Estonia has missed several chances to bring in major manufacturing
Three companies have secured state funding to carry out major investment plans — though in the past, Estonia has missed several chances to attract large-scale industry.
It's a stroke of luck that several large-scale industrial projects — each requiring investments in the hundreds of millions and creating dozens of jobs — are currently interested in setting up in Estonia, especially given the overall instability of the investment climate. Estonia's unpredictable eastern neighbor and the country's inconvenient conditions for investors only add to the challenge.
"Electricity prices and availability are certainly factors that clients have brought up in their feedback, as well as the speed and clarity of the permitting process," said Robert Lang, head of investor services at the Estonian Business and Innovation Agency (EIS).
"It's extremely important what kind of long-term strategy the state adopts for energy development. Once that strategy is approved, it should not be changed a few months later. That kind of volatility is damaging," said Erik Laidvee, CEO of Derivaat NH3.
"I think political uncertainty has also played a role and we've seen quite a bit of that lately. For example, last year there was talk of introducing corporate income tax. While we now know that's off the table, the mere possibility of it disrupted business confidence around investment decisions," said LHV macroanalyst Triinu Tapver.
Still, investors see advantages in Estonia's strong legal system, convenient digital solutions, skilled workforce and tax environment — though the latter could use more stability. The interest is clearly there, as demonstrated by this week's announcement of several state-supported investment grants.
Estonian company Derivaat NH3 received €11 million in state support to build a power plant, a project with a total price tag of €120 million. While the state's share is under 10 percent, it's still crucial support.
"Right now, banks are very cautious about financing projects like this, especially when they're being developed by relatively new companies that don't have major production assets to offer as collateral. The state's backing gives the project credibility and improves our position in negotiations with banks. Without that support, the required share of self-financing could have become a dealbreaker," Laidvee explained.
Derivaat had already taken a risk earlier by embedding pipes for the planned ammonia plant into the concrete during the construction of a new quay at Paldiski South Harbor — at a time when the project's financing was still uncertain. The current economic environment is not favorable to such large-scale investments.
"All the factors are currently leaning toward the negative. Interest rates have been high. At the same time, costs have risen, which means production now yields smaller profit margins. Doing business in general has become more expensive. You can't just roll up profits like you used to. All these things push entrepreneurs away," said Tapver.
But the minister of economic affairs believes the state must make funding decisions like these now if it wants to attract investment during difficult times.
"This large-scale investment support scheme was specifically designed so that the investor or business must first make the investment themselves and only afterward can they apply for the state grant. That's how we reduce the state's risk," said Minister of Economic Affairs and Industry Erkki Keldo (Reform).
Asked what kind of businesses Estonia is hoping to attract, officials mention keywords like high added value and smart industry. In practice, this means modern technology, expert knowledge and high salaries.
"We're definitely hoping to bring in successful startups and funds that invest in startups, as well as large industrial firms. On the foreign investment side, we're focused on high value-added industrial companies, especially where market failures are more significant than in other sectors," Lang said.
Over the years, several investors have backed out of setting up production in Estonia due to local opposition — cases include the planned pulp mill in Tartu and a poultry facility in Väimela. Those projects received little support from the state. Authorities are now working to avoid similar situations.
"We're mapping large industrial areas across Estonia — at least 30 hectares in size — that local governments have already developed. We're reviewing them to see if zoning is in place and whether initial environmental impact assessments can be carried out. That should help reduce local resistance. Why? Because then local residents will know where the housing areas are, where the green spaces are, where people can walk their dogs or take their kids for a stroll and where the industrial areas are," Keldo explained.
If a company is prohibited from investing in the Baltics due to geopolitics, that's unavoidable. But if Latvia and Lithuania are becoming more attractive than Estonia, the country needs to step up its game. Those working to attract foreign investment say the government is finally doing a good job and needs to keep going.
"Every country's investment policy should be based on broader national priorities. That could be defense, energy security, new fuels or major logistics projects like Rail Baltica. Several foreign companies have expressed interest in that project, asking when it will be completed and what its progress is. National defense is a very high priority for us and we're seeing strong interest in Estonia, not least because, let's face it, Estonia is viewed as an expert when it comes to our eastern neighbor," said Lang of EIS.
That naturally raises the question: why did Estonia let a major investment opportunity from one of Europe's largest defense firms, Rheinmetall, slip through its fingers?
"Defense is a slightly different case from other industries because historically it's a sector with heavy state involvement. The conditions defense companies require are different and in this case, those conditions likely weren't acceptable or suitable for Estonia. Rheinmetall is definitely still welcome to operate in Estonia and it would be a mistake to think this was the only project we've discussed with them," Lang said.
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Editor: Marcus Turovski, Johanna Alvin
