Commission Report (2002): Latvia

• Progress since the last Regular Report
• Overall assessment
• Conclusions

Chapter 16: Small and medium-sized enterprises

Progress since the last Regular Report

Since last year`s Regular Report, Latvia has made limited progress in revising its SME strategy and reforming the state support system for business promotion. However, efforts to improve the business environment have continued.

Since the last Regular Report, some progress has been achieved on SME policy. Latvia endorsed in April 2002 the European Charter for Small Enterprises. The Charter principles will be reflected in the new SME strategy for the period 2002--2006 (National Programme for SME development 2002--2006), which is under preparation. The second phase of the government`s SME lending programme, in collaboration with commercial banks, public and international financial institutions has led to a better access to finance for small business. Some efforts have also been made as to improve access to information such as the Latvian Development Agency`s Internet portal for exporters. Only some progress has been made in reforming the support system for business promotion. In October 2001, it was decided to close down the Latvian Export Credit organisation. Discussions are ongoing about a future guarantee scheme.

In April 2002, Latvia endorsed the principles of the European Charter for Small Enterprises. The European Charter, adopted by the European Council in June 2000, is the reference document in the field of enterprise policy within the economic strategy set up at the Lisbon European Council. The reporting process on the implementation of the European Charter in Latvia started in May 2002.

The business environment continues to be improved in collaboration with the Council of Foreign Investors in Latvia, the National Economy Council and local business associations. The Latvian Development Agency is conducting a reassessment of the administrative barriers to investment, in collaboration with the Foreign Investment Advisory Service, which is part of the World Bank`s group.

The new Commercial Code entered into force in January 2002. Amongst other things, it reduces the number of legal business forms from seventeen to the internationally recognised five. However, enterprises point to some practical problems, to the costs due to the obligation to re-register companies and to the coexistence of two systems in the transition period. The law ``on annual reports of enterprises'' provides for a simplified reporting system for small businesses.

The new law, which is being prepared on the control of State aid (see Chapter 6 Competition policy), is expected to take into account the Commission Recommendation on SME definition. The distinction between micro-, small and medium-sized enterprises and the criterion of financial independence will be introduced.

Overall assessment

Latvia has made progress in structuring an SME policy in line with that promoted by the EU. While the Government has acknowledged in various documents the importance of SMEs for increasing economic competitiveness, it took time before commitments were translated into concrete actions. The allocation of adequate resources has proven to be a further problem.

The administrative capacity to manage SME policies remains weak. The budget reduction in 2002 for the Latvian Development Agency has come at a time when new tasks are being allocated. So far, the Ministry of Economic Affairs has not been actively involved in the preparation for the Structural Funds, through which significant support to SMEs can be provided in future.

Over the last few years, emphasis has been put on improving access to finance and on the improvement of the legal and administrative framework for business activities. The availability of bank finance no longer seems to be a real problem. Increased attention will have to be drawn to non-banking sources of finance, such as schemes for start-ups, and to equity. Efforts should be strengthened to prepare for full use of structural funds in the area of enterprise development.

The business environment has significantly improved as a result of regular consultations between the Government and business representatives, including foreign companies and more recently also local business associations. According to the business community, the functioning of courts, administrative capacity at municipal level, construction and real estate transfer procedures, education and training, infrastructure development, and the fight against tax evasion are among the issues still requiring urgent attention. Efforts also need to be sustained in such areas as customs, public procurement, and the particular needs of smaller enterprises. The emerging practice of consulting business representatives when preparing new legislation must be continued. Efforts must be made to ensure a proper follow-up to these consultations and to inform the interlocutors about subsequent changes.

Efforts are needed to upgrade business support services and to inform businesses better of the rules applying to them within the EU. Also business associations must be strengthened so that they can efficiently present their views to the authorities, irrespective of their size and political adherence.

Conclusions

In its 1997 Opinion, the Commission concluded that the basic structures for SMEs were in place, but there was a need for further refinement of policy, the simplification of legislation to make it more SMe-friendly, the strengthening of support infrastructures, an improvement of the tax environment and the development of SMEs` access to finance.

Since the Opinion, Latvia has made further progress in addressing some of the challenges of SME policy and has markedly improved the business environment. Its policy towards SMEs is generally in line with the EU approach.

Negotiations on this chapter have been provisionally closed. Latvia has not requested any transitional arrangements in this area. Latvia is generally meeting the commitments it has made in the accession negotiations in this field.

In order to complete preparations for membership, Latvia`s efforts now need to focus on establishing and strengthening the delivery mechanisms as well as the administrative capacity to manage SME policies.

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