EMCC European Monitoring Centre on Change

Latvia: ERM Comparative Analytical Report on ‘Public policy and support for restructuring in SMEs’

  • Observatory: EMCC
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  • Published on: 14 May 2013



About
Country:
Latvia
Author:
Raita Karnite
Institution:

Disclaimer: This information is made available as a service to the public but has not been edited by the European Foundation for the Improvement of Living and Working Conditions. The content is the responsibility of the authors.

99.7% of enterprises in Latvia are SMEs. Economic policies are focused on SMEs, aimed at creation of new SMEs and providing conditions for their successful operation, based on the ‘problem oriented’ approach. Responsibility for SME policy and employment policy is divided among several institutions. Restructuring has never been targeted as specific policy issue. Nevertheless, the current approach has provided suitable policies for restructuring needs of SMEs. During the recession, additional measures were adopted, such as a new insolvency law, or a special programme, providing specific conditions for registration and operation of micro enterprises, and financial assistance for SMEs was intensified.

QUESTIONNAIRE

Part 1: Overall policy context

1.1. Has there been public or policy debate on the specific challenges for SMEs and/or their employees in restructuring before the global recession of 2008/09? Please specify, for example:• If so, since when (e.g. up to 3 years before, 3-10 years before, longer), at which level (national, regional, sectoral, all of them) and in which form (‘real’ policy debate mirrored in policy documents or rather public debate mirrored in media, or both)?• Which policy areas (for example, SME policy, entrepreneurship policy, employment policy, social policy, regional policy etc.) were involved? Particularly: Does SME policy specifically deal with restructuring? Does ‘restructuring policy’ specifically deal with SME issues?• Did the public and policy discussions deal with restructuring as such or were specific types or phases of restructuring covered?• Which were the issues/contents that have been discussed? Which specific characteristics of SMEs in restructuring were considered in this context? Was the specific case of SMEs as subcontractors a topic for discussions?• Did the discussions rather deal with the enterprise perspective or with the employee perspective or both?

Responsibility for spheres that are included in this report is divided between the Ministry of Economics that is responsible for economic policies/challenges regarding SMEs and the Ministry of Welfare (via the State Employment Agency (Nodarbinātības Valsts aģentūra, NVA)) that is responsible for employment and unemployment prevention. To some extent also the Ministry of Agriculture that is responsible for rural development is involved.

Economic policies regarding SMEs have been widely discussed and developed before the crisis but not regarding specific challenges of SMEs amid restructuring. In Latvia, the possibility of crisis was not recognised before it appeared and the challenges of crisis and recession were not considered.

Economic policy was based on the conviction that Latvia lags behind other countries regarding the number of enterprises (measured per population), and on that establishing new and fostering the successful development of existing SMEs may help to improve the situation. Besides, the share of SMEs among the all companies – which are seen as potential beneficiaries from the state policy - was impressive. In 2009, of 128,609 economically active commercial units, 115,939 (90.1%) were micro enterprises, 10,254 (8%) were small enterprises, 2,065 (1.6%) were medium sized enterprises. 351 enterprise (0.3%) was classified as large, of these 246 (70%) were located in capital city Riga. Latest data is not available, but it is expected that number and share of micro enterprises has increased after 2010 when a special micro enterprises’ programme was introduced (LV1108039Q). Hence, since the beginning of this century business promotion policies were focused almost exclusively on SMEs.

Public policies were created and discussed at national level and implemented in policy documents. It was mirrored in media.

As described before, SMEs policy has never dealt specifically with restructuring issues either in general or regarding specific types or phases of restructuring. Specific ‘restructuring policy’ has never been developed in Latvia. Debate regarding the specific challenges for SMEs’ employees in case of crisis also has never been developed.

The SMEs policies were based on SMEs’ potential challenges in the course of normal operation (‘problem oriented’ approach). Establishing new SMEs and their successful operation was the main goal. Restructuring was considered as a normal development phase. Economic crisis and recession were not included as special conditions.

Promotion policies were available also for existing SMEs and automatically were suitable for SMEs that initiate restructuring. Some of them were and still are especially suitable for internal restructuring (for instance, instruments for innovation activities or diversification of economic activity), while others are suitable for fast recovering in case of restructuring through bankruptcy/closure.

