STEERING THE FUTURE

2. STEERING THE FUTURE VIEW BY FOREIGN INVESTORS IN LATVIA Mr. Gunnar Ljungdahl Chairman of the Board, FICIL, Senior Vice President Stockholm School of Economics in Riga May 28, 2010

3. Agenda • Investors through 20 years • Lost opportunities and lessons learned • High Council 2009 year’s follow up • FICIL recommendations and Dialog Framework 2010

5. FDI balance during 20 years(thsd LVL) Source: Lursoft

6. Lost opportunities and lessons learned • History and attitude (1) • Attracting investors to Latvia (2) • Implementation of investments (3)

7. Attitude – Lost Opportunities • Riga Subway – from Zasulauks to VEF in 12 minutes – first span of the planned Riga Subway which was to be opened in 1996. • 300 mn roubles were to be invested in the first round of construction alone

8. Attitude – Lost Opportunities «Baltic Pulp» was established in 2000 to prepare the project for construction of a pulp. Estimatedinvestments ~ 900 mn. €

9. Attitude – Lost Opportunities • Saint Gobain. Preparatory works started at 2005 • Planned site for the plant – industrial and business zone of IkšķileDistrict, on the border of Ogres District close to Ogres textile production plant. • Estimated investment app. LVL 49-56 mn. • 771 days to hear “NO”

10. Foreign Capital Companies (FC) in Latvia LC – Local Capital Source : Lursoft 2010; data for 31.12.2008.

11. Foreign Capital Companies (FC) in Latvia Source: Lursoft 2010

12. Follow- up on Position Papers (i) Significant government expenditure cuts implemented, however sounds to linear Industrial Investment Attraction (Polaris process) Spatial Planning and Construction Process Government's communication strategy needs to be improved

13. Follow- up Position Papers 2009 (ii) Insolvency law still under discussion National Economy Competitiveness Institution Task force formed under the Prime Ministers office SSE Riga Negotiations with SSE, Sweden, underway Tax and Tax Administration majority of VAT optional norms introduced, reduced VAT for accommodations and printed books Development of Personal Income Tax and Capitals Gains Tax (improvement required)

14. 3 frogs sit on a log, one decides to jump. How many left on the log? THREE Remember, a decision is not an action.

15. Six cases that can be examined Singapore Success founded in establishing pro-business environment and aggressively pursuing FDI through a high performance agency Republic of Ireland Built on low tax rate with flexible approach to attract FDI, bring in anchor investors and move up the value chain Targeted approach to capturing FDI through independent marketing agency Costa Rica Built R&D capability around Nokia as an anchor and successfully developed Finland Deregulation and creation of pro-business environment to drive competition and productivity Sweden Estonia Rapid creation of a business-friendly environment and government focus on ICT sector to grow labour productivity through move to knowledge economy SOURCE: Northern Ireland research, Literature review; press search; expert interviews

16. Seven emerging themes Successful regions have had a clear strategy based on rigorous diagnosis of existing strengths 1 Leadership has come from the top to drive alignment 2 Productivity transformation takes a long time and requires the creation of a competitive and attractive business environment 3 Successful regions place intense focus on attracting, retaining and embedding anchor institutions 4 High performing investment agencies have cultures that are responsive, fast-moving and work to overcome bureaucracy 5 To maximise impact, R&D incentives have been conditional on co-operation between firms or between firms and other institutions 6 Non-financial support to make connections and build skills and knowledge has helped differentiate best practice players 7 SOURCE: Northern Ireland research Literature review; press search; expert interviews 16

17. FICIL Dialog Framework 2010 • Risk of reform fatigue • Ease of doing business • “Time for Change” approach and revive of competitiveness • Spatial Planning and Construction Process • Higher Education system in Latvia • Entrepreneurship Facilitation

19. The Red Queen effect The Red Queen said: “It Takes all the running you can do, to “keep in the same place” Lewis Carroll's fantasy novella, “Through the Looking-Glass” For an evolutionary system, continuing development is needed just in order to maintain its fitness relative to the systems it is co-evolving

21. Measures to Take in Support of Inward Investment Ahmed Sharkh Member of FICIL Board PricewaterhouseCoopers Country Managing Partner May 2010

22. Content • Where are we now? • Where should we be? • What should we do?

23. Where are we now? (1) • Largest decline in PE & VC investment in 2009 FDI ↓ 70% • Low Global Venture Capital and Private Equity Country Attractiveness Index 50th among 66 countries Source: IESE Business School, Ernst&Young, DLA Piper Weiss Tessbach

