Ministries merger aims for efficiency

The Baltic Times, TALLINN
By Kairi Kurm
Mar 28, 2002

New Minister of Economy Liina Tonisson has started the long awaited merger of the Roads and Communications Ministry and the Economy Ministry. The two ministries have been operating as two separate entities under one minister, Tonisson, since January.

Former ministers are lukewarm about the idea.

“It’ll be a ministry with a huge area of responsibility that is difficult to manage,” said former Economy Minister Henrik Hololei. “I believe that when Estonia becomes a member of the European Union the minister of economy will have to spend more time outside Estonia than the minister of foreign affairs does. There are constant meetings of the councils which the minister has to attend.”

Former Minister of Roads and Communications Toivo Jurgenson said that while representing one ministry he could not attend all the necessary meetings.

“I tried to participate in at least two international meetings a month and was constantly balancing near international scandals,” he said. “The annual forums of international institutions on shipping, aviation, railway and road transportation were always attended by ministers.

“Besides that she should propose new bills in Parliament and attend Cabinet and government meetings.”

According to Aap Tanav, former spokesman of the Ministry of Roads and Communications, the tasks of both ministries don’t coincide.

The Ministry of Economy deals mostly with energy policy, trade and construction, he said. Only the number of employees from the administrative, accounting and public relations departments could be decreased in a merger, he said.

The Ministry of Roads and Communications currently employs 80 people, while the Ministry of Economy has 140 employees.

“The economic effect is small,” said Tanav. “Cutting down 10 million kroons ($562,000) in a 2 billion kroon budget is a small number.”

Efficiency not cost savings is the prime motive behind the merger, according to Kuldar Vaarsi, a spokesman for the Roads and Communications Ministry.

“We aren’t aiming at creating an inexpensive organization, but a better and more effective structure,” said Vaarsi.

Jurgenson said that a positive effect would be that economic policy could be worked out by one structure.

The responsibilities of each ministry have decreased since most of the state-owned companies were privatized. According to Jurgenson there were over 600 state-owned companies in 1994 when he was the minister of economy. By 1995 there were 23.

Both Jurgenson and Tanav said the new ministry would work on roads and communications issues, while the Economy Ministry’s duties could be divided between other ministries.

The idea to merge the ministries was first raised in 1997, when several government officials said there were too many ministries for a country of Estonia’s size.

The merger should be completed by the end of November.


Kallas refuses to re-examine energy deal

The Baltic Times, TALLINN
By Kairi Kurm
Mar 28, 2002

Estonia’s Prime Minister Siim Kallas last week turned down an offer from the U.S. company NRG Energy to restart negotiations on the sale of two Soviet-era oil-shale fired electricity plants in the Estonian city of Narva.

Under a privatization agreement that was canceled Jan. 8, NRG Energy was to borrow 285 million euros ($252.21 million) for renovation of the two plants, which account for 90 percent of electricity production in Estonia.

The Estonian government canceled the deal, which was six years in the making, because NRG Energy failed to obtain funding by the end of 2001.

Under the deal, NRG Energy would have bought a 49 percent stake in the facility.

Then Prime Minister Mart Laar resigned soon after the unpopular deal was quashed.

Dave Peterson, president of NRG Energy, wrote in a letter to Kallas, who was finance minister when the deal was initially signed, on Feb. 19 that NRG was prepared to conclude the deal in three to four weeks if necessary.

“Prime Minister Kallas, when you and I sat down together to sign the memorandum of understanding at the U.S. State Department more than six years ago, we were full of excitement at this opportunity to revitalize Estonia’s oil-shale energy sector and northeast Estonia,” he wrote. “I ask you to return to these noble goals.”

Kallas, who was finance minister when the deal was signed, refused.

“I sincerely regret that the parties were unable to achieve the expected outcome set down six years ago in the memorandum of understanding,” Kallas wrote to Peterson on March 21. “We should, however, acknowledge that the political and economic situation in Estonia has changed dramatically in the past six years.