The SME policy is closely connected with other policies - entrepreneurship policy (regarding business bureaucracy, registration, tax rate policy, special taxation regime for SMEs), employment policy (labour law, prevention of unemployment), regional policy (regional programmes of EU Structural funds, promoting SMEs in rural regions), social policy (SMEs policy results in providing income for individuals and their families who start entrepreneurship instead of being unemployed, education is focused at promoting of the entrepreneurship in higher education programmes and training programmes for unemployed).

Among issues that have been discussed, the most important was access to funding. EU funding was widely used for implementation of SME policies and intensity of these policies increased on the basis of EU Structural funds when Latvia joined EU.

Other issues were business environment, including simplification of business bureaucracy (procedures for establishing an undertaking, bookkeeping standards for SMEs), taxation (lower taxes for SMEs or simplified payment), technical standards (environment, certification).

The specific case of SMEs as subcontractors was not a topic for discussion.

The discussions rather dealt with the enterprise perspective than with the employee perspective however, SME policies were usually coordinated with the employment policy.

1.2. Did the global economic and financial crisis of 2008/09 cause any change in focus of the above (for example, increased/decreased focus on SMEs and their employees in restructuring, change in policy areas or issues covered)?

When crisis begun, SMEs were seen as an instrument that helps to compensate lost employment in large enterprises. On the other hand, the previous goals in promoting of SMEs’ development also remained valid. Thus, SME policies were less targeted by austerity measures. On the contrary, a part of funding was redistributed in favour of business promotion programmes aimed at increasing competitiveness of and providing financial guarantees for SMEs.

When closures of enterprises started, the new insolvency law was adopted in order to make exit of SMEs easier and faster. More attention was paid to business starting programmes so that after closure of a failed business, new SMEs could be easy established or self–employment started.

The focus on small enterprises was even more increased during the crisis. In 2010 a state programme for supporting micro enterprises was implemented.

1.3. Are social partners or employers’ and employees’ organisations involved in public and policy debate on restructuring in SMEs?• If so, which (types of) organisations and at which levels?• What are their opinions, perspectives, recommendations?• Did they succeed in convincing governments or public authorities at various levels of their viewpoints?

Social partners - employers’ and employees’ organisations - are involved in public and policy debate on policies regarding SMEs in general, but not specifically on restructuring in SMEs. Yet, as described before, general policies are also suitable for SMEs under restructuring.

These policies are discussed at national, sector, regional level. At national level the partners are the national level employers’ organisation Latvian Employers’ Confederation (Latvijas Darba Devēju konfederācija, LDDK) and the Latvian Chamber of Commerce and Industry (Latvijas tirdzniecības un rūpniecības kamera, LTRK) (on employers’ side) and the Free Trade Union Confederation of Latvia (Latvijas Brīvo Arodbiedrību savienība, LBAS) (on employees’ side). The discussion has usually tripartite format, and it is developed in the National Tripartite Cooperation Council (Nacionālās trīspusējās sadarbības padome, NTSP), inter-sectoral commissions and committees, working groups, as well as at the level of legislative procedures in the Cabinet of Ministers and commissions of Latvian Parliament (Saeima).

Sector level problems are discussed between sector level ministries and social partners. The discussion is usually bipartite. At employers’ side, initiators are organisations, established by employers (not always employers’ organisations by law). Employees are represented by sector level trade unions. Social partners rarely discuss sector level problems between themselves, mostly because of the large variety of organisations representing employers in each sector. At regional level discussion is mainly between companies and local governments.

Discussed topics vary among social partners. While employers’ organisations focus on professional issues and economic policies, trade unions focus on social aspects and social policies.

At national level main policies are discussed. At sector level, the discussions usually concern particular issues (particular regulations), or sector level challenges. At regional level, company level challenges are tackled.

Statistical measurements are not made on the success in convincing governments and public authorities. There are some examples of success at national level (insolvency law, general directions of the state support). In the sectors, where public organisations are more active, new policy measures more often appear and are introduced. Such sectors are, for instance, electronic industry, wood processing, metal industry.

