1. -1- After Crisis: Policy Reforms for Effective Management of State Owned Enterprises in Latvia Mr. Daniels Pavļuts Minister of Economics 18 January 2012, American Chamber of Commerce

2. -2- Crisis in Latvia: GDP growth – from +33% to -25%

3. -3- Fiscal consolidation (or ‘internal devaluation’)  Internal devaluation vs. external devaluation  Reasons for choosing ‘internal devaluation’: 1.Fixed exchange rate with the euro – a precondition for joining the eurozone in 2014 2.The need for economic and governance reforms 3.Opportunity to balance the economy and change the development model to sustainable growth 4.Social and economic costs of internal devaluation

4. -4- YearMillion EUR 2008119 20091514 2010726 2011513 Fiscal consolidation of State Budget relative to GDP, 2008-2011 -9.5% -4.1%

5. -5- Latvian Story: Latvian Story: Fiscal stability  Fiscal stability – a precondition for healthy economic environment and sustainable growth  The government debt of Greece is 150% of GDP, while that of Latvia is less than 50% of GDP  Budget deficit will be reduced below 3% of GDP in 2012  Low inflation: 3.3% in 2009, -1.2% in 2010, 4% in 2011  Current account surplus: 8.6% in 2009, 3.6% in 2010  Latvia’s position in international rankings is improving (for instance, Doing Business is up by 10 positions to 21st place – best among CEE, ahead of France, Austria)

6. -6-

7. -7- Note: Decomposition of Latvian exports share’s growth to the EU by using a permanent market share analysis (%) -21.1% +28.5% 7 +37.3% 60% of exports’ growth was driven by increasing competitiveness 45% of exports’ growth was driven by increasing competitiveness 6% of exports’ decline was affected by decreasing competitiveness Latvian Story: Latvian Story: Exports are growing due to increased competitiveness

8. -8- Demand for Reform Fiscal consolidation and focus on productivity has created a demand for effective government and policy reform Effective management of state owned enterprises (SOE) in Latvia is one of such reforms

9. -9- Latvia is a shareholder directly and indirectly in more than 140 enterprises, including 74 fully owned (from Latvenergo with turnover ~ EUR 712 million to National Symphony Orchestra) More than 52 thousand people were employed in SOE (that is ~ 5 % of total employed) State of play Issues regarding state ownership function and SOE is competence of Cabinet of Ministers (government) Tasks to improve SOE governance are defined in policy documents and strategies (Strategic Development Plan 2010.-2013, Declaration of the Intended Activities of the Cabinet of Ministers (25.10.2011) e.t.c.)

10. -10- 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 (earnings before interest, taxes, depreciation and amortization) in crisis, low but steady dividend flow State of play

11. -11- Main issues (continued) Return on invested capital could be greater - total return on equity of SOEs, excluding financial sector, was 7% in 2009 Governance is decentralised - managed by 11 line ministries Everlasting issues of transparent and professional supervision and of political influence over operational decisions

12. -12- MacCarthaigh, M. The corporate governance of commercial state-owned enterprises in Ireland. Institute of Public Administration, 2009. P61 http://tiny.cc/b09rm/ LATVIA There is clear tendency in Europe to go towards centralized model Transition period is needed to accomplish this aim - implementation of dual model of SOE governance is under political discussion in Latvia Key reforms up to 2013 It can be done by dividing supervision functions between Centralised SOE Manager (to be established) and respective line ministries

13. -13- Concept of principles for engagement of public person in business activities - submitted to Cabinet of Ministers, decision in December 2011 Key reforms up to 2013 (continued) Aim is to 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

14. -14- Concept of SOE governance – currently under formal review among ministries Key reforms up to 2013 (continued) Implementation of OECD corporate governance principles including: - 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

15. -15- Implementation of corporate governance principles and improvement of governance practice Advise government, line ministries, SOE on corporate governance Definition of specific, measurable business objectives (economic and social); an annual evaluation of the results achieved Provide regular assessment whether to maintain shares as state-owned of a particular SOE General supervision of SOEs and shares disposal implementation, decision making on individual dividend payments Ensure record-keeping and information transparency regarding use of state capital Centralised SOE Manager Functions of SOE Manager (to be adopted)

16. -16- Brīvības street 55, Rīga, LV 1519 Phone: 67013101 Fax: 67280882 E-mail: pasts@em.gov.lv Web page: www.em.gov.lv Thank you!