24. Where are we now? (2) • Total tax burden: 33% of corporate profits • Relatively high labour tax burden Source: PricewaterhouseCoopers and World Bank findings in “Paying Taxes”

25. Where are we now? (3) Grey / Black economy still very high: • Tobacco smuggling 47% • In 2009 losses from the black alcohol market amounted to uncollectable excise of LVL68.8 million Source: Latvian producers and traders of alcohol and tobacco Tax revenues in the first quarter of 2010 dropped by 27.7% compared with the corresponding period of 2009

26. Where should we be? • A clearly communicated and consistent long-term tax strategy and tax policy • A smalltax burden in line with the economic situation • Transparent tax administration • Large direct investment in industrial projects and new jobs • A developed IPO market for Latvian companies and entrepreneurs in the near future

27. What should we do? (1) To counter tax evasion and to improve the quality of public services as well as the people’s overall perception of the government, FICIL believes in the ‘Time for Change’ approach comprising: • Economic incentives • Stricter law enforcement and tax administration • Increased transparency of public spending • Stability and better communication

28. What shouldwe do? (2) • Shift the tax burden from labour to consumption: • Reduce the rate of personal income tax (target: 20%) and increase the personal allowance (target: LVL 70) • Increase the rate of real estate tax on households (target: 2.5%) • Reset the annual cap to the 2006 level (LVL 20,700) and link social security benefits to contributions made

29. What should we do? (3) • Introduce subsidies to employers to avoid payment of unemployment benefits • Introduce tax relief for large industrial projects • Improve the situation of low-income earners

30. What should we do? (4) • Fight tax evaders • Introduce heavier penalties on businesses that underreport sales • Strengthen controls over income and taxes paid by individuals through: • Implementing so-called zero declarations • Verifying the origin of money used for purchasing luxury items

31. What should we do? (5) • Increase transparency of public spending • Make public details of all salaries at public institutions • Provide stability and better communication: • Sufficient transition periods for taxpayers • Communication and consultation process to determine how changes in tax laws will affect various industries

33. Entrepreneurship Facilitation in Latvia Mr. Charlotte Hagberg Board member, FICIL Senior Vice-president, SEB Bank May 28, 2010

34. Reason Behind • Workforce emigration prevention, creating new jobs and the encouragement of first employment among younger people and long-term unemployed should be of the primary concerns: • develop targeted employment support mechanisms; • encourage the start of new companies and private initiatives to support entrepreneurship, e.g. “Jobs & Society” concept. ”Center for New Entrepreneurs” Centrs Jaunajiem Uzņēmējiem

35. Purpose of Jobs & Society • Jobs & Society: Entrepreneurs helping other entrepreneurs to start new companies • To organize a system where established companies and entrepreneurs help other entrepreneurs to start new, sustainable companies. • To create new companies and new jobs and thereby building the foundation for a rich welfare system and working society. • To improve the climate for entrepreneurs and new companies in Latvia by creating a new entrepreneurial culture. • To transform the Latvian business society to a modern, transparent, knowledgeable environment for companies and investors

36. Background • The ”Jobs & Society” –concept was developed in USA and UK by among others Mr Pehr G. Gyllenhammar, former CEO of Volvo and then vice chairman of the Aspen Institute in USA. • When Volvo closed down a factory in 1985 in Ronneby, Jobs & Society was launched in Sweden. • This week Jobs & Society in Sweden are celebrating their 25th anniversary • With the support of FICIL, the non-profit foundation, Jobs & Society in Latvia is founded by Karl Mikael Cakste, Viktors Kulbergs and Harry Goldman (founder and president of the Swedish organization).

37. Jobs & Society today - impressive facts: • In 2009 Jobs & Society participated in the start of approx. 12 000 companies through the work of 90 ”enterprise agencies” situated all over Sweden.. • It has been proven that the method improves the quality of the business start and creates more sustainability than if the entrepreneur would start without this support. • 80% of the companies started through J&S are still active after three years • Less than 1% of J&S companies have bankrupt after three years (compared to 4-5% average all companies) • J&S is financed 65% from private sector and 35% from public sector. • Swedbank, SEB and Nordea in Sweden have been partners of Jobs & Society since the start 25 years ago. They will now support the set up of the organization in Latvia.

38. Jobs & Society - concept At the enterprise agency the potential entrepreneur gets: • practical support (business plan, budgets, applications, book keeping), • coaching (what do do and not to do), • access to established networks and mentors. • the consultation results in an elaborate business plan, which makes the entrepreneur better prepared. • all this is free of charge for the entrepreneur! • The first enterprise office in Latvia will open in Q3/2010.