Part 2: Support instruments

2.1. Please provide an overall assessment about how accessible and suitable public and social partner based restructuring support for companies in general are for SMEs or their employees.• Do SMEs and/or their employees generally have access to the available instruments and are these suitable for their specific needs in restructuring?• Are there specific (types of) instruments (for example, targeting specific types or phases of restructuring, offered at specific administrative levels) that are more/less accessible and suitable for SMEs and/or their employees that for larger firms? If so, why?

As described before, restructuring is not specifically targeted in economic policies in Latvia. Support is provided through general business promotion and employment policies.

The general business promotion policy in Latvia is focused explicitly and exclusively on SMEs, of which the majority are micro-enterprises, These policies are described in ERM CAR on Public support instruments to support self-employment and job creation in one person and micro-enterprises (LV1108039Q).

The Ministry of Economics provides the state assistance in the following directions:

  • business promotion – six measures: developing of external markets (internationalisation), strengthening of international competitiveness, increasing motivation for innovation and entrepreneurship, support for investment in small and micro enterprises in territories appointed for special support, cluster programme;
  • training of employed – four measures: support for training in order to increase competitiveness, organised in partnership or individually (two separate measures), assistance for attracting high qualified workforce, support for creation of new jobs;
  • starting business – two measures: support for starting self-employment or business, and business incubators;
  • promotion of innovation – seven measures: development of new products and technologies, centres of competence, technology transfer institutions, production of new products and technologies, implementation of new products and technologies, support for establishing industrial property rights on new products and technologies, investment for production of high value added products;
  • loans and guarantees – eight measures: loan guarantees, short term export loan guarantees, loans for increasing competitiveness, investment loans from SEB banka and Swedbank (two separate measures), risk capital loans, seed and starting capital fund, mezzanine loans (new measure, started in 2012).
  • tourism promotion – two measures: preservation, renovation of the culture monuments with national significance and adjustment of infrastructure for culture development, development of bicycle tourism with national significance;
  • housing – two measures (as indirect support for the construction industry): improving of heat resistance/isolation of multi apartment houses, improving of heat resistance/isolation of social houses;
  • energy – three measures (as indirect support for the energy sector): increasing efficiency of centralised heating systems, increasing efficiency of heating systems in enterprises, development of combined heat and power generation on the basis of renewable energy resources;
  • state guarantees – for implementation of business promotion projects and state investment projects.

In rural areas, also rural development policy, conducted by the Ministry of Agriculture, as well as rural development programmes and funds are available for SMEs under restructuring. For instance, some part of funding is allocated to programmes for diversification of economic activity in rural areas, and these are accessible for SMEs and suitable for restructuring.

Employment policies are accessible and suitable for SMEs’ employees on the general conditions - they do not distinguish unemployed according to specific circumstances of ones employment before she/he lost job. NVA offers more than ten measures for unemployed and persons under high risk of unemployment.

The support measures may be grouped as follows:

  • assistance in seeking for job, including career consultations – traditional measures;
  • training - six measures, including training in order to increase competitiveness, and life-long learning;
  • employment measures – five measures, including subsidised employment,
  • assistance in seeking for job abroad.

The ESF programme targeting persons at high risk of unemployment is available for employees in commercial enterprises or self-employed whose working time was reduced at least one month before involvement in the programme, and who have been employed at the company for not less than six month. A life long learning programme is also available for employed and self-employed. In both programmes the employer should confirm that the relevant education programme is necessary for the employee.

Regarding specific aspects, the condition that the majority of SMEs’ support instruments are financed from the EU structural funds and these instruments are available only for SMEs that qualify for the relevant support (meet requirements for application) may cause difficulties for SMEs. Qualification criteria (requirements for application) and cofinancing are main obstacles to funding from EU Structural funds.

Special investigation on the issue how suitable for restructuring available instruments are has not been conducted, because restructuring has never been specifically targeted. The list of provided measures reveals that most significant challenges that are characteristic for enterprises in restructuring are covered in public policies, namely funding and investment, state guarantees, innovation, diversification of economic activity, development of new markets, export promotion, assistance for starting business, as well as training and support for starting business through unemployment prevention programmes.

