EUROPEAN COMMISSION Brussels, 5.10.2021 SWD(2021) 285 final COMMISSION STAFF WORKING DOCUMENT Analysis of the recovery and resilience plan of Estonia Accompanying the document Proposal for a COUNCIL IMPLEMENTING DECISION on the approval of the assessment of the recovery and resilience plan for Estonia {COM(2021) 625 final}



Table of contents 1. Executive summary 2. Recovery and resilience challenges: scene-setter 2.1. Macroeconomic outlook and developments since the 2020 country report 2.2. Challenges related to sustainable growth, cohesion, resilience and policies for the next generation 2.3. Challenges related to the green and digital transition 2.3.1 Green dimension 2.3.2 Digital dimension 3. Objectives, structure and governance of the plan 3.1. Overall strategy of the plan 3.2. Implementation aspects of the plan 4. Summary of the assessment of the plan 4.1. Comprehensive and adequately balanced response to the economic and social situation 4.2. Link with country-specific recommendations and the European Semester 4.3. Growth potential, job creation, economic, institutional, and social resilience, European Pillar of Social Rights, mitigating the impact of the crisis, and social territorial cohesion and convergence 4.4. The principle of ‘do no significant harm’ 4.5. Green transition 4.6. Digital transition 4.7. Lasting impact of the plan

4.8. Milestones, targets, monitoring and implementation 4.9. Costing 4.10. Controls and audit 4.11. Coherence 5. Annex: Climate and Digital contribution of the measures of the Estonian Recovery and Resilience Plan



1.Executive summary Estonia’s economy has withstood the COVID-19 crisis relatively well and is expected to rebound strongly. Real GDP contracted by 2.9% in 2020, significantly less than the EU average (6.0%). According to the Commission 2021 summer forecast, economic growth is expected to rebound to 4.9% in 2021 and 3.8% in 2022, driven by dynamic developments in private consumption and investments. Unemployment increased sizeably from 4.4% of the labour force in 2019 to a projected 7.9% in 2021, due in particular to restrictions related to the COVID-19 pandemic, but is expected to decrease following the economic recovery. Government support to households and businesses was prompt to counteract the impact of the pandemic. In April 2020, Estonia adopted a fiscal policy package of over 2.5% of GDP. A further 8.7% of GDP was allocated to liquidity schemes, but the uptake of these schemes turned out to be low. The budget deficit reached 4.9% of GDP in 2020 and Estonia plans to decrease it gradually to below 3% of GDP by 2024. Estonia’s public debt has increased in the COVID-19 crisis, but remains among the lowest in the Union and on a sustainable path. The Estonian recovery and resilience plan (RRP) amounts to an estimated EUR 982 million. This is to be financed in large part through non-repayable financial support from the Recovery and Resilience Facility (RRF), which allocates a maximum financial contribution of EUR 969 million to Estonia. The country has not requested RRF loans. The plan is well-aligned with the overarching national strategy “Estonia 2035” and other sectoral strategic documents. A key focus of the plan is on the green and digital transitions, with measures to improve energy efficiency and develop renewable energy; increase the sustainability of transport and mobility; support companies in the twin transition, in particular start-ups and small and medium-sized enterprises; further digitalise public services; and increase the labour market relevance of the education and training system, notably as regards green and digital skills. The RRP contains measures to improve the accessibility and resilience of the health system and envisages some improvements to the social safety net and access to social services. Equal opportunities and social and territorial cohesion are important cross-cutting themes in the plan. The RRP includes adequate measures to help address the key challenges Estonia is facing. The challenges identified in the most recent country-specific recommendations pertain to the following broad policy areas: the green transition and the digital transformation, the health system and the social safety net, education and training, and supporting innovation and hence the productivity of the economy and the competitiveness of Estonian companies. Estonia’s RRP includes a set of mutually reinforcing reforms and investments that are expected to contribute to effectively addressing the identified challenges to varying degrees. The plan is consistent with the challenges and priorities identified in the most recent euro area recommendation. The six pillars as set out in the RRF Regulation are expected to be addressed through the six components of the plan, with each of the components addressing one or more pillars. The measures supporting climate and digital objectives meet the minimum thresholds, accounting for 41.5% and 21.5% of the plan’s total allocation respectively. The remaining challenges are addressed with a number of reforms and investments, thus complying with the objectives of the RRF. The measures envisaged in the Estonian RRP are expected to have a sizeable impact on growth potential, job creation and economic, social and institutional resilience. Measures to promote a green and digital business sector are expected to have a positive impact on growth potential and job creation. Through the development of green and digital skills and support to companies and sectors to adapt to and drive the digital transition, as well as green technology development programmes, the plan is expected to promote the economic growth potential of Estonia. Measures aimed at supporting youth employment and the uptake of skills should contribute to job creation, while the further digitalisation of the public administration and the strengthening of the framework to fight money laundering should contribute to improved institutional resilience. Furthermore, each of the components in the plan is expected to contribute to social and/or territorial cohesion, thereby contributing to social resilience. The RRP proposes reforms in health care, in the social policy area and for the green and digital transitions, which are expected to contribute to Estonia’s economic and social cohesion. Social cohesion will be supported by measures relating to health care, supporting youth employment, promoting digital and green skills, and to some extent those related to reducing the gender pay gap and improving the social safety net, including access to social services. Some of these reforms will be accompanied by investments which are expected to contribute to improving the hospital infrastructure, employability of young people and skills development. The measures supporting climate objectives account for 41.5% of the plan’s total allocation calculated in accordance with the methodology of Annex VI to Regulation (EU) 2021/241. The contribution of Estonia’s plan to the green transition is built on three pillars: green transition in enterprises, sustainable energy and energy efficiency, and sustainable transport. For decarbonising the economy, the plan incentivises the uptake of renewable energy, development of green technologies including green hydrogen, modernisation of business models, resource efficiency and improved skills related to the green transition. Increased sustainability in transport should be achieved through creating new connections between various modes of sustainable transport and mobility with a focus on rail and active modes of transport such as cycling. The Estonian plan takes into account circular economy considerations. The plan contains no measures having biodiversity as their objective, but by contributing to climate change mitigation, which is one of the major threats to biodiversity, the plan may also be beneficial to the preservation of biodiversity. The plan supports Estonia’s decarbonisation and energy transition objectives, as set out in the National Energy and Climate Plan and is expected to contribute to reaching Estonia’s 2030 and 2050 climate and energy targets. The measures supporting digital objectives account for 21.5% of the plan’s total allocation calculated in accordance with the methodology of Annex VII to Regulation (EU) 2021/241. The contribution of Estonia’s recovery and resilience plan to the digital transition focuses mainly on two priorities: the digital transformation of enterprises and the further modernisation of digital public services. The implementation of the plan should help companies from all sectors, in particular small and medium-sized enterprises, to seize the opportunities offered by digital technologies. Building on Estonia’s position as a frontrunner in the digitalisation of public services and drawing on the latest technologies, a series of measures of the plan are expected to make the delivery of public services even more efficient, secure and transparent, boost the competitiveness and presence of Estonian enterprises in foreign markets and help to attract foreign investors. Other aspects of the digital transition are also addressed to varying extents in the plan. This notably includes the support to the rollout of very high-capacity networks in market failure areas to reduce the digital divide. Estonia’s RRP complies with the ‘do no significant harm’ principle. The assessment follows the methodology set out in the Commission’s Technical Guidance on the application of ‘do no significant harm’ under the RRF Regulation (2021/C58/01) and the six corresponding environmental objectives. Where necessary, compliance with the ‘do no significant harm’ principle is ensured by milestones. The measures envisaged in the RRP are expected to have a lasting impact on the economy and institutions. In particular, the envisaged measures that aim at fostering the twin transitions are expected to have a positive impact on the resilience, growth potential and economic transformation, through improved efficiency of public administration, job creation, innovation and productivity growth. This notably includes investments aiming at deploying digital solutions in the construction and road freight transport sectors, investment in very high-capacity broadband networks, as well as reforms fostering digital public services. Measures promoting energy efficiency and fostering the development and uptake of innovative green technologies, as well as those reducing regulatory barriers for investment in renewables are expected to unlock private investments. In addition, measures related to skills are expected to bring structural change in the education and training policy, and support the twin transition. Measures to provide health and social care in an integrated way can be expected to improve the accessibility and quality of social services. However, there is no specific commitment in the RRP to implement the Action Plan on integrated care. The arrangements proposed in the RRP, including the envisaged timetable, milestones and targets, and the related indicators are expected to ensure an effective monitoring and implementation of the plan. The State Shared Service Center and the Ministry of Finance are tasked with implementing and monitoring the plan overall, whereas line ministries and other bodies are responsible for the implementation of individual measures. The milestones and targets are realistic and relevant, and the distribution of milestones and targets across time is rather even, albeit with the biggest investment backloaded towards 2026. The control system and arrangements proposed in the RRP are based on the national processes and structures used for EU structural funds. The plan identifies actors and their roles and responsibilities for the performance of the internal control tasks. The control system and other relevant arrangements, including for the collection and making available of data on final recipients, are adequate. A dedicated IT tool is in place to meet the specific management and reporting requirements described in the plan. It should ensure the necessary audit trail, as well as the reporting on milestones and targets.

