The diverse character of the SOE landscape in Latvia, including entities that are clearly not profit oriented, makes management and standard setting difficult.
In Latvia, there are altogether 65 100%-owned SOEs, from which there are 14 small SOEs in the culture sector and 13 SOEs in the health sector as well as many other small SOEs which are mainly employed to implement public service obligations or delegated functions.
Therefore the same standards for developing of strategies, setting of targets, evaluation and monitoring of results may not be relevant for both large commercial companies operating in international markets and small regional theatre.
In terms of shareholding management, the majority of the benchmarking countries have taken a more centralized approach by concentrating the largest part of shareholding in the hands of a limited number of entities as compared with Latvia operating with 12 shareholding managers. More centralized shareholding would allow the potentially conflicting interests of line ministries to be minimized. Line ministries, that need to develop policy and regulation for their respective sectors and manage government funding, and at the same time hold a role of a shareholder for SOE operating in the same sector, plays two roles at the same time. Furthermore, a large number of small SOEs affect management quality and drive up external administrative costs.
Therefore the objective of the project was to have an independent review of the framework of SOEsÕ governance system that was built in Latvia and to support the development of an adequate classification that would take into account the wide spectrum of different SOEs in the portfolio and would help to develop the methodological framework for their governance.
The results were achieved by, firstly, developing a method for classifying all SOEs into relevant groups. Secondly, reviewing and proposing revisions to the way targets and key performance indicators are set and monitored for each group of SOEs and how dividend policy is applied.
The suggestion was to divide 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. Based on this grouping there are opportunities to calibrate requirements of shareholders in terms of target setting and governance.
It was proposed to differentiate the selection of targets and KPIs between Group A and Group B companies. The general direction recommended for companies in Group A is to focus on financial targets and for companies in Group B Ð on non-financial targets. In that way, it is possible to adjust the current approach and legislative framework to take into account the wide scope of the SOE portfolio.
Now the smaller SOEs in culture and health sector can focus on non-financial targets, while large commercial SOEs can focus on meeting the highest reporting standards.
It was also suggested that the dividend policy should be further focussed on a limited number of companies in Group A, which is a different approach from the current system in place.
The findings also suggested that the number of KPIs should be limited so that it would make a compatible set of targets that are to be monitored and would show a clear direction of the shareholder’s expectations.
As a result, SOEs have an illustrative list of KPIs as well as a number of case studies, which is a much larger set of financial and non-financial operation indicators that can be used as targets.
In terms of monitoring the progress towards the set targets and key performance indicators, the suggestion was to integrate them into the annual reporting cycle through creating meaningful management reports as a part of the annual report, which would ensure both transparency of company performance to public sector bodies (for performance evaluation purposes) and to the general public.
The project report also included several findings that will be used to develop new proposals for the government, such as how to centralize the governance of commercially oriented SOEs.