In recent years, from time to time, a discussion on the inclusion of state and municipal corporations in the capital market enters the public space of Latvia. However, it appears that the opportunities and benefits offered by the capital market are not really realized in Latvia.
Furthermore, it is not clear what prevents responsible institutions and officials from taking specific actions in order to take logical next steps in the development of large state-owned companies and, therefore, Latvian society. Especially since the other two Baltic countries have success stories to learn from.
The Financial and Capital Market Commission (FCMC) has invested significant work in capital market development over the past three years. First, by carrying out a thorough assessment of the situation and developing a 10-step program for the development of the Latvian capital market. Second, the gradual implementation of measures for the implementation of the developed program.
In early 2021, the FCMC held the first Latvian capital market forum, during which we also discussed the state’s opportunities for the development of the Latvian capital market. It has often been argued that this is a question of political will, as it relates to essential aspects of economic development. Two years have passed without progress, because, as Ints Dälderis said in the forum: “there are no votes in favor”. Currently, the 14th Saeima awaits the start of its four-year work cycle, while Prime Minister Krišjānis Kariņš, who is currently leading the negotiations for the formation of the new government, stressed: “the country needs a government and a coalition. which is primarily capable of guaranteeing the security of the citizens of the country and the economic development of the country. ”Does this mean that we will finally find a way to make money for the country?
The participation of state and municipal corporations in the capital markets through the issuance of bonds or the offer of equity shares would allow them to attract financing for ambitious development projects. This should be done by using diversified sources of financial attraction, thereby also improving the company’s balance sheet. This step usually offers companies the opportunity to receive cheaper financing from both the capital market and lenders in the future. The participation of these companies in the capital market would also create the opportunity to divert a significant amount of funds from the state-funded pension scheme to the strengthening of the local economy, so the beneficiaries would not only be the companies, but also the Latvian citizens who invest. .
At the same time, without obvious benefits in the diversification of funding sources, participation in the capital market allows companies to organize their internal processes and become transparent and better managed. Environmental, social and management criteria, or principles of sustainability, are an integral part of the management of any modern company. These principles are more successfully implemented on a daily basis by public companies whose sustainability criteria are higher and whose goals are more ambitious than companies that do not participate in the capital market. This is related to both regulatory norms and investors’ wishes and requirements for the company to become more modern. The capital market also offers free growth in marketing and reputation management. News published by companies reaches a much wider audience both nationally and internationally. Even the name of the market maintainer – the exchange – is a sort of quality mark and helps to operate on international markets. This has long been understood and appreciated by companies across Europe and the world, while Latvia is still the latest in Europe for capital market development.
Often in discussions it is incorrectly stated that participation in the capital market would be a covert privatization of legally defined non-privatizable companies. I can say with certainty: nowadays it is not possible, because the controlling share remains in the hands of the state. There are examples in the capital market that clearly show a different approach: the state keeps a company determined to be strategic and not privatizable, taking advantage of the opportunity to attract investment to finance certain business development projects.
For example, AS “Latvijas valsts meži” and AS “Latvenergo” have set up a joint venture for the development of wind farms. By giving the opportunity for every resident of Latvia to buy a share (up to 20%) of the share capital, such a subsidiary company would achieve several positive effects: Latvian residents would invest their funds in financing Latvia’s energy security, while companies they would have the opportunity to attract significant funding for the implementation of the investment plans. At the same time, the interests of the state would be preserved, as most of the shares would remain under state control.
Latvia is not the first country to implement such a policy. Right next to it, the initial public offering of “Ignitis” (Lithuania) and “Enefit Green” (Estonia) shows the great interest of investors, as well as the strategic vision of the companies that being on the capital market is a value. By evaluating the success of the public offering of “Enefit Green”, we can once again make sure that the company has access to the money on very favorable terms, without requiring guarantees. At the same time, investors evaluate not only the results achieved by the company, but also the future goals and ambitions indicated in the prospectus.
The inclusion of state-owned corporations in the regulated market would generally represent a significant boost for the development of the Latvian capital market and would offer the opportunity to carry out various ambitious investment projects without spending public funding on them, which are currently needed for many other purposes. . Therefore, we hope to finally see this direction in the government declaration and action plan. This would create an opportunity for both households to invest the accumulated funds, which are currently held in bank accounts and are losing their value due to inflation, and for pension funds to invest the savings of each Latvian resident in the development of the Latvian economy.
