The development and investment behaviour of local authorities in Estonia
Viola Soiver
Abstract
The paper is focused on the development and investment behaviour of local authorities in Estonia. Local authorities are depending a lot from the investment grants from central government or EU funds. Therefore the local authorities have to consider the policy of EU or central government to receive the funding. The economic situation in local authorities has weakened the local authorities’ potential to co-finance the investment grants or the make new investments by their own. The local authority can take loans only to co-finance the EU projects. The local authorities with previous liberal loan policy have to slow down their investment activities. The investment autonomy of the local authorities is decreased.
Introduction
Estonia has one-tier local self-government (The Constitution of Estonian Republic, 1992) with226[1]parishes and towns (Estonian Ministry of Interior, 2010). The issues of local life are in the competence of local government units and these issues are dealt with while performing local government tasks (Haljaste et al, 2008). Beside the every day management every local authority has to plan the future with strategic plan. Every local authority has to compose development plan (Local Government Act, 1992) to develop the strategic planning on local level. The development plan is the input to local budget (Local Government Budget Act, 1993) to implement the strategic planning. Development plan has to last next three years or at the end of financial obligations (Local Government Act, 1992) therefore most of the plans are composed before the economic decline but need up to date because of the changed environmental conditions.
The author wants to research how the economic decline influenced the local authorities’ development and investment behaviour. The financial autonomy of the local authority is very low (Rea-Soiver, 2004). Most of the local authorities receive block grants from central budget (Ministry of Finance, 2007, 2008, 2009a, 2010). Also most of the investments are co-financed from EU structural funds (Haljaste et al, 2007). Before the economic decline the local authorities had resources to co-finance the EU projects with own revenues or by loans.In the situation of economic decline many local authorities have announced the cancellation of investments at all. The author’s research interest is to find out the local authorities development and investment behaviour before and during the economic decline. The minister of finance wants to speed up the use of EU funds to create new jobs and to increase the cash flow (The Press Relief of Ministry of Finance, 2009a). Local authorities are in complicated situation – how to find from the tension budget the resources to co-finance investment projects from EU funds. When the local authority doesn’t have investment potential then other local authorities get the development advantage and the citizens may leave.
The research questions:
1. What is the local authorities’ development and investment patterns from 2006 to 2009?
2. What are the changes of the development and investment behaviour after the economic decline started?
There are two research levels. In the first level the author will analyses the local authorities’ financial data from the Ministry of Finance from 2006 to 2009. The author will find out the pattern of revenues, investments and the share of structural investment grants from investment costs. In this research level the author will find out does wealthier local authorities is in the better development and investment position? In the second level the author will use the questionnaire answers from 30 local authorities to get the explanations about the development and investment behaviour.
Strategic behaviour of Estonian local authorities
Local authority is the area for living, working and entertainment for the same time therefore local authority has to developthe area for different requirements (Raagmaa, 1996: 55).The Planning Act (2002) regulates the spatial planning and requires general and detailed plans from local authorities. Also local authorities have to compose the development plan as socio-economic strategic plan (Local Government Act, 1992). The author will concentrate on the socio-economic planning on the local level. The socio-economic planning is compulsory for local authorities from 1992.The legislation sets the formal determinants of the plan, i.e. duration of the plan (at least three years or at the end of financial obligations), time to update the plan and assess the implementation of the plan (at the 1st of October in every year), the connection with other legal acts (local budget, investment plan), participation of the stakeholders as early as possible etc. Only eight years ago the methodological guide was published by the order of Estonian Ministry of Interior. The guide was published because “the development plan has become recently the “live tool” for local authorities” (Noorkõiv, 2002: 7).Quote to development plan is one argument to apply for structural grants (Haljaste et al, 2007: 11).
Development plan is based on strategic planning process (Local Government Act, 1992). The local development plan describes the objectives of the accomplishment of public law functions (among other things, in providing public services and creating material conditions for the purpose) and envisages the possibilities for implementation of theses objectives (Haljaste et al, 2008: 29). At the same time the local development plan covers the strategic as well as applied level (Haljaste et al, 2007). Strategic planning is a particular model of how to undertake management of an enterprise or organization in a manner that responds to changes beyond the control of the organization, yet which provides direction for that organization over a time horizon of several years (Miller & Holt-Jensen, 1997). In the sense of local authorities: “Strategy is the action plan with agreed goals and implementation ways, the plan considers the strengths and weaknesses of the region and opportunities and threats from outside environment” (Ulst, 2003).
