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Government and enterprise is a series of studies and initiatives developed by Ernst & Young, examining various facets and aspects of governments’ relationships with enterprise. The series opens with this study which focuses on state-owned enterprises, where the aim is to delve deeper into the issue of government ownership, understanding how the state operates in this particular role.

Upcoming initiatives in the series will continue to develop the government and enterprise theme, delving deeper into what governments (national and local) own, what they co-deliver in partnership with the private sector, and where they regulate provision from the market.

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A working group of experts from the Baltic Institute of Corporate Governance (BICG) has prepared a report on state-owned enterprises (SOEs) in Latvia.

On the 8th of September, the Annual Review 2009 was presented to the Cabinet of Ministers’ Reform Steering Group meeting. The aim of the initiative is to highlight the link between the state and the individual and emphasize that all assets owned by the Latvian state is the property of Latvian citizens, and it is a direct obligation of the government to manage it with due care and in a responsible manner.

The report provides detailed information on the financial performance of companies that are fully or partly owned by the government. BICG experts have analyzed the profitability of companies in the energy, telecommunications, forestry, transport, real estate, healthcare and other sectors. According to the compiled data, the Latvian state is a shareholder in altogether 142 companies with their aggregate turnover comprising 18% of Latvia’s GDP in 2009. In per capita terms, the value of state-owned shares and assets is 1,646 LVL. The total value of state-owned assets is 3.68 billion LVL, including state shareholdings in companies 2.06 billion LVL worth. The balance sheet total of SOEs is 7.15 billion LVL. In 2009, SOEs contributed 185 million LVL to the state budget by dividend payouts; the number of employees totals to about 53 thousand.

According to Baltic Guidance on the Corporate Governance of Government-owned enterprises developed by the BICG and a group of international level corporate governance experts, compiling a publicly available annual report about SOEs and their performance appraisal is among the recommendations to be followed towards a more efficient and professional management of state-owned assets.

“The Review is the first ever document of this type in Latvia. Its preparation has been a voluntary work donated by the BICG and its expert team. The goal is to improve transparency in Latvia and create a benchmark for SOE evaluation in the years to come, thus contributing to their better performance,” said Kristian Kaas Mortensen, President of the BICG.

The report also assesses the financial performance of SOEs as compared to their peers in other countries, including in the Baltic Sea region. The conclusions are that better-governed SOEs and their more efficient operations would bring higher returns to the government budget both in the form of regular and one-off dividends.

On Wednesday, the 8th of September, the Reform Steering Group meeting discussed the Review and decided to set up an intersectoral working group and charge it with a task of drafting a policy document regarding the management of government-owned assets, with an aim to increase the revenue to the government from investment in SOEs.

“Finding the right levers and tools to make the operations of companies more efficient will be one of the main challenges for the working group”, admits Daiga Auziņa-Melalksne, a Board Member of BICG. “The Review outlines a number of possible alternatives, including establishing a central professional management body similar to those in Nordic countries. Further steps involve an evaluation of the compiled data and assuring an efficient management at all SOEs. Improved management of SOEs potentially may raise their value, increase the dividend payout amount and underline the role of a transparent and advanced corporate governance for the development of business environment. “

The report was prepared in two months and involved the participation of the leading experts on the Latvian and Baltic financial markets, including international audit companies and investment banks. There was an immense support from the Ministry of Economics and other ministries in the form of contributed financial data on SOEs and assets.

Similar reports are published also in Finland and Sweden. Recently Lithuania has prepared its report, and right now an in-depth audit is in progress with a goal to enhance the financial performance of SOEs.

About Baltic Institute of Corporate Governance

Baltic Institute of Corporate Governance is a non profit, non governmental initiative, working towards creating better governed public and private companies in the Baltic Sea region. BICG pursues global class transparency and competitiveness of public, private and state or municipality owned enterprises in the Baltic region through the promotion of leading corporate governance practices.

The document presented to the Reform Steering Group and the Presentation (in Latvian) is available on the website of the Cabinet of Ministers: http://www.mk.gov.lv/lv/aktuali/zinas/2010gads/09sept/080910-mp-07/.

Prepared by:

Kristian Kaas Mortensen, President, Baltic Institute of Corporate Governance, phone: +370 6111 33 44, km@corporategovernance.lt.