The justification Estonia has provided on the amount of the estimated total costs of the RRP is broadly reasonable and plausible. Estonia has provided individual cost estimates for all investments included in the recovery and resilience plan. The cost estimates have been validated by an internal government body (Grant Management Unit of the Support Development Department of the State Shared Service Center). A large part of the measures concern demand-driven schemes for which Estonia included milestones and targets that would only be met if the full amount is spent. The assessment of the cost estimates and inherent supporting documents show that costs are justified and reasonable to a medium extent. The plan contains some recurrent costs, such as personnel costs and maintenance costs, which are essential for the success of the reform or investment and which do not impose a significant burden on the national budget (most are temporary and the non-temporary ones lead to a limited cost for the future), making them all duly justified and acceptable. Some of the cost estimates are rather high compared to past experience or comparable projects. Therefore, they are deemed as establishing the plausibility of the cost estimates to a medium extent. Finally, the estimated total cost of the recovery and resilience plan is in line with the principle of cost-efficiency and is commensurate to the expected national economic and social impact. Estonia has put in place adequate and sufficient arrangements to avoid double EU funding. The RRP is coherent to a medium extent. The RRP displays coherence within each component and shows thematic interlinkages and synergies between the different components, in particular those related to digital transformation and green transition. However, in some areas, coherence is not fully achieved. While the RRP includes substantial investments to foster the green and digital transition and support economic growth, more reforms to strengthen the social safety net, notably broadening the coverage of unemployment insurance benefits, could contribute cushion possible adverse effects on certain groups. The significant investments in health infrastructure could have been accompanied by measures leading to a greater increase in the health workforce to alleviate shortages. Long-term care is envisaged to be addressed with several, but the coherence and interlinkage between these measures could have been better ensured with broader reforms to improve the access to and quality of long-term care. The measures included in the RRP to address the decarbonisation of the economy are mainly related to investments, while concrete actions to phase out oil shale are expected to be set out in the National Development Plan of the Energy Sector only at the end of 2025 and broader reforms, such green taxation, are not envisaged. Overall, the RRP is stronger on investment than on reforms. Table 1: Summary of the assessment of the Plan under the RRF criteria (1)

Balanced Response (2)

CSRs (3)

Growth, jobs… (4)

DNSH (5)

Green target (6)

Digital target (7)

Lasting impact (8)

M&T (9)

Costing (10)

Control Systems (11)

Coherence A A A A A A A A B A B 2.Recovery and resilience challenges: scene-setter 2.1.Macroeconomic outlook and developments since the 2020 country report The Estonian economy contracted by 2.9% in 2020, in the wake of the COVID-19 crisis. The macroeconomic scenario contained in Estonia’s RRP expects a rebound of economic growth in 2021 to 2.5%. According to the plan, growth will remain strong in 2022, at 4.8%, before falling back to a more moderate 3.2% in 2023 and 3.1% in 2024. Initially, according to the scenario, real GDP growth is driven by a recovery in private consumption. In the outer years, also investment is projected to pick up. According to the plan, inflation is set to remain contained and reach around 2% by 2025. The RRP macroeconomic scenario expects unemployment to peak at 8.0% of the labour force in 2021 before falling to 6.2% in 2024. Before the onset of the COVID crisis, the Estonian labour market was tight, with very high employment and labour force participation rates and a low unemployment rate (4.4% in 2019). In 2020, unemployment increased to 6.8% of the labour force mainly due to restrictions related to Covid-19 pandemic. In sectoral terms, unemployment rose the most in the tourism and -related sectors of hospitality services (restaurants and hotels), which have relatively low wages, but other sectors also saw a decline in employment. The negative impact on employment was softened by a broad wage subsidy scheme over March-June 2020, and a more targeted scheme over December 2020-January 2021. The rise in unemployment could widen inequalities because it may take longer for the low-skilled to return to the labour market. Women and youth are disproportionally affected as they tend to be over-represented in labour-intensive accommodation and services sectors. Workforce shortage persists, particular in industrial and IT sectors, but also agriculture, social, education and health sectors are still struggling to find the necessary workforce. Estonia continues to have one of the highest gender pay gaps in the EU (21.7% in 2019 vs EU27 average of 14.1%) and gender inequality is expected to have widened due to the lockdown and economic downturn. Policy analysis shows that the pandemic has led to significant difficulties for women in reconciling work and family life, which has prompted some women to reduce or abandon paid work. Estonia has pronounced regional disparities that result in a wide gap in social and economic performance between the capital region and the rest of the country. Rapid depopulation, ageing and social exclusion affect areas outside Tallinn and Tartu, putting significant pressure on the education, health and social systems. The budget deficit reached 4.9% of GDP in 2020 and the RRP expects it to decrease gradually and no longer exceed 3% of GDP by 2024. In April 2020, Estonia adopted a relatively sizeable fiscal policy package of over 2.5% of GDP. A further 8.7% of GDP was allocated to liquidity schemes, which do not have a direct budgetary impact. However, only a small part of the liquidity schemes was actually used. After an increase in the debt-to-GDP ratio to 18.2% in 2020 due to the combined effect of shrinking GDP and fiscal stimulus, debt is expected to grow to 28.0% in 2024. DG ECFIN’s Debt Sustainability Monitor of early 2021 projects debt to reach 32.4% of GDP in 2030. Despite these increases, Estonia’s debt continues to be on a sustainable path. According to the economic forecast underlying the Stability Programme, which Estonia also used for its RRP, the country’s economic recovery prospects are relatively favourable. However, the macroeconomic and fiscal outlook continue to be affected by high uncertainty related to the COVID-19 pandemic and its economic consequences. A number of risks for the macroeconomic scenario have been specified. The downside risks include new virus outbreaks and a slower-than-expected pace of vaccination in Europe. The negative risk scenario developed in the Stability Programme takes into account the postponement of the economic recovery by two quarters at the end of 2021. Under this scenario, exports of travel services have been hampered throughout the year, companies delay investment decisions, the number of bankruptcies and unemployment will increase. In addition, due to a period of uncertainty and persistence of constraints, service consumption is constrained and savings continue to grow. According to this risk scenario, the Estonian economy would grow only by 1.5% in 2021 (versus 2.5 % in the base case). Given the outcome for the first half of 2021, the downside risk scenarios are rather unlikely to materialise. Table 2. Comparison of macroeconomic developments and forecast 2019 2020 2021 2022 2023 2024 COM COM RRP COM RRP COM RRP RRP RRP Real GDP (% change) 5.0 -2.9 -2.9 4.9 2.5 3.8 4.8 3.2 3.1 Employment (% change) 1.3 -2.7 -2.2 -0.8 -0.9 1.7 0.8 0.6 0.4 Unemployment rate (%) 4.4 6.8 6.8 7.9 8.0 6.3 7.3 6.6 6.2 HICP inflation (% change) 2.3 -0.6 -0.6 2.2 2.0 2.4 2.1 2.0 1.9 General government balance (% of GDP) 0.1 -4.9 -4.9 -5.6 -6.0 -3.3 -3.8 -3.2 -2.2 Gross debt ratio (% of GDP) 8.4 18.2 18.2 21.3 21.4 24.0 24.6 27.4 28.0 Sources: Commission Summer Forecast 2021 for real GDP and HICP inflation and Commission Spring Forecast 2021 for other variables (COM). Recovery and resilience plan (RRP). Compared with the latest Commission forecast, the macroeconomic scenario underpinning the RRP is more pessimistic. The Commission 2021 summer forecast expects real GDP in Estonia to grow at a pace of 4.9% and 3.8% in 2021 and 2022, respectively. Similarly to the Estonian authorities, the Commission considers recovering consumption and exports as the main growth engine behind the recovery in 2021. Private consumption is forecast to remain a main driver of growth in 2022, due to expected spending of accumulated household savings and recent changes to the second pillar of the pension system, which allows savers to withdraw their pension assets at any point in time. Favourable prospects for domestic and external demand, as well as the implementation of the recovery and resilience plan are also set to strengthen investment. Labour market projections and inflation are similar, although the Commission forecast foresees a somewhat higher inflation rate over the horizon covered, and a lower unemployment rate for 2022 (Commission 2021 spring forecast). For the general government deficit and debt, the Commission’s 2021 spring forecast projects a similar development to the RRP until 2022. Years beyond 2022 are currently not covered by the Commission forecast. The macroeconomic scenario of the RRP is plausible. The economic scenario is identical to the one contained in the 2021 Stability Programme and has been developed by the Ministry of Finance. It is similar to projections done by several other independent government agencies at the time and in line with the Commission 2021 spring forecast (published in May 2021), which showed real GDP growth of 2.8% in 2021 and 5.0% in 2022. Based on exceptionally good outturn in the first half of 2021, the Ministry of Finance forecast for 2021 and 2022 was revised upwards in September 2021. 2.2.Challenges related to sustainable growth, cohesion, resilience and policies for the next generation Estonia has improved its productivity in recent years, but the gap with the EU average remains. As in the case of other EU13 countries, Estonia enjoys fast productivity growth rates which however are not enough in the convergence process with the EU average overall productivity rate (Adarov et al, 2020). The main source of productivity growth in Estonia is capital deepening. Incomes have converged faster to the EU average than productivity. In 2019, the GDP per capita was 67% of the EU average, while the gap in labour productivity per hour worked was almost 30%. This reflects the high activity and employment rates in Estonia. Still, since the financial crisis, total factor productivity growth has moderated, and the existing gap with the EU average in terms of levels suggests that there is potential for more efficient use of resources and for further technological upgrade. While Estonia has invested in research and innovation, and especially in the digitalisation of the public sector, those investments have not, or not yet, fully delivered expected economy-wide productivity gains. Estonia’s overall innovation performance improved in 2019 and from 2021 the state plans to invest at least 1% of GDP per year in research and innovation. To date, the level of research-based innovation in the business sector has remained relatively low. Stronger productivity growth is hampered by the limited cooperation between research institutions and businesses, which has been a long-standing issue that may have impeded faster catch-up in productivity. The transfer of knowledge from universities to companies and the commercialisation of research results have been relatively low. Creating a robust technology transfer system would be essential to support industrial innovation and the green and digital transitions. Digitalisation has not yet transformed some important sectors, most notably manufacturing. The long-term challenges of the adequacy of the social safety net have been aggravated by the recent rise in unemployment. In 2019, 23.7% of population remained at risk of poverty or social exclusion (21.1% in EU27 in 2019). The impact of social transfers on poverty reduction (other than pensions) in Estonia was 28.1%, being slightly below the EU average (32.3% in the EU27) in 2019. Apart from low unemployment benefits, there are gaps in the coverage of the unemployment benefit system for those in non-standard forms of work and those with short work spells. The increase in unemployment (6.9% in Q2 2021 compared to 4.4% in Q2 2019), combined with the lack of adequate coverage of the benefits, have shed further light on the need to raise the adequacy of the social safety net. Developing an integrated care system for enhanced service delivery would contribute to improving the effectiveness of the social safety net. The organisation and financing of social services, including of long-term care, is fragmented between the social and health care sector and between the state and the local government. The crisis has aggravated the difficulties in providing affordable and available social services, especially for the elderly, people with disabilities and for low-income earners. The person’s own contribution for financing long-term care services in institutions has steadily increased up to 78.3% over the years. The shortage of home care services and excessive financial burden in institutional care raises the poverty risk of family members.

