncertain whether this interest will continue when the economic situation changes and the EU reduces its support. 92. Institutions of higher education are also facing a possible decrease in the number of students, because the number of people who would be capably of acquiring higher education on the basis of their national examination results is going down (see Figure 6). In its audit Statecommissioned Higher Education of 2008, the National Audit Office drew attention to the fact that there are not enough new students in the priority specialties of the state who meet the admission requirements. For example, the number of study places created in the areas of natural and exact sciences or technology, production and construction (NEST) in 2007 was bigger than the number of suitable candidates on the basis of Report of the National Audit Office for the Riigikogu, Tallinn

33 the results achieved in national examinations taken in sciences. This means that it has been difficult for universities to fill state-commissioned study places with suitable students. Quality education and filling statecommissioned study places cannot be guaranteed at the same time in this manner. The number of potential new students (cf. the number of those who wrote essays in Figure 6) has decreased even further after 2007, and the number of those who passed examinations in mathematics and chemistry has also decreased. Only the examination in physics has been chosen by a stable number of young people, but their number is very small considering the whole. In a situation like this, there is no reason to hope that the number of students seeking admission in NEST specialties and thereby also the number of graduates would increase. On top of that, the Ministry of Education and Research has forecast that the number of upper secondary school graduates will decrease by almost one-fifth in the next five years. Figure 6. Number of students who passed national examinations, * mathematics chemistry physics essay (both in Estonian and Russian) * The data for 2008 show the number of students who registered for national examinations, the data for other years show how many passed these examinations. Source: National Examinations and Qualifications Centre 93. The planned abolishment of state-commissioned education in institutions of higher education raises the question whether this system should also be reviewed in vocational education and adult education. Similarly to higher education, state-commission education at these levels is also based on the proposals made by the relevant committees, which in their turn should consider the medium-term forecast of the need for labour prepared by the Ministry of Economic Affairs and Communications and the situation at other levels of education. This means that changes cannot be made in higher education without considering the situation in general education and vice versa: general education reforms have a direct impact on higher education. Vocational and adult education also depend on both general education as well as higher education. Report of the National Audit Office for the Riigikogu, Tallinn

34 Urmas Nemvalts, Postimees Open the door! Let me and the reform in! The objective and status of the Estonian Education Strategy are unclear Did you know that the following development plans in the area of education, for example, will expire in 2013: Development Plan for the General Education System ; Development Plan for the Estonian Vocational Education System ; Development Plan for Adult Education ; Strategy for Teacher Training in Estonia ; and Estonian Research and Development and Innovation Strategy Knowledge-based Estonia. 94. Attempts were made to launch uniform planning of the education system in 2009, when the Ministry of Education and Research entered into a trilateral agreement with the Estonian Education Forum and the Estonian Cooperation Assembly in order to pay the foundation for the preparation of the long-term education strategy of Estonia. The draft of the strategy was presented to the Minister of Education and Research by 29 June The preparation of the strategy was financed by the European Union Structural Funds from the measure Improvement of the Strategic Management of Public Sector Institutions and Non-profit Associations and the total cost of the project was 67,847 (incl. 61,087 from the ESF). 95. The goal of the project was to develop the education strategy of Estonia, which would tie together the provisions of previous development plans and offer approved solutions to the key issues of the education sector in Estonia. The strategy was supposed to cover the entire lifelong learning process, and improve the competitiveness of Estonia and the quality of life of the people living here. The activities of the existing draft mainly cover general and higher education, and adult education gets almost no mention at all. Also, no attention has been paid to vocational education. We cannot therefore say that the current draft strategy covers the entire spectrum of education. The need to combine all development plans that concern all educational levels and school types into a single document is emphasised in the draft strategy, but only by However, several development plans in the area of education will expire in 2013 already. Many decisions about education also depend on the European Union Structural Funds. Planning their next period has already started and definite decisions must be made before Not all educational levels have been discussed in the draft strategy and its content is also very selective and pays no attention to many of the difficulties the education system is facing. For example, the strategy makes no mention of what the future school network in Estonia could be like. Also, no attention has been paid to financing principles, but it is clear that solving the challenges of the Estonian education system will be very difficult without talking about money and general organisation. A document like this will not help the Ministry of Education and Research to make decisions. Report of the National Audit Office for the Riigikogu, Tallinn

35 97. The draft strategy does also not clarify why the selected period is , because no specific deadlines are actually given in the development plan and the challenges are not that ambitious, so could be solved in a shorter period. Many of the activities mentioned in the development plan have already been launched and should be carried out by For example, the strategy says that all children should be provided access to preschool education. However, the Development Plan for General Education already states that it must be guaranteed that 95% of children take part in preschool training by 2010 and the same indicator must rise to 98% by The state must consider what it commissions Read more The National Audit Office s audit Inservice Training and Retraining of Adults, completed in The state should order various surveys and analyses with a clear goal. Many education experts have worked hard on the draft education strategy for two years, but the (legal) status of this document is unclear. It does not comply with the requirements established by the Government to strategic development plans in terms of its content or format. The Ministry of Education also has no plan for the development of an actual strategy on the basis of this document. Although this draft education strategy has not been officially approved by the Government or the Riigikogu, there are plans to introduce the education strategy to the general public. Project Elu5x includes the introduction of the completed strategy at conferences and regional roundtables. The cost of the project is 159,180 euros and the money for this will be received directly from the European Commission. The emphasis in adult education is still on short-term courses 99. In recent years Estonia has made great progress in taking part in lifelong learning and even passed the average European indicator by reaching 10.9% in 2010 (the European Union average was 9.1%). Such progress is impressive, as the relevant indicator was just over 6% at the beginning of the 2000s. Urmas Nemvalts, Postimees It is difficult to find a job as a killer these days, so I decided to retrain Can you lend me some cauliflower for my ikebana? Participation indicators improve mainly on the back of conferences and seminars 100. The goal set in the Development Plan for Adult Education is to give adults better access to formal education and informal training in order to improve the knowledge of people and the education of population; to reduce the share of adults who only have general education and no professional or vocational education; and to promote the acquisition of a higher educational level of qualification. Report of the National Audit Office for the Riigikogu, Tallinn

36 Did you know that one-third of the Estonian population aged have low qualifications? They only have general secondary education or a lower level of education and they have not acquired a single profession or received education that evidences professional skills In its audit 'In-service and Retraining of Adults', which was completed in 2010, the National Audit Office pointed out that participation in lifelong learning has increased, but this increase has mainly been achieved on the back of short conference and seminars, and does not contribute significantly to improving the qualification of labour or achieving the goal or retraining and therefore does not improve the competitiveness of the Estonian economy. It is true that some growth has been achieved in the number of people participating in formal training and professional in-service training and retraining courses, but it has not been equally significant (see Table 6). Table 6. Participation of people aged in lifelong learning in the last four weeks (share in % and absolute figure), * Study Participated in lifelong learning, incl. 7 (49 600) 9,8 (69 200) 10,6 (75 600) 10,9 (78 300)... studied in formal education system 3,6 (25 100) 3,6 (25 300) 4,6 (32 900) 4,2 (30 400)... studied in general education school/vocational school 0,5 (3300) 0,4 (2800) 0,4 (2700) 0,5 (3400)... studied in an institution of higher education 3,1 (21 800) 3,2 (22 500) 4,2 (30 200) 3,7 (27 000)... participated in training 3,7 (26 500) 6,6 (46 900) 6,7 (48 000) 7,2 (52 000)... participated in professional in-service training or retraining... participated in professional conference or seminar 2,4 (16 700) 3,1 (22 000) 3,3 (23 800) 3,4 (24 100) 0,7 (4700) 2,2 (15 600) 2,2 (15 600) 2,2 (15 600)... participated in hobby-related training 0,6 (4100) 1,1 (7900) 0,9 (6400) 1,3 (9600)... participated in other training 0,1 (900) 0,2 (1500) 0,3 (2200) 0,4 (600) * The indicators studied in formal education system and participated in training do not automatically equal the indicator participated in lifelong learning, as a person could have participated in both at the same time. Source: Statistics Estonia 102. Short-term training courses that last less than a week dominate in adult education. The share of such training courses ten years ago was 42%, but in 2010 it exceeded 73% (and was more than 75% in 2009) (see Figure 7). Figure 7. Participation of people aged in lifelong learning in the last four weeks. Share of training according to duration Over 1 year 3 months to 1 year 1 to 3 months 1 week to 1 month Less than 1 week Source: Statistics Estonia Report of the National Audit Office for the Riigikogu, Tallinn

37 Did you know that Estonia will invest approximately 130 million euros of money received from the European Union in adult education from 2008 to 2013, i.e. approximately 180 euros per every residence aged 25-64? 103. Adult education is financed mainly from the structural funds of the European Union. The state plans to invest approximately 130 million euros in adult training from 2008 to Irrespective of the large amounts of money, there is still no comprehensive overview of what has been done and the results that have been achieved. Updates to the Estonian education information system, which would make it possible to compile information about in-service training providers and the training that has taken place and to collect relevant statistical data in order to plan the further development of the area, are still being planned. Although the goal the Government has set itself in its action programme for is to increase the share of people participating in lifelong learning to 20% of the adult population, the National Audit Office would like to point out to the Government that it should also work on the qualitative indicators in addition to the quantitative ones, i.e. what should be taught and to whom. Standstill in health care 104. The study Sustainability of the Financing of Estonian Health Care was completed by the Ministry of Social Affairs, the Estonian Health Insurance Fund and the World Health Organization last year. The results of the study indicate that the current health care financing system will sooner or later be unable to cover the health expenditure. In the best case, the resources of the Estonian Health Insurance would be sufficient to cover the deficit until After that, the health care system will need additional financing either from the state budget or by increasing out-ofpocket payments by people. The authors of the study believe that the annual need for additional financing will reach 510 million euros by Urmas Nemvalts, Postimees Oh, health insurance above your head You re lucky 105. The health care system s need for money can partially be alleviated through a more responsible and efficient use of resources. First of all, it calls for attributing more importance to public health, strengthening first contact care and restructuring the hospital network. Report of the National Audit Office for the Riigikogu, Tallinn

