Latvia’s economic growth potential is significantly affected by the relatively high share of state-owned and municipally owned companies (SOEs) in several sectors where private-sector alternatives also exist. Although in recent years some improvements have been made in the areas of governance and consolidation, which were to some extent encouraged by the administrative-territorial reform of 2021, the presence of the public sector remains structurally significant and in certain segments may be insufficiently justified from an efficiency perspective. FICIL emphasises that the state involvement in the economy must be clearly defined and based on addressing market failures, rather than on maintaining parallel commercial structures.
According to Lursoft database information for 2024, approximately 65 state-owned and 259 municipally owned companies operate in Latvia, covering a broad range of NACE level 2 sectors – from healthcare and utility services to real estate management, transport and, in some cases, also competitive commercial sectors. According to the OECD’s 2024 report on Latvia, 7% of the workforce was employed in the state-owned companies, which is 3 times more than the OECD average.[1] FICIL notes that such broad involvement raises questions about the boundaries of the state functions and the justification of the public resource use.
Deficit of Transparency and Accountability in the Governance of Public Capital
One of the most significant challenges associated with the SOEs in Latvia is limited transparency and insufficient effectiveness of external oversight. State Audit Office data show that a considerable share of municipally owned companies operate without medium-term strategies, while many of them demonstrate weak financial performance. In addition, a report prepared by the State Chancellery concluded that fewer than 40% of SOEs published complete and sufficiently high-quality information in line with regulatory requirements.[2] FICIL emphasises that this points to a systemic need to strengthen governance discipline, transparency and results orientation.
Financial market instruments, including stock exchange listing, can serve as a practical mechanism for improving governance quality. They introduce stricter disclosure requirements and external market oversight, thereby reducing information asymmetry and weaknesses in internal control. Romania can be cited as a successful example: between 2000 and 2019, the IPOs of five SOEs in the energy and utility sectors accounted for approximately 90% of total stock exchange IPO proceeds (EUR 1.3 billion), significantly contributing to the development of the local capital market. In Latvia, until 2026 this instrument has so far been used in a very limited capacity,[3] while significant steps have recently been taken towards its broader introduction in SOEs. Namely, in 2026, AS “LAU Infra Group” carried out the first initial public offering (IPO) of a SOE in Latvia,[4] while the Riga municipality began preparing AS “Rīgas namu pārvaldnieks” for listing on the stock exchange.[5] Nevertheless, the use of the stock market in financing and governing SOEs remains relatively limited, since large state-owned companies such as “Latvenergo” and “Augstsprieguma tīkls” operate mainly in the bond market, where transparency requirements are narrower. FICIL believes that greater participation of SOEs in capital markets could strengthen both their operational efficiency and the development of Latvia’s financial market. At the same time, a more comprehensive assessment of the potential economic benefits, risks, and broader implications of this approach is needed, considering the specific characteristics of each enterprise’s operations and strategic objectives of state ownership.
Sectoral Performance Fragmentation and Structural Efficiency Gaps
More effective governance of state-owned and municipally owned enterprises begins with a fundamental question: are the existing resources being used as efficiently as possible? In Latvia, duplication of functions, fragmented governance and insufficient use of economies of scale (using larger-scale advantages) continue to limit the efficiency of SOEs. This is also confirmed by the FICIL analysis carried out, which reveals significant differences in companies’ financial performance depending on their size and sector. For example, state-owned companies in the real estate sector, micro-enterprises on average operated at a loss of EUR 10.430, while small and medium-sized enterprises reported a positive profit[6]. Meanwhile, in the water supply sector, losses were observed among both small and medium-sized enterprises, whereas larger companies in the energy sector were better positioned to benefit from economies of scale. Regional disparities also play an important role, as limited administrative capacity and access to investment in less developed municipalities may hinder infrastructure development and improvements in operational efficiency. These findings demonstrate that company consolidation is not a universal solution, as efficiency also depends on governance quality, cost structures, and sector-specific regulations. The State Audit Office (2023) also points to a similar duplication of functions in municipally-owned companies, highlighting the need to review the existing governance model.[7]
In FICIL’s view, the aim should be to achieve a greater return on every euro invested, rather than simply to reduce the number of companies. Measures could include merging companies where this improves efficiency and selling them to private investors where continued public ownership is no longer strategically or economically justified.
The main benefit of reorganisation lies in the opportunity to generate greater added value with fewer resources by consolidating similar functions, eliminating duplicated administrative processes, optimising costs, and making more efficient use of infrastructure. This would not only reduce operating costs, but also allow the savings to be redirected towards improving service quality and financing new investments. Such measures are particularly relevant in municipalities, where several small enterprises perform similar functions, as illustrated by reorganisations carried out in Bauska and Dienvidkurzeme municipalities, in order to use available resources more effectively6. At the same time, reducing regional disparities requires strengthening the administrative capacity of less developed municipalities and ensuring more equitable access to municipal infrastructure. Given limited budgetary resources, this could be facilitated through the centralisation of certain functions, such as accounting, IT services, and other administrative services.
