Our experience

State Ownership Policy Review (Part II)

Beneficiary

Cross-Sectoral Coordination Centre

Background

Several years have passed since 2015, when Latvia implemented a corporate governance reform making significant changes to how state-owned companies are governed, increasing their efficiency and return on capital, and promoting the attainment of goals important to society as a whole. Improving the corporate governance framework requires that the state-owned companies’ governance framework and practices facilitate the shareholder’s involvement in setting their strategic goals and the achievement of objectives specified in their strategies, while bringing state-owned companies closer to the governance and disclosure levels of listed companies. As well as making the governance of state-owned companies more efficient, it is necessary to assess the return on capital invested by the state, looking for opportunities to make better use of the funding sources available to the state-owned companies and achieving optimal capital structures.

Diversifying access to finance can help state-owned companies grow, operate efficiently and develop good governance practices, facilitating innovation, creating jobs and providing additional state revenue, while freeing public funds for alternative investments. This practice makes it possible to share business risk with the private sector and to minimise reliance on bank financing and the need to invest public funds.

To raise awareness of the benefits of capital markets and to improve the corporate governance and financial resilience of state-owned companies, a project was carried out under the leadership of the Cross-Sectoral Coordination Centre to develop a methodology for creating optimal capital structures in state-owned companies.

Objective

Examining how state-owned companies apply corporate governance principles in practice and evaluating their existing capital structures to identify shortcomings and prepare a comprehensive methodology for financing state-owned companies in order to obtain optimal capital structures, while bearing in mind the development of the local capital market.

Main tasks

Analysing the corporate and financial governance of state-owned companies
Preparing a financing methodology for state-owned companies
Drawing up recommendations and a roadmap to help implement the financing methodology in state-owned companies

Key activities involved in the project

Conducting reviews of 15 state-owned companies and interviewing representatives of the companies and their shareholders to identify shortcomings in their existing corporate governance practices and receive recommendations for preparing the methodology
Conducting interviews with institutional investors, state-owned companies in OECD countries and their shareholders as well as other stakeholders to identify good practices for preparing the methodology
Testing the financing methodology in 15 selected Latvian state-owned companies

The methodology enables the state to secure an appropriate return on the capital invested and to implement a balanced dividend policy in each state-owned company. The recommendations are especially important for developing the state-owned companies and increasing their value because raising funds, including through the stock exchange, will not only encourage new investment projects but also promote development of the local capital market and give Latvian residents an opportunity to invest in promising companies. The methodology prepared by PwC and the recommendations support the reform implemented by the Cross-Sectoral Coordination Centre to improve and centralise the governance of state-owned companies, making it more efficient and professional.

Pēteris Vilks, Head of the Cross-Sectoral Coordination Centre

The outcome

The project aimed to improve the decision-making processes in government agencies and state-owned companies, focusing on the work of the Cross-Sectoral Coordination Centre as a coordinating body and ministries as state shareholders in choosing the most appropriate financing model and capital structure for each state-owned company. To prepare comprehensive recommendations, an analysis of the state-owned companies’ corporate governance framework and practices was carried out, assessing their compliance with the OECD and World Bank guidelines and best practice examples in OECD countries, and interviews were held with institutional investors and representatives of the state-owned companies and their shareholders to gather key insights for a more efficient governance of the state-owned companies.

The methodology offers the state-owned companies and their shareholders various corporate governance tools for presenting information on their strategic goals and expected results in a transparent manner. Primarily through introducing shareholder expectation letters, the methodology will help the shareholders communicate clearly with the companies and the Latvian public about what the state shareholder and the sectoral ministry expect from the company’s medium-term business strategy, including its capital structure, expected profit and dividend levels, the recommended set of financial tools, and the required corporate governance standards.

Find out more about the study

The project was funded by the European Union (the Directorate-General for Structural Reform Support and the European Bank for Reconstruction and Development).