“There have also been significant changes on the international level, most notably in the European Union energy market policy that we must take account of in light of our impending EU accession.”

Kallas went on to present several reasons why the deal could not be completed. The main argument was that the banks requested a state guarantee although it was agreed from the start that the state would not provide one.

There were also complaints about a planned price hike that would help cover NRG’s profitability demands.

The deal’s cancellation had long been demanded by former Estonian President Lennart Meri, Estonian scientists, environmental organizations and the former opposition Center Party, which is now a governing coalition partner.

“It is my understanding that the real reason for the failure to finance the project as originally intended was in fact the situation in the markets that changed significantly after the events of September 11,” said Kallas.

The U.S. Embassy in Estonia issued a sharp reaction on March 22, stating that the U.S. government was disappointed by the Estonian government’s flat refusal to re-examine the deal.

“We are continuously supporting NRG in all its efforts to make it a successful deal,” said Thomas Hodges, the embassy’s public affairs officer. “This was a deal that held many positive aspects for Estonia, especially for the public and for communities in northeastern Estonia, and is something that the U.S. government attached great importance to.

“It would have improved the technology, reduced pollution, enabled more efficient energy production and involved investments in Ida Virumaa (the region where the plants are located).”

Peeter Kreitzberg, deputy chairman of the Center Party, told The Baltic Times in January when the deal was canceled that NRG Energy had gone to unacceptable lengths to secure the deal, with Petersen even saying that backing out would jeopardize Estonia’s chances to join NATO and the EU.

The Estonian government has tasked the Economy Ministry with finding alternative ways to finance the renovations of the plants. Some analysts have suggested that the company should be listed on the stock exchange.


Neighborly relations

The Baltic Times, TALLINN
Interview by Kairi Kurm
Mar 28, 2002

Estonia’s relations with Russia are as vital to Estonia’s political stability and economic prosperity as they have always been. Kairi Kurm talked to Karin Jaani, Estonian ambassador to the Russian Federation, in Moscow about how things stand between the two countries.Slowly but steadily the tension in relations between the two neighbors is ebbing. That negotiations are underway for a summit between the Estonian and Russian presidents proves that both sides, once barely on speaking terms, have grown a little closer together.

Russia’s negative attitude to NATO expansion to the Baltic states, a row over which branch of the Orthodox church should be registered in Estonia, and double custom tolls are the main thorns in the side for anyone trying to improve relations.
What are the biggest issues in Estonian-Russian relations?

Estonia has been ready for years to develop good-neighborly relations with Russia. The two countries have prepared five economic agreements, which have not yet been signed. Russia has expressed a desire to review the agreements a couple more times. It seems to me that Russia is currently politically not ready to sign any business agreements.

Estonia’s relations with Russia are already today viewed as being part of the relations between Russia and the European Union. From Russia’s point of view the main obstacle to establishing normal relations with Estonia seems to be the problem of the registration of the Estonian Orthodox Church of the Moscow Patriarchate by the Estonian authorities. The Russian side has said clearly that as soon as the church is registered the Estonian-Russian Intergovernmental Commission can start working again on improving business relations.

What is Russia’s standpoint on Estonia’s NATO aspirations?

We can see some dynamics here. A year ago Russia’s position on NATO’s enlargement toward Russia’s boundaries was stiff, but after the tragic events of Sept. 11 in the U.S. it changed. Russian Foreign Minister Igor Ivanov told our Foreign Minister Kristiina Ojuland in a meeting in Kaliningrad two weeks ago very clearly that although Russia was not happy about the accession, it accepts the sovereign right of each country to choose its own security guarantees.

President Putin has also said that Russia cannot dictate to any nation how to ensure its security, but at the same time the expansion of NATO to include Estonia, Latvia and Lithuania would probably not increase their level of security.

Estonia’s consulate in St. Petersburg was attacked last week. There was a noisy meeting in front of the building and the window was smashed with a brick. Do you feel safe here in the Estonian Embassy in Moscow?