Meanwhile greater private sector involvement could reduce the financial burden on municipalities and foster competition. The potential approach is illustrated by the centralised district heating management model implemented by SIA “Gren Latvija”.[8] Furthermore, FICIL calls for the development of a regulatory framework for Real Estate Investment Trusts (REITs), which would help attract private capital to real estate and relevant infrastructure projects, diversify financing sources, and create opportunities to use capital invested in public assets more efficiently.[9] Ultimately, the objective is to assess in which sectors and to what extent the public ownership is necessary and justified, while ensuring efficient resource management, lower costs, and higher-quality public services.
The Potential of SOEs in Infrastructure Development and Promoting Innovation
Involvement of the state or of municipalities in the economy is traditionally justified by the provision of critical public services and the mitigation of market failures. However, FICIL emphasises that in certain segments in Latvia this involvement goes beyond the boundaries of public functions and may cause efficiency losses, especially in sectors with significant private competition. At the same time, it is recognised that in strategically important areas, such as energy and healthcare, state involvement can play a significant role in ensuring long-term investment and systemic development, provided it has a clear mandate and a consistent governance structure. For example, European experience shows that state-owned companies can be important drivers of innovation if they have a clear strategic mandate. Sweden’s “Vattenfall” invests considerable funds in research and development,[10] while France’s “EDF” acts as an instrument for implementing the state’s energy strategy with a long-term orientation up to 2050. [11]
Latvia’s SOEs management system requires targeted reforms focused on more efficient resource allocation, greater transparency, and clearly defined strategic objectives. FICIL calls on policymakers to regularly assess the economic justification for state and municipal ownership, reduce duplication of functions by centralising administrative operations, and pursue economically justified restructuring of SOEs, especially in relation to small enterprises. At the same time, governance standards and performance monitoring should be strengthened, while opportunities to attract private capital should be expanded by assessing the potential for stock exchange listings and developing a regulatory framework for Real Estate Investment Trusts (REITs). Public ownership should be prioritised in areas where it is strategically justified and can contribute to infrastructure development, innovation, and long-term economic growth.
Sources:
[1] OECD. (2024). OECD economic surveys: Latvia 2024. OECD Publishing. https://doi.org/10.1787/dfeae75b-en https://doi.org/10.1787/dfeae75b-en?utm_source=chatgpt.com
[2] State Chancellery. (2024). Report on state and municipal capital companies in 2024 published. Available: https://valstskapitals.gov.lv/lv/jaunums/publicets-parskats-par-valsts-un-pasvaldibu-kapitalsabiedribam-2024-gada https://valstskapitals.gov.lv/lv/jaunums/publicets-parskats-par-valsts-un-pasvaldibu-kapitalsabiedribam-2024-gada
[3] OECD (2022), Capital Market Review of Romania: Towards a National Strategy, OECD Capital Market Series, OECD Publishing, Paris, https://doi.org/10.1787/9bfc0339-en.
[4] Eversheds Sutherland Bitāns. (06.07.2026.). Our team advises LAU Infra Grupa. Available: https://www.eversheds-sutherland.com/lv/latvia/insights/eversheds-sutherland-bitans-advises-lau-infra-grupa?
[5] Riga City Municipality. (26.02.2026.). On the listing of Rīgas namu pārvaldnieks on the stock exchange. Available: https://www.riga.lv/lv/par-rigas-namu-parvaldnieka-kotesanu-birza?
[6] FICIL. 2026. FICIL study on the performance of SOEs from 2022 till 2024. Available: https://www.ficil.lv/wp-content/uploads/2026/11/Technical_analysis_EN.pdf
[7]State Audit Office of the Republic of Latvia. (15 June 2023). Municipalities Should Assess Their Participation in Capital Companies More Comprehensively and Critically. Available at: https://lrvk.gov.lv/lv/jaunumi/pasvaldibam-vispusigak-un-kritiskak-javerte-lidzdaliba-kapitalsabiedribas
[8] Gren. Our services. Available: https://gren.com/lv/pakalpojumi/
[9] FICIL. FICIL Position on Investment protection 2025. Available: https://www.ficil.lv/wp-content/uploads/2025/10/IPCE-FICIL-POSITION-PAPER-ON-INVESTMENT-PROTECTION_ENG.pdf
[10] Vattenfall. (2024). Breaking society free from fossil fuels. Available: https://group.vattenfall.com/globalassets/com/sustainability/vattenfall-annual-and-sustainability-report-2024.pdf
[11] OECD (2025), State-Owned Enterprises and Sustainability: Leading by Example, OECD Publishing, Paris, https://doi.org/10.1787/c99c7ef0-en.