38 Reforming the hospital network has ground to a halt Read more The National Audit Office s audit Sustainability of the Hospital Network, completed in 2008 The problems in the acquisition and use of medical equipment are connected to problems in the hospital network Read more Follow-up audit of the acquisition and use of medical equipment in medical institutions completed by the National Audit Office in General hospitals in Estonia: Järva County Hospital Kuressaare Hospital Lääne County Hospital Rakvere Hospital South Estonian Hospital Narva Hospital Viljandi Hospital Valga Hospital Hiiumaa Hospital Põlva Hospital Rapla County Hospital The hospital network still needs reforms 106. The audit that focussed on the sustainability of the Estonian hospital network, which was published in 2010, indicated clearly that there are not enough patients, doctors or money to preserve the present hospital network or invest in equipment. Although the Minister of Social Affairs admitted at the time that the hospital network is not optimal or sustainable in the use of both human and financial resources, the Minister has not taken any significant steps to reform the hospital network after the audit A concept for optimising the hospital network was completed in the ministry by the time the audit was published, but any work on its implementation has ground to a halt. The Government s action programme for , which was approved in spring 2011, does not mention reforming the hospital network at all. The action in the programme that is aimed at guaranteeing the sustainability of hospitals is the payment of the so-called start-up money of 15,000 euros to young doctors who have completed their residency and go to work in county hospitals. In the opinion of the National Audit Office, this measure alone is not sufficient to guarantee that sustainability of the hospital network The problems in the acquisition and use of expensive medical equipment highlighted in the follow-up audit that was completed in 2011 clearly indicate that the hospital network must be optimised Difficulties in the acquisition and use of everyday, but expensive medical equipment were the most obvious in general hospitals. For example: General hospitals were not always able to guarantee performance of the tests prescribed in treatment instructions, because they don t have enough money (and patients) to acquire a CT scanner. None of the general hospitals that own a CT scanner were able to guarantee the required workload for the scanner, because there are not enough people in the region covered by the hospital or not enough staff to run the equipment 24 hours a day. General hospitals do not have enough money to buy new X-ray equipment The audits completed by the National Audit Office in recent years show that the growing problems in the hospital network threaten and accessibility and quality of health services. Leaving the hospital network to develop on its own is not sufficient to guarantee that all hospitals survive and remain able to provide quality health services and the Ministry of Social Affairs should take a leading role in the strategic steering of the health care system. Read more The National Audit Office s audit Organisation of GP Care, completed in 2011 The GP system needs development 111. GPs are the cornerstone of the health care system, not hospitals and expensive medical equipment. They are the ones that help people in the case of most health problems. In complicated cases, GPs refer patients to specialists. Report of the National Audit Office for the Riigikogu, Tallinn

39 112. If the GP system does not function, hospitals have to step in and start seeing and treating patients with minor health problems, which creates extra costs for health insurance and reduces the accessibility of specialist medical care without reason Approximately 70 million euros or 9.2% of health insurance money is spent on the GP system, which is the foundation of the health care system. At the same time, the expenditure of specialist medical care comprises 55% and benefits for temporary incapacity for work 12.5% of health insurance money The audit completed by the National Audit Office in 2011 indicated that the GP system in Estonia is unable to perform all of its functions in the health system, because GPs do not always perform the agreed services, frequently refer patients to specialists without good reason, and the system does not guarantee accessibility of GP services in all regions. Urmas Nemvalts, Postimees Oh dear, the entire GP system is breathing funny! Will you refer me to a specialist or will the National Audit Office be able to treat me? Many patients are treated by specialists instead of GPs 115. One of the qualities of a well-functioning GP system is that patients who should be treated by GPs are not referred to specialists without good reason. The audit showed that GPs have often referred patients to cardiologists in the case of one of the most widespread chronic diseases, hypertension. In more than half of the cases it was not justified Also, the National Audit Office expected patients to contact GPs with problems that fall into the competency of GPs rather than going straight to hospital. The audit, however, showed that out of the people who went to the emergency departments of hospitals 14% did so with no good reason. These people could have received help from their GPs. There were two main reasons why patients behaved in this manner: they were either unaware that they could receive the help they needed from their GPs, or they simply did not trust their GPs. Also, contrary to common belief, most of the patients went to the emergency departments during regular working hours The failure of the GP system to perform its tasks created additional costs for the state. The two examples described above (referring patients suffering from hypertension to cardiologists and patients choosing Report of the National Audit Office for the Riigikogu, Tallinn

40 emergency departments over GPs) alone mean that the work not done by GPs has cost the state almost one and a half million euros. Working time is spent on things not related to treatment 118. GPs should spend the majority of their working time on treating people. Unfortunately, an analysis of the working time of GPs indicates that more than 20% of working time is spent on things that are not directly related to the treatment of patients In the doctors own opinion, the majority of the time they spend on non-medical work concerns the preparation of disability documents for the Social Insurance Board. This is followed by administration and preparation of documents outside appointments. It is also significant that in the opinion of GPs, their working week is more than 50 hours long on the average GPs who run their surgeries alone have to spent the most time on non-medical work, even though they are already in a worse situation, as they often work in rural areas where the number of patients is smaller, which means they get less money, and it is more difficult to find a locum. There are not enough GPs Did you know that the age of GPs working in Hiiu, Lääne-Viru, Pärnu and Ida-Viru Counties is higher than the average The financing system does not guarantee a quality service Implementation of the First Contact Care Development Plan has stalled 121. The key to the success of the GP system is to have a sufficient number of GPs, also in rural areas. Unfortunately, the lack of GPs, especially in rural areas, is becoming a very common problem. One of the reasons for the lack of doctors is that the current system does not make GPs want to work in rural areas. In general, GPs working in rural areas earn considerably less than their colleagues in towns and cities, their workload is bigger, they work on their own, which means that it is much more difficult for them to find a locum when they go on holiday or a training course. However, the role of GP in the country is more important than in cities, because other options of medical care are not so accessible The lack of GPs will increase in the coming decades. In comparison to the current situation, the number of GPs in Estonia in 20 years time will be 20% less, as the number of doctors who reach retirement age is higher than the number of young GPs The National Audit Office finds that the current system of financing GP care of which approximately 2% is paid on the basis of performance does not motivate all GPs to provide quality services. GPs receive their money primarily as a base fee and a capitation fee that depends on the number and age of patients. Such a financing system means that GPs who do not make much of an effort earn as much as those who contribute considerably to the quality of the care they provide. Also, the existing financing scheme does not encourage GPs to improve their qualifications. The National Audit Office therefore advised to increase the proportion of the performance fee in financing and to create a mandatory evaluation system of the competency of GPs to guarantee better quality Most of the problems detected by the National Audit Office are not new to the Ministry of Social Affairs. They have been addressed in the area development document First Contact Care Development Plan with the measures needed for the resolution of the problems. The National Audit Office finds that the development plan has been carried out considerably slower than intended, which is why several of the goals set for 2015 cannot actually be achieved and many of the interim goals set for 2010 have still not been attained. Report of the National Audit Office for the Riigikogu, Tallinn

41 The state has not done everything to avoid expenditure caused by bad health 125. The National Audit Office finds that at the time when the state is working on making the health system more efficient by improving the hospital network and the GP system, attention should also be paid to the areas that help people stay healthy. One of these areas is the creation of a safe working environment. Working environment problems still not solved Read more Follow-up audit of the National Audit Office about the activities of the state in guaranteeing a safe working environment completed in A thorough impact analysis should be done before the implementation of occupational accident and disease insurance 126. In the follow-up audit completed in 2011, which focussed on guaranteeing a safe working environment, the National Audit Office found that the state has not taken any steps in the last three years to motivate employers and employees to improve their working environment The National Audit Office was already critical in 2007 and found that the state s activities in guaranteeing a safe working environment had been insufficient. The number of lethal occupational accidents in Estonia is still higher than the average in the European Union. The number of occupational accidents here is lower now, but all parties agree that statistics do not represent all occupational accidents. Also, only a few occupational diseases are diagnosed in Estonia. There reason for this is the inability of the Ministry of Social Affairs and the Estonian Health Insurance Fund to find sufficient financing for identifying occupational diseases. This has led to the situation where the health damage caused by bad working environments cannot be proven and instead of making employers pay, the cost of treating such diseases is compensated solidarily from the health insurance budget Unfortunately, the state has not taken any steps in three years to resolve the problems highlighted in the audit. Although the Estonian Government has mentioned the creation of occupational accident and disease insurance as an activity in all of its recent action programmes, Estonia remains one of the few countries in the European Union that does not have such insurance The Action Programme of the Government of the Republic again states that occupational accident and disease insurance should be introduced. However, the systems and experience of other countries as well as the impact of the planned system on all interest groups should be thoroughly analysed before the implementation of the new insurance system. The National Audit office finds that Estonia needs a system that would motivate employers to improve the working environment and employees to stay healthy. The system should guarantee prevention of occupational accidents and diseases, compensation for damage to health and rehabilitation. Supervision is still not focussed on the quality of treatment services Supervision in the area of health needs to be perfected 130. Year after year the National Audit Office has pointed out that the supervision exercised in health care too poor to guarantee the quality of health care. The National Audit Office found in 2007 that supervision does not have a clear purpose, which means that there is no certainty whether supervision focuses on important problems and whether it has a significant influence on the quality improvements of health services. The quality problems of nursing care that were repeatedly highlighted in the media in 2010 suggest that there has been no progress in this area. Report of the National Audit Office for the Riigikogu, Tallinn

42 131. This is also confirmed by all recent audits conducted by the National Audit Office in the area of health. Just like four years ago, the National Audit Office found also in 2011 that supervision of health care focuses too much on the so-called input (compliance of infrastructure and staff with requirements) and not enough attention is paid to the performance of the service providers For example, the audit of the National Audit Office that focussed on the acquisition and use of medical equipment indicated that supervision of the condition and use of equipment was poor. The Health Board only employs one official for this purpose, but there are more than 2000 service providers to inspect. Although a number of breaches were identified in 2010 and several precepts were issued, even the officials themselves felt that they were too lenient The quality of the treatment is mainly evaluated in the clinical audits of the Estonian Health Insurance Fund. Only five of these can be conducted in any one year. Irrespective of the health insurance budget that has increased considerably, the Health Insurance Fund has not found the money needed to increase the number of quality assessment audits In light of the fact that health care expenses will certainly rise in the future, the Minister of Social Affairs has to make several important decisions to make the current health system more efficient. When the results of the National Audit Office s audit Organisation of GP Care were published in spring, all parties the Ministry of Social Affairs, the Estonian Health Insurance Fund, the representatives of GPs and the National Audit Office agreed that the system has to be changed. The Minister of Social Affairs now has to come up with some solutions. No clarity in the energy sector 135. The fuel and energy economy is a strategic infrastructure, which must guarantee that the state is constantly supplied with quality fuels, electric and thermal energy at optimal prices 9. The fuel and energy economy must be as efficient as possible, comply with safety and environmental requirements, and its sustainable functioning is one of the foundations of the state and guaranteeing it is a national priority. The state should pay more attention to heating supply 136. Heating supply is an important part of the energy economy in Estonia sue to the cold climate. District heating is the main system for distributing heating in Estonia: heating is produced for an entire city, town or group of buildings in a boiler house and distributed to consumers through a heating network or pipeline. 151 of the 226 local governments in Estonia use district heating and approximately 60% of the state s population consumes heating in this manner. The remaining people use localised heating: e.g. stoves, boilers, heat pumps, electric heating or other options The National Audit Office analysed in 2010 whether the state s actions have secured the sustainable development of the heating supply (primarily district heating), which pursuant to the District Heating Act 9 Long-term Public Fuel and Energy Sector Development Plan until Report of the National Audit Office for the Riigikogu, Tallinn

