Chapter 2. Responding to business needs: Fostering a doing-business enabling framework in Latvia

The general legal and policy framework

The Latvian Commercial Law is at the centre of founding, operating and closing businesses in Latvia. It applies to sole traders, partnerships (in particular, general and limited partnerships) and companies (in particular, private and public companies). The Commercial Law establishes the rules for starting a business, registration requirements, organisational and financial management, the relationship between members, adaptions and restructurings, and the liquidation of a commercial entity. In its application to commercial reality the Commercial Law works in conjunction with, and refers to, other laws such as the Law on the Enterprise Registry,1 the Law on Annual Financial Statements and Consolidated Financial Statements2 and the Law on Electronic Documents.3

The Commercial Law was adopted on 13 April 2000 and has since been amended several times. The number of amendments is particularly high since 2011 and it is not unusual to see up to four amendments per year as, for example, in 2013. Historically, the Commercial Law was built on the experience of its German counterpart, the Handelsgesetzbuch of 1897.4 This is still visible in both the structure and specific provisions of the law. The Latvian Commercial Law deviates insofar as it integrates the rules concerning private and public companies into one formal law. As a result, the Commercial Law contains a section on general rules applying to all company forms and more specific rules applying to private and public companies only.

The country’s accession to the European Union (EU) in 2004 proved to have a high impact on the regulation of businesses in Latvia. The Commercial Law reflects the European Union’s acquis to commercial and company law. A certain degree of harmonisation and cross-border compatibility strengthened the international dimension of Latvian commercial and company law. The standardisation effect of the EU directives is particularly felt with regard to public companies, while the Latvian legislation is little constrained by EU law with regard to private companies.

The Law on Judicial Power regulates the judicial system in Latvia.5 It introduced a three-tier courts system and laid down basic principles maintaining judicial independence. The procedures for hearing cases are outlined in the Civil Procedure Law,6 the Criminal Procedural Law7 and the Administrative Procedure Law.8 In Latvia the Constitutional Court operates as an independent institution examining laws’ conformity with the Constitution. Latvia is reforming the judicial map and consolidating small district city court areas within the jurisdiction of regional courts (OECD, 2017). The reform aims to improve the efficiency of the court system through the equalisation of the length of the proceedings, ensuring equal practices before the court and redistribution of judges’ posts.

In parallel, the government adopted a range of regulatory policies and frameworks to encourage a sound business environment and economic development. The National Development Plan 2014-2020 is the highest level strategic mid-term document currently in force, approved by the Saeima in December 2012 (Government of Latvia, 2012). It includes, among other things, a list of regulatory policy-related priorities focusing mostly on impact assessment, administrative burden reduction and regulatory simplification as well as the better engagement of stakeholders.

The National Development Plan complements the National Reform Programme of Latvia in the implementation of the “EU 2020” Strategy,9 of which one of the key policy action lines of Latvia’s national economy is the improvement of its business environment, envisaging the simplification of administrative procedures, the elimination of administrative costs and burden, and the implementation of e-services for the performers of economic activities.

In 2016, the government set the overall goal of placing Latvia among the top 20 economies in the World Bank’s “Doing Business” rating and among the top 40 economies in the Global Competitiveness Index in 2018.10

While the regulatory policy of the Latvian government is not consolidated in a single, overarching document, several individual elements of the better regulation agenda are spelt out in strategies and programmatic documents at both governmental and ministerial level – a number of which are presented in the various sections of this chapter. The institutional stakeholders responsible for the implementation of the different aspects of the commercial and regulatory policy framework are highlighted in Box 2.1.

The Commercial Law: A facilitative commercial framework for all

Businesses consulted for this report expressed their general satisfaction with the Latvian Commercial Law. The legal forms of businesses offered and their general design provides a reliable framework as the basis for their commercial activity. The stakeholders also expressed their general satisfaction with the public services involved in operationalising the Commercial Law and its associated substantive and procedural laws and institutions, such as the Enterprise Registry, the State Land Service and Land Registry offices and Patent Office (see below).

