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

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

-3- 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 , Declaration of the Intended Activities of the Cabinet of Ministers e.t.c.) Main sectors where SOE operates: energy, telecommunications, forestry, transportation, real estate, health and other State of play

-4- 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 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 State of play (continued)

-5- Main issues Governance is decentralised - managed by 11 line ministries Government is extensively involved in SOE governing including significant political influence over operational decisions Lack of business oriented approach - unbalanced sector policy implementation and commercial perspective Low return on invested capital - total return on equity of 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- 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 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 Key reforms up to 2013

-7- MacCarthaigh, M. The corporate governance of commercial state-owned enterprises in Ireland. Institute of Public Administration, P61 LATVIA 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 Key reforms up to 2013 (continued) It can be done by dividing supervision functions between Centralised SOE Manager (to be established) and respective line ministries

-8- 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 disposal implementation Ensure information transparency regarding use of state capital Centralised SOE Manager Functions of SOE Manager (to be adopted)

-9- Dual model of SOE governance (1) Company vs public state agency? Decentralized governance YES (4) How to govern? Implementation of corporate governance (3) What is most adequate governance type for each SOE? 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 4 decisions to take (2) Maintain shares as state-owned? Sell: - in short or long term - all shares or partly NO - Reorganise - Liquidate NO (1) Do all SOE acting accordingly to principles for engagement of public person in business activities?

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