43 Read more The National Audit Office s audit report completed in 2011: The State s Actions in Ensuring the Sustainability of the Heating Supply Did you know that the monetary turnover of district heating calculated on the basis of the quantity of heating sold to consumers 10 and the average cost of heating 11 from remained between billion kroons ( million euros) per year? means a supply of heating which is reliable, hedges its risks related to fuel sources, is efficient, is sold at a justified price and meets both environmental requirements and the needs of consumers The cost of heating comprises the biggest part of the housing expenses of residents. The price of district heating in Estonia in 2010 was 435-1,470 kroons ( euros) per 1 MWh (plus VAT), depending on the producer and the fuel used. In 36 district heating networks (approximately 25% of all networks), district heating 12 was more expensive than electrical heating. Urmas Nemvalts, Postimees Did the cold take your wallet as well? No, I still have it but electric and heating are eating up the contents. Did you know that heat losses from district heating pipelines cost the consumers 660 million kroons (42.2 million euros) in 2008; and 689 million kroons (44 million euros) in 2009? Source: National Audit Office on the basis of data from Statistics Estonia 139. The heat loss caused by the poor technical condition of heat networks is one of the reasons why heating is so expensive. The audit indicated that 75% of heating pipelines are older than 15 years. Also, the diameter of the pipeline used in many local governments to distribute heat is too big for the existing consumption. Pipelines that are too old and too big in diameter lead to large heat loss, which mainly remains between percent. In the heat networks of 28 local governments, heat loss exceeded 25%. The boilers that are used are also old: approximately 40% of them are older than 20 years and 20% are older than 30 years. This means that a number of heat networks and boilers need investments in the nearest future Reducing the proportion of natural gas in heating supply also requires investments. According to the energy sector development plan, a situation must be achieved by 2020 in which no single fuel accounts for more than 30% of the balance of fuels used to produce heat. According to Statistics Estonia, 44% of heat was produced from natural gas in Overreliance on natural gas may call the reliability of the heating supply into question, since in the event of an interruption to supplies boiler plants would not be able to make the immediate transition to replacement fuels or make use of reserves. 10 Heating balance (district heating, consumption in households), Statistics Estonia. 11 Average cost of heating consumer in companies, Statistics Estonia. 12 The Competition Board collected the data that characterise the prices of district heating from local governments, The price of an electrical heating package in the first half of 2010 was 1,100 EEK/MWh. Report of the National Audit Office for the Riigikogu, Tallinn

44 Did you know that two of the three large heat producers were unable to prove to the Estonian Competition Authority during the supervision in 2010 that they had the ability to immediately transfer to replacement fuels if necessary? One of them did eventually prove its ability to transfer to reserve fuels, but unfortunately not in reasonable time (2-3 hours), as it needs at least 24 hours to do so. The state has paid little attention to the development of district heating Many people are obliged to consumer district heating that is too expensive Did you know that 106 of 151 local governments have formed 164 district heating areas in total? 45 local governments that use district heating have not defined the areas. Coordinating the price should become more transparent The National Audit Office analysed the price approval documents from of the six companies in the area of administration of the Estonian Competition Authority that belonged to the sample It is important to note that the state has not demanded the existence of reserves from most companies. The District Heating Act stipulates that only the three large companies are obliged to maintain fuel reserves and their reserves must cover the consumption needs of three days. Some local governments say that their smaller heat producers also have fuel reserves or it is possible for them to use replacement fuels. However, the National Audit Office found in the course of the audit that whilst the Technical Surveillance Authority does have an overview of working boilers, it is not aware of their possibilities to use reserve or replacement fuels. The number of consumers that would be left without heating in the event of an emergency is therefore not known It is the view of the National Audit Office that the Ministry of Economic Affairs and Communications has turned insufficient attention to the sustainable development of the heating supply. No national heating supply development plan has been drafted, and there are no principles on the establishment of district heating areas or on the regulation of the price of heating. Very little attention has also been paid to ensuring energy security and developing support measures for the heating supply and to the actions of the Estonian Competition Authority in regulating the price of heating In the District Heating Act the state has given local governments is opportunity to create district heating areas in order to guarantee a stable number of consumers and primarily to create the conditions required for the development of combined heat and electricity production, making investments and thereby a more sustainable use of energy. Pursuant to the District Heating Act, people living in district heating areas are generally obliged to consumer district heating irrespective of whether the heating is produced and distributed efficiently and whether its price is competitive in comparison to alternative heating options The audit indicated that district heating areas have also been established in places where district heating is neither the most economical nor the most environmentally friendly means of providing heat. The state has not clarified the status of a sustainable district heating area in the District Heating Act and the Ministry of Economic Affairs and Communications has not coordinated the establishment of heating areas in local governments. 89% district heating areas have therefore been established without anyone investigating the condition of boiler plants and heat networks, the need for investments or their sustainability (e.g. whether there was a sufficient number of consumers in the area or would be in future), considering alternative fuel solutions and determining whether district heating was the most economical and efficient method of providing heat in the area The price of thermal energy must be approved by the Estonian Competition Authority in all district heating areas as of The task of the Estonian Competition Authority is to make sure that the price of heat is not unreasonably high and only contains the expenses and investments required for the production of heat In the opinion of the National Audit Office, the Estonian Competition Authority has mainly focussed on ascertaining whether the revenue and expenditure of heating companies were justified and less attention has been paid to analysing whether investments were sufficient and justified. Report of the National Audit Office for the Riigikogu, Tallinn

45 Approval of the price has therefore not always met the goal of guaranteeing that the production and distribution of district heating becomes more efficient and consumers will also be provided with a sustainable heat supply in the future In addition to little attention being paid to guaranteeing the sustainability of heating supply, the National Audit Office also found problems in price approval at a more general level. Price approval is not transparent; decisions differ in their content and depend largely on the skills of the official who approves the price. For example, a number of methods have been used to evaluate whether the costs of heat production are justified, no minutes have been taken of the decisions made at meetings with companies and companies have no access to the expert opinions used in the analysis. The general price approval principles developed by the Estonian Competition Authority do not contain any guidelines as to how and when the different measures for controlling expenditure should be used. There is also no system for assuring the quality of price proceedings. Streamlining the heating supply requires large investments The state and local governments do not want to deal with heat supply Did you know that the energy sector in Estonia is the biggest user of natural resources and the biggest polluter? As late as in 2010, approximately 94% of electricity was produced from oil shale and 4% from natural gas. Only 2% of electricity was produced from renewable sources. Source: Statistics Estonia 148. When heat networks and production are inefficient and not enough money is invested to streamline them, it means that consumers will have to pay increasingly more for heating in the future, which does not guarantee good quality or accessibility of the service. The survey carried out by the National Audit Office among local governments indicated that in the opinion of local governments, the estimated total need for investments in district heating is 11.2 billion kroons (715.8 million euros). The analysis conducted by the National Audit Office indicated that local governments or heating companies alone are unable to make such an investment in the next few years if the price level of heat remains the same The reason for the bad situation in heat supply is that the state has not considered the area of district heating a priority and has usually left it to local governments to organise. There is still no comprehensive heat supply development plan at the level of state. The survey carried out among local governments indicated that many local governments have not shown much interest in the organisation of energy economy and district heating, and they do not have the competency required to deal with the area. They expect the state to step in and determine the development trends of the area in a national development plan. Analysing the district heating problems that cover the entire country and finding solution to them is a task of the state, not local governments. The state, however, has not performed its task yet In the view of the National Audit Office, in order to ensure the sustainable development of the district heating sector it must first and foremost be determined in which areas district heating is and will continue to be viable, able to be offered to consumers at a justified price and produced efficiently. In areas where such heating is not sustainable, measures must be developed that will enable consumers to make the transition to more efficient methods of heating. The electricity market is facing important changes 151. The changes caused by opening the electricity market also need to be resolved in the Estonian energy economy in addition to the problems in Report of the National Audit Office for the Riigikogu, Tallinn

46 heat supply. The main problems are the pressure applied by carbon trading in the European Union on electricity produced from oil shale and the competitiveness of our electricity production in the future as well as providing affordable electricity to people in Estonia. The state wants Estonia to be energy independent and have affordable electricity at the same time The financing scheme of the new oil shale block is not yet clear Did you know that according to the EU Emissions Trading Directive, all electricity producers should start buying CO 2 quota at the auction organised by the state in the trading period that starts in 2013? Free quote may be distributed in exceptional cases when the conditions set by the Commission have been met. Producing energy from oil shale is becoming more expensive 152. The goals set in the most important development plans in the Estonian energy sector are to guarantee Estonian people with a constant, sustainable and affordable electricity supply, to secure Estonia s energy independence with the use of oil shale energy and to reduce the environmental impact of the extraction and use of oil shale In the pursuit of energy independence, the Government decided to support the construction of a new 300 MW oil shale block of Eesti Energia in May 2011, which costs 560 million euros and will be completed by The construction of a second 300 MW block will be decided in The estimated cost of the total investment is approximately one billion euros The Electricity Market Act was amended at the beginning of 2010 with the addition of a grant for the existence of the installed net capacity of production equipment powered by oil shale in order to ensure that energy production with the new oil shale blocks of Eesti Energia would be economically profitable. As such a grant is essentially public aid, an application was filed to the European Commission in March 2010: to permit public aid in the amount of up to 953 million euros for the construction of an oil shale power plant. When it became evident that the Commission may not grant its permission, the Ministry of Economic Affairs and Communications decided to withdraw the public aid application in June After the European Commission criticised the public aid application, the state decided to support the construction of the oil shale blocks via the permitted greenhouse gas emissions or the CO 2 quota that are distributed to electricity producers free of charge. The free CO 2 quota mean that electricity producers (incl. Eesti Energia) can keep the money they would otherwise have to spend on buying quota at the auction. Basically, we are still dealing with state support. The European Commission will decide in spring 2012 at the earliest whether giving free quota to companies will be permitted. The investments made on the account of the free quota must modernise electricity production in order to reduce CO 2 emissions and it may not cause any unjustified distortion of competition. The National Audit Office is of the opinion that the establishment of a new oil shale block may not meet these goals and it is therefore not certain that the Commission will grant Estonia the permission to support electricity producers with the distribution of free quota As the European Commission has not made its decision yet, the state does still not know what sources will be used to finance the construction of the new oil shale plant and how much more consumers will have to pay for electricity as a result of this. Nevertheless, Eesti Energia has started building the new oil shale plant with the Government s approval and expects the state to give it investment support The new EU procedure on trading in greenhouse emissions and especially the fact that the quote required for producing oil shale energy must be bought at an auction in the future will have an impact on the Report of the National Audit Office for the Riigikogu, Tallinn