One of the issues mentioned by stakeholders concerns the spirit of application of the Commercial Law and its related laws. It is felt that state institutions such as courts and public services take a rather restrictive approach in commercial reality. Where, for example, the Commercial Law does not provide a rule for a specific issue, the state institutions’ starting point may not always be the stakeholders’ freedom to privately create rights and obligations as they see fit. Instead courts and public services conclude, at times, that when a matter is not regulated, it is not allowed. This is thought to contradict the history of the Commercial Law, which was enacted to facilitate business and which should view prohibition as the exception and not as the starting point. At least two solutions were proposed by stakeholders:

First, by establishing an enabling culture by principles of interpretation, where for instance the higher courts, in particular the Supreme Court, could contribute to a more facilitative interpretation of the law in their judgement. Second, the legislature could support this cultural change by selected intervention where practice and courts do not achieve facilitative solutions.

An issue for further discussion might be bringing state enterprises and institutions with a commercial function, such as certain ports by way of example, within the general framework of Commercial Law if not already the case. This might unleash the beneficial effects of a facilitative Commercial Law in two ways. The established structures of the Commercial Law – for example the organisational rules of private and public companies – could be an efficient backbone to organise such enterprises and institutions.11 Further, private enterprises might find a levelled playing field with state-owned enterprises, contributing to a higher efficiency of the Latvian economy. To give an example, the Port of Hamburg is legally organised as a public company (Hamburger Hafen und Logistik Aktiengesellschaft). This contributes to a successful governance structure and allowed for a part-privatisation by way of publicly offering the shares on the Frankfurt Stock Exchange in 2007 (with the state keeping a majority share).12

Toward legal certainty and the predictability of the Commercial Law

Pace of reform and uncertainty

Modern governments, in particular in the European Union, face the challenge of finding the right balance between speedy reactions to reform needs and avoiding overburdening institutions and actors with a hectic rhythm of reform. This challenge finds its roots in multiple causes. To name a few: the European Union adds a second source of reform needs in addition to national reform initiatives; moreover, information technology (IT) and globalisation have accelerated change in the business world, which needs to be reflected in the underlying law.

As described above, the Commercial Law is at the centre of founding, operating and closing businesses in Latvia as well as addressing any related disputes. While going in the right direction, there is a widespread feeling from state institutions such as courts and services as well as from entrepreneurs that the hectic rhythm of law or regulation reforms is difficult to follow. In 2016, the most commonly mentioned obstacle impeding business growth was “frequent changes in laws and regulations” (mentioned by 66% of respondents) (Figure 2.1). This can have an impact on legal stability and predictability, hindering business development. Some small and medium-sized enterprises (SMEs) that do not have legal resources may also feel overwhelmed and have trouble keeping up to date.

Figure 2.1. Obstacles hindering business activities in Latvia, 2001-16

Source: Adapted from Latvia - Ministry of Economy (2016).

A possible solution might be to collect reform amendments and enact reform packages in less hasty waves. In addition, while there are initiatives to communicate laws and regulations in understandable language to businesses, there seems to be room for improvement. Improving further the communication of reform packages, in particular explaining their key measures and principles, might make it easier for those concerned to digest the new information. Currently, Latvian law and essential websites are not consistently available for foreign investors in an up-to-date and English version. Some stakeholders suggested that allowing accounting and employment documents to be provided in English, which currently seems prohibited, would increase the attractiveness of Latvia as a place for foreign investment.