Regional disparities have been significant due to the widening gap in social and economic performance between the capital region and the rest of the country. Regional disparities in Estonia have been high as the regions of Harju and Tartu generated more than 74.2% of the country’s GDP in 2017 and also had the highest level of income, in contrast to the regions of North-East and South-East Estonia. Continued depopulation and ageing have affected the areas outside main cities, in particular as regards education, workforce shortages, health and social systems and services provided by the local governments. Connectivity (transport and digital) is unevenly provided in the rural and urban areas. These trends have had a negative impact on investment and job creation in the more remote territories. Estonia has not made prior plans to address those regional disparities. A high level of unmet needs for medical care, weak health outcomes and health workforce shortages have been long-standing challenges in Estonia. The number of healthy life years has been among the lowest in the EU, with large disparities by gender, region, education and income, which has negatively impacted the size and quality of the labour force. Healthcare has been relatively underfinanced in Estonia compared to the EU on average (general government expenditure by function on healthcare was 5.3% of GDP compared to 7.0% of EU average) and this may have been the main reason for the reportedly long waiting times and shortages of health professionals (especially nurses with 6.3 per 1 000 inhabitants compared to 8.2 in the EU). The first wave of COVID-19 exposed structural weaknesses in the Estonian health system, and some investments have been made to improve resilience, in particular as regards provision of more financial, material and human resources to deliver the expected regular health services alongside the care for patients with COVID-19 or similar infectious diseases. Nevertheless, reforms and further investments would be needed to boost the resilience, accessibility, efficiency and quality of the health system. In particular, reinforcement of primary care, disease prevention, integration of health and social care, strengthening of the health ICT governance framework, as well as addressing healthcare workforce shortages and to improve workforce skills and geographical availability of the service are essential. Bringing knowledge and skills levels in line with the needs of the labour market and structural changes in the economy has been a long-term challenge. While the education and training system performs well, it has faced structural challenges as regards early school leaving, insufficient labour market relevance of higher education and of vocational education and training, and the high number of ageing teachers. The specialised education of bachelors and master degrees in fields such as artificial intelligence, high performance computing, cybersecurity or data science is also rather low compared to other EU Member States (Righi et al, 2020). Furthermore, rapid reskilling has been necessary for employees of sectors which have suffered the most, and where the tasks and nature of work have changed. Significant shortages of highly skilled labour are projected in Estonia with an annual linear growth rate of -1.9% of new tertiary graduates during the period 2013-2016, and with significant skill shortages in the ICT field (Biagi et al, 2020). Re-designing of the skills forecasting system by transferring OSKA surveys to existing registry data relevant for the education and training system would help better anticipate skill needs. High-technological manufacturing and other knowledge-intense sectors need highly skilled information and communication technology specialists. igital upskilling of employees should go hand in hand with measures supporting the digital innovation in companies. To support the green transition, it will also be important to introduce this aspect in education programmes. The Estonian banking sector is sound overall, but money laundering risks remain. Estonian banks have been profitable thanks to high efficiency, good quality assets and low-cost funding. Banks operating in Estonia have become less dependent on their parent banks and now largely fund themselves from domestic deposits and the wholesale funding market. At the same time, Estonia has updated its assessment of money laundering and terrorist financing risk, following large-scale money laundering cases. While supervisory actions have been taken against non-compliant banks and payment institutions, there is room to increase the intensity of on-site supervision and to provide the financial supervisor with adequate sanctioning powers. This also includes the capacity for the Financial Intelligence Unit to systematically access data for financial transactions. Proactive cooperation between the Financial Intelligence Unit and the law enforcement agencies could be improved. 2.3.Challenges related to the green and digital transition 2.3.1 Green dimension The recovery and resilience plan should contribute to the green transition and at least 37% of the financial allocation needs to contribute to climate objectives. The measures in the plan shall contribute to achieving the 2050 climate neutrality objective, and the 2030 energy and climate targets, taking into account Member States’ national energy and climate plans. They should also contribute to meeting environmental targets for waste, pollution control, sustainable mobility, biodiversity protection and restoration, marine and water resources, and support the transition to sustainable food systems as well as to a circular economy as appropriate, while ensuring that nobody is left behind. Given Estonia’s high energy and carbon intensity, fostering the green transition to avoid carbon lock-in is key to ensuring competitiveness of the Estonian economy. Estonia is one of the most carbon and energy intensive economies in the EU due to its dependency on oil shale and the high energy intensity of its transport and building sectors. Estonia needs a clear pathway for phasing out oil shale in electricity production and replacing it with low- and zero-carbon electricity sources such as renewables to achieve its greenhouse gas mitigation objectives in the near and longer term. This necessitates an increase in financing for renewable energy projects, for storage, and for corresponding investments into the electricity grid. At the same time, it is crucial that this phasing-out follows the model of a just transition, in particular for the poorer and heavily oil-shale industry dependent Ida-Virumaa region in the East of the country. The share of renewable energy in final energy consumption increased from 17% in 2005 to 32% in 2019. Estonia aims to contribute to the EU’s 2030 target for renewable energy by reaching a share of 42% of renewables in gross final consumption of energy. According to the International Energy Agency, oil shale accounted for nearly 80% of Estonia’s total electricity in 2018, but is gradually being replaced by other sources. This development has been driven by the Union’s Emission Trading System and national measures to incentivise the uptake of renewable energy. These improvements have laid the groundwork for an accelerated expansion of wind energy, which is the second largest source of renewables electricity generation after solid biofuels. Estonia considers wind energy the renewable energy source with the biggest potential, thus the development of offshore wind parks benefit from a supportive legislative framework. However, challenges remain related to planning and permitting for new wind farms both onshore and offshore. Additional challenges concern grid infrastructure that would benefit from additional investments to allow for a larger share of intermittent renewables (transport of electricity, storage, etc.). Estonia is also lagging behind the EU’s 10% target of renewables in transport, having reached 5% in 2019. Estonia’s contributions to the 2030 EU target for energy efficiency are of modest ambition for primary energy consumption, amounting to 5.4 Mtoe, and of very low ambition for final energy consumption, amounting to 2.9 Mtoe. Estonia’s Long Term Renovation Strategy estimates that 141 000 buildings, representing 54 million m², need renovation within 30 years and aims at improving the living and working conditions of 80 % of the Estonian population. It assesses that the need for annual reconstruction funding will also rise almost 5 times, from less than EUR 200 million per year to EUR 900 million per year. Estonia has set an objective to renovate 3% per year of the floor area of public buildings, altogether 170 000 m2 by 2030 and to increase the energy efficiency of residential buildings and offices. The table below gives an overview of Estonia’s objectives, targets, and contributions under Regulation (EU) 2018/1999 of the European Parliament and of the Council of 11 December 2018 on the Governance of the Energy Union and Climate Action. Table 3. Estonia’s national targets and contributions regarding energy and climate National targets and contributions Latest available data 2020 2030 Assessment of 2030 ambition level Binding target for greenhouse gas emissions compared to 2005 under the Effort Sharing Regulation (%) +17 +11 -13 As in ESR National target/contribution for renewable energy: Share of energy from renewable sources in gross final consumption of energy (%) 32 25 42 Sufficiently ambitious (37 % is the result of RES formula) National contribution for energy efficiency: Primary energy consumption (Mtoe) 4.7 6.5 5.4 Modest Final energy consumption (Mtoe) 2.9 2.8 2.9 Very low Level of electricity interconnectivity (%) 63 >60 >60 N/A Source: Assessment of the final national energy and climate plan of Estonia, SWD (2020) 905 final. Estonia’s transport infrastructure and policy has a number of shortcomings in terms of connectivity and sustainability. Rail and intermodal transport remains under-developed and under-electrified. Greenhouse gas emissions from road transport have increased in recent years. Estonia has one of the most carbon-intense passenger car fleets in the EU. To support the green transition, the introduction of an appropriate vehicle tax based on a vehicle’s CO2 emissions and levied on passenger cars and light commercial vehicles, combined with other measures, should be envisaged. Over time, such measures could contribute to reduction in CO2 emissions in Estonia by creating incentives for the purchase of less CO2 intensive vehicles. Development of rail transport, both as regards investments into the network, including Rail Baltica, and measures motivating increased use of rail passenger transport and inter-modality would contribute to the greening of Estonia’s transport system. Digitalisation of transport, e.g., common planning and ticketing systems for public transport, could further incentivise and increase the use of public transport. Given that Estonia is sparsely populated, sustainable road transport also needs to be developed. Completing key cross-border projects, such as Rail Baltica, in cooperation with the other Baltic countries, and synchronisation of the electricity grid with the continental European network by 2025 remain key challenges. There is also potential for cross-border development of offshore wind and a project between Estonia and Latvia has been initiated. Resource efficiency remains a challenge as high levels of domestic material consumption and waste generation drag down resource productivity and hamper competitiveness. The circular material usage rate (8.7%) is below the EU27 average (11.2%). Estonia would greatly benefit from a comprehensive national strategy and an action plan on circular economy targeting the entire life cycle of products. Since oil shale is Estonia’s largest source of hazardous and non-hazardous industrial waste and key to improve its energy and resource efficiency as well as to reach its climate goals, the transition away from oil shale mining and use is by far the most important in terms of the green transition. This would require termination of financing of new oil shale infrastructure, including oil shale refineries. The government has, in the coalition agreement, agreed to phase out oil shale for power generation by 2035 and shale oil by 2040. For a long-term firm commitment and predictability of the investment environment, these targets should be laid down in strategic documents and accompanied by concrete steps towards the targets. In terms of biodiversity, Estonia presents a mixed picture. On the one hand, Estonia has extensive protected areas and a larger share of species and habitats in good status than in the rest of the EU; forests cover 58.4% of its territory and Estonia’s uptake of organic farming of 21% in 2018 is not far from the EU 2030 target of 25%. On the other hand, some habitats and species are under pressure, notably grassland and forest areas. Estonia lacks a post-2020 Forest Development plan and the rate of wood harvesting has increased significantly in the recent years. The Estonian land use sector, which includes forestry, is switching from being a carbon sink to an emitter of carbon. The main contributor (94.5% in 2018) to energy production from biomass is the forestry sector, raising concerns about the unsustainable use of Estonian forests. Estonia is one of the few EU Member States in which peatlands and peat-topped soils are strongly present – covering 20.2% of total national territory. Such areas can be large sinks for or sources of greenhouse gases, depending on their state. Therefore, it is important to ensure adequate protection of Estonian peatlands including rewetting when appropriate. Not all water bodies have yet achieved a good status and nitrate concentrations are increasing in some of them, with agriculture identified as a significant contributing factor. The pressure on water availability in Estonia is very high due to demand from the oil shale mining sector. The pressures on water quality seem to be most acute in coastal waters: only 13% of these were reported as having good ecological status, compared with 60% of rivers and 67% of lakes. Moreover, the most recent figures on eutrophication in coastal waters show a substantial rise which reflects a serious and more general problem of eutrophication in the Baltic Sea as a whole. 2.3.2 Digital dimension