47 competitiveness of electricity produced from oil shale from 2013 onwards. Although the state decided to apply for the European Commission s permission to distribute partly free quota to energy production in Estonia, the quantity of the units received free of charge is starting to decrease gradually. Also, investments into more environmentally friendly production must be made to the extent of the value of the quota received free of charge. This means that the need to obtain CO2 quota to cover electricity production in the future will give rise to increasingly higher expenses, which will also be evident in the price of electricity The energy and climate policy of the European Union must be considered when investments are made in carbon-intensive electricity production: for example, the European Commission has constantly stated that the current CO 2 unit price is so low that trading in greenhouse gas emissions does not contribute to the reduction of climate impact. The Commission therefore wants to steer the situation in such a manner that the price of the CO 2 quota would go up in the future. The quota trade of the EU is a significant reason why Eesti Energia decided to use wood as fuel to the extent of 50% in the new oil shale boiler its building, as the CO 2 created by burning wood is not subject to tax. Urmas Nemvalts, Postimees No, but smell it yourselves! Does it not remind you of sawdust a bit? Did you know that 74% of all electricity consumed in the Nordic countries in 2010 was bought and sold at the power exchange: the share of such electricity is approximately 80% in Sweden, approximately 56% in Finland, approximately 60% in Norway and approximately 90% in Denmark? On the free market the production and price of electricity in Estonian power stations depends on the entire market region 159. When Estonian joined the European Union it also entered into the obligation to open the electricity market to all consumers by 2013 at the latest. At the moment, the Estonian electricity market is only partially open (only larger electricity consumers, who comprise approximately 30% of total consumption, are obliged to buy electricity on the open market). All consumers will be able to select whom they buy electricity from when the market opens, i.e. they can decide whether to buy electricity via the power exchange or to enter into a mutual contract with an electricity producer. The example of the Nordic countries suggests that it is very likely that the share of electricity traded at the power exchange will increase in Estonia after the market is opened. Report of the National Audit Office for the Riigikogu, Tallinn

48 Estonian electricity producers cannot guarantee consumers electricity prices that are lower than the exchange price Did you know that the average price in the trading area of Finland from was between euros/mwh euros/mwh? An important factor that influences the electricity price is the usability of Norwegian hydro energy (the quantity of precipitation and the fill of reservoirs). Free market leads to an increase in electricity price Did you know that the energy price for consumers divides approximately as follows: 1/3 taxes (VAT, excise duty and renewable energy charge or the support paid to electricity producers); 1/3 network charge; and 1/3 the price of electric power? 160. All Baltic and Nordic electricity producers will trade at the exchange on the basis of the same rules. In order to cover market demand, the producers that make the cheapest offers are the first that can start selling electricity. If the capacity offered for consumption is insufficient, the next best offer will be given the green light and this will continue until the required quantity is covered. The price of the most expensive accepted offer will be the price of the electricity sold to consumers. Electricity producers that sell for a higher price than the accepted prices will not be allowed to trade at the exchange The price on the power exchange is therefore formed according to the price of the energy producer whose offer was the most expensive and the Estonian energy producers that take part in the exchange cannot in any way guarantee a cheaper price for the Estonian consumers who buy electricity on the exchange The volume of Estonia s electricity market is approximately 9 TWh/year (total consumption) whilst the volume of the Nordic electricity market is approximately 400 TWh/year. The Estonian market only comprises 2.25% of the Nordic electricity market, which means it s natural that the price on the exchange will be determined by larger markets and producers. The smallness of the market means that Estonian producers will not be able to have any significant impact on the electricity price on the exchange The average price paid for a MWh of electricity by the Estonian consumers that currently buy electricity on the open market (via the power exchange) in 2010 was euros. The consumers who bought electricity on the regulated market paid approximately 30 euros/mwh. The price level in Estonia and the Baltic States will become similar to that of the Nordic countries when they fully join the open electricity market. The price in Estonia and Finland will be the same more than 98% of the time after the construction of the Estlink 2 cable between Estonia and Finland is finished after The price of electricity from on the basis of the forward transactions concluded on the financial markets will be euros/mwh In conclusion, we have to admit that achievement of the goals set in national development plans guaranteeing affordable energy to Estonian people and the energy independence of Estonia with the use of oil shale energy is not fully possible. Firstly, comparing electricity prices on the open markets of Nordic countries and Estonia with the prices on the regulated Estonian market in 2010 shows that the electricity price is 40-45% higher. As the price of the electricity traded on the market comprises approximately one-third of the electricity price paid by consumers, the only way the state can reduce the price for consumers is by cutting taxes and network charges. Secondly, the state cannot guarantee that Estonian consumers are only supplied with locally produced energy, because trading on the power exchange makes it impossible to isolate Estonia s production capacities, incl. the capacities of oil shale plants, from the other production capacities offered on the market. The National Audit Office thinks it is questionable whether oil shale electricity would be competitive in open market conditions, which means there is the threat that the oil shale plants will stop working and the investments paid for by the Estonian taxpayers will have been made in vain. Report of the National Audit Office for the Riigikogu, Tallinn

49 The state is obliged to prepare consumers for the opening of the electricity market 165. Opening the electricity market in full concerns all residents and electricity consumers in Estonia. In order to ensure that the consumers benefit as much as possible from the opening of the market, they must be given adequate information as early as possible. The Ministry of Economic Affairs and Communications has not even started informing the consumers yet and it is not known when informing will start. Urmas Nemvalts, Postimees Well, hello, power exchange! Informing the consumers is delayed 166. Informing the consumers should start well in advance of the actual opening of the market. Consumers must inform network companies of changing the electricity seller at least 30 days before 1 January 2013 in order to ensure that the open market will be functioning successfully from day one. This means that informing the approximately half a million consumers who enter the free market must be completed no later than in summer The consumers who do not take any steps when the market opens either due to their unawareness or unwillingness will remain clients of their existing electricity seller. Approximately 90% of all electricity consumers are currently clients of Eesti Energia and if they do not change the seller themselves after the market opens, they will automatically remain clients of Eesti Energia. The open market does not work and there will be no competition if one seller dominates the market. The existence of several sellers creates competition on the market and gives consumers the chance to get a better offer. The state does not use all options to protect consumers 168. The price increase resulting from the opening of the electricity market will have the biggest impact on less privileged people. EU directive on the internal market in electricity stipulates that Member States take the measures necessary to mitigate the price increase in order to protect less privileged consumers. National energy action plans and benefits in the social security system are some of the mitigating measures given in the directive. Many European countries use price regulation to protect consumers, which makes it possible to sell electricity at lower tariffs to consumers on low income in certain quantities. Also, many countries have decided to give certain quantities of free electricity to less privileged consumers and electricity producers are not allowed to cut electricity supply during winter months. Report of the National Audit Office for the Riigikogu, Tallinn

50 169. The Government of the Republic sees the existing social benefits as the main measure that protects consumers. They cover subsistence allowances and in certain cases also the additional social benefits paid from the state budget or by local governments. The National Audit Office would like to point out that the state has not analysed whether or not the current system of social benefits enables to consider the impact of the increase in electricity price. Considering that the state has no comprehensive overview of the use of social benefits and their impact on how people cope, the changes associated with the opening of the electricity market may bring about additional expenses, which have an impact on people s income. The National Audit Office therefore believes it is important to analyse the impact that the opening of the electricity market will have on people s coping and allocate money to covering the associated expenses if necessary. No additional money for supporting the consumers who cannot cope with the possible additional expenses created by opening the electricity market has been planned for the coming years. Confusion in the collection of packaging waste 170. Human activities result in the creation of a lot of waste. The first thing that needs to be done to spare the environment and natural resources is to prevent the creation of waste. Waste must be recycled as much as possible if its creation cannot be prevented. Packaging forms a large part of household waste: one-third of the weight of a bin and two-thirds of its capacity In order to collect and recover as much packaging waste from residents and companies as possible, the Packaging Act stipulates the target recovery indicators, which must be met by the companies that generate packaging waste and recovery organisations. Did you know that the quantity of packaging waste generated in Estonia was 215,000 tons in 2008 and 162,100 tons in 2009? The state does not perform the obligation to recover the prescribed amount of packaging waste Packaging waste is not recovered 172. In 2010 the National Audit Office analysed whether the activities of the state support the collection and recovery of packaging waste in such a manner that packaging undertakings recover as much of the packaging waste as possible and the recovery goals stipulated in the European Union packaging directive are met According to the Ministry of the Environment and the calculations prepared by the National Audit Office, the state failed to meet the target recovery indicators in both 2008 and The state had entered into the obligation to cover 50 and 60%, respectively, of all packaging waste generated (see Figure 8). The situation is even worse in the recovery if single types of packaging, e.g. plastic and metal. Report of the National Audit Office for the Riigikogu, Tallinn

51 Did you know that the target recovery indicators of various materials since 1 January 2009 have been as follows (the figure in brackets shows actual recovery in 2009): glass 70% (89%); paper and cardboard 70% (71%); metal 60% (34%); plastic 55% (27%); wood 45% (86%); and total 60% (59%) Packaging waste (tons) Figure 8. Generation and recovery of packaging waste ( ), percent %34%41%50%52%45%58% 50 12%14% 0 Generation per person (kg) Generation of packaging waste (tons), whereof: Recovery (tons) Generation per person (kg) Source: National Audit Office 174. However, the recovery organisations that represent 80-90% of packaging undertakings, have confirmed that the target recovery indicators have been met. The National Audit Office fund that the data submitted by the recovery organisations and the undertakings to the packaging register and the data of the Ministry of Environment about bringing packaging to the market and recovery are out by almost a half. Table 7. Packaging waste generation and recovery data in different sources (2008) Packaging undertaking the undertaking that packages good and/or imports or sells packaged goods, in the course of economic or professional activities. Recovery organisation a non-profit organisation founded by packaging undertakings to which the obligations associated with recovery are transferred. Data source Official report of the Ministry of the Environment to the European Commission Data of recovery organisations (packaging register, management reports) Generation of packaging waste (t) Recovery of packaging waste (t) Recovery (%) 214, , ,688 67, Source: National Audit Office The data in the packaging register is not reliable Supervision is insufficient 175. The packaging register does not give a true overview of how much packaging Estonian companies actually bring to the market. Companies are interested in showing smaller packaging quantities than the actual ones, as smaller quantities mean that they have to pay less money to the recovery organisation and it is also easier for them to meet the target recovery indicators. Although the law stipulates that packaging undertakings and recovery organisations must have the generation and recovery data submitted to the packaging register audited, this requirement was not met a single time in This means that the data contained in the packaging register has not been verified As the data in the packaging register has not been verified, the National Audit Office does not find the data concerning the generation and recovery of packaging waste reliable. Neither the Environmental Inspectorate nor the Tax and Customs Board have checked the data of packaging waste from its generation until its recovery. This makes it Report of the National Audit Office for the Riigikogu, Tallinn