Access to law and legal information in a globalised world

Entrepreneurs and managers praised recent initiatives to communicate laws and regulations in accessible language. As mentioned above, widening the horizon in order to attract more international investment might be a strong reason to extend these measures further and consider the needs of investors from outside of Latvia. A core initiative could be to make Latvian law and essential websites consistently available for foreign investors in an up-to-date English version. In some countries, e.g. Estonia, all current Estonian laws are available in a consolidated English version, the English version being informative only. In the United Kingdom, information is provided based on business lifecycle events (Box 2.4). A point for discussion would be whether stakeholders should have the option to choose another language such as English to be the legally relevant language for company, accounting and employment documents. The guiding question would be whether the expected advantages of more international investment and improved cross-border co-operation would outweigh the public cost of providing this option.

Box 2.4. Providing information for business by lifecycle events

Many countries design and organise information systems and explain business law by way of practical topics. For instance, the UK web portal, gov.uk, provides information on government services, including a bookmark for business and the self-employed (see below). The Irish portal helps to identify the main regulations which affect businesses and provides links to the relevant agencies and their guidance, tools and contact points.

Source: UK - gov.uk, “Business and self-employed”, website; Ireland – Department of Business, Enterprise and Innovation, website.

The formal requirements for businesses: Reduction and coherence

The Action Plan for Improvement of the Business Environment

The longest standing and arguably most significant initiative undertaken by the government to ease doing business in Latvia is the Action Plan for Improvement of the Business Environment (the “Action Plan”), elaborated yearly since 1999 by the Ministry of Economy in co-operation with stakeholders: the National Economic Council, the Foreign Investors Council in Latvia, the Latvian Chamber of Commerce and Industry, and the Employers’ Confederation of Latvia.

The Action Plan lists concrete measures aimed at eliminating excessive regulatory burdens in all areas related to running a business. Over the years, several hundreds of such measures were identified and introduced as a part of the plan.

The Action Plan currently being implemented, issued in February 2017, seeks to achieve “simple and high-quality services in business: more e-services”. In particular, Action Lines 2.1. and 3.11. explicitly cover Starting a business and Smart public administration and its e-services, respectively – two set of reforms directly addressed in this chapter. Overall, the Action Plan includes 46 measures, reflecting the following paradigms:

• observing the one-stop-shop principle

• implementing the “Consult First” principle, especially at the stage of starting a business

• simple and qualitative state public e-services – even more active integration of e-solutions (digitalisation)

• introducing business-environment-friendly infrastructure development services, including introducing and observing reasonable deadlines ensuring the importance of safety and quality requirements

• simplifying administrative requirements, especially in the field of taxes and accounting, and reducing the bureaucratic burden

• strengthening the legitimate expectations in the regulatory framework, especially in matters of protection of rights of investors and insolvency.18

The measures fall under the portfolio and responsibilities of several ministries. The implementation of the Action Plan and the respect of the targets and deadlines defined therein is hence decentralised, with rather soft co-ordination and oversight powers entrusted to the Ministry of Economy. In case of significant delays and lack of progress, political discussions take place at the ministerial level.

To date, ministries have not yet fully deployed quantification methodologies such as the Standard Cost Model (or equivalent), grounding their simplification programmes on qualitative assessments and perception surveys. One established source of information in this respect is the portal Let’s Share Burden Together!, which offers citizens and businesses the opportunity to report excessive administrative burdens and submit proposals for simplification (OECD, 2016).19 The reports submitted through the website are considered by the State Chancellery, which decides whether or not to organise a follow-up or not, in co-ordination with the responsible state body. In the future, the portal will be also used as a platform to conduct more targeted sector- and policy-specific opinion surveys on administrative burden and bureaucracy.20

In addition, every other year a business survey, “The Impact of Administrative Procedures on Business Environment” is conducted to collect inputs from the stakeholders on perceived barriers to doing business and on trends further to the simplification agenda.

The Draft Public Administration Reform Plan 2020

Most recently, and in the wake of implementing the National Development Plan 2014-2020, a Draft Public Administration Reform Plan 2020 (“PA Reform Plan”) was announced at the State Secretaries Meeting of 27 July 2017, and is currently being finalised.21 The Public Administration Reform Plan will complement the Ministry of Economy Action Plan for Improvement of the Business Environment. It was drawn up in light of the ever-increasing public demand for the efficiency and competitiveness of public administration, the simplification of processes and the reduction of administrative burdens.