For any comments about the Review and conclusions, please contact Indars Aščuks, head of the working group, phone +371 29119096, indars.ascuks@nasdaqomx.com.

Press release, June 2, 2010

Today, Baltic Institute of Corporate Governance (BICG) launched the Baltic Guidance on the Corporate Governance (Guidance) for the state and municipality-owned enterprises. These best practise recommendations were developed to enhance the financial and social performance of such enterprises and to give a competitive lift for the whole Baltic region.

The Government-owned enterprises (GOEs) represent a significant share of economic activity and have an important economic and social impact. They mainly operate in sectors of high economic and social significance, like utilities, energy, transport, thus inefficiencies in their governance come at a high public cost.

GOEs governance challenges are essentially the same internationally: absence of clear strategic objectives, complex decision making and accountability structures, inadequate separation of state ownership from the regulatory role and industry policy, lack of transparency, no or passive ownership policy, highly politicized, incompetent, weak boards, bureaucratic mindset into the day-to day management.

By launching the Guidance BICG seeks to provide the tool for GOEs to effectively address the mentioned challenges and enhance more professional governance, better strategic and operational oversight, improved financial and social performance and the achievement of the government’s strategic objectives.

“Better governance of Government-owned enterprises would have a positive impact on state budgets, on the public’s perception of government, and on the quality of infrastructure and services as well as make the Baltic region more attractive to foreign investment, – says Arminta Saladžienė, Chair of the Executive Committee of the BICG. – The launch of the Guidance is the first step. Now we encourage our countries to take the lead and consider the issues raised in the document, discuss and evaluate the recommendations, develop action plans and implement them.”

According to Philip Armstrong, Head of Global Corporate Governance Forum, it is certain that this commitment will yield significant returns. Strong governance practices in the Baltic GOEs are critical in helping realise the goals of constructing a vibrant society, creating jobs, stimulating investment, hemming in corruption, building wealth, and protecting human freedom. The Baltic Guidance on the Governance of Government-owned Enterprises leads squarely in this direction.

The Guidance was developed under the leadership of the BICG working in close cooperation with a large number of experts, government officials, board members and executives from GOEs, as well as other stakeholders from each Baltic country. It has a strong relation with the OECD Guidelines on the Governance of State-owned Enterprises, which is the recognised international best practice standard, but it is written with the regional approach. The Guidance provides a roadmap on how to achieve international best practices focusing on the specific issues faced in the Baltic region.

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Key note speech by Prime Minister of Latvia Mr. Valdis Dombrovskis to BICG graduates on May 29, 2010

Good afternoon ladies and gentlemen,

Let me start with excerpt from one of definitions of corporate governance that you can find in your folders, which states the following:

„Sound corporate governance practices inspire investor and lender confidence, spur domestic and foreign investment and improve corporate competitiveness.”

This definition contains almost everything that my country, Latvia, is looking for at this moment.

As all of you probably know, Latvia faced the sharpest GDP contraction in Europe in 2008. Minus 18% of GDP in peacetime is dramatic. This, coupled with unseen FDI contraction and flight of capital as a result of the run on PAREX Banka, created life-threatening situation to our State. We were heading towards default. Two out of three main international rating agencies have downgraded Latvia to junk category with all the consequences that it had on Latvian enterprises.

To stabilize the situation, one of the first tasks after my government took power in March 2009 was exactly to regain investor and lender confidence.

As a result of radical budgetary consolidation, which in 2009 and 2010 amounted to 1 billion Lats or around 10% of GDP the situation is improving. Nevertheless, these measures were economically and socially painful. Although there are some downward movements, unemployment in Latvia is still among highest in the EU. To create jobs we badly need domestic and foreign investment.

And finally, to overcome the crisis and warrant sustainable growth, my Government undertook radical structural reforms in economic, social and public sectors with aim to regain competitiveness of Latvian economy in medium term.

As you can see, all three components of the corporate governance are also crucial for the country in general, which means that you in this room and we at the Government are working in the same direction.

Almost 20 years since Baltic states re-gained their independence where marked with sign of always deeper integration into global processes. Be it WTO, NATO or EU, organizations in which all three Baltic states are members now, membership is the proof of constant willingness of our countries to become fully fledged members of international community.

