After joining OECD in 2016 and starting active reforms in corporate governance of state-owned enterprises (SOEs) in Latvia, Cross-sectoral Coordination Centre (CSCC) was set as a coordinating institution responsible for drafting legal acts and supplemental guidelines in relation to the governance of SOEs and taking part in the processes of corporate governance of SOEs. CSCC is also responsible for monitoring the implementation of those legal acts and related guidelines as well as to provide consultations and organize learning events for shareholders (mainly line ministries) and management of SOEs.
Although the accession to OECD was successfully completed and the legislative base had been elaborated, once getting to the implementation, CSCC - the coordinating institution, which was monitoring the implementation – thought that it is worthwhile to review the elaborated SOEs’ governance system quite early at the beginning of the reform so that appropriate adjustments could be made taking into account the reality.
At the right moment, the opportunity from the newly-established Structural Reform Support Service (SRSS) at the European Commission came that allowed CSCC to apply for top consulting services and engage KPMG – international consulting firm to help CSCC find answers on how to adjust the methodology of SOE governance according to the wide landscape of SOEs. It was concluded that the main challenge of SOE policy in Latvia is the diversity of the SOE landscape because operating as 100%-owned SOEs these entities were ranging from profit-making businesses operating in a free market to regulated utility companies or providers of public services heavily subsidized by the state budget. And the governmental institutions as the shareholders faced challenges in terms of setting and applying unified standards of SOE governance. For example, the same strategic planning and target setting standards are to be applied to SOEs such as a national energy company and a regional theatre, therefore it creates a large variability in interpretation and potentially disproportionate burden both on SOEs and the CSCC.
The aim of the analysis and recommendations under this project was to suggest an approach to group the SOEs with an aim to calibrate the policy regarding target setting, reporting, monitoring and dividends in SOEs and hence reach a more optimal balance between the desired policy results and resources needed to achieve and sustain them.
To achieve this the consultant analysed the best practices of four other OECD/EU member states (Italy, France, Sweden and Estonia). Although there were similar patterns in all benchmarking countries of SOE presence in several economic sectors, there was no ready methodology that could be directly transposed to Latvia.
The report by consultant suggests dividing the SOEs into two major groups, A and B, based on specific parameters, in particular, whether the entity should build on its commercial potential or rather focus on delivering a specific task delegated by the government. By applying these parameters it is possible to come to two groups: A: holders of strategic economic and physical assets or companies with commercial potential, and B: entities with a delegated state assignment.
The selection of targets and KPIs is later differentiated between Group A and B companies. The general direction recommended for companies in Group A is to focus on financial targets and for companies in Group B – on non-financial targets. It is suggested that the shareholders should focus their attention on a limited number of key targets and a compatible set of KPIs for each SOE or group of SOEs.
The report suggests an illustrative list of KPIs as well as includes a number of case studies of specific SOEs to illustrate the approach. The proposal extends the list of financial targets and KPIs currently suggested by the CSCC with a larger set of non-financial indicators.
Consequently, as regards the dividends the proposal is for the dividend policy to be further focussed on a limited number of companies in Group A.
In terms of monitoring the progress towards the set targets and key performance indicators, the suggestion is to integrate them into the annual reporting cycle through creating meaningful management reports as a part of the annual report to ensure both transparency of company performance to public sector bodies and to the general public.
Furthermore, the report pays particular attention to the methods the shareholders and the CSCC could use to make the shareholder – management dialogue more effective and result oriented.
Although the implementation of all of those proposals is still on its way, the CSCC considers that the main benefits will be the reduction of administrative burden and based on this first project we will have the possibility to develop new state ownership policy in the year 2019 and start a new project to evaluate the capital structures of SOEs and possible development of capital markets.
|Award category:||new solutions to complex challenges - a public sector citizen-centric, sustainable and fit for the future - european or national level|
|Type of activity:|
|Keywords:||SOEs, State-owned enterprises, corporate governance|
|Short English description:||The aim of the analysis and recommendations under this project was to suggest an approach to group the SOEs with an aim to calibrate the policy regarding target setting, reporting, monitoring and dividends in SOEs and hence reach a more optimal balance between the desired policy results and resources needed to achieve and sustain them.|
|Organisation:||Cross-sectoral Coordination Centre of the Republic of Latvia|
|Level of government:||national level|
|Size of organisation:||1-25|
|Number of people involved:||1-5|
|EU membership:||EU member|