Nr. 12-2011 Published monthly by:
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The Estonian Investment Climate As part of SCCE's 2010 series of meetings, conferences and seminars on the economic environment headlined; Here we are. What's next?, Estonia's investment climate was in focus at an April Business Breakfast Seminar at Tallinn's Three Sisters Hotel.

This morning Mikael Orkomies - Partner at Excedea, Raul Allikivi - Head of the Economic Policy Division at Estonia's Ministry of Economic Affairs and Communications, and Andrus Alber - Chairman of the Management Board at NASDAQ OMX Tallinn Stock Exchange gave a brief on the subject.

- Estonia has been one of the favorite countries for foreign investors and although Estonia has dropped in the private equity attractiveness index, it is still one of the most interesting East European countries for investors, said Mikael Orkomies, Partner at Excedea.

Mikael Orkomies
- Eastern European countries are not coming out of the crisis as one group and it make sense to divide them in three sub-categories, continued Mikael Orkomies. First, there are the countries that joined the EU in 2004 and 2007 and for all these countries the EU membership is a guarantee of positive development; All enjoy the benefits of EU structural funds, all countries follow, more or less, the same legislation, and all are part of same economic free zone.

- The second sub-category includes potential EU members. They are the last convergence cases in Europe and include Croatia, and small western Balkan countries like Macedonia. Turkey and Ukraine are problematic cases in this category while Georgia, Moldova, Armenia and Azerbaijan might be something for the optimists in a couple of decades. The third sub-category includes the five autocratic 'stans' of Central Asia; Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan.

- As for Estonia, and the other two Baltic States, skilled labor is available again but at the same time consumer confidence is low.

- Investments into financial services, real estate, manufacturing and trade, with the major part of the investments coming from Sweden and Finland, make up the Estonian FDI's in a nutshell, continued Mikael Orkomies.

Click for a larger illustration. Graphic: Excedea
- Several companies have found "after crisis Estonia" to be attractive and significant foreign investments into Estonia have already been made during 2010. Some examples include Autoliv's acquisition of Norma, TeliaSonera's acquisition of Eesti Telekom, Kinnarps Furniture's increased production resources, Trelleborg's extended production, and Ericsson's increased production.

- The Baltic States went into the crisis as a region, but will come out at an individual pace. In 2 – 3 years of time the differences between the three countries will be even larger than now.

- Estonia will develop faster than Latvia and Lithuania, and this will benefit all three Baltic countries. It is again possible to think about starting or acquiring businesses as costs and valuations have come down significantly, concluded Mikael Orkomies.

Raul Allikivi, Head of the Economic Policy Division at Estonia's Ministry of Economic Affairs and Communications, presented Estonia's National Programmes in Support of Entrepreneurship.

Raul Allikivi
- Our main target sectors for the Estonian national support programmes include ICT - Information and Communication Technology, Business and Financial Services, Transportation and Logistics, Machinery and Metal Industry, Electronics Industry, and Wood Processing, said Raul Allikivi.

- The current short term challenges for businesses include liquidity, cost cutting and access to finance. As for the latter we are improving the financing by extending the existing KredEx schemes.

- The limit of loan guarantees is raised by 45 MEUR - from 51 to 96 MEUR - in order to provide more flexible loans with smaller minimum amounts and less special controls. Furthermore, the limit of export guarantees is up by 128 MEUR - from 64 to 192 MEUR. These guarantees will add more stability for the exporter and KredEx can be more risk averse.

- New KredEx schemes are also introduced, like the equity capital loan where the State's contribution is 25 MEUR; on average 0,4 MEUR per company. This loan is for additional equity capital subordinated to bank loan, which improves the accountability and readiness of the banks to provide financing to company.

- Furthermore, financing by the banks with a State guarantee, where the State's contribution is 25 MEUR with additional foreign financing amounting to 51 MEUR; on average 0,4 MEUR per company. In cooperation with EIB – the European Investment Bank, the State will be able to provide additional resources with good interest rates to give loans to companies.

- Finally, long-term loans to companies in cooperation with banks, where the State's contribution is 25 MEUR; on average 0,8 MEUR per company. An option is created to allocate long-term resources to banks for financing projects that meet specific criteria.

- The estimated impact of these opportunities is that the improved financing of companies will contribute to preservation of existing jobs and the total amount of the measures during 2009 and 2010 will be nearly 2,5% of Estonia's annual GDP.

- We also have new tools available for investors, told Raul Allikivi. Easier access to state-owned land is one such new tool which will enable high impact investors to buy or rent state-owned land through a streamlined process, and it will also enable local governments to acquire land for developing industrial areas.

- Support for technology investments is another tool and it is based on an existing programme; a 100 million kroon budget for high impact investors with support up to 25% of the investment. A high impact investor here should make a technology investment of at least 100 million kroons and create at least 100 new jobs.

- Our support tool for infrastructure investments involves support for building access roads, electricity- and gas-connections, etc. The application process is done in cooperation with local government and the current budget is 100 million kroons, supporting up to 85% of the investment with 50 million kroons as a maximum amount.