The recovery and resilience plan should contribute to the digital transition and at least 20% of the financial allocation needs to contribute to digital objectives. The measures in the plan should, inter alia, contribute to the digital transformation of the economic and social sectors. The objective of the measures in the plan should be to improve not only the competitiveness, but also the resilience, agility and security of companies and public actors, all while ensuring inclusiveness. Estonia scored the 7th highest ratings in DESI 2020 and is among the European leaders in digitalisation. The country is notably a front-runner in digital public services and performs very well as regards digital skills. However, Estonia could improve on connectivity and further support the integration of digital technologies by businesses. Estonia ranks 14th in the EU in connectivity in 2020. 71% of its households are covered by very-high-capacity networks against an EU average of 59%. The country also performs well in the take-up of mobile broadband, covering 75% of individuals against and EU average of 71%. Furthermore, Estonia scores overall well on fixed broadband take-up, reaching 83% of households, but less well on the take-up of high speed (at least 100 Mbps) fixed broadband, where, despite the very good availability of very-high-capacity networks in the country, it lies well below the EU average, with only 19% of households subscribing to such speeds. Fixed broadband prices in Estonia are higher than the EU average. The objectives of Estonia’s current national broadband plan, the 2020 Digital Agenda, are to provide all residents with internet access above 30 Mbps and to achieve at least 60% of household subscriptions with a speed of above 100 Mbps. Estonia’s new digital strategy for 2020+ has been in preparation since the end of 2019 and will align its connectivity targets to those of the Gigabit Society. Estonia continues to invest in the deployment of its broadband infrastructure and uses both public and private funds to do so. Estonia’s ambition on 5G connectivity is to cover major cities by 2023 and transport corridors by 2025. However, Estonia scores 0% on the DESI 5G readiness indicator and the award of 5G pioneer bands is still pending. The country’s ambitious 5G goals will depend on the timely award of the pioneer bands. Estonia ranks 3rd in the EU in 2020 on digital skills but skills shortages remain an obstacle to investment. 62% of the population have at least basic digital skills (and 37% above basic), both above the EU average (56% and 31% respectively). The percentage of ICT graduates (6.7%), ICT specialists (6%) and female ICT specialists (22% of the total ICT specialists) in Estonia are higher than the EU average. However, businesses have identified skills shortages as one of the main obstacles to investment (84% of firms) and the share of investment in human capital and skills is low. The Estonian education system generally performs well, but the reported skills shortages suggest the link with the labour market remains a challenge. Despite a high percentage of ICT specialists, businesses provide only limited skills training to meet the ICT needs in Estonia. Only 17% of Estonian enterprises provide ICT training to their staff (against 20% for the EU average). Further increasing the number of ICT specialists, maintaining a high number of ICT graduates and financing the upskilling of workers in the public and private sectors could help Estonia tap the full potential of the digital economy. Estonia ranks 14th in the EU in 2020 and scores slightly below the EU average on the integration of digital technology by businesses. In 2020, 74% of Estonian SMEs have at least a basic level of digital intensity (above the EU average of 60%). Estonia made some modest progress in a number of criteria, such as in use of social media by business (16% in 2019), share of SMEs selling online (16% in 2020) and share of businesses selling online across borders (9% in 2019). The share of high-growth firms planning to grow as a result of increased digitalisation is 11% (31% EU average), while the share of firms perceiving the need for advanced digital technologies or starting to plan their adoption is 26% (39% EU average) and the share of growing firms with a strategy or action plan to digitalise is 8%, far from the 22% EU average figure (Benedetti et al., 2021) . To boost the digital transformation of its economy, Estonia needs to continue its efforts to better integrate digital technologies, particularly in SMEs. This objective could be achieved through a cross-sectoral initiative, covering sectors that do not yet use digital technologies very intensely and going beyond high-growth industries. On digital public services, Estonia is a leader in the EU. It has well-developed e-government and e-health systems, with all central government services being accessible online. The country also has one of the highest shares (89%) of e-government users in Europe. Estonia’s X-road system, the backbone of its e-government, is a digital information infrastructure that securely connects over 900 organisations daily. It is important for Estonia to keep ensuring that the full range of online public services is user-friendly and cost effective. Promoting the opening and the use of information gateways, including the Estonian Open Data Portal, would help Estonia achieving those goals. Most R&D in Estonia is performed in the public sector. The main strategy document for Estonia’s R&D&I policy is Knowledge-based Estonia 2014–2020 — the third strategy on research and development and innovation. Priority setting in the strategy is based on a methodology of smart specialisation. Estonia aims to become an attractive place for R&D, to motivate more people to choose a career in research, to support R&D serving the interests of the Estonian society and economy, as well as to increase the knowledge-intensity of the Estonian economy in general. The key policy in R&D is focused on public sector contribution with public sector financing of R&D reaching the target of 1% of the GDP in the 2021 budget. Maximising the impact of the public investments in R&D will require boosting absorptive capacity of R&D results in businesses and improving linkages between public R&D sector, academic institutions and businesses, including by improving access to finance for companies. Estonia signed the Declaration on cooperation on Artificial Intelligence (AI) in 2018. Estonia’s national strategy on AI devotes significant attention to the uptake of AI solutions in the public sector, including via targeted training; technical and financial support for AI pilots in various agencies; creating reusable AI components for public sector AI applications, to accelerate their deployment; and developing guidelines for AI development, including for what concerns the responsible use of data. The national AI strategy set the goal of at least 50 live AI applications in Estonian public sector by the end of 2020 and there are currently over 80 different AI initiatives. Estonia could benefit from more sizeable investments in energy efficiency, sustainable energy production, grid connectivity, sustainable transport, the circular economy and other dimensions of the digital and green transformation. The reduction of the environmental footprint of the ICT sector itself also needs to be tackled. In September 2019, 33 Estonian technology companies signed a Green Pledge promising to take their operations to a completely environmentally sustainable basis by 2030. While the Estonian technology sector is prioritizing the environment as an integral part of business, more specific targets and action plans should be encouraged. Figure 1. DESI 2020 – Relative performance of Estonia by dimension Note: EU aggregate corresponds to EU28, based on 2020 DESI report. Box 1: Progress towards the Sustainable Development Goals