The development strategy ensures the unified strategic model in development plan with the goals and list of priority fields (Thalheim, 2005). Most of local authorities use the development priorities to describe the strategic direction in fields (Noorkõiv, 2002). To compose the strategic and sustainable plan is complicated task for local authorities (Thalheim, 2005). It needs the vision and position of the future and involvement on people from different fields (Noorkõiv, 2002). The strategy cannot be to complicated, very fancy vision and strategic model doesn’t fit into implement in small and weak organisation (Kaplan and Norton, 1996).
Weak strategic planning process leads to compose weak development plans (Reimer, 2009). The Ministry of Finance sees several weaknesses – the variety of the methodology, weak link between the development plan and budget (Kukk, 2004). The analysis of action plans reveals that the cost of the listed tasks doesn’t consider the potential of the local authorities budget (Haljaste et al, 2007).The question is does local authorities have opportunity for strategic planning or they just define the necessary investment articles? The author of the paper will find the answer from the analysis of local authorities’ investment behaviour. Does the economic decline influence the development and investment behaviour of local authorities?
Revenuespattern of Estonian localauthorities
The revenues of local authorities are diversified to almost 100 different articles (Jõgi, 2009). However half of the revenues of local authorities come from personal income tax (Jõgi, 2007; Jõgi, 2008; Jõgi, 2009). Personal income tax is divided between central and local government, today the tax rate is 21 per cent and 11.4 per cent of the tax will go to local budget (State Budget Act, 1999). The share of personal income tax has been increased from 2006 to 2008 (2006 – 44%; 2007 – 48%; 2008 – 51%) (Jõgi, 2007; Jõgi, 2008; Jõgi, 2009). This is the sign of economical rise because public and private sector competed with each other and the salaries grow remarkably. The growth of the revenues is remarkable in 2006 to 2008 in wealthier local authorities which collect the large proportion of revenues form taxes (Ministry of Finance, 2007, 2008, 2009a). Their economical success is mainly depending on the personal income tax. To decrease the deficit of the central budget the Government of the Republic decreased the amount of the tax to local budget from 11.9 to 11.4 of 21 per cent in spring 2009 (The Amendment of the State Budget Law of 2009). As a sign of economic decline and as a result of changing taxing principles the share of personal income tax from revenues has decreased to 49 per cent (Ministry of Finance, 2010). The amount of personal income tax decreased 13 per cent compare with 2008; this is the same level as in 2007 (Ministry of Finance, 2010).
The revenues of other taxes are generally five per cent of the total income (Jõgi, 2009). The personal income tax, land tax and so called natural resources tax (mining and water using fares) is the main resources from taxes and is the base to calculate the financial potential of local authority (Jõgi, 2009). Central government supports the financially weaker local authorities with equalization fund (block grant). Local authority is eligible for equalization fund when the calculated costs outnumber of calculated revenues (State Budget Act, 1999). Financially weaker local authorities survive mostly because of the equalization fund (Jõgi, 2009). Local authorities also receive categorical grants from central government to cover the costs of certain obligations, i.e. teachers’ salaries, school lunches, subsistence allowance etc (State Budget Act, 1999).
There are three different answers groups in the questionnaires from local authorities. Some of the representatives from local authorities confirmed that the economic decline and the change of the share of personal income tax to local budget have decreased their financial situation and developmental potential. “There is less money because of the economic decline and also because of the high rate of unemployment”. (Parish of Halinga) “Today the budget of local authorities is only for survive, the development activities and investments are cancelled or in minimal level”. (Parish of Paikuse)“We implement old projects where we have financial support from funds. There is very high competition for new investment projects. The prioritisation of the investments is very important today”. (Parish of Käru)
On the other hand most of Estonian local authorities receive block grants (equalisation fund) to cover the overall expenses. Therefore the representative of the parish of Tamsalu says: “The economic decline hasn’t influenced much because when the share of own revenues are smaller the share of equalisation fund is bigger or vice versa. But the situation is different when the share of own revenues is bigger and there is no block grants from central government. Then the local authority’s wealth and development potential is directly connected”. “Today the economic decline is not influencing the local authorities’ budget because the shortage from taxes is covered from the equalization fund from central government” (Parishof Tapa).“Our population is small therefore no influence” (Parish of Vormsi).
