State Administration Structure Law and the Road to Stock Exchange for State-Owned Enterprises

It is no secret that, compared to other countries in the region, the stock market capitalisation of Latvian companies lags far behind its economic potential, representing only 1.8% of GDP at the end of 2023. The number of Latvian state and municipality-owned companies listed on the stock exchange relative to private sector issuers still remains at zero, in contrast to Lithuania (36%) and Estonia (38%). These statistics not only show the passivity in the use of financing opportunities offered by the capital market but also the vast differences between the supervisory models adopted by neighbouring countries for state-owned enterprises. Since state-owned enterprises make up an extremely significant share of potential capital market candidates, it is important to understand what hinders their participation in the capital markets, and how to get rid of these unfavourable factors?

Article 88 of the State Administration Structure Law

The first part of the widely debated Article 88 of the State Administration Structure Law (SASL) still provides that public persons may acquire a stake in capital companies only to (1) eliminate a market failure, (2) provide strategically important goods or services or (3) manage strategically important properties. These restrictions have long been based on an outdated concept of the need to restrict state commercial activity because it allegedly distorts the market economy. As a result, the commercial frontiers of public corporations have been fundamentally restricted for a long time, with adverse effects on both the financial situation of Latvia and society as a whole.

At the same time, other major European economies, which are bound by equivalent obligations of competitive neutrality, allow state commercial activities justified by objectives such as generating additional revenue (Finland), creating increased value, promoting the development of energy and natural resource industries (Norway), promoting sustainability, science, medicine, national employment (Sweden) and protecting essential national interests (Germany).

The above-mentioned countries also do not restrict their strategy for state-owned enterprise establishment within a legal act, which is subject to the problem of legal staticity. The core of state’s participation strategy in corporate companies is laid down in internal policy planning documents, which can be regularly updated to adapt to unpredictable changes in the global market economy.

Fourth criterion of Article 88(1) of the SASL

Considering the aspects mentioned before, it is necessary to add a fourth criterion to Article 88(1) of the SASL, which is linked to the strategic objectives set for the state-owned enterprise, thus enabling the main decision-making body (Cabinet of Ministers, councils of municipalities) to decide on the services provided by state-owned enterprises in the form of a policy planning document. This would not only provide flexibility and adaptability to change but also a sufficient level of certainty about the legality of the services provided by the state-owned enterprise, both for the company itself and for its potential capital market investors.

Strengthening competitive neutrality

Although the competition neutrality framework established in Article 14.1 of the Competition Law has been in force since the beginning of 2020, the Competition Council, as the enforcer of this framework, has not adopted any decisions on the finding of a breach of this Article. Instead, the Competition Council has actively developed more than 400 opinions, providing its legal assessment of the compliance of each service provided by state-owned enterprises with the policy criteria of Article 88(1) of the SASL. However, the legal analysis part of the Competition Council's opinion practice should be abandoned, as the overarching objective of these activities can be achieved with a much less restrictive instrument – more active monitoring of competitive neutrality.

Capital markets – a bridge between private and public interests

The listing of shares on capital markets is an excellent instrument to reduce the conflict between private and public interests. However, Latvia still needs to do a lot to ensure the right environment for a successful stock market listing of market-oriented state-owned enterprises. Thus, it is important to improve the supervisory model for state-owned enterprises by making the necessary changes to both the SASL and other related laws and regulations.

Kārlis Mārtiņš Krauze, ZAB Eversheds Sutherland Bitāns, lawyer