Overview table of the overlap between the Sustainable Development Goals and the four dimensions underpinning the recovery and resilience plans. This section outlines Estonia’s performance with respect to SDGs with particular relevance for the four dimensions underpinning the recovery and resilience plans (green transition, fairness, digital transition and productivity, and macroeconomic stability), indicating possible areas where investments and reforms in line with the objectives of the Facility could further accelerate the progress on the SDGs. Green Transition Estonia performs relatively well overall in achieving the SDGs. Over the past 5 years, Estonia has made progress in almost all areas, with the notable exception of environmental goals, in particular SDG 12 responsible consumption and production and SDG 13 climate action, where a number of indicators show deteriorating trends. The important issue to watch concerns SDG 13 “Climate Action”, as Estonia is still dependent on oil shale for power generation and continues to have the highest C02 emissions in the EU from new passenger cars. A promising signal is the increase in renewable capacity which will need to be accelerated for Estonia to complete its phasing out of oil shale for electricity production that it has announced for 2035 (2040 for shale oil).

Fairness

Estonia has performed particularly well with respect to SDG 4 “Quality of education”, showing progress at all levels of education except the most recent trend for early leavers. While in social areas Estonia has performed relatively well, including in SDG 1 “No poverty”, its performance has been persistently weak on SDG 3 ‘good health and wellbeing’, namely in the areas of access to healthcare and the share of people with good health. The gender pay gap in Estonia remains one of the highest in the EU. The gap was considerably higher than the EU average in 2019, 21.7% versus 14.1%, indicating that Estonia requires still some efforts to achieve SDG 5 ‘gender equality’. Digital transition and productivity Estonia features a persistently low resource productivity. Performance in innovation under SDG 9 ‘Industry, innovation and infrastructure’ is improving, in particular what concerns employment in technology companies and R&D personnel. Macroeconomic stability Estonia’s performance on SDG 8 ‘decent work and economic growth’ has been good overall with lower-than-expected impact on GDP in crisis. Estonia has had a high share of investment relative to GDP and low unemployment. The latter increased significantly in the COVID-crisis to the EU average level. 3.Objectives, structure and governance of the plan 3.1.Overall strategy of the plan Estonia’s RRP is linked to the national long-term strategy Estonia 2035 and contributes to addressing the challenges identified in the context of the European Semester. Estonia 2035 is the umbrella strategy that provides a basis for reconciling the different national processes of planning and budgeting in relation to various funding sources, including the EU funds. The plan was prepared taking into account the whole set of actions and investments envisaged to achieve greater synergy between the different sources of funding and the respective strategies governing their use. The Estonia 2035 strategy identifies the key development challenges as follows: (a) Population, health and life expectancy; (b) Business environment and learning opportunities; (c) Biodiversity and (living) environment; (d) Governance. The RRP is designed to contribute to addressing those challenges and stresses the importance of improving cohesion and regional balance. The plan aims to help Estonia’s transition to a more resilient and sustainable economy, to contribute to the achievement of the UN Sustainable Development Goals, to support the green and digital transition and to increase growth potential and competitiveness by investing in innovation, skills and capital. The RRP is connected to Estonia’s National Reform Programme approved on 29 April 2021, which is presented as an Action Plan under the Estonia 2035 strategy, and is broadly consistent with other strategic planning documents, such as the SF21+ Operational Programme (in negotiation) and the Territorial Plan for Just Transition (in negotiation). Furthermore, measures included in the plan are connected to the National Energy and Climate Plan and other strategies, as well as with the joint EU-level priorities and Estonia’s international commitments. According to the plan, to achieve the objectives specified in the Estonia 2035 strategy and in the country-specific recommendations, different sources of funding will be used comprising both EU funds and national revenues. In this combination of funding, the intention is to design and implement policy interventions in a way that consolidates resources to optimise policy impact and promotes synergies while reducing red tape and operational risks. Investments and reforms in Estonia’s plan amount to EUR 982 million and are divided into six components: (1) Digital transition in enterprises (12% of the estimated cost of the plan), (2) Green transition in enterprises (23%), (3) Digital State (12%), (4) Energy and energy efficiency (9%), (5) Sustainable transport (10%), and (6) Health and social protection (34%). The components broadly correspond to the six pillars of the RRF. Across the components, the plan contains 41 measures in total, including 16 reforms and 25 investments. All the components contain both investments and reforms. Table 4. Components and associated costs Component Estimated costs (EUR million) I: Digital transformation of enterprises 116.2 II: Accelerating the green transition in enterprises 220.2 III: Digital State 121.7 IV: Energy and energy efficiency 92.1 V: Sustainable transport 96.1 VI: Health and social protection 336.3 Digital transformation of enterprises. This component (with an estimated cost of EUR 116.2 million) aims to foster the digital transformation of Estonian companies and their competitiveness, in particular, on export markets. The proposed measures will provide financial support to SMEs and microenterprises of all sectors, at different stages of their digital transformation, as well as specific contributions to the adoption and deployment of digital solutions in the construction and road freight transport sectors in particular. Moreover, the component is expected to increase digital skills, through awareness-raising of SME managers and support to the upskilling and retraining of specialists in information and communication technologies (ICT). Actions aimed at supporting the identification of export opportunities and the promotion of Estonian companies abroad will also be carried out in this component, in synergy with the activities of Enterprise Estonia. Green transition in enterprises. This component (with an estimated cost of EUR 220.2 million) aims at speeding up the green transition in the business sector in Estonia and to seize the business opportunities it represents. The proposed measures include support to the development of green technologies, increasing green R&D and innovation capabilities and resource efficiency in companies, introduction of new business models and improving skills levels in areas related to the green transition. Moreover, the component foresees deployment and piloting of green hydrogen integrated value chains in strategic areas. The measures under this component aim for a comprehensive approach to the green transition addressing key market failures and facilitating the technological and behavioural break-through to increase the competitiveness of the business sector. Digital State. This component (with an estimated cost of EUR 121.7 million) aims at increasing the resilience and the sustainability of digital infrastructures and services of the Estonian administration (notably in light of the growing cybersecurity threats), as well as increasing efficiency and user-friendliness of these services. The proposed measures are expected to enable Estonia to take advantage of the opportunities offered by the latest technologies. They are expected to benefit both citizens and businesses. Specific actions are also foreseen in order to reinforce the country’s capacities to combat money laundering. Furthermore, the support to the deployment of very-high-capacity networks in rural areas should help ensuring wide access to online services and, more generally, contribute to the further digital transformation of the country. Sustainable energy and energy efficiency. This component (with an estimated cost of EUR 92.1 million) aims at addressing the challenge of decarbonising the energy sector, increasing energy efficiency and reducing the dependency on oil shale. This will be done by incentivising the uptake of renewable energy and improving the energy efficiency of buildings. The renewable energy subcomponent includes a reform which aims at contributing to decarbonising the economy through including the targets and actions to phase out oil shale in the national Development Plan for the Energy Sector and through removing administrative barriers to renewable energy installations. The reform is complemented by three measures which aim to strengthen the electricity grid to increase renewable energy production capacity and adapt to climate change, to incentivise renewable energy installations in industrial areas and to pilot possibilities for renewable energy storage. The subcomponent of energy efficiency will target renovation of apartment buildings and private dwellings by providing financial support, but a reform is also foreseen to remove administrative barriers to energy efficient renovations by providing advisory services and digital tools on legislation, technical aspects and financing of renovations.