52 possible to declare quantities that are smaller than the actual quantities brought to the market and to show activities where other types of waste was recovered as recovery of packaging waste. Also, insufficient supervision means that it is possible to recover less than indicated and to use this to artificially increase the performance targeted recovery rates and to avoid excise duty claims The current practice where waste that has been handed over to a company that prepares recovery (e.g. transport, sorting or pressing company) is regarded as recovered waste without checking whether the waste reached the actual recovery company is also wrong and in contravention to European Union law. The state did not collect 44 million euros worth of excise duty on packaging Did you know that the excise duty payable is 2.5 euros for 1 kg of unrecovered plastic or metal packaging, 1.2 for wood and paper, 0.6 euros for glass? Did you know that sorting packaging waste from other waste makes it possible to reuse the packaging material and save the environment, and also save money on the removal of household waste? 178. Companies must pay packaging excise for the packaging waste not recovered within the scope of target indicators. Since most of the target recovering indicators of packaging materials were not achieved in 2009, then companies should have paid excise duty on the missing amount. The National Audit Office finds that the state may have missed out on 44 million euros in excise duty on packaging it should have collected from packaging companies in Since the data submitted by companies are not audited or checked due to omissions in supervision, it is impossible to identify the companies that failed to perform their obligations retroactively or to file excite duty claims against them. The system for collecting packaging waste is not user-friendly 179. Packaging waste is collected directly from companies and shops as well as from individuals. People can dispose of packaging free of charge by placing them in packaging containers or special packaging waste bags; and the packaging of soft drinks is also collected through the deposit system. The quantity of recovered packaging waste would be bigger if everyone in Estonia had the chance to dispose of their packaging waste near their homes. Creation opportunities for people to dispose of their packaging waste free of charge and informing people of the obligation to sort waste are tasks of recovery organisations. Urmas Nemvalts, Postimees See, darling, I also tried to sort our waste! Throw the black one in the forest, stick the red and yellow ones in the bin next door and take the white one to your office. People do not know that they can dispose of packaging waste free of charge 180. Although people have been obliged to sort their packaging waste for more than five years now, the survey carried out by the National Audit Office among the population indicated that 54% of people still do not know that they can dispose of packaging waste free of charge. This lack Report of the National Audit Office for the Riigikogu, Tallinn

53 of knowledge is also obvious in the way people sort packaging waste: although 75% of people in Estonia have claimed that they know which packaging should be collected by type and where they need to be thrown, only 20% sort layered cardboard (mainly juice or other drink cartons) and 35% sort plastic. Also, people for whom Estonian is not their native language pay less attention to sorting waste. Another serious problem is that people throw household waste in packaging containers, which reduces the usability of packaging material. The number of packaging containers is small and they are not easy to use Did you know that even the largest local government in Estonia, the City of Tallinn, has not entered into contracts with recovery organisations? It is difficult to hold recovery organisations accountable 181. The National Audit Office finds that one of the reasons for the limited awareness and interest is that the appearance of packaging containers is different in different areas and they are not always properly marked, which confuses people. Also, some of the containers in Tallinn are public whilst others are not. The insufficient quantity of packaging containers and the fact that people cannot always dispose of different types of waste at the same place also reduces the desire of people to sort waste. This means that law-abiding citizens will have to take their various bin bags to several places or cover a lot of ground between them. The responses given to the survey carried out among people and local governments also indicated that containers are often too full and the opening in the container is often too small so that larger packaging cannot be thrown in there The reason why these problems have emerges is that local governments and the state have been unable to check the activities of recovery organisations sufficiently. The analysis conducted by the National Audit Office indicated that many local governments have not taken advantage of the opportunity to stipulate the locations of collection points, the minimum number and capacity of containers and the frequency at which they are emptied in their waste handling rules. Many local governments admitted that recovery organisations come up with their own terms and all the local governments can do is to take them or leave them. Some local governments have financed the purchase or emptying of containers themselves, thereby taking over the monetary obligation that is by law is assigned to packaging recovery organisations. As the clean packaging waste collected from stores and directly from production companies as well as the possibility to buy recovery certificates from waste handlers helps to meet the target recovery indicators to a significant extent, there is no need for recovery organisations to increase the quantity of waste collected with packaging containers. The small number of containers for paper and cardboard packaging waste makes this particularly obvious In the opinion of the National Audit Office, it is difficult for the state to steer and control the recovery organisations that are primarily responsible for the collection and recovery of packaging waste. Shortcomings in the legislation make it impossible to punish recovery organisations after their accreditation even if they fail to perform the obligations assigned to them by law. For example, recovery organisations have reduced the number of collection containers after receiving their accreditation. The state is also unable to guarantee that these organisations have sufficient financial capacity and their financial relationships are sufficiently transparent, that the packaging data are audited or that the network of packaging containers meets the requirements set forth by law. Report of the National Audit Office for the Riigikogu, Tallinn

54 Producer s liability has not been fully implemented 184. The lack of supervision of the activities of packaging undertakings and recovery organisations and the data they submit, the inconvenience of the collection network and the low awareness of the population mean that Estonia will not meet the target recovery indicators and a large quantity of packaging ends up in landfills instead of being recovered. The removal of household waste, however, is paid for by consumers and not packaging undertakings, so the latter have no motivation to reorganise packaging in a manner that promotes recovery. The National Audit Office is therefore of the opinion that the principle of producer s liability, according to which packaging undertakings have to be liable for the collection and recovery of packaging waste, the creation of a container network and informing people as well as bear the expenses of the above, has not been fully implemented in Estonia. Unsustainable forestry development plan Did you know that 7.3 million m 3 of forest was felled in 2009? 3.2 million m 3 or 41% of this was felled from state forests million m 3 of forest was felled in 2010, 3.3 million m 3 or 32% of this was felled from state forests. Source: Statistics Estonia 185. On 15 February 2011 the Riigikogu approved the Estonian Forestry Development Plan until The main objectives of the development plan are to guarantee the viability of forest management, to protect the natural environment and its diversity of life, and to improve the competitiveness of the forest sector The development plan states that million cubic metres of timber should be felled from state and private forests per year, which is twice as much as cut in The authors of the development plan are of the opinion that the prescribed fellings should be equal to the annual forest increment and it should not reduce the viability and competitiveness of forests. Urmas Nemvalts, Postimees Does anyone remember why Uncle Beaver is the one who writes the natural laws in our forest? Be happy that it s not Uncle Fish! 187. In order to increase annual felling, the development plan states that the conditions of felling should be relaxed and the felling age of the forest should be lowered. Increasing annual felling is not sustainable 188. The National Audit Office is of the opinion that increasing annual felling to the planned extent is not sustainable, because maintaining the desired annual felling at the current fellings without damaging the natural environment and the viability of the forest sector over the next years is already impossible. Report of the National Audit Office for the Riigikogu, Tallinn

55 The development plan requires increasing the clearance area by up to two times Read more The National Audit Office s audit Sustainability of State Forest Management, completed in For example, the development plan presumes that in the next 10 years, forest will be cleared on an area that is up to two times bigger than before or 15,000 ha per year instead of the current 7,300 ha The National Audit Office audited the sustainability of state forest management in 2010 and ascertained that the current felling in the state forest cannot be maintained in the long term, let alone increased. If clearance in state forests continues at the current rate, the area of forests suitable for felling in the best forest types would decrease considerably in the subsequent decades, the species composition of the forests would change considerably, their ecological condition would deteriorate and there would be a steep decrease in fellings Similar conclusions have also been reached in the development plan, whose authors admit that pine, spruce and birch forests would become considerably younger if the planned felling went ahead. For example, the area of pine forests reaching felling maturity would decrease by two times by 2040 and the area of pine forests that are up to 30 years old would increase by six times (see Figure 9). The significant decrease in the area of pine forests suitable for felling will create a lack of timber in the future, which will seriously harm the long-term competitiveness of the forest industry sector. At the same time, the share of paludified forests and forests subject to paludification in pine forests reaching felling maturity will increase year after year, which means that they will yield less expensive sawn logs and where felling conditions are difficult due to the soft soil. Figure 9. Division of pine forests by age Männikute vanuseline jagunemine Area (thousand ha) 80,0 70,0 60,0 50,0 40,0 30,0 20,0 10,0 0,0 Treeless Lage 9 Pindala (tuh. ha) Age Vanuseklass class Source: Cases of Timber Offering for the Forestry Development Plan Compiled by E Pärt, Centre of Forest Protection and Silviculture, 2010 Increased felling threatens the condition of valuable forest habitats 192. The decrease in the area of older forests and increased felling threaten the achievement of the goals stipulated in the European Union nature directive regarding the protection of valuable forest habitats in the areas of the Natura 2000 network In 2007 the Ministry of the Environment submitted a report to the European Commission, which stated that the condition of 80% of valuable forest habitats in Estonia is not good. The Ministry of the Report of the National Audit Office for the Riigikogu, Tallinn

56 Environment was of the opinion that old natural forests, old broadleaved forests and deciduous forests subject to paludification are in bad condition The least that must be done to improve the situation of forest habitats is to guarantee that the area of valuable forest habitats is maintained and cohesion between habitats does not disappear. It is important to avoid protected areas turning into isolated islands, which may be caused by the intensifying forest management. Increasing fellings and the resulting younger forests means that the further deterioration of valuable forest habitats cannot be prevented Irrespective of the problems in the protection of valuable forest habitats, the authors of the forestry development plan have not analysed the impact of increased felling and reducing the age of felling maturity would have on the condition of habitats and how the forest habitats that are currently in bad condition can be improved. Unsustainable cultural investments 196. The Ministry of Culture distributed more than 2 billion kroons for investments in sports and cultural assets from The Ministry decides how to distribute most of this amount on the basis of an investment plan (2.045 billion kroons). According to the resolution adopted by the Riigikogu, the largest investment objects (Kumu Art Museum and the new building of the Estonian National Museum) were financed from the gambling tax paid to the Estonian Cultural Endowment (0.605 billion kroons). Larger investment objects have received money or applied for money mainly from the European Union's Regional Development Fund for the development of visiting and business environment. Thus, the main goal of the investments has not been to support culture directly, but to develop business and tourism. Read more The National Audit Office s audit Distribution of Investments in the Ministry of Culture, completed in 2010 Guidelines are superficial and rules are not followed The expedience of investments is not assessed Feasibility and cost-benefit analysis an analysis of the economic costeffectiveness, socioeconomic impact and (political, economic, technical, financial and institutional) feasibility of the project In 2010 the National Audit Office organised an audit, which focussed on the activities of the Ministry of Culture in the distribution and planning of investments and inspection of their use. The purpose of the audit was to assess whether or not the state plans, distributes and inspects the use of investments made in culture and sports in a manner that is transparent, sustainable, economical and expedient. Distribution of investments is not transparent 198. The National Audit Office found that the investment distribution guidelines of the Ministry of Culture are superficial and do not specify how investments are distributed. The distribution procedure and the bases on which decisions are made cannot be observed and preliminary assessment and follow-up inspection of projects are insufficient. This is why the investment distribution process of the Ministry of Culture is not transparent. The National Audit Office also ascertained that the agreed procedure is not adhered to The Ministry of Culture does not assess the expedience of investments. A feasibility and cost-benefit analysis is only ordered for projects that receive support from European Union Structural Funds. No feasibility and cost-benefit analysis or any other analysis is done for Report of the National Audit Office for the Riigikogu, Tallinn