There is also third opinion: “The importance of strategic planning has increased. The implementation of the development plan hasn’t changed”. (Parish of Ridala) “The priorities are set in development plan. Only the implementation period is longer now” (Parish of Haljala)
The Ministry of Finance has divided the local authorities in three categories – wealthy local authorities, medium local authorities and coping local authorities. The calculation is based on the revenues from three main taxes – personal income tax, land tax and natural resources tax. The sum of the main taxes is divided with the number of citizens to compare the local authorities. The scale of the average revenues is mathematically divided into three parts (Jõgi, 2007; Jõgi, 2008; Jõgi, 2009). The cap between the three different groups and marginal of the scale has been increased by every economically good year from 2006 to 2008 (Chart 1).
Chart 1. The average revenue from three main taxes in local budget divided with the number of citizens (Source: Ministry of Finance 2007, 2008, 2009a).
Note: The appropriate data for 2009 is not available yet.
About 50 local authorities from 227 are named wealthy (the number has been almost same in three years). Most wealthy local authorities situated next to capital or next to other towns or in East-Estonia where the mining is important. The average growth among wealthy local authorities in three years has been 48 per cent, the differences between maximum and minimum in the group is five times (Table 1) – therefore the gap between rich and richer local authorities is remarkable.
Wealthy local authorities / Medium local authorities / Coping local authorities / Total2006 / N / 52 / 87 / 88 / 227
Mean / € 541 / € 343 / € 261 / € 356
Std. Deviation / 257,837 / 26,999 / 37,253 / 165,048
Minimum / € 400 / € 302 / € 103 / € 103
Maximum / € 1827 / € 395 / € 302 / € 1827
2007 / N / 48 / 108 / 71 / 227
Mean / € 693 / € 426 / € 325 / € 451
Std. Deviation / 340,727 / 34,806 / 44,843 / 207,640
Minimum / € 503 / € 376 / € 138 / € 138
Maximum / € 2364 / € 499 / € 374 / € 2364
2008 / N / 48 / 131 / 48 / 227
Mean / € 803 / € 485 / € 365 / € 527
Std. Deviation / 390,417 / 45,275 / 49,853 / 236,884
Minimum / € 586 / € 413 / € 165 / € 165
Maximum / € 2471 / € 584 / € 407 / € 2471
Table 1. The average revenue from three main taxes in local budget divided between the amount of citizens (Source: Ministry of Finance 2007, 2008, 2009a).
Note: The appropriate data for 2009 is not available yet.
The number of medium local authorities has grown almost two times. The average growth among medium local authorities in three years has been 41 per cent, the differences between maximum and minimum in the group is only 31 per cent. This shows that generally the differences between local authorities have been decreased in economic rise. Now is the question how the local authorities have used the additional revenues.
The number of coping local authorities has been decreased twice in three years. The average growth in three years has been 39 per cent, the differences between maximum and minimum in the group is three times. This shows that there are local authorities with very weak financial potential.
The personal income tax is the most important source of revenues for local authorities (Jõgi, 2009). There is significant difference between the three groups based on the share of personal income tax from revenues (Chart 2). Because there are no available information to group the local authorities in 2009, therefore all the calculations of 2009 is using the grouping of 2008.
Chart 2: The share of the personal income tax from revenues (Ministry of Finance, 2007, 2008, 2009a, 2010)
Note: Categorisation in three groups in 2009 is based on the information of 2008. The appropriate data for 2009 is not available yet.
The means of three groups are clearly different but the group of wealthy local authorities is the most heterogenic in all four years (Table 2). The homogeneity inside the group has been same from 2006 to 2008, last year the difference inside the group has been decreased a little.