Sustainable transport. This component (with an estimated cost of EUR 96.1 million) aims at reducing emissions from transport and incentivising the uptake of sustainable modes of transport. The new Transport and Mobility Development Plan and the related Implementation Plan to be adopted, will include investments to develop interconnected and shared mobility in urban areas at the expense of private cars and promote a comprehensive framework of light mobility (on foot or bicycle) in areas outside major urban centres. As part of the Transport and Mobility Development Plan, within the timeline of the RRP, the Tallinn capital region common transport system will be implemented and the railway between the two biggest towns Tallinn and Tartu will be electrified. The investments support the development of the cross-border Rail Baltic project, connecting the three Baltic capitals and countries with Poland and the rest of the EU. The measures aim at connecting Rail Baltic with other national railways and other TEN-T hubs (Tallinn Airport and Old Port) and facilitating access to its local stops on foot or by bicycle. This will be done by constructing the Rail Baltic terminal in Tallinn, a section of the Tallinn-Rohuküla railway connecting Western Estonia with international TEN-T hubs, and the Old Port tramline in Tallinn connecting Tallinn Harbour, Tallinn Airport and the new Rail Baltic terminal. Finally, the measure supporting cycling and pedestrian paths will ensure safe and sustainable access to the Rail Baltic local stops. Health and social protection. This component (with an estimated cost of EUR 336.3 million) aims at improving accessibility and resilience of the health care system, improving access to social services, reducing youth unemployment and reducing the gender pay gap. The reform on the reorganisation of the Estonian health system aims at addressing health workforce shortages and improving the hospital network. The reform is accompanied by two investments, notably the construction of the Northern Estonia Medical Campus to consolidate hospital resources in Tallinn as well as to improve the access to medical care for two-thirds of the Estonian population and the enhancement of medical helicopter capabilities. The Strategic Framework for addressing health workforce is expected to outline the measures to address these shortages. Measures strengthening primary care include extending the list of medical specialisations accessible through e-consultation and incentivising health professionals to work in remote areas. The update of e-health governance should strengthen the coordination of e-health services to better respond to the needs of the health system, and the development of digital solutions should support a sustainable health system in Estonia. The access to social services is envisaged to be improved by modernising and simplifying the support system for children with higher care needs, supporting independent living of people with lower care needs, and, by an action plan on the integration of social and health care services to establish an integrated care model throughout Estonia. The investment targeting youth unemployment aims at supporting young people to gain work experience and improve their skills. The extension of the duration of the unemployment insurance benefits by 60 days in case of adverse labour market conditions, should contribute to some extent to strengthening the social safety net. Measures to reduce the gender pay gap should be outlined in Estonia’s Welfare Development Plan 2023-2030. In addition, a digital gender pay gap tool should enable employers to easily collect information on the gender pay gap and its possible reasons in their organisations. 3.2.Implementation aspects of the plan Consistency with other programmes is ensured. Estonia’s RRP is broadly consistent with the National Reform Programme (Estonia 2035 Action Plan) and the National Climate and Energy Plan, and includes measures that are complementary to the National Just Transition Plan. A disclaimer is added that the information in the RRP on the use of different EU funds should not be considered final, as negotiations on different EU funds are still ongoing. The plan makes appropriate references to demarcation and complementarities across the various funding programmes. In general terms, Estonia intends to use the RRF funding in a way that is complementary to other funding programmes especially in addressing the country-specific recommendations, as the RRF is a time-limited instrument. However, in certain areas, such as Just Transition, broad upskilling and reskilling, youth, education content, support to R&D and innovation, Estonia has made a choice not to use extensively the RRF, but to rely on the Just Transition Fund and Structural Funds linked to their thematic logic. Technical support may be requested under the Technical Support Instrument, to build capacities to implement the RRP, and it could provide expertise in a number of areas such as healthcare, education, green and digital transition, decarbonisation, energy, quality living space, anti-money laundering and others. The RRP is broadly consistent with the challenges and priorities identified in the most recent euro area recommendations. The Council recommendation on the economic policy of the euro area recommended to euro area Member States to take action, including through their RRPs, to, inter alia, ensure a policy stance which supports the recovery, including by strengthening the coverage, adequacy and sustainability of the health system. The RRP contributes to EAR 1, as it pursues reforms and investments to support the provision of integrated and human-centred health care, raises the capacity of health institutions to adapt to crisis situations and addresses the shortages of health workforce included in Component 6 on health. The Council also recommended euro area Member States to, inter alia, further improve convergence, resilience and sustainable and inclusive growth, including by ensuring effective active labour market policies and support to job transitions, notably towards the green and digital transition, as well as by improving the functioning of public administration. Components 1 and 2 include reforms and investments to improve capacities of businesses to achieve the green and digital transition and Components 4 and 5 promote the climate change adaptation and mitigation. Component 3 contributes to the digital transformation focusing on public services and public administration. Component 6 on social cohesion supports employment of young people and their labour market participation. The plan sets out a clear administrative organisation for its implementation. The State Shared Service Center is the managing authority (“SSSC”, coordinating authority for Structural Funds). The Ministry of Finance, which has been the national coordinator for the RRP, is the lead ministry responsible for planning, monitoring and evaluation in cooperation with the State Shared Service Center. The State Shared Service Center and the Ministry of Finance will work closely with line ministries, the State Chancellery and other institutions in order to ensure and monitor the implementation of the plan. Complementarity between measures financed from the RRF, other EU financial instruments and own financing is set to be ensured through sector-specific programmes allowing transparent monitoring under the national budgetary strategy and annual state budget laws, and also preventing double funding. Estonia is committed to take into account gender equality and equal opportunities during the implementation of the various measures. The plan describes existing national challenges mainly in terms of gender equality and needs of persons with disabilities. The plan states that all reforms and investments will take into account gender equality and ensure equal rights and opportunities to participate, regardless of gender, racial or ethnic origin, religion or belief, disability, age or sexual orientation. In the preparation and implementation of interventions, the potential impact of activities on gender equality, inclusion and equal treatment, including accessibility, will be analysed and, where appropriate, measures will be implemented to reduce potential risks (including by reducing barriers preventing underrepresented groups from participating in activities or receiving the benefits generated). Each component contains a disclaimer that the reforms and investments shall be monitored to ensure gender equality and equal rights and opportunities for all to participate in the reforms and investments and to benefit from their results. Furthermore, the RRP states that the promotion of the rights of persons with disabilities, in accordance with the principles of the UN Convention on the Rights of Persons with Disabilities, is integrated into a number of development plans and strategies, the most important of which are the current Wellbeing Development Plan 2016-2023 and the future Wellbeing Development Plan 2023-2030. The plan contains some measures that are expected to help Estonia address the challenges posed by gender equality and equal opportunities for all. These include measures to reduce the gender pay gap and address the needs of persons with disabilities, such as facilitating the accessibility of the living environment. The measure on digital skills is expected to contribute to an increase of the number of women in information and communication technology professions and to address gender segregation in the labour market. The investment to support youth employment should help young people to get in employment and thus contributing to their social inclusion. Reforms and investments included in the plan should reduce existing social, economic and territorial disparities. The plan refers to legislative and policy initiatives that are expected to complement the reforms and investments included in the plan. The RRP was the subject of various public discussions and debates, which covered the plan’s main elements. Several thematic public consultations, open to civil society organisations, social partners, local authorities and other stakeholders, were organised between December 2020 and June 2021. Representatives from social partners, business organisations, local governments and other stakeholders took part in the negotiation process between the Commission and the Estonian authorities. From 20 May to 4 June 2021, all interested parties had the opportunity to submit their views and comments by taking part in the public consultation on the draft plan. Stakeholders’ engagement in the implementation is planned to be established through the management and control system. Estonia intends to use a similar system to that in place for the implementation of the Cohesion policy support where stakeholders’ representatives participate in the EU funds Monitoring Committee. The RRP does not include a security self-assessment for investments in digital capacities and connectivity. The plan does provide a short analysis of strategic autonomy and security aspects in the descriptions of the two components supporting investments in digital technologies. Moreover, the component aiming at reorganising and modernising the digital services and infrastructures of the public administration includes actions specifically aimed at reinforcing security aspects. The implementation of the recent national Regulation on the security of communications networks is also expected to help ensure the reliability of the suppliers of the solutions to be deployed with the support of the measure on last mile connectivity. The Estonian RRP includes the following cross-border projects: ·Construction of the Rail Baltic Tallinn terminal, the starting point of Rail Baltic, a cross-border project connecting the three Baltic capitals and countries with Poland and the rest of the EU. ·Cooperation with Finland in the context of the implementation of a measure aiming at developing a virtual assistant to access digital public services. The RRP sets out Estonia’s communication plans. The objectives of the communication strategy are in line with the RRF Regulation and aim to raise awareness about the RRP’s contribution to the Estonian and European recovery and to the twin transition. The purpose of communication is also to be transparent about grant planning and distribution and to ensure the visibility of supported and funded projects. Partly, the RRP-related communication will be integrated in the overall communication strategy of EU funds, which is managed by the EU Funds Communication Management Group. The communication process will have a stronger focus in 2021, 2024 and the end of 2026, around major events in the implementation of the plan. A dedicated communication plan will be set out including media briefings, articles on major topics, press briefings and audience-based activities to ensure that messages reach all target groups. Estonia plans to target four main groups: specific target audiences (potential applicants and final recipients, entities participating in the implementation of the RRP, social partners and NGOs), politicians, opinion-leaders and experts, and the general public with a dedicated approach towards the Russian-speaking population. A wide range of communication channels will aim to provide objective and comprehensible information to all the above-mentioned target groups. A dedicated RRF homepage (online since spring 2021) provides access to all information and communication materials. It is expected that Estonia will ensure the necessary funding of all these measures. The RRP foresees a series of coordinated communication activities with the European Commission, including joint press releases, social media posts, possible events with the participation of Commissioners and members of the European Parliament. These would focus on key areas such as mitigating the social and economic impact of the crisis, development of green hydrogen technology, digital transition, green transition for businesses, energy efficiency and major infrastructure projects, namely the– Rail Baltic Ülemiste Joint Terminal, the Tallinn Old Port tramline, the Rohuküla railway and the Tallinn Hospital. An indicative amount of EUR 95 000 has been planned for communication activities. The Communications Department of the Ministry of Finance and the Communications Unit of the State Support Service Centre are responsible for the organisation of communication. The communication strategy will be monitored based on a number of indicators and benchmarks specified in the communication strategy. It is essential that the described communication plan is implemented. Coordination between the EU and national authorities is specified in the strategy and should be pursued to maximise the impact and effectiveness of communications. State aid and competition rules fully apply to the measures funded by the Recovery and Resilience Facility. Union funds channelled through the authorities of Member States, like the RRF funds, become State resources and can constitute State aid if all the other criteria of Article 107(1) TFEU are met. When this is the case and State aid is present, these measures must be notified and approved by the Commission before Member States can grant the aid, unless those measures are covered by an existing aid scheme or comply with the applicable conditions of a block exemption regulation, in particular the General Block Exemption Regulation (GBER) declaring certain categories of aid compatible with the internal market in application of Articles 107 and 108 TFEU. When State aid is present and it requires notification, it is the duty of the Estonia to notify State aid measures to the Commission before granting them, in compliance with Article 108(3) TFEU. In this respect, the State aid analysis carried out by Estonia in the recovery and resilience plan cannot be deemed a state-aid notification. In as far as Estonia considers that a specific measure contained in the recovery and resilience plan entails de minimis aid or aid exempted from the notification requirement, it is the responsibility of Estonia to ensure full compliance with the applicable rules. 4.Summary of the assessment of the plan