57 projects financed from the state budget of Estonia. It is therefore unclear what the basis is on which the Ministry decides whether or not an investment project is sufficiently justified and prepared and which area would be the most deserving of the limited resources. Control of allocated money is formal State agencies and making use of EU money in full are priorities 200. The Ministry of Culture checks the use of the allocated funds only formally. It is mostly limited to comparing the planned and actual expenses. Nobody visits the objects in the course of work. As the planned expenses listed in the applications submitted to the Ministry of Culture are too general, it is possible to perform detailed checks of the materials, technologies and work methods used in the projects The analysis of the distribution of investments of recent years confirms that the priorities of the Ministry of Culture in making investments are state agencies and making full use of the money obtained from the European Union. The amount of investment support paid to state agencies more than doubled by 2010 when compared to More than a half of this amount is the money received from European Union Structural Funds, but the investments made into state agencies from public revenues have also increased by 2010 when compared to 2007 (by about one-third) The resolution General Principles of the Cultural Policy of Estonia adopted by the Riigikogu on 16 September 1998 states that the priorities for the state in financing culture are the content, innovation and national cultural meaning of the activity, not the form of ownership of the cultural institution. The Ministry justifies aiming its investments primarily at state agencies with the obligation to guarantee that state assets are prudently managed. The National Audit Office points out that prudent management of state assets does not always justify the construction of new or much larger buildings that the existing ones. The Ministry has also named investing in buildings in danger of destruction or fire as one of its priorities. Despite this, many state agencies have failed to act on the Rescue Board s precepts regarding their breaches of fire safety requirements. New buildings are built and maintained at the expense of other activities in the area of government Did you know that the establishment of larger objects alone will generate 8 hectares of floor space of cultural institutions and money must be found for their maintenance in the nearest future. Investment decisions are not sustainable 203. In its audit Distribution of Investments in the Ministry of Culture the National Audit Office analysed the changes in the operating expenses of ten of the largest construction or renovation objects completed or planned from The analysis showed that the financing obligations and additional operating expenses of the ten or so larger objects built or renovated in the last five years alone, which take 3.3% from the Ministry of Culture's budget this year, will demand as much as 12% of the budget in As 13 The sample of the audit included Jõhvi Concert Hall (completed in 2005), Kumu building of the Estonian Art Museum (completed in 2006), renovation of the Estonian Drama Theatre (completed in 2008), Ilon s Wonderland of Läänemaa Museum (completed in 2009), the Puppetry Centre (completed in 2010), Jaani Church in St Petersburg (completed in 2011), the hangars and exposition of seaplanes in the Estonian Maritime Museum (completion planned for 2011), the extension of Vanemuine Theatre (time of completion unknown), the new building of Estonian Public Broadcasting (planned for 2013), the new building of the Estonian National Museum (planned for 2014). Report of the National Audit Office for the Riigikogu, Tallinn

58 the Government has stipulated in the state s budget strategy that the maintenance costs of state agencies will not increase from , the Ministry of Culture will have to cover these additional expenses at the expense of its other activities. Figure 10. Impact of the audited 10 largest investment objects on the budget of the Ministry of Culture added and forecast loans payable and additional operating expenses in the Ministry's budget in comparison to 2006 (kroons) ,3% % Budget of the Ministry of Culture without servicing the financing obligations and operating expenses added after Reference base ,7% % New financing obligations and additional operating expenses arising from new audited investment objects SourceState Budget Act, Ministry of Culture, State Budget Strategy One of the reasons for the increase in expenses associated with construction is that the Ministry of Culture does not take into account the object s future operating expenses or demand the preparation of feasibility and cost-benefit when it makes decisions about financing new builds. This means that when the Ministry makes its investment decisions, it has no idea of the burden the investment decisions will place on the budget in the future. Did you know that the price of electricity has increased by 89% from ? The average price per kwh was 0.9 EEK in 2005 and 1.7 EEK in Large consumers (incl. the Estonian Art Museum) pay even more. Source: Eesti Energia 206. Even if feasibility and cost-benefit analyses are prepared when EU money is applied for, they raise a lot of questions. For example, in its criticism of the application submitted earlier this summer, the European Commission highlighted that the analysis enclosed with the application for the new building of the Estonian National Museum did not list future expenses and potential revenue had not been adequately and realistically assessed. Among other things, the European Commission pointed out that: the new building would have ten times more exhibition space than the existing museum and it would be the biggest museum in Europe built with EU support; approximately 6,000 per year have so far paid 0.75 euros for their tickets, but the submitted analysis assumed that 142,000 people should be prepared to pay 6 euros for their tickets in the future; the average number of visitors per day according to calculations would be 500 people and 150 people would be in the museum at the same time, which makes one visitor per 40 m 2 and the museum would therefore look empty most of the time; and Report of the National Audit Office for the Riigikogu, Tallinn

59 the new building would generate an additional 800,000 euros in maintenance expenses per year, which would comprise approximately 6.2% of all the maintenance expenses of museums. The calculations are also based on the assumption that the salaries of museum staff would not rise and their average amount will also be 640 euros in The European Commission analysed the plans of the new building of the Estonian National Museum as a project aimed at increasing the competitiveness of the region, which is why in mainly considered the economic aspects of the project and found that it is not economically justified. High maintenance expenses and low salaries mean that the project is not considered reasonable or promising. According to new plans, construction of the building will be transferred to Riigi Kinnisvara AS, which means that calculation of future expenses may change considerably. Urmas Nemvalts, Postimees Did you hear it, old man? The builders want more for the Estonian National Museum than we can pay. Oh well. Maybe it s too early for our people to move into a museum No matter what scheme is used to finance the construction of new buildings (state budget funds, loan or leasing, or support from the European Union), it does not mean that increasing operating expenses do not have to be covered and the money for this must in any case be found from the state budget. The National Audit Office agrees that the lack of space in the Estonian National Museum is a problem that needs to be resolved, but the questions is what kind of a building is built and how expensive it is, and what it means for the future expenses of the state. Not a single national cultural asset has been able to maintain itself with their own revenue so far. However, plans only focus on covering the construction or renovation expenses. The Ministry of Culture does not pay enough attention to the economic aspects, including the increasing operating expenses, which are associated with maintaining new or bigger buildings and usually also an increase in the number of staff, in its decision-making process. Construction of new buildings increases operating expenses There are less and less available funds in the cultural policy 209. The majority of the budget of the Ministry of Culture's area of government comprises the maintenance costs of the majority of cultural institutions and larger investments. For example, in 2010 the Ministry of Culture spent almost a half of its budget on ten larger institutions or assets (including Estonian Public Broadcasting, Estonian National Opera, Vanemuine Theatre, Estonian Drama Theatre, Estonian National Library, Report of the National Audit Office for the Riigikogu, Tallinn

60 Estonian Art Museum, Estonian National Symphony Orchestra, construction of the new building of the Estonian National Museum and the exposition of the seaplane hangar of the Estonian Maritime Museum). Add the money distributed by the Estonian Cultural Endowment and the Estonian Film Foundation plus the Ministry s own maintenance expenses and these amounts comprise more than two-thirds of the budget of the area of government. The remaining one-third has to cover the financing of the maintenance of other institutions (mainly museums and theatres), the areas of sport, art, literature and national culture, and the various programmes of the Ministry. Did you know that the average gross monthly salary in Estonia in 2010 was 12,392 kroons? At the same time, the average gross monthly salary of a person working in the cultural sector was 9,904 kroons. The average gross monthly salary of people working in the cultural sector was 13% lower than the average of all areas of activity and it had increased to 20% in Source: Statistics Estonia 210. The so-called fixed part of the budget of the Ministry of Culture that comes with major investments has increased considerably and will increase even further. For example: the expenses of the Estonian Art Museum before the opening of the new building of KUMU comprised approximately 1.5% of the entire budget of the area of government, but in 2011 they comprise as much as 2.7%. If the plans of Estonian Public Broadcasting materialise and another 18,000 m 2 of space is built for them in comparison to the size of the current buildings, the share of public broadcasting in the budget will also increase noticeably. Building a new house for the Estonian National Opera is also discussed. On top of that, the Estonian Maritime Museum has requested another 2.3 million euros from the Ministry of Culture for the reconstruction of the seaplane hangars and exposition, which comprises 32% of the net cost of the public procurement contract. This means that there will be even less money left for various programmes or other specific purposes in the future if these current investment plans materialise The National Audit Office finds that the increase in state budget expenditure must also be taken into consideration when European Union funds are used or investments are made from the state budget, and those who make investment decisions should also analyse whether there will be enough money in the future for things other than maintenance of buildings. The need for labour will also increase when new or bigger buildings are built. Although salaries in the cultural sector are on average one-fifth lower than the average salary in Estonia (and the positions in the sector usually require people with higher education), the increasing maintenance costs of buildings and the increasing need for labour make it impossible to increase the existing salaries in the nearest future. Read more The National Audit Office s audit Followup Audit of the Registration, Preservation and Use of Museum Assets completed in 2011 Museums are more visitorcentred Survival is an effort for museums 212. The majority of the institutions in the area of administration of the Ministry of Culture are museums and their operating expenses comprise approximately one-third of the budget of the area of government. In its audit Registration, Preservation and Use of Museum Assets conducted in 2005 the National Audit Office found a number of omissions in the administration of museum collections, guaranteeing the required preservation conditions and exhibiting museum assets. At the beginning of 2011 we assessed the changes that had occurred from The National Audit Office is of the opinion that compared to 2005 the activity of museums has become more visitor-centred and researcher-friendly. Number of visitors was growing in the audited year, even though the overall number decreased suddenly in According Report of the National Audit Office for the Riigikogu, Tallinn

61 to Statistics Estonia, number of visitors has increased the most in the last decade when compared to other cultural institutions, even though number of visitors in 2010 was 4% lower than the year before From 2005 to 2011 museums have been allocated 70,480,743 euros (1.1. billion kroons) for investments from the state budget, which comprises 79% of all the allocations for investments from the budget of the Ministry of Culture s area of government. However, the majority of this money has done to single large museums. Also, there is no considerable improvement in the preservation conditions of museums, because investments have mainly be made with the support received from the European Union and building depositories is not an eligible activity. Preservation conditions in one-half of the museums are not satisfactory Exhibit an item of cultural value kept in a museum. State asset the permanent preservation must be guaranteed by the state. Collections grow faster than the international average There are still omissions in keeping account of museum assets Did you know that In 2010 there were 4.1 million exhibits in the state museums administered by the Ministry of Culture? Donations, collecting and transferring assets account for 95% of the growth in collections. The museum information system needs content 215. Irrespective of the investments made, the preservation conditions in almost a half of the museums are not satisfactory. Exhibits are often stored in unsuitable conditions: workrooms, cellars, attics or sheds In comparison to 2005 the collections of audited museums have grown by 16.5% in total (3.3% a year on average). The increase in museum collections remained below the international common limit of 2% in 59% of the museums from One of the reasons for the unusually fast growth of collections is the lack of a common collection policy. Although the National Audit Office suggested in its audit of 2005 that the Minister of Culture consider the development of the common principles of a collection policy, which would create the preconditions for a well-considered and coordinated collection of museum assets, the Ministry has not managed to do this in six years The accounting data concerning museum assets show that the overview of collections has improved, but some of the assets have still not been appropriately recorded. If audited museums had managed to provide scientific descriptions of 68.5% of their collections by 2004, then by % of the collections had been described (in principle, the Museum Act requires description of the entire collection). However, museums also have materials that have not even passed initial registration In addition to the initial registration of exhibits and scientific description, museums must also carry out annual inventories in order to check the existence and condition of their exhibits. Less than one-half of the museums had managed to carry out the required inventories by the end of No inventories have been carried out in respect of 8% of all exhibits (including 27% of exhibits in county museums and 3% in other state museums) In 2005 the state developed the museum information system (MuIS), which should become the basis for keeping account of exhibits and distributing information about them, and make it possible to view museum collections online. Unfortunately, MuIS has not achieved the planned goals, as a number of collections have still not been entered in the information system. 56% of the collections of all of the museums in the area of government of the Ministry of Culture had been entered in MuIS by the start of Museums have generally managed to enter only minimal information about the data characterising the exhibits in MuIS and it is not sufficient for introducing museum assets to the general public. Report of the National Audit Office for the Riigikogu, Tallinn