The programme for reforms outlined in the PA Reform Plan takes account of the processes, functions and human resources available in the Latvian public administration. It grounds future actions on the three dimensions of “economy” (investing less), “utility” (investing proportionally, taking account of the benefits) and “efficiency” (investing smartly). The resulting initiatives are not supposed to increase state budget expenditures. Rather, reforms should be carried forward thanks to innovative solutions that rationalise Latvia’s administrative regime.

In the PA Reform Plan, the Latvian government identifies a number of recurring structural challenges, including:22

• The public administration and human resource development policy is currently not sufficiently flexible and is incapable of adapting to the rapidly changing environment and public interest.

• The allocation of responsibilities and tasks to discharge administrative functions is not efficient and does not sufficiently leverage synergies and economies of scale, causing significant internal administrative burden and consumption of human resources.

• The system does not stimulate individual responsibility. Performance appraisals could be further grounded on a clearly defined reporting system with established criteria. Remunerations in the public administration, moreover, are not competitive and contribute to a negative public image of the public administration and a continuous flow of senior management into the private sector.

To tackle these challenges, the PA Reform Plan sets up ten reform directions, which should be implemented over a period of three years and are intended to be the basis for changing the culture of the state administration. Among the reform priorities, the government seeks to introduce a “zero bureaucracy” approach, facilitating the transition to a small and analytical public administration with streamlined supervisory and control functions (Box 2.6).

“Consult First”

One of the most visible, innovative and successful measures implemented in the framework story of the government’s administrative simplification programme is the so-called “Consult First” project signed in June 2017. Explicitly drawing from OECD guidance,23 this initiative led by the Minister of Economy is a co-operation between 22 state market surveillance and enforcement bodies24 as well as business associations including representatives of the Latvian Employers’ Confederation, the Latvian Chamber of Commerce and Industry, the Latvian Traders Association and the Association of Latvian Food Traders.

It aims to encourage a “client-oriented” approach to promote self-assessment and advice on compliance and conformity correction, prior to proceeding to established sanctions. The “Consult First” principle aims to provide advice first, before sanctioning businesses, to some extent. Legal rules that are considered essential will still be enforced without prior advice. In order to ensure uniform application of the “Consult First” principle, the Ministry of Economy introduced specific guidelines to the enforcement authorities, and linkages are envisaged with revised performance appraisals and capacity-building programmes. Consultations and communication are thereby put at the forefront of the dialogue with businesses, limiting recourse to fines to severe and recidivist cases.

This approach is highly welcomed by businesses and serves as a useful addition to the repertoire of state agencies dealing with businesses. Stakeholders proposed two points to further improve the “Consult First” principle. First, stakeholders asked whether further clarity in terms of what is key (immediate enforcement) and what is non-key (consult first) can be achieved. Second, stakeholders suggested establishing the “Consult First” initiative as a right for businesses as opposed to a discretionary remedy of the state agency. Further analysis is needed to assess the impact of such requests.

Further reform initiatives

The government also envisages launching additional initiatives that may be conducive to making further progress on administrative simplification for improving the business environment, primarily under the leadership and co-ordination of the State Chancellery. Among such initiatives are:

• Newly established, dedicated Labs, which should help investigate ways to enhance ethics in the public administration, and embed results-oriented and performance management practices.

• An Entrepreneurship Project, to be carried out as of 2018 in conjunction with the Latvian Public Administration School, which aims to diffuse end user and entrepreneur-centred approaches to decision making among Latvian regulators.25

• In the framework of the European Structural and Investment Funds (ESIF) project, a single portal26 as of 2020 to elaborate and co-ordinate legal acts within the executive branch. The portal will also include the “Public Participation” e-service, which will publish white and green papers to gather opinions from civil society and the public sector; announce stakeholder engagement activities, and consolidate inputs and feedback received in various consultation rounds.

