Latvia is moving ahead with the reform of state-owned enterprises (SOEs) by endorsing a methodology for optimising capital and governance structures for such companies.
The approach was developed in an advisory project with international partners and creates a “letter of expectation” as a new reporting tool. The letter will require SOEs to disclose certain indicative metrics for their capital structure, expected rate of return and dividend payout ratios. It will also define a set of financial instruments to use during a five-year period and set corporate governance standards.
The goal is to bring Latvian SOEs to standards that can attract investment and meet the requirements – in terms of disclosure and transparency – to access capital markets. “The methodology provides an opportunity to ensure an appropriate return on capital invested by the state and to implement a balanced dividend policy for each SOE,” said Pēteris Vilks, head of Latvia’s Cross-Sectoral Coordination Centre (CSCC).
Latvia currently has 170 SOEs, accounting for a significant share of the economy with almost 15 per cent of total assets and 9.7 per cent of all profits, and playing a defining role in various sectors such as energy.
Mario Nava, Director-General for Structural Reform Support at the European Commission, said: “Access to finance is crucial for any company and I believe it is very important that state-owned enterprises can also benefit from what the capital market has to offer.”
Jim Turnbull, EBRD Deputy Director, Capital Markets Development, added: “SOEs can benefit from, and contribute to, a thriving local capital market that offers companies diversified access to finance, enhanced corporate governance and new investment opportunities for institutional investors.”
The SOE reform project was funded by the European Union (EU) and implemented by the European Bank for Reconstruction and Development (EBRD), in cooperation with the European Commission and with support from PricewaterhouseCoopers Latvia (PwC).
Līga Kļaviņa, Deputy State Secretary, Ministry of Finance of Latvia, concluded: “The findings of this working group encourage companies to consider going beyond traditional funding instruments, such as bank lending or using public funds, and indicate that capital markets have the potential to provide better funding terms for companies. Market funding can improve the long-term competitiveness of companies and reduce reliance on the state budget for funding investment needs. On a more general level, active capital markets contribute to investment and growth.”
