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Policy for Effective Management of State-owned Enterprises in Latvia

This document outlines the policy for the effective management of state-owned enterprises (SOEs) in Latvia. It covers the state's engagement in business, main sectors where SOEs operate, issues and reforms, and the role of a Centralized SOE Manager.

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Policy for Effective Management of State-owned Enterprises in Latvia

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  1. Policy for Effective Management of State-owned Enterprises in Latvia Mr. Juris Puce State Secretary 5th-6th September 2011 Ljubljana

  2. Latvia • Since 2004 – European Union country • Euro adoption goal - 2014 • Territory: 64,559 sq km • Population: 2.24 million (2010) • Capital: Riga • GDP -18.1 billion EUR (2010) • Inflation- 2.5%(December 2010)

  3. State of play By law state may engage in business only in case: • the market is unable to ensure collective interests of society • of industries with natural monopoly • of strategically important industries • of new industries • of capital intensive industries • of industries with the need of ensuring the highest quality standard Issues regarding state ownership function and SOE is competence of Cabinet of Ministers. Tasks are defined in policy documents and strategies(Strategic Development Plan 2010.-2013, Declaration of the Intended Activities of the Cabinet of Ministerse.t.c.) Main sectors where SOE operates: energy, telecommunications, forestry, transportation, real estate, health and other

  4. State of play (continued) • Latvia is a shareholder directly and indirectly in more than 140 enterprises, including 74 fully owned (from Latvenergo with turnover ~ EUR 712 million till National Symphony Orchestra) • More than 52 thousand people were employed in SOE (that is ~ 5 % of total employed) • At the end of 2009 total assets of SOEs amounted to EUR 10.17 billion, combined turnover of EUR 3.2 billion (17.2% of GDP) • The average net profit margin was 5.9% in 2009 • Resilient EBITDA in crisis, low but steady dividend flow

  5. Main issues • Governance isdecentralised - managed by 11 line ministries • Government is extensively involved in SOE governing including significant political influence over operational decisions • Lack of business oriented approach - unbalancedsector policy implementation and commercial perspective • Low return on invested capital - total return on equityof SOEs, excluding financial sector, was 7%in 2009 • No goals are set to measure SOEs performance • Non-transparent and not very professional supervision • SOEs which act as public state agencies

  6. Key reforms up to 2013 • Reassess principles for engagement of public person in business activities: • Reorganize SOEs that are performing only public administrative functions into public state agencies • Decrease public sector engagement in business • Implementation of OECD corporate governance principlesincluding: • setting up Centralized SOE manager (status, functions) • measuring SOEs performance (presently decentralized managed by line ministries; common reporting system as pilot project is ongoing) • ensuring transparency on state capital • revising dividend policy • reviewing supervisory board institute (not existing to limit political influence) • reconsidering remuneration policy

  7. Key reforms up to 2013 (continued) • There is clear tendency in Europe to go step by step towards centralized model - is the trend right? • Transition period is needed to accomplish this aim - implementation of dual model of SOE governance is under political discussion in Latvia LATVIA MacCarthaigh, M. The corporate governance of commercial state-owned enterprises in Ireland. Institute of Public Administration, 2009. P61 http://tiny.cc/b09rm • It can be done by dividing supervision functions between Centralised SOE Manager(to be established) and respective line ministries

  8. Functions of SOE Manager (to be adopted) Ensure information transparency regarding use of state capital Implementation of corporate governance principles and improvement of governance practice Advise government, line ministries, SOE on corporate governance Centralised SOE Manager Provide regular assessment whether to maintain shares as state-owned of a particular SOE General supervision of SOEs and disposal implementation Definition of specific, measurable business objectives (economic and social); an annual evaluation of the results achieved

  9. Who is in the driving seat? (A)Centralised SOE Manager with significant influence of line ministry (B)Line ministry with significant influence of Centralised SOE Manager (3)What is most adequate governance type for each SOE? (2)Maintain shares as state-owned? NO (1) Do all SOE acting accordingly to principles for engagement of public person in business activities? Sell: - in short or long term - all shares or partly NO - Reorganise - Liquidate Dual model of SOE governance 4 decisions to take (4) How to govern? Implementation of corporate governance YES YES (1)Company vs public state agency? Decentralized governance

  10. Thank you! Brīvības street 55, Rīga, LV 1519Phone: 67013101Fax: 67280882E-mail: pasts@em.gov.lv Web page: www.em.gov.lv

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