It was a regrettable hooligan attack. I don’t see any strong political signs behind it. There was a bomb threat here last fall, after the terrorist attacks in the U.S. The Russian side has guaranteed the safety of our embassy as well as other diplomatic representations, and we follow our own safety measures as well. I should say that we feel quite safe here.

Will Estonia joining the EU influence relations with Russia?

This should liven up trade between Estonia and Russia. Becoming the EU’s border state and knowing Russia so well, Estonia might become a good connecting link between EU and Russia. Cross-border cooperation is an important issue between the relations of two countries. Considering this, we already have established good connections with St. Petersburg and the Pskov region.

Russia is Estonia’s 10th biggest export partner, with a 2.8 percent share in total exports and the fifth import partner with 8.1 percent. How might this change in the future?

Regarding exports to Russia we’re in a bad situation. We have a 5.4 billion kroon ($303 million) trade deficit with Russia. Our exports to Russia in 2001 were 6 billion kroons and imports were 11 billion kroons. These figures are regrettably small. But there is nothing Estonian producers can do about it. Since 1995 Russia has imposed double customs tariffs on Estonian products, which makes it very difficult for Estonian producers to enter the Russian market.

When will Russia abolish the double tariffs?

Imposing them was their sovereign decision. Russia can unilaterally abolish them, because it has unilaterally enforced it. It depends a lot on the general political atmosphere. They will most likely be abolished when Russia becomes a member of the World Trade Organization.

What’s the business climate like in Russia today?

The business climate has improved in the last few years, but it’s still uncertain. Several large international companies have come here lately. The bigger the company the more secure it feels itself here.

One of the biggest problems is that Russia has yet not carried out banking reform. There are many commercial banks the survival of which is difficult to estimate. The situation is similar to what we had in Estonia at the beginning of the 1990s, when some banks merged and others went into bankruptcy.

The situation is improving and Russia itself wants foreign companies to come. The climate is advantageous also because income tax is very low. It’s 13 percent. The time to experiment and start a business here will come in the near future.

The Organization for Security and Cooperation in Europe closed its missions in Latvia and Estonia at the end of December, a sign it is satisfied that the rights of the Russian minority are being protected. When will Russia be satisfied with the minority situation in Estonia?

Russian diplomats have told me they regret the OSCE left Estonia and Latvia. They think there are still problems we should solve under international supervision. This has something to do with active lobbying by some non-citizens in Estonia, who have not overcome the relics of the past and believe that Russian should become the state’s second official language.

The new government is reviewing the question of maintaining Russian schools. Time will tell whether the demand for a Russian secondary school education remains. The Council of Europe, the OSCE and the United Nations are of the opinion that the human rights of non-Estonians are guaranteed and correspond to international standards. Russia’s disagreement is just a different opinion.


Estonia lukewarm on trade group idea

The Baltic Times, TALLINN
By Kairi Kurm
Mar 21, 2002

The Heritage Foundation, a U.S. think tank, is lobbying President George W. Bush to establish a global free trade association, a voluntary free-trade association of 11 nations that would include Estonia.

The idea was first proposed in 2001 following the release of the “Index of Economic Freedom,” a Heritage Foundation and The Wall Street Journal publication. In it, Estonia, the United States, Ireland, the Netherlands and Luxembourg tied for fourth place behind Hong Kong, Singapore and New Zealand among 156 world economies.

Estonia scored well on factors such as loosened restrictions on banks, limited trade barriers, openness to foreign investment and few price controls.

Latvia scored low because of corruption and a slow rate of privatization. Lithuania also was left off the list mostly because of delays in privatization.

A free trade association would not compete with the World Trade Organization or regional trade agreements like the North American Free Trade Agreement but would be an alternative at a time when the advance of global free trade has stalled, according to the Heritage Foundation.

To become members, countries would only need a firm commitment to protecting basic economic freedoms in trade policy, capital investment, property rights and regulation.

