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After Crisis: Policy Reforms for Effective Management of State Owned Enterprises in Latvia

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. Crisis in Latvia: GDP growth – from +33% to -25%. F iscal consolidation (or ‘internal devaluation’).

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After Crisis: Policy Reforms for Effective Management of State Owned Enterprises in Latvia

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

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

  4. Fiscal consolidation of State Budget relative to GDP, 2008-2011 -9.5% -4.1%

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

  7. 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

  8. 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.) • 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)

  9. State of play • 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

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

  11. Key reforms up to 2013 • 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 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

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

  13. Key reforms up to 2013(continued) Concept of SOE governance – currently under formal review among ministries • 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

  14. Functions of SOE Manager(to be adopted) Ensure record-keeping and 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 shares disposal implementation, decision making on individual dividend payments Definition of specific, measurablebusiness objectives (economic and social); an annual evaluation of the results achieved

  15. 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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