Wealthy local authorities / Medium local authorities / Coping local authorities / Total2006 / N / 52 / 87 / 88 / 227
Mean / 44,21% / 37,75% / 29,88% / 36,18%
Std. Deviation / 0,15405 / 0,06846 / 0,07149 / 0,11058
Lower Bound / 39,92% / 36,30% / 28,37% / 34,73%
Upper Bound / 48,50% / 39,21% / 31,40% / 37,63%
2007 / N / 48 / 108 / 71 / 227
Mean / 48,14% / 41,15% / 30,63% / 39,34%
Std. Deviation / 0,15552 / 0,07078 / 0,07044 / 0,11456
Lower Bound / 43,63% / 39,80% / 28,97% / 37,84%
Upper Bound / 52,66% / 42,50% / 32,30% / 40,84%
2008 / N / 48 / 131 / 48 / 227
Mean / 50,59% / 41,57% / 31,89% / 41,43%
Std. Deviation / 0,15281 / 0,08237 / 0,07132 / 0,11633
Lower Bound / 46,15% / 40,15% / 29,82% / 39,91%
Upper Bound / 55,02% / 42,99% / 33,96% / 42,95%
2009 / N / 48 / 131 / 48 / 227
Mean / 49,09% / 40,38% / 31,48% / 40,34%
Std. Deviation / 0,16531 / 0,08624 / 0,7847 / 0,12056
Lower Bound / 44,29% / 38,89% / 29,21% / 38,77%
Upper Bound / 53,89% / 41,87% / 33,76% / 41,92%
Table 2: The share of the personal income tax from revenues (Ministry of Finance, 2007, 2008, 2009a, 2010)
Note: Categorisation in three groups in 2009 is based on the information of 2008. The appropriate data for 2009 is not available yet.
There are significant differences between the groups in all four years (in 2006 F=38,395, p=0,00; in 2007 F=52,444, p=0,00; in 2008 F=42,398, p=0,00; in 2009 F=32,798, p=0,00). The gaps between the groups and the share of personal income tax from revenues have increased remarkably from 2006 to 2007. Next two years the growth has been even-tempered. The economic decline decreased the share of personal income tax from revenues in all groups. Therefore the losses from personal income tax are the same in three groups.
Financially weaker local authorities cover their costs with block grants. The wealthier local authorities receive most of the revenues from taxes. Does the bigger share of revenues for one citizen increase the local authority’s development potential? Most of the local authorities confirm that: “more revenues increase the local authority’s possibility to allocate the resources also for investments”. (Town of Haapsalu, Parishies of Kullamaa and Kehtna). “Today there is minimal level for survival.All additional resources up to the minimal level can give possibilities to make something more or better” (Parish of Käru).“More revenues will also increase the support for service delivery not only for development activities”. (Parish of Vigala)“The bigger share of revenues by one citizen can give the local authority possibility to participate in bigger projects where the sum or share of the self-finance is greater.” (Town of Sindi).“Local authority has hired the development specialist and secured therefore the administrative capacity to develop local authority”.(Parish of Kadrina) But “the bigger amount of money doesn’t secure always the better use of revenues”. (Parish of Juuru)
Central government will support the financially weaker local authorities therefore there isn’t always positive effect to increase the revenues of the local authorities. The support from central government is therefore smaller. Therefore the motivation to increase the share of own revenues of local authority is threatened.
On the other hand the representative of parish of Lavassaare says “The wealthier local authority can only improve the service delivery there is no impact for capital investments”. This shows that local authority is depending from structural investment grants.
The author will analyse the local authorities investment pattern in next chapter more in deep to find the answer how the local authorities have use their financial potential to get the strategic advantage.
The investment pattern of Estonian local authorities
All local authorities have to have strategic plan to fulfil the strategic goals (Local Government Act, 1992). The Ministry of Finance (2009b) has calculated the share of investments from the cleaned budget (revenues from taxes, sale of goods and services, block grants from central government and other revenues; the structural grants for investments and specific obligations are excluded). The average share of investments from cleaned budget is between 22 – 24 per cent, the share of investments is generally increased by every year (Chart 3). The wealthy local authorities have increased their share of investments by every economically good year (2006-2008) and decreased in 2009. Therefore the bigger revenues influence the investment potential. The share of investments among the medium local authorities is the same in all four years. Therefore the medium size local authorities have used generally the additional revenues for service delivery. The share of investments among coping local authorities is at the same level in 2006 and 2009 and in 2007 and 2008. The influence of economic decline has influenced the most coping local authorities.