Eleven countries would qualify, including Chile, the Czech Republic, Denmark, Estonia, Hong Kong, Ireland, Luxembourg, New Zealand, Singapore, the United Kingdom. and the United States.

Another 26 countries need only modest reductions in regulatory burdens they place on businesses.

The 11 potential candidates account for nearly one-third of the world’s gross domestic product.

For Gerald P. O’Driscoll Jr., director of the Heritage Foundation’s Center for International Trade and Economics, the prospect of gaining full access to such a massive market should be enough to tempt other countries to loosen regulatory reins in their own economies.

“For nations that want to avoid being swallowed whole by the European Union, the logical alternative is (this association),” he said, referring to smaller countries like Denmark, Estonia and Ireland. “They will be forced to accept intrusive EU regulation, which undoes much of the good that they have accomplished by liberalizing their economies.”

Lea Kroonmann, head of the state funded Estonian Trade Promotion Agency, said that the EU market covers the needs of Estonian exporters and there was no need to join any other associations. “Estonia is a very small country,” she said. “The EU market alone would be enough for us.

“Very few companies are looking for export opportunities in Asia or the United States.”

Tambet Made, chairman of the Estonian Trade Council, agrees. “There are no limitations for trading with these potential members at present,” said Made. “It will become advantageous for Estonia only if its biggest trading partners, like Russia for example, join.

Other officials said inclusion in the GFTA was an honor, but that the EU and the WTO were the highest priorities for the country.

EU calls for tax policy changes, Tallinn seethes

The Baltic Times, TALLINN
By Kairi Kurm
Mar 14, 2002

Siim Kallas got a strong message from Brussels on his first trip there as Estonia’s prime minister: Change your corporate tax system.

European Commission President Romano Prodi told Kallas on March 7 that Estonia should change its popular policy of not taxing reinvested corporate taxes.

“It is clear that this has created problems for some member countries because it is completely outside the strategy of the European Union,? said Prodi.

Analysts say the tax strategy is one reason the Estonian economy posted strong growth and low unemployment last year, particularly in the fourth quarter, despite the souring global economy.

Estonia eliminated taxes on reinvested corporate profit in 2000.

Kallas had heated discussions about the strategy with EU Commissioner for Enlargement Guenter Verheugen and Taxation Commissioner Frits Bolkestein, Radio Free Europe reported.

He said direct taxation falls outside the realm of EU negotiations.

“In our opinion there is no need to discuss the Estonian income tax system at the accession talks, but the question keeps cropping up,? Kallas was quoted as saying. “The inclusion of the income tax issue would not be practical, as this topic could seriously delay talks. We would not be prepared to contemplate solutions to any of the other issues within the taxation chapter.?

The EU typically only monitors indirect taxes such as value added taxes and tariffs. Countries themselves are usually free to determine their own coporate taxation systems.

Prodi and the European Commission have been heavily criticized by member states in the past for trying to oversee tax policy.

But in Estonia’s case pressure is being brought on by several members, including France, Spain and Italy.

“The formal policy of the European Union has until today been that direct taxation is the sovereign right of states,? said Kallas. “The income tax of investments is formally not touched upon in the negotiations process.?

Prodi said the commission’s stand was not against Estonia but for a more harmonized tax system for the EU.

“It is obvious that it has created problems for some member states since it is different from the joint strategy of the EU,? said Prodi. “The problem is that we have to bring into agreement totally different approaches.

“I am not saying that we need to do everything the same way, I am just saying that since we have to live in a single market, we need to have common rules.?

Prodi’s comments have met with disdain not only from Kallas but elsewhere in Estonia.

Andres Kuningas, head of the international affairs department at the Ministry of Finance, said Estonia’s tax policy was approved by the International Monetary Fund and was in accordance with the EU’s “code of conduct,? under which member states were pledged not to violate honest competition in corporate taxation.

“The Estonian taxation system is a symbol of the country,? said Kuningas. “Our standpoint is that the legislation should not be changed. It does not contradict EU terms.?