At the same time, Latvia was integrating the international community economically. In modern global economy the terms “integration” and “competition” stand very close to each other. Countries compete to attract know-how, capital and talent. To be competitive, country needs to be attractive for businesses and people.

There are many ways to conduct business in modern world, each country, each region have their business history, culture and practice, nevertheless there are some trends that are commonly used as reference. Here I think of OECD Principles of Corporate Governance adopted in 2004 and serving as benchmark for businesses around the world.

I warmly welcome the creation of the Baltic Institute of Corporate Governance and re-assure that the work done by the Institute is absolutely critical to improve the business environment in Latvia and Baltic region in general. In particular, I would like to praise the BICG for issuing the Baltic Guidelines for Corporate Governance of the State -Owned Enterprises. They are very timely as at present my Government is evaluating which State – owned enterprises it will keep, which ones have to be restructured into public agencies and which enterprises will be privatized.

And to finish, let me address one very important issue. And this is leadership and how it goes together with corporate governance. This quote belongs to Mark Goyder, Director of Tomorrow’s Company, and, in my mind, reflects very well the link between leadership and corporate governance:

“Governance and leadership are the yin and the yang of successful organizations. If you have leadership without governance you risk tyranny, fraud and personal fiefdoms. If you have governance without leadership you risk atrophy, bureaucracy and indifference.”

Leadership – that’s the other thing that Baltic business needs. Money does not have nationality, leaders do. That is the reason why I full – heartedly support this initiative and executive training for business leaders is the best and most practical way to implement what BICG is after.

Thank you!

The Seimas of Lithuania and the Lithuanian Ministry of Economy together with Baltic Institute of Corporate Governance to host Baltic summit on Corporate Governance on March 19, 2010 in the Lithuanian Parliament.

Governance of state-owned enterprises is a major challenge in many economies, including the 3 Baltic states.

As the Baltic governments seek higher efficiency and transparency in the public sector, governance of the state and municipality-owned enterprises is of primary importance.

Baltic Institute of Corporate Governance will develop corporate governance guidelines for state and municipality owned enterprises to aid the Baltic governments assess and improve the way they exercise ownership of these companies, which constitute a significant share of the economy.

Welcome address will be held by Prime Minister Andrius Kubilius, Chairman of the meeting will be Pekka Timonen, other key note speakers include Richard Frederick, Dag Detter, Chris Hodge Ian Plenderleith and Arminta Saladžienė.

Invitation

Baltic Institute of Corporate Governance (BICG) is in a process of developing “Baltic Guidelines for Corporate Governance in State and Municipality owned companies”.

As a part of developing these guidelines, BICG has contracted an international experienced expert Mr. Richard Frederick.

Richard Frederick advises on issues of corporate governance and transparency mainly for the World Bank, the IFC, UNCTAD and the OECD.

He was one of the principal authors of the OECD Principles of Corporate Governance, and a contributor to the OECD Guidelines for Multinational Enterprises, the UN Guidance on Good Practices for Corporate Governance Disclosure, and other national and international codes of governance. Recently he has analyzed state-owned enterprise governance and worked on corporate governance codes in developing and emerging market economies.

Mr. Frederick was involved in the privatization of state-owned enterprises for the Treuhandanstalt in the former East Germany and, while at KPMG, advised boards on executive remuneration schemes. Formerly a Principal Administrator at the OECD and the Director of Operations of the International Federation of Accountants, Mr. Frederick holds an undergraduate degree from Yale University and an MBA from INSEAD.

BICG, together with Mr. Frederick, is involving all stakeholders from Baltic State and Municipality owned companies in creating the “Baltic Guidelines for Corporate Governance in State and Municipality owned companies”. We do that through working groups, national meetings, questionnaires, a high level summit on March 19, and as well direct phone interviews with Mr. Frederick.

BICG Group members who would like to get involved in this development can contact Kristian Kaas Mortensen. km@corporategovenance.ltor +370 6111 33 44

Please join us in congratulating Arminta Saladžienė, Chairman of the Baltic Institute of Corporate Governance, Executive Committee on her honour in joining the Business Hall of Fame.

She received this honour together with Sicor Biotech CEO Vladas Bumelis and LAWIN Partner Rolandas Valiūnas, in an Awards Ceremony by President of the Republic of Lithuania Dalia Grybauskaitė.

More details and pictures on www.president.lt.