4.1.Comprehensive and adequately balanced response to the economic and social situation The plan includes a balanced set of reforms and investments contributing to the Union’s economic, social and territorial cohesion by referring to the six pillars of Article 3 of the Regulation (EU) 2021/241. Estonia’s plan consists of six components, covering a broad range of policy areas: 1. Digital Transformation of Enterprises 2. Accelerating the Green Transition in Enterprises 3. Digital State 4. Energy and Energy Efficiency 5. Sustainable Transport 6. Health and Social Protection. Three components in the Estonian plan directly contribute to the green transition (pillar 1). Two components directly address the digital transformation (Pillar 2). Two components contribute directly towards smart, sustainable and inclusive growth (Pillar 3), with most components partially addressing the aforementioned pillars as well. All components directly or indirectly contribute towards social and territorial cohesion (Pillar 4). Two components support health, economic, social and institutional resilience (Pillar 5), while one component promotes policies for the next generation, children and youth. The coverage of the Estonian plan towards the six pillars is summarised in Table 5 below. Table 5. Coverage of the six pillars of the Facility by the Estonian RRP components Green transition Digital transformation Smart, sustainable & inclusive growth Social and territorial cohesion Health, and economic, social and institutional resilience Policies for the next generation Digital transformation of enterprises ○ ● ● ○ ○ ○ Accelerating the green transition in enterprises ● ○ ● ○ ○ Digital State ● ○ ● Energy and energy efficiency ● ○ ○ Sustainable transport ● ○ ○ Healthcare and social protection ○ ○ ● ● ● Key: “●” investments and reforms of the component significantly contribute to the pillar; “○” the component partially contributes to the pillar 1st pillar: green transition Green challenges are addressed in the plan in particular under Components 2, 4 and 5 on accelerating the green transition, energy and energy efficiency, as well as sustainable transport. Investments in Component 2 are expected to promote green skills, foster innovation and the development of green technologies, as well as support the change of business models in manufacturing and resource efficiency in companies and the deployment of resource-efficient green technologies. Additionally, through this component, Estonia intends to promote the uptake of green hydrogen technologies. Those measures are expected to contribute to the transition to a circular economy while mitigating climate change, reduce the carbon footprint of companies as well as improve productivity and competitiveness. Additionally, the component is also aimed at encouraging the introduction of sustainable production through improved recycling of waste and the use of bio-resources. Component 4 on energy and energy efficiency is expected to improve the energy efficiency of buildings, while promoting the deployment of clean and renewable energy. Through the renovation of multi-apartment dwellings and small residential buildings, Estonia is expected to reduce its final energy consumption leading to heating, electricity and CO2 emission savings, as well as improving the living conditions of residents of such buildings. Additionally, Estonia intends to increase the capacity of production and storage of green energy, including through the deployment of a smart energy system. Component 5 on sustainable transport is expected to build a public transport infrastructure leading to long-term greenhouse gas reduction. Estonia intends to construct (or rehabilitate) a rail link and related infrastructure, a new tramline, as well as new bicycle- and walk-ways, which is expected to contribute to the Estonian 2035 strategy, the Estonian National Energy and Climate Plan for 2030 and the sustainable mobility targets set out in the ongoing Transport and Mobility Development Plan 2021-2035. As part of the latter, within the timeline of the RRP, the Tallinn capital region common transport system will be implemented and the railway between the two biggest towns Tallinn and Tartu will be electrified. Other components indirectly contribute to the green transition. For instance, Component 1 on the digital transformation of enterprises is expected to contribute to climate neutrality and the circular economy through the deployment of digital technologies in the construction and transport industries, manufacturing, as well as the service sector. Based on the methodology for climate tracking set out in Annex VI to Regulation (EU) 2021/241, the quantitative assessment of the plan in relation to the climate target finds a contribution of 41.5% of the total allocation, thereby complying with the minimum threshold of 37%. 2nd pillar: digital transformation Digital challenges are addressed in the plan mostly under Component 1 on digital transformation of enterprises and Component 3 on the digital state. The investments under Component 1 are expected to accelerate the digital transformation of business by putting in place appropriate strategies and promoting the uptake of digital technologies and providing financial support to SMEs from all sectors to carry out investments that should enhance their digital transformation. In addition, it aims to develop an e-construction platform and related public services, standards and data management and sharing tools, as well as support projects aiming at developing and prototyping innovative private services connected to the national e-construction platform. Component 1 also includes a measure on deployment of ICT technologies in the transport and logistics sector. Under the skills reform, the Estonian plan intends to address the shortage of ICT specialists and promote the inclusion of women in the field by ensuring that at least 35% of the beneficiaries of the supported training activities are women. Additionally, Estonia intends to increase the export capacity and competitiveness of Estonian companies, including notably those of the ICT sector by adapting its export advice to digital companies following the increase in consumption of digital goods due to COVID-19. Component 3 of the plan on the digital state is expected to drive the digitalisation of the public sector and services. Thus, it contributes to the second pillar through the development of an excellence centre for data management and open data, the development of cloud solutions in the Estonian public sector, further development of digital public services for individuals and businesses, as well as a virtual assistance platform. Combined, these measures aim to improve the efficiency of the delivery of public services, reduce the administrative burden and whenever possible, enable a proactive delivery of information, in line with the once-only principle and thus contributing to the implementation of the single digital gateway. The plan is also expected to contribute towards bridging the digital divide between rural and urban areas with the construction of very high-capacity broadband networks. Furthermore, the plan includes a measure to strengthen the fight against money laundering through enhanced data use. Other components indirectly contribute to the digital transformation. Measures in Component 2 on accelerating the green transition are expected to contribute to the digital transformation through digital solutions to energy and resource efficiency, the mobilisation of green and digital technologies, enabling access to the environmental datasets for start-ups as well as the development of green skills fostering ICT solutions for climate neutrality. Component 6 on health and social protection is expected to further integrate ICT solutions for better customer service management and information gathering, thus further improving the e-health system. Based on the methodology for digital tagging set out in Annex VII to Regulation (EU) 2021/241, the quantitative assessment of the RRP in relation to the digital target finds a contribution of 21.5% of the total allocation, therefore complying with the minimum threshold of 20%. 3rd pillar: smart, sustainable and inclusive growth Components 1 and 2 on the digital transformation of enterprises and accelerating the green transition provide opportunities for job creation, economic competitiveness and sustainable long-term growth, to which a well-functioning internal market is key. Under Component 1 on the digital transformation of businesses, Estonia is expected to promote growth through five sets of measures: support to the digital transformation of enterprises; development of e-construction; digital skills; support to the competitiveness of enterprises in foreign markets; as well as the digitalisation of the freight infrastructure. Support aimed at increasing the level of research and investment, as well as the uptake of digital technologies in SMEs (first measure) is expected to help transform those enterprises and improve the efficiency of their processes. Investments into the digitalisation and automation of the construction sector (second measure), which accounts for 10% of GDP and has a low labour productivity (below EU average), is expected to increase the overall productivity growth of the sector and the economy through spill-overs. Additionally, reforms on digital skills (third measure), which aim at improving the education system, cyber-capacity and availability of specialists, are expected to support growth, sustainability and international competitiveness of companies. Moreover, reforms on the competitiveness of exporting businesses (fourth measure) are expected to increase business innovation and R&D, as well as (e-) exports potential, through innovative business centres, as well as country and regional strategies, thus strengthening the sustainable growth potential of the economy, including exporting SMEs. Moreover, the measure on development of digital waybills services aiming to digitalise the exchange of information in road freight transport (fifth measure) is expected to contribute to a smooth functioning of the internal market. As demonstrated throughout the COVID-19 crisis and recalled in the updated EU industrial strategy, the internal market together with innovation and competitiveness are key for the resilience of the EU. Component 2 on accelerating the green transition is expected to support entrepreneurship and economic growth. The plan includes measures which contribute to supporting the change of business models in manufacturing, green technology development programmes and the deployment of resource-efficient green technologies. The establishment of the Green Fund will improve access to finance and should therefore contribute to the development of green technologies in research-intensive businesses, as well as the start-up sector. These measures should raise Estonia’s economic growth potential and increase its international competitiveness. Component 4 on energy and energy efficiency is also expected to contribute partly to the growth potential of Estonia. Sustainable renovation of apartment buildings and private dwellings will support regional employment in a large sector of the Estonian economy. Additionally, strengthening the supply of green energy throughout the country is expected to underpin the long-term sustainability, employment, and growth potential.