62 220. The legal basis of MuIS is also unclear. Although museums are currently required to keep account of their exhibits in MuIS, the legislation required for this still missing, as the Ministry of Culture has not developed it The main reason why the implementation of MuIS has been delayed and filling it with content will take a long time, and why museums are unable to keep account of their exhibits as required or carry out inventories is the lack of staff. The operating expenses allocated from the state budget have decreased in recent years, which makes it impossible to hire extra staff for the additional duties (i.e. entering data in MuIS). The operating expense budget has decreased, own revenue has doubled 222. Since less and less money has been allocated for operating expenses from the state budget but the maintenance costs of buildings are growing and additional duties have emerged, then museums have to dig deeper into their own revenue in order to manage. However, earning own revenue requires contributions by the staff, which means that there is less staff for the performance of the other duties of museums Museums with bigger operating expenses usually earn more own revenue (bigger museums manage to earn more own revenue), but this connection is not absolute. The museums operating expenses, own revenue and number of visitors differ on a large scale. Although the Estonian Art Museum has the biggest number of visitors and it earns more own revenue than other museums, its operating expenses still exceed the expenses of other museums manifold. The ability of museums to earn own revenue per visitor is also very different (see Figure 11). Figure 11. Own revenue and operating expenses of museums (left scale, kroons) and number of visitors (right scale) in Estonian Art Museum Estonian National Museum Estonian Open Air Museum Virumaa Museums Foundation Estonian Maritime Museum Estonian History Museum Saaremaa Museum Museum of Estonian Architecture Estonian Sports Museum Estonian Museum of Applied Art and Design Tartu Art Museum Estonian Theatre and Music Museum Läänemaa Museum Dr Fr R Kreutzwald Memorial Museum Estonian Health Care Museum Viljandi Museum Pärnu Museum Hiiumaa Museum Harjumaa Museum Valga Museum Palamuse O Luts Parish School Museum Järvamaa Museum Põlva Peasant Museum Mahtra Peasantry Museum Tartumaa Museum AH Tammsaare Museum at Vargamäe Iisaku Museum Rannarootsi Museum number of visitors (right scale) own revenue (left scale) operating expenses (right scale) 0 Report of the National Audit Office for the Riigikogu, Tallinn

63 III. Problems in local governments 224. In 2010 the National Audit Office focussed its attention on how local governments cope with their tasks and the problems that obstruct this. Municipal land, maintenance of local roads, managing spatial development and construction activities are the areas that the National Audit Office dealt with in depth. We noticed that the state as the general coordinator of different areas and the policy-maker is aware of the problems of local governments. The National Audit Office is of the opinion that some of the problems of local governments are the result of the state s weak support and insufficient cooperation with local governments. The state has started to execute the Supreme Court s ruling in a formal manner There has been no progress in the division of the tasks of the state and local governments or in the organisation of financing 225. It is still unclear how and when the state plans to execute the ruling made by the Supreme Court in March 2010, where the court pointed out that the state had failed to divide the functions of local governments into state functions and local government functions. Also, the state still hasn t implemented a local government financing system where the costs of state functions are separated and covered from the state budget A couple of state functions are formally highlighted in the state budget for 2011, but it will not be possible to separate state functions from local authority ones fully until all of the functions assigned to local governments by law have been analysed. After a year and a half the system for financing local government functions have still not been arranged in such a manner that it would be possible to assess whether each local authority has enough money. It is very important to follow the principle that the quality of services should not be considerably below the average in Estonia due to lack of money The purpose of executing the ruling made by the court is not to see formal changes, but to guarantee that all people in Estonia have equal access to services of equal quality wherever in the country they are and that such services at least meet a certain minimum standard. It is unclear when the goal will be achieved, as the state has no clear action plan. Considering the resources at the disposal of the Regional Minister, we certainly cannot expect to see better analysis results in the nearest future. Another goal, which is for each ministry to cooperate more with the representatives of local governments, has also not been achieved. The National Audit Office finds that the local governments demanding that the share of income tax paid to them from the state budget be raised back to the level before the cutbacks will not solve the problem and instead, the Riigikogu should demand that the Government execute the Supreme Court s ruling quickly and fully. Report of the National Audit Office for the Riigikogu, Tallinn

64 The increase in revenue that started at the end of 2010 also continued in 2011 Did you know that local governments collected 17-18% less revenue in 2010 than in 2008? Tax revenue decreased somewhat more in towns and cities. Size of local authority small local authority (up to 1,500 people) medium local authority (1,500 to 3,000 people) small town (3,000 to 10,000 people) large municipality (3000 and more people) city (10,000 and more people) Did you know that Avg. change (median) 17.7% 19.6% 20.3% 18.1% 20.4% in 2009 the average decrease in revenue per local authority in comparison to 2008 was 13%, and the same indicator was2% in 2010 in comparison to The respective indicators of decrease in terms of tax revenue were 13% and 6%. The decrease in revenue caused by the recession was replaced with an increase at the end of The impact of the deterioration of the economic environment that appeared in 2008 hit the local governments in 2009 as a decrease in revenue. The decrease in the revenue of local governments continued in 2010, but they decreased at a more modest rate than the year before (see Figure 12). The total decrease in the revenue of local governments in the last two years of recession amounted to 2.9 million kroons or 13% However, there was a positive change in the last quarter of 2010 when revenue started going up once again and this increase has also continued in Figure 12. Total revenue of local governments and relative change in revenue in comparison to the previous year in the period from Total revenue, billion EEK % 11% 18,1 20,1 13% 22,8 20,2 19,9 11% Source: Monthly budget execution reports of local governments 230. It is positive that the number of municipalities, towns and cities whose revenue had increased in comparison to the same period in the previous year increased considerably in the last months of For example, the total number of local governments whose revenue had increased was 145 in the last quarter of 2010 this is twice as many as of the same time in 2009 when revenue had increased in only 73 local governments. 2% total revenue, billion EEK relative change in revenue 25% 15% 5% 5% 15% Urmas Nemvalts, Postimees Relative change in revenue Wow! Your slices are half a millimetre thicker than before! What can you say, life s getting better. Tax revenue the basis of the overall increase in revenue 231. At the end of 2010 the revenue of local governments increased mainly due to the increase in tax revenue, which comprised as much as 60% of the increase in the total revenue of local governments in the fourth quarter of The amounts received as income tax also Report of the National Audit Office for the Riigikogu, Tallinn

65 increased in this period (2%) in addition to the bigger revenue received from other taxes (e.g. land tax, sales tax), which shows that the economic environment is recovering from the recession. The number of local governments whose tax revenue increased in comparison to the previous year increased considerably at the end of Did you know that 75% of local governments received tax revenue only from two state taxes: income tax and land tax? The most common local taxes are advertising tax (49 local governments), road and street closure tax (22 local governments) and parking charge (8 local governments) The data of the Tax and Customs Board indicate that an important factor that influences the amounts of tax revenue earned by local governments the number of taxpayers was at its lowest in the first quarter of The number of taxpayers had decreased 16% by this time since the beginning of The graph that illustrates the decrease in the number of taxpayers has been going upwards in the subsequent periods (see Figure 13) and the number of taxpayers has started to recover. The number of taxpayers was at its lowest in the first quarter of the previous year also on the basis of the number of local governments. Figure 13. Relative change in the number of taxpayers and employers from in comparison to the beginning of % -3% 0% 3% -6% -9% -12% -15% -18% Q Q Q Q Q Q Q Q Q Q Q % 16% Q taxpayers employers Source: National Audit Office on the basis of the data of the Tax and Customs Board 233. When we compare the number of taxpayers as well as employers in the fourth quarter, we see that the indicators in 2010 were already somewhat better than in 2009, but there is still a long way to go before the level of 2008 is reached again. According to the forecast of the Ministry of Finance, the revenue of municipalities, towns and cities that is received from personal income tax should exceed the level of 2008 again in The average payout made to employees, i.e. taxpayers in the second half of 2010 also increased in comparison to the year before (see Figure 14). This confirms once again that the factors that influence a very important component of the revenue base of local governments personal income tax are showing signs of recovery after the crisis. 14 Comparison of the Indicators of Local governments and the State ( ), Report of the National Audit Office for the Riigikogu, Tallinn

66 Figure 14. Average payout subject to labour taxes from 2008 to 2010 (kroons) Kroons Q 1 Q 2 Q 3 Q 4 Source: Tax and Customs Board The expenditure of local governments is decreasing Total cutbacks were larger than the decrease in revenue 235. Whilst expenditure 15 decreased about as much as revenue in 2009 (the different was only 1% in favour of revenue), the decrease in expenditure in 2010 was bigger than the decrease in revenue. Expenditure in 2010 changed -8% and revenue -2% in comparison to the year before (see Figure 15). The total decrease in the expenditure of local governments in the period from 2009 to 2010 when compared to 2008 is 4.2 billion kroons or 18%, which is considerably more that the decrease in the revenue of local governments in the same period (2.9 billion). Figure 15. Total expenditure of local governments and relative change therein in comparison to the previous year in the period from total expenditure, billion kroons relative change in total expenditure Total expenditure, billion kroons % 16% 14% 21,3 19,5 10% 8% 17,8 20,4 23, % 20% 10% 0% 10% 20% Relative exchange in total expenditure Source: Monthly budget execution reports of local governmentssavings in expenditure were mainly achieved on the account of investments and management costs. Over the last two years, investments have decreased by 2.2 billion kroons and management costs by 1.6 billion kroons in total. Investments have decreased by almost one-third in both 2009 and 2010 when compared to the previous year Staff expenses have also undergone a large decrease in 2010 when compared to the previous year (3% in 2009 and 5% in 2010). The average decrease in staff expenses in local governments in comparison to the time 15 Please note! The monetary outgoings of local governments are regarded as expenditure in this report (on the basis of the cash-based budget execution reports), i.e. the payment of money when assets are acquired and renovated, which have been called investments in the report. Report of the National Audit Office for the Riigikogu, Tallinn