All business promotion instruments are more accessible and suitable for SMEs than for larger enterprises, because business promotion policy is not envisaged for large firms. Employment policies also are more often focused at SMEs, while assistance from unemployment prevention policies is not connected to company size.

2.2. Do there exist specific public or social partner based support instruments explicitly targeting at SMEs and/or their employees in restructuring? Please specify, for example:• If so, by whom are they offered (public vs. social partners/employers’/employees’ organisations) and at which administrative levels (national, regional)?• Are the activities of different support service providers coordinated? If so, how and how well does this work?• Which phases of restructuring do they target?• Which types of restructuring do they target?• Do they target SMEs in general, or specific size classes, sectors, regions, legal forms, roles (for example, as subcontractors) etc.? Do they target employees of SMEs in restructuring?• What type of support do they provide? What specific challenges for SMEs in restructuring do they address?• Is there some information about how well they are known among SMEs and their advisors and about how they are generally assessed by the SME sector? What are their strengths and weaknesses? Are there recommendations for improvement?

Specific public or social partner based support instruments explicitly targeting at SMEs and/or their employees in restructuring do not exist.

Part 3: Good Practice

Name of the instrument:

Atbalsts pašnodarbinātības un uzņēmējdarbības uzsākšanai. Support for starting self-employment and entrepreneurship (first described in LV1108039Q)

Justification for selecting measure as Good Practice:

The instrument was advised as Good Practice by a representative of the Ministry of Economics for several reasons: it is envisaged to increase economic activity and is suitable for restructuring, it is aimed at facilitating creation of micro, small and medium sized businesses, promoting the formation of new, sustainable and competitive enterprises in all regions of Latvia, and it includes two interconnected measures - developing knowledge and skills of entrepreneurs in economic activity and providing financial support for starting business. Support for starting self-employment and entrepreneurship was seen appropriate in circumstances when a large number of businesses, mostly small, go bankrupt - to help employees and employers of these businesses to start new businesses instead of being unemployed. The loans were small - less than € 17,000 on average and grants were € 2,760 on average - suitable for solving restructuring problems. The measure was supported by amendments to Commercial Law (adopted on 15.04.2010.) that allowed establishing limited liability company with equity capital not less than LVL 1 (€ 1.42) (before the lowest level was LVL 2,000 (€ 2,845)).

Date of launch of the instrument and end date (if applicable):

from 21 August 2009 to June 2015.

Initiator/administrator (organisation):

Ministry of Economics (responsible institution).

Other involved actors:

  • Investment and Development Agency of Latvia (Latvijas Investīciju un attīstības aģentūra, LIAA) – administration,
  • the Mortgage and Land Bank of Latvia (Latvijas Hipotēku un Zemes banka, LHZB), Department of Support programmes ALTUM – applicant of the project, recipient of the project funding, implementation of the project, including training, advisory support and funding;
  • training companies – training activities;
  • Confederation of Small and Medium Sized Enterprises (Latvijas mazo un vidējo uzņēmumu konfederācija, LMVUK), supported by social partners - LDDK and LBAS – public support.

Source of funding: European Social Fund, the state budget and private funds. Total funding – LVL 23,055,238 (€ 32,804,648), of which public funds are LVL 14,315,238 (€ 20,368,748) (EU Structural funds are LVL 12,167,953 (€ 17,313,437), State budget – 2 147,285 (€ 3,055,311)), and private funds are LVL 8,740,000 (€ 12,435,899). The programme is tied to the Micro loans programme of LHZB. This programme was started before the recession, but intensified and focused more on micro enterprises amid recession.

Target group: individuals (at least 18 years old), including unemployed who wish to start entrepreneurship, or have started business within the last three years, or existing entrepreneurs (including those who have established their businesses earlier than three years before submission) who wish to establish a new factory in order to develop a new direction in their business.

It is planned to provide training for 1,200 participants, and financial support to 600 projects.

Phase of restructuring targeted: management of restructuring, but also anticipation of change (training, business consultation).

Type of restructuring targeted: bankruptcy/closure, internal restructuring, relocation.