- Retraining of labor is another new and important support tool. It is now possible to get support for training of employees with up to 50% of the costs covered. Since 2009 in-company trainings are eligible for support if it includes international knowledge transfer. One of the targets here is to align trainings for unemployed with the concrete labor/skills needs of an investment project.

- We are also working with Invest in Estonia Standards, concluded Raul Allikivi. It is a project run by the Ministry of Economic Affairs and Communications in cooperation with Enterprise Estonia, targeted to improve investor services at local leveIs and scheduled to be completed 2010-2011.

Andrus Alber, Chairman of the Management Board at NASDAQ OMX Tallinn Stock Exchange, busted a set of myths on going public and getting listed on the stock exchange.

Andrus Alber
- There are indeed myths connected to companies' possibilities to get public and get listed on the stock exchange, said Andrus Alber. One of them is the myth that a company is too small and there would be no investor interest.

- However, reality shows that many European IPO's – Initial Public Offerings were around 1 mio EUR in 2009. As for investors' interest it is worth to note that in this year's IPO of the Lithuanian company Linas Agro - active in agricultural production, processing and the related marketing chain - 1/3 of the retail investors were from Estonia.

- As for the availability of funds it is furthermore worth to note that private persons' cash accounts in Estonian banks amount to ca 60 bn EEK, the volume of Estonian pension funds is ca 15 bn EEK and the volume of Estonian investment funds is ca 5 bn EEK.

- Another myth is that public funding through the securities market is highly expensive. As for this issue a lot depends on volume, structure and geographical dimension of the transaction. Usually the all-inclusive one-off costs for conducting due diligence, preparing documentation, arranging offering and listing shares, sum up to the range of 4 to 8% of the offering volume. Costs of loan financing tend to be comparable, but re-occur annually, causing repeated negative cash flow while the cost for an IPO is a one time cost.

- Furthermore listed companies often enjoy lower costs of loan financing. In a study among Estonian listed companies, 67% of the respondents confirmed that due to more transparent and organized accounting, their loan servicing costs had decreased.

- There is also the myth of possible loss of control over the company once it gets listed. 86% of our issuers disagree with this, said Andrus Alber.

- There are some crucial questions that should be answered by owners and management before taking a decision on an IPO; Does the company needs the financing to facilitate faster development or realize an idea? Which financing source would support the company's long-term goals in the best way? Is the company ready to become public? Why should an investor want to invest into the company? First issuers will get the sharpest attention... Is the company, its owners and management ready for this?

- It was in 1996 that trading started on TSE - the Tallinn Stock Exchange, told Andrus Alber. In 2001 HEX – the Helsinki Stock Exchange, became a majority owner of TSE and a year later also majority owner of the Riga Stock Exchange. During 2003-2004 HEX and the Stockholm Stock Exchange merged, resulting in the OMX Group, with the parent company listed in Stockholm and Helsinki. In 2005 Vilnius Stock Exchange joined the group and from 2008 we belong to the NASDAQ OMX Group Inc.

- Last year's trading activity on the NASDAQ OMX Tallinn Stock Exchange included 84.757 trades at a total value of 266,6 mln EUR, concluded Andrus Alber.

Karl Pedak,
Sales Manager at 3Step IT and one of the attendees at the SCCE Seminar
- It was three interesting presentations from three different angles that we could take part of at this SCCE Business Breakfast Seminar, says Karl Pedak, Sales Manager at 3Step IT and one of the attendees at the morning seminar.

- I got a good overview on Estonia's FDI-situation compared to other EU countries and whether the Baltic's should be looked upon as a common region or if the Estonian economical climate is more similar to the Nordic countries.

- The Ministry of Economic and Communication Affairs has worked out more support packages for investors than ever before. And, what are the factual possibilities for a company who would like to expand their share capital via the mythical world of the stock exchange.

- Our company, 3Step IT, entered the Estonian market in 2001. It went smoothly and we used the knowledge of our local partners instead of consultancy services or support from the State. Our mother company engaged additional investor capital making it possible for us to expand our activities here fast and powerfully. You can say that our company had a role as both an investor as well as an investee.

- As we entered the Latvian and Lithuanian markets in 2005, we found out that the Estonian market was more mature compared with our two neighboring countries. In Lithuania for example, we had to fight our way up to high levels of the bureaucracy to make things happen.

- Looking back now, I could say that our expansion most probably had been faster and stronger if we had used experts knowing the local market and eventual State support programs.

- What could trig investors to Estonia in the future? Our company finds the Estonian business climate fairly liberal, open and reliable. Based on our experiences, we can say that what works in the Nordic countries also generally works in Estonia as well – but, might absolutely not work in Latvia and Lithuania. Estonia has several strengths as mentioned at the seminar; a business culture similar to the Nordic countries, well developed e-services, low corruption level, a good geographical location, many support programs and a skilled labor force available again, concludes Karl Pedak his comments from the SCCE Business Breakfast Seminar.

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