The respected business newspaper Aripaev wrote in a March 11 editorial that if the EU made the country’s admission to the EU contingent on changing the corporate tax policy then it should pull out of negotiations now.

“Estonia has not created for itself unjustifiable benefits and is not requesting special treatment,? the editorial read. “It has only removed obstacles that were restricting faster growth.

“If such simple truths are not understood by Eurocrats then maybe Estonia should try to explain them more slowly.?

Quality concerns touch off Estonian sausage war

The Baltic Times, TALLINN
By Kairi Kurm
Mar 14, 2002

A bitter battle between meat packers is brewing in Estonia with companies accusing each other of using inferior ingredients and endangering public health.

The fight has become more intense as Estonia nears the summer deadline for meat producers to comply with European Union standards, which observers say will put many out of business.

Elmut Paavel, managing director of meat producer Valga Lihatoostus, started the row when he began sending competitors’ cooked sausages to a laboratory for analysis.

“Consumers should know what they are buying and what they are eating,? said Paavel.

He said the analysis showed poultry byproducts in sausages from the companies Rakvere Lihatoostus, Woro Lihakominaat and Filee Lihatoostus.

“If someone wants to eat chaff, let him do that,? said Paavel.

Paavel argues that many companies that sell discount sausages are fooling consumers using “mechanically deboned meat? rather than high-quality beef or pork.

Much of the mechanically deboned meat comes from the United States.

The meat is picked off chicken scraps at poultry plants and pressed into a paste, which is often sold abroad, and it is used to fill sausages.

“Finland, Latvia and Lithuania have restricted the import of such muck, but we accept everything,? said Maie Niit, manager of the meat company Otepaa Lihatoostus.

Silver Rambos, sales director at the meat producer Woro Kommerts, wrote to the business newspaper Aripaev that consumers should have several levels of price and quality to choose from.

“Many would like to drive Mercedes, but still there are more Opels and Fords around,? he wrote.

Paavel argues that companies which use inferior ingredients are simply fooling consumers.

“We had standards during Soviet times, when producers had to follow certain standards if they wanted to use the well-known trademarks such as Lastevorst, Lemmikvorst or Doktorivorst for example,? he said. “Now some are producing sausages of the same name but of different ingredients. The consumer dislikes it and will never buy products of the same name again, even from those producers which use quality meat.

“Opel producers would not mark their cars with a Mercedes sign,? he said.

Companies that use the paste normally sell their sausages cheaper and have fared well in the market.

Agriculture Ministry officials say sausage sold in Estonia is safe to eat and that the battle now is more a consumer rights issue than one of public health.

Rambos and others say the complaints stem from the increased competition on Estonia’s meat producing market, which will have to meet EU requirements by July.

Many producers have complained that 10 years is not enough time to revamp production standards to meet EU requirements. Preparations have been expensive and observers say that many of the country’s 250 meat producers and slaughterhouses will begin closing.

The mudslinging is a way to shake out the market in the name of consumer protection, said Peeter Grigorjev, head of the Estonian Meat Association.

“The sausage battle started because companies that have failed to compete are using all kinds of methods to survive,? he said. “They say that they stand for the well-being of customers.

“All companies need market share in order to receive a loan from banks. Banks do not lend money to the ones that don’t meet EU requirements.?

Grigorjev says many Estonian meat producers have bleak futures.

“It is obvious that many will have to close their doors by January 2003,? he said. “I believe that about 40 will survive, mostly the biggest companies and those small ones, which have found a niche market. Small companies that deal with everything from slaughtering to packaging will see hard times.?

A group of seven meat producers has called on Estonia’s Ministry of Agriculture and the Veterinary and Food Board to establish an official classification for sausages and require companies to list ingredients for packaged as well as loose sausages.

The highest quality products should contain at least 95 percent pure meat. The second level would contain 70 percent and the third 50 percent, according to the proposal.