Description of services provided:

Support includes:

  1. loan (90% of the total value of the project) – max LVL 54,000 (€ 76.800),
  2. grant for supporting economic activity – 35% of the loan value, but not more than LVL 3,600 (€ 5,122) (after two years of operation),
  3. grant for pay off of the loan – 20% of total value of the loan but not more than LVL 2,000 (€ 2,845) (after two years of operation),
  4. training and consultation (in the course of elaboration and implementation of a business plan) – training according to modules’ principles, 20-80 hours courses, consultations on request will provide LHZB).

Outcome of the instrument:

From the outset up to 31 March 2012, 2,564 agreements were signed on participation in the program, 1,210 individuals were trained, 1,303 business plans were submitted, and 639 contracts on loans were signed with total amount of loans LVL 7.65 million (€ 10.89 million) and grants in total amount of LVL 2.53 million (€ 3.6 million) (Source: Ministry of Economics, Department of implementation of EU Structural funds).

Support for starting self-employment and entrepreneurship, supported by amendments in the Commercial law, was helpful during the crisis. According to LURSOFT research, in period from 1 May 2010 to 8 August 2012, 23,593 limited liability companies were established with equity capital € 1.42 – € 2,844. In 2011, the average turnover of economically active micro-capital companies was € 30,000.

Strengths of the measure:

The measure provides a complex approach including not only financial support but also training and assistance on elaboration of business idea – the function that is not characteristic for commercial banks.

Weaknesses of the measure:

Some difficulties were observed in beginning of implementation of the programme: completion of training groups, preparing programmes etc.

Monitoring/evaluation of the instrument:

The programme is implemented by using EU Structural funds and it is monitored according to the specification of use of EU Structural funds. Implementation of the programme is regulated by Regulations of the Cabinet of Ministers No 293 Regulation on the activity Support for starting self-employment and entrepreneurship of the supplement 1.3.1.2. of the Operational programme ’Human resources and employment‘, adopted on 31 March 2009. The regulation was amended twice in 2009, in 2010 and in 2011. Supervision and control of the implementation is the responsibility of the Ministry of Economics, and this should be implemented according with the Council Regulation (EC) No 1083/2006 of 11 July 2006 laying down general provisions on the European Regional Development Fund, the European Social Fund and the Cohesion Fund and repealing Regulation (EC) No 1260/1999.

The regulation No 293 determines target indicators for the period until 2013: 5,000 persons should receive training and 25% of the persons who have received training and consultation services should be involved in self-employment or commercial activities.

Weblink: http://www.altum.lv/public/atbalsts-komercdarbibas-uzsacejiem.html,

Information sources used for filling this section:

Web sites: Ministry of Economics, LIAA, LHZB.

Interview with Ilze Beināre, Director of the Entrepreneurship Competitiveness Department of the Ministry of Economics of the Republic of Latvia, Phone 371 67013151, fax. 371 67013278, e-mail Ilze.Beinare@em.gov.lv.

Statistical data from Egita Polanska, senior expert of the Department of Implementation of the EU Structural Funds of the Ministry of Economics, phone 371 67013108, e-mail Egita.Polanska@em.gov.lv.

Relevant laws and regulations of the Republic of Latvia in http://www.likumi.lv/doc.php?id=190611.

Commentary

Restructuring is not only crisis phenomenon – it may be and is necessary also in normal conditions in order to increase efficiency of an undertaking. This is why restructuring is not specifically targeted in Latvia’s public policies. Instead, restructuring needs are incorporated into the focus of general policies.

The other reason for less attention specifically to restructuring challenges is the dominance of more general business development challenges, such as low intensity of business activity in general, poor business education, lack of entrepreneurial skills and lack of funding.

Nevertheless, existing ‘problems oriented‘ approach provides that restructuring needs became most important during the crisis and appearing challenges are more or less tackled. SMEs are privileged because all business promotion policies are oriented specifically at SMEs, and some of them are specifically focused at micro enterprises.

Funding is most the crucial issue for any policy. Both business promotion measures and unemployment prevention measures would not be possible without EU funding.

Raita Karnite, EPC, Ltd.

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