67 before the decrease in revenue was 8%. However, the decrease in management costs was twice as big in the same period: 15% on average. Local governments started cutting their staff expenses later than their management costs. When we evaluate the change in management costs, we have to consider the circumstance that the winters of 2009/2010 and 2010/2011 were relatively cold and rich in snow, which made it impossible to cut the administration costs even more. Did you know that the number of students in general education schools in 2010 was 6% lower than in 2008? Expenditure has decreased the most in the areas of education and economy 238. The area of activity where expenditure has decreased the most in the last two years is education, where approximately 0.6 billion kroons less has been spent on staff and approximately 1.4 billion kroons less has been used for investments when compared to 2008 (see Table 8). One of the reasons for the decrease is the state budget cuts of 2009, where the education expenditure of local governments, incl. the salary support of teachers, was reduced considerably with the supplementary budget. Also, the number of students attending general education schools decreased by approximately 6% in the same period The decrease in staff expenses has been relatively large in local governments also in the fields of general government and culture, and investments and management costs have decreased the most in the field of economy. Table 8. Changes in expenditure by most important types and areas of activity from in comparison to 2008 Area of activity Staff expenses Management costs Investments Total mln kr % mln kr % mln kr % mln kr % education (09) economy (04) leisure, culture and religion (08) housing economy and utilities (06) general government (01) environmental protection (05) social protection (10) health care (07) public order (03) Source: Financial data of local governments from the balance data information system (Please note! The data are accrual-based) Report of the National Audit Office for the Riigikogu, Tallinn

68 The budget deficit of 2009 was replaced with a surplus in 2010 Did you know that the deficit of 2009 was mainly covered with the money left over before (0.7 billion kroons) and the remainder with increased liabilities (0.3 billion kroons) and sales of financial assets (0.2 billion kroons)? The surplus of money increased by 0.3 billion kroons in Earlier liabilities were also significantly reduced on the account of the surplus (by 0.1 billion kroons) In the last five years, the expenditure of local governments exceeded revenue the most in 2009 when the budget deficit in cash-based calculations was approximately 1.2 billion kroons. However, the efforts local governments have made started to produce results in 2010 and the year ended with a surplus of approximately 0.4 billion (see Figure 16). The measures taken by the state to restrict the loan burden of local governments also played a role here. Figure 16. Budget surplus or deficit of local governments from 2005 to 2010 Million kroons Source: Monthly budget execution reports of local governments 241. The number of local governments that ended the budgetary year with a deficit also decreased considerably in the previous year when data from 2009 and 2010 are compared. The number of such municipalities, towns and cities at the end of 2009 was 139, but last year it was only The National Audit Office carried out a survey in 213 local governments in order to learn more about their financial situation. Despite the improvement of the situation, the results of the survey indicated that 31% of local governments were sometimes unable to meet their financial obligations when due in % of the respondents considered the decrease in revenue the reason for their payment problems, as they were unable to react to it quickly by cutting their expenditure. There is also a number of local governments that have not managed to pay state taxes when due. Due to the decrease in revenue the salary of employees has been cut down in more than a half of the local governments Budget cuts have had an impact on the accessibility of public services 243. The local governments included in the survey of the National Audit Office employed approximately 4% fewer people in 2010 than in Approximately 50% of all municipalities, towns and cities have cut the number of employees, but the number of employees has increased in approximately 9% of local governments. 37% of the respondents admitted that there was a connection between the decrease in revenue and the decrease in the number of employees The number of local governments that reduced the salaries of their employees is higher than the number of those that reduced the number of their employees. In 61% of the surveyed local governments, the salaries of employees in 2010 were lower than in 2008 (see Figure 17). Approximately 30% of local governments have reduced the number of employees as well as their salaries. Report of the National Audit Office for the Riigikogu, Tallinn

69 Figure 17. Decrease in salaries of employees and its reasons in surveyed local governments Salaries have been reduced 61% Salaries have not been reduced 39% Source: Survey of 213 Local governments by the National Audit Office % of the surveyed local governments considered the decrease in revenue the reason why they cut their total staff expenses, the number of employees and their salaries. The other reasons given were improving the efficiency of the organisation of work, outsourcing services or delegation of duties outside the local authority. Decrease in staff costs has deteriorated the accessibility of services in almost a third of local governments 246. The negative impact of the reduction of staff expenses mentioned by the surveyed local governments is that the accessibility of public services in their municipality, town or city has deteriorated in 30% of the cases. Approximately one-half of the respondents found that reducing staff expenses has had no impact on the accessibility of services (see Figure 18). Figure 18. Impact of reduction of staff expenses on the accessibility of public services Expenses have not decreased 21% Expenses have decreased 79% Accessibility of services has deteriorated 30% Accessibility of services has not deteriorated 49% Source: Survey of 213 Local governments by the National Audit Office 247. The need to reduce the working and opening hours of local government agencies became necessary in several local governments when their revenue decreased. Approximately 14% of local governments have done this. Opening hours were mainly changed in libraries and public Internet points, but shortening the working hours of nursery schools and hobby clubs was also mentioned. Some local governments noted that they have had to send their citizens to neighbouring municipalities due to the decrease in the opening hours of the municipal government and the increased workload of employees. Report of the National Audit Office for the Riigikogu, Tallinn

70 Extract from the response given by a local authority: The government building was temporarily closed for citizens on Fridays in 2010 (April-November) as our employees were on unpaid leave. It was also impossible to implement the so-called good start methodology in nursery schools to its full extent. Giving legal advice to the citizens of our municipality decreased considerably after several positions were made redundant, and the time spent on communicating with clients and mapping the situation in the area of social work has shortened. The opening hours of the cash desk were reduced. The opening hours of nursery schools and libraries were also reduced, and the swimming pool was closed in summer. Every fourth local authority has stopped performing some voluntary functions as a result of the decrease in revenue The condition of roads and streets as well as street lighting have suffered the most as a result of the reduction of management costs and investments 248. Approximately one-quarter of local governments spend more time on administrative operations as a result of the reduced budget of staff expenses. The responses also indicated that processing of various applications and issue of permits has suffered as a result of the large workload of employees and the lack of employees that can cover for others. Processing applications that concern statutory plans, architectural drawings and construction has been delayed the most, but there have also been delays in making decisions about land issues, waste management and payment of benefits Responding to various applications and information requests has taken more time than before. There are delays in submitting data to registers. The unpaid leave of officials or reduction of working hours means that people have to wait longer for appointments with officials. However, the survey also shows different options: several respondents found that the recession had decreased their workload, because the demand for various permits, etc., has decreased Similarly to staff expenses, the main reason for the decrease in management costs and investments is also the overall decrease in the revenue of local governments. Approximately three-fourths of the local governments that responded to the survey of the National Audit Office shared this opinion The National Audit Office also asked local governments whether the decrease in revenue forced the authority to stop providing any voluntary services (i.e. services not arising from law). It became evident that approximately one-quarter of all local governments had either stopped providing certain functions they had taken upon themselves in better times, or reduced the extent to which such services are provided. The majority of such terminated activities concerned the payment of various benefits. In most cases, authorities have stopped paying support or organising events in the field of sports and culture. The non-profit sector has also had to settle for smaller support from local government budgets than before When asked to evaluate the consequences of the decrease in revenue on management costs and investments, most respondents said that the area that suffered the most was road and street maintenance (82% of the respondents). We also found out that the need to cut expenditure had forced the local authority to reduce the working time of street lighting in 66% of the cases. More than a half of those who took part in the survey also mentioned cancellation of investments into objects of education and sport, leisure and youth work as consequences of the cutbacks (see Figure 19). Report of the National Audit Office for the Riigikogu, Tallinn

71 Figure 19. Consequences of the reduction of the management cost and investment budget in surveyed local governments have cancelled planned investments into objects in the area of social protection 23% have cancelled planned investments into objects in the fields of sports, leisure and youth work have cancelled planned investments into objects in the area of education 56% 52% have cancelled planned investments into developing the organisation of waste management 23% Extracts from the responses given by local governments We had cold holidays in winter 2010, because the temperature in the schoolhouse was low. have cancelled planned investments into developing the public water supply and sewerage network the opportunities to use public buildings have deteriorated street lighting is turned on for fewer hours 23% 33% 66% Every third lamp is on from 10:30 pm to 5:30 am. In summer, street lighting is not switched on at all. the condition of roads and streets has deteriorated 82% 0% 25% 50% 75% 100% Source: Survey of 213 Local governments by the National Audit Office 253. According to the respondents, the deterioration of the condition of streets and roads is evident in the fact that local governments are unable to perform essential maintenance, such as repair of potholes on roads with hard surface, grading gravel roads, etc., not to mention make investments into roads. Many respondents said that they have also been unable to perform the maintenance repairs required to keep buildings in a good condition. Road maintenance requirements are not followed Read more The National Audit Office's audit report 'Organisation of the Maintenance of Local Roads', completed in 2010 Local roads are not maintained according to requirements 254. Road maintenance is an area where local governments have to follow rather specific guidelines given by the state. The heads of local governments decide how much of their budgetary funds are used on road maintenance, but various requirements have to be considered in the performance of roadwork or in the general organisation of road maintenance. This is required to guarantee traffic safety on roads, because road maintenance must be the same irrespective of the road s location. The National Audit Office is of the opinion that we cannot accept the situation where some local governments intentionally ignore the requirements that guarantee road safety and that the state, who established the requirements, actually tolerates this. Report of the National Audit Office for the Riigikogu, Tallinn

72 Urmas Nemvalts, Postimees Dear Santa, Can I please have a Black Christmas? The amount of investments local roads need is not known Did you know that the total length of municipality, town and city roads at the beginning of 2010 with the private roads taken into public use in local governments was approximately 23,200 km whilst the total length of state roads was 16,500 km? 255. Controversy surrounds the funding of local road maintenance, at the heart of which is the amount of subsidies paid out to local governments from the state budget. Clarifying the need of local roads for investments by the end of 2007 in order to streamline the road maintenance funding system is set forth in the National Transport Development Plan The National Audit Office has found that this has not been done, as local governments have not analysed the actual condition of local roads or the need for roadwork. The need for greater funding than is currently being provided is also felt by representatives of local governments as well as the state, but the exact amount required is not known. This is the reason why there is a lack of weighty arguments to support local government demands in terms of allocating subsidies from the state budget for local roads. Figure 30. Road maintenance costs of local governments, their share in total expenditure of local governments and subsidies received for road maintenance from the state from Expenditure and allocation from the state, billion kroons % 1,0 0,1 8% 9% 1,5 0,3 1,7 0,4 8% 1,9 1,0 6% 1,2 5% 1,0 0,2 0, (budget) total road maintenance costs 10% 5% 0% Share of the road maintenance costs in total expenditure money allocated by the state (without EU support) share of road maintenance costs in total expenditure Accounting of local roads is incomplete Source: National Audit Office on the basis of the monthly budget execution reports of local governments ( and the orders issued by the Government of the Republic about the distribution of the money allocated for the maintenance of local roads in public use ( Incomplete information about the condition of local roads makes ascertaining the condition of local roads and the need for roadwork more difficult. Although this information should be available in the National Report of the National Audit Office for the Riigikogu, Tallinn