The plan would follow European Union guidelines, which do not classify mechanically deboned meat as meat.

The same companies, which include Valga Lihatoostus, Noo Lihatoostus, Oskar, Otepaa Lihatoostus, Vastse-Kuuste Lihatoostus, Rey and Linnamae Peekon plan to leave the Estonian Meat Association, which currently represents 26 members, and establish their own trade association, which will represent companies that use local meat only.

Marje Kokk, deputy director of the Estonian Consumer Protection Board, said that current legislation requires labeling of packaged products only.

The Ministry of Agriculture is drawing up legislation that would require ingredients to be listed on shipping invoices for nonpackaged products, such as sausages bought by the kilo. Under the regulations shopkeepers would be able tell consumers what’s in the sausages if they ask.

“We didn’t actually have the regulation on our agenda for this year, but as the problem of meat content of products has become very acute we’ll try to have the labeling rules amended by the end of the first half of the year,” Kairi Ringo, head of the ministry’s food safety bureau, told the Baltic News Service.


Estonian companies look to private power

The Baltic Times, TALLINN
By Kairi Kurm
Mar 07, 2002

Several companies, from metal processors to cucumber growers, have cut ties with state-owned electricity supplier Eesti Energia and built their own power plants, and several others are currently considering the move.”Electricity prices are increasing constantly and it is becoming more reasonable to open local power plants,” said Urmas Tooming, a spokesman for Baltic Ship Repair, which plans to put power plants online this fall for several of its operations.

The company will open two gas-fired plants in Tallinn’s Kopli shipyard, one in the Tallinna Meretehas shipyard and two in Klaipeda’s Western Ship Repair Yard.

Each plant will have a capacity of 1.1 megawatts and the Klaipeda generators will also produce heat, Tooming said.

Baltic Ship Repair also plans to supply nearby businesses with power.

Several florists, which need electricity and constant heat year round, are also considering buying their own generators.

Cucumber grower Grune Fee has already made the switch.

The company invested 15 million kroons ($882,000) in a power station in 1997, when it was still a bold concept.

The trend is growing, but Grune Fee manager Raivo Kulasepp says Eesti Energia doesn’t have to worry too much yet.

“I don’t expect a big increase in the (private) production of electricity until the prices have gone a little higher,” said Kulasepp.

He recommends private power if companies intend only to consume electricity and heat they produce themselves.

“It becomes unprofitable when they start distributing it,” he said. “Eesti Energia is doing everything in its power to keep the market closed.”

Although he sells power generators, Ardo Kuusk recommends that companies think hard before supplying their own power.

“Companies that consume energy less than a megawatt or two and need thermal energy for heating houses in winter time should not bother with it,” said Kuusk, director of the diesel generator retailer Baltic Marine Group.Kuusk says he has talked to several florists that are currently considering switching.

But it’s not just small companies looking to save a few dollars on power costs that are turning to private power.

Narva textile producer Kreenholmi Valduse, the country’s fifth largest electricity consumer, is considering investing 170 million to 220 million kroons in a power plant. Company Director Meelis Virkebau says the investment would pay for itself in six to eight years.

Virkebau said 10 percent of Kreenholmi’s annual budget is spent on electricity.

One of Estonia’s largest self-sufficient operations is metal producer Silmet, which has had its own power station since it opened in the 1940s.

When the company was privatized in 1997 the new owners doubled the station’s capacity and refitted it to produce the factory’s heat as well.

“Our power plant enables us to produce less expensive electricity primarily because the final price does not include distribution costs,” said Mehis Pilv, the company’s development director. “Distribution costs make up roughly half of the consumer price.”

Silmet’s power station is oil-shale fired and has a capacity of 200 megawatts. It also sells some electricity to neighboring companies.

Silmet’s plant produces 200 megawatts of thermal energy that helps supply heating to its home town of Sillamae.

“Today companies are dreaming of establishing their own power plants but in a few years there will be only a few (energy-intensive) companies that haven’t considered it at all,” said Pilv.