Component 5 on sustainable transport is expected to partly contribute to the growth potential of Estonia through improved connectivity. The construction (or rehabilitation) of a rail link and related infrastructure, as well as a new tramline, should contribute to the connectivity between regions, thus facilitating the outreach to different markets for businesses, and better access to workplaces for the population. Component 6 on health and social protection contains measures supporting young people, which should raise growth potential and ensure the inclusiveness of growth. In particular, investments into labour market measures for young people will contribute to improving the employability of young people and raising the growth potential. 4th pillar: Social and territorial cohesion The plan pledges to implement all measures with due regard to the principle of equal treatment providing equal opportunity to all people regardless of gender, racial or ethnic origin, religion or belief, disability, age or sexual orientation. As such, all components are expected to partly contribute to social and territorial cohesion. Moreover, each component includes measures that aim at directly or indirectly improving social inclusion and addressing regional disparities, thereby contributing to the fourth pillar. Component 6 on health and social protection is expected to promote social and regional cohesion. The plan is expected to improve the provision of healthcare across Estonia with the adoption of the Hospital Development Plan in 2024 and the construction of the Northern Estonia Medical Campus, improving e-consultations and investing in medical helicopters for better access to healthcare in the remote areas. The measure on extending the duration of the unemployment insurance benefit in case of difficult labour conditions is expected to contribute to improving the safety net. The access to social services should partially be improved by measures on long-term, notably those modernising and simplifying the support system for children with higher care needs, supporting independent living of people with lower care needs, and the action plan on the integration of social and health care services. Measures reducing the gender pay gap and addressing youth unemployment should also contribute to improving social cohesion. Component 5 on sustainable transport is expected to indirectly contribute to the convergence between regions in Estonia. Measures under this component are expected to improve the connectivity between urban and rural areas, through an improved transport network. This should promote citizens’ access to education, employment and public services, as well as business access to different markets. Component 1 on the digital transformation of enterprises and Component 3 on the digital state are expected to indirectly contribute to social and territorial cohesion. Through the digital skills measure, Component 1 aims at providing learning opportunities to different groups including those who have not yet had access to adult learning. In Component 3, Estonia is expected to improve the access to its public services throughout the country. Coupled with the construction of very-high-capacity broadband networks, it should also contribute to reducing the digital divide between rural and urban areas and ensure equal access to those services for individuals and businesses. These are expected to encourage business relocation and employment in different regions of Estonia. Component 4 on energy and energy efficiency is expected to partly promote regional job creation. It is expected to sustainably contribute to regional employment through projects such as, the (green) renovation of multi-apartment dwellings and small residential buildings, as well as the increase in capacity of deployment and storage of green energy, with the inclusion of a smart energy system. The transition from a fossil fuel-based energy model to a renewable energy use is expected to foster employment locally through a more scattered allocation of renewable energy. 5th pillar: Health and economic, social and institutional resilience, with the aim of increasing crisis preparedness and crisis response capacity, among others The resilience of Estonia’s social, health and economic system is expected to improve as a result of the measures proposed in Component 6 on health and social protection. The plan intends to invest a third of its RRF non-repayable financial support in the construction of the Northern Estonia Medical Campus and the acquisition of multifunctional medical helicopters. Strengthening of primary healthcare, addressing health workforce shortages, as well as the promotion of e-health should improve the access and resilience of the health care system. Measures related to extending the duration of the unemployment insurance benefit in case of difficult labour market conditions and the measures on long term care are expected to contribute to economic and social resilience. The digitalisation of the public sector and services (Component 3) is expected to contribute towards the institutional resilience of Estonia. The development of an excellence centre for data management and open data, the deployment of secured cloud solutions in the Estonian public sector, as well as a virtual assistance platform (‘Bürokratt’) and other digital channels should ensure a better outreach of public services to citizens and businesses across Estonia. Furthermore, the measures to combat money laundering should increase the resilience of the financial sector and of the state. 6th pillar: Policies for the next generation, children and young people, such as education and skills Measures aiming at ensuring the access to employment and social services for the Estonian youth (Component 6) contribute directly to creating better prospects for the next generation. Through an upgraded ‘My First Job’ (M1T) scheme, which is at the centre of the Estonian enhanced Youth Guarantee Action Plan, the RRF should contribute to getting young people into employment. The wage subsidy and training allowance are expected to nudge employers into hiring young professionals with little experience, and in turn help them to gain skills, thereby also reducing youth unemployment. Additionally, the digital and green skills reforms, under Component 1 and 2 respectively, are intended to help increase the uptake of vocational skills, thus also indirectly improving skills of the next generation. Finally, reforming the support system for children with higher care needs contributes to better and quality access to services for children. Taking into consideration all reforms and investments envisaged by Estonia, its recovery and resilience plan represents, to a large extent a comprehensive and adequately balanced response to the economic and social situation, thereby contributing appropriately to all six pillars referred to in Article 3 of the RRF Regulation, taking the specific challenges and the financial allocation of Estonia into account. This would warrant a rating of A under the assessment criterion 2.1 in Annex V to the RRF Regulation. 4.2.Link with country-specific recommendations and the European Semester In 2019 and 2020, Estonia received country-specific recommendations to improve the adequacy of the social safety net, including by broadening the coverage of unemployment benefits, and access to affordable and integrated social services, and to take measures to reduce the gender pay gap, including by improving wage transparency. It was also recommended to improve the accessibility and resilience of the health system, including by addressing the shortages of the health workers, strengthening primary care and ensuring the supply of critical medical products. Moreover, it was recommended that Estonia address skills shortages and foster innovation by improving the capacity and labour market relevance of the education and training system, as well as to support the innovation capacity of small and medium-sized enterprises and ensure sufficient access to finance. In addition, it was recommended that Estonia focus investment on the green and digital transition, in particular on digitalisation of companies, research and innovation, clean and efficient production and use of energy, energy interconnections, resource efficiency and sustainable transport, taking into account regional disparities. These investments are meant to contribute to a progressive decarbonisation of the economy. To tackle the COVID-19 crisis, Estonia was recommended to take all necessary measures to effectively address the pandemic, sustain the economy and, when economic conditions allow, to pursue fiscal policies aimed at achieving prudent medium-term fiscal positions and ensuring debt sustainability, while enhancing investment. Finally, Estonia was recommended to step up efforts ensuring effective supervision and enforcement of the anti-money laundering framework. Estonia’s recovery and resilience plan provides detailed information on how the country-specific recommendations (CSRs) are addressed through measures included in the plan or funded through other sources. Overall, the plan addresses most of the CSRs. However, in some cases, the measures in the plan alone are not sufficient to ensure that the CSRs are addressed adequately. This is notably the case of the CSR on strengthening the social safety net, including by broadening the coverage of unemployment benefits and on access to social services, which would be addressed in a more substantial way by including a reform to broaden the coverage of unemployment benefits and a comprehensive reform of the long-term care system. Measures addressing health workforce shortages are included in the RRP, but given the challenges in this area, it remains important to tackle them with more ambition in the coming years. More wage transparency should contribute to further reduce the gender pay gap. The CSR on decarbonising the economy is partially addressed, as the targets and actions for phasing out oil shale will be proposed in the upcoming renewed National Development Plan of the Energy Sector only at the end of 2025 and broader reforms to support the green transition, such as green taxation, are not envisaged. The plan contains some measures that contribute to improving the adequacy of the social safety net and access to social services (CSR 2, 2019 and 2020). Component 6 on health and social protection envisages to improve the quality and accessibility of social services by measures on long-term care, including those improving the support system for children with higher care needs, supporting independent living of people with lower care needs and an action plan on providing social and health services in an integrated manner. However, the RRP does not contain a comprehensive reform of the long-term care system. The measure on extending the duration of the unemployment insurance benefit in periods of high unemployment is expected to help the unemployed to bridge a longer period of unemployment in difficult labour market conditions. A broadening of the unemployment insurance benefit coverage is not included in the RRP. Some measures are taken to address the challenges related to reducing the gender pay gap, including by improving wage transparency (CSR 2, 2019). The Welfare Development Plan 2023-2030 should outline measures to narrow the gender pay gap, in particular by reducing the prevalence and negative impact of gender stereotypes on the lives and decisions of women and men, including concerning educational and career choices and carrying the care burden, and supporting a more effective implementation of the Gender Equality Act. The digital gender pay gap tool should make information available to employers concerning the gender pay gap and its possible reasons in their organisations. However, it is not envisaged to make the data available to public authorities, which would increase wage transparency. The measure on digital skills of Component 1 is also expected to contribute to increasing the number of women in information and communication technologies, and thus contributing to addressing gender segregation in the labour market. Moreover, all measures in the plan will be implemented taking into due account gender balance and equal opportunities.

Estonia’s plan includes measures to improve the accessibility and resilience of the health system, including by addressing the shortages of health workers, strengthening primary care and ensuring the supply of critical medical products (CSR 1, 2020). As the pandemic has revealed some structural vulnerabilities of the health system, Component 6 on health and social protection includes investments and reforms aiming at improving the resilience and accessibility of the health care system. The measures to strengthen primary care include incentivising the health workforce to pursue the profession and to work in remote areas and extending the scope of e-consultation to reduce unmet needs for specialised care. Measures addressing health workforce shortages envisage, in particular, ensuring the availability of personnel in the different health sectors and increasing the number of health practitioners in certain specialisations. However, given the challenges as regards health workforce shortages, it remains important to tackle them with more ambition in the coming years. The governance of e-health is envisaged to be updated to make it more patient-friendly. The