The regulatory impact assessment system

In Latvia, the obligation to conduct a regulatory impact assessment (RIA) and the necessary arrangements for the underlying system are set out in a Cabinet Instruction of December 2009.27 That legal base includes the methodology of quantifying and monetising administrative costs. Such an assessment is to be carried out in cases in which the draft legal act has negative administrative impacts. The instruction defines “administrative costs” as those costs that result from information obligation provision or storing duties.

The Cabinet of Ministers adopted amendments to Instruction No. 19 in June 2017, which entered into force as of 1 January 2018.28 They provide for a series of new assessments to be conducted as a part of the RIA, including expected impact on small and medium-sized enterprises (SMEs), micro enterprises and start-ups. Moreover, the analysis of impacts on the environment, competition, health and non-governmental organisations (NGOs) will have to be included in the initial impact assessment, together with statements on the compliance requirements. If a new public service is created or redesigned, the RIA must include an analysis of delivery channels and an assessment of the impact on existing or future information and communication technology (ICT) systems.

These and other amendments will be added to a revised version of the existing Handbook on Draft Legislative Act Initial Impact Assessment, elaborated by the State Chancellery.29 The handbook is complemented by a Guide on Enhanced Standard Cost Model. Furthermore, specific training for policy officials on the new RIA requirements is envisaged by the end of 2017.

To consolidate all necessary information on the RIA system for government initiatives, the State Chancellery published a dedicated section of the electronic Guidebook on Drafting Legislative Acts, which includes downloadable forms and the relevant guidance materials.30

Ex post reviews of regulatory stock

Similar to several OECD countries, no systemic programme is in place in Latvia on ex post reviews of existing regulations. Reviews of regulations are part of the development planning system, and should in principle be conducted as a part of the regulatory process. However, to date such evaluations have tended to be carried out on an ad hoc basis or in particular areas or for particular types of legal acts, for example, with the aim of identifying obsolete legal provisions. Setting up inter-institutional working groups for such reviews is a regular practice.

Further, also to the recognition within the Saeima of the need for more systematic evaluation of the implementation of laws, the Cabinet of Ministers adopted a Conceptual Report on “Implementation of Ex Post Evaluation” in August 2016,31 with the aim to improve the oversight of efficient implementation of regulations. Implementing that commitment, the State Chancellery conducted two pilot projects throughout 2017 in co-operation with the Saeima and relevant line ministries – namely an ex post evaluation of the Law on Volunteers Work and one of the Regulation on Public Administration Employees Performance Evaluation System. On the basis of that experience, the Chancellery will elaborate a methodology for post-implementation regulatory reviews in 2018.

An effective agenda for administrative simplification with untapped potential

Overall, Latvia appears to be on a good reform track, reflecting a strong political commitment to rendering the economy more competitive.

Latvia is developing and advancing many reforms to develop a sound business climate, including pursuing administrative simplification and digitalisation; reviewing its legal framework for commercial activities; and increasing businesses’ accessibility to public services, especially through digital means.

While this is also partly the result of complying with EU legislation and policies, it is undeniable that the government set the explicit goal of matching the top world performers in terms of facilitating doing business and stimulating entrepreneurship. The inclusion of targets related to improvement in Latvia’s ranking according to established OECD and other international indicators (e.g. World Bank’s Doing Business) in government decisions confirms such commitment and increases accountability, while at the same time allowing the government to sustain its reform momentum over time and across several areas of intervention.

Progress is acknowledged and there is general appreciation by private sector stakeholders of the government’s work on easing doing business in the country. Both the substance and means to achieve such progress are an asset.

Most of the non-governmental stakeholders met by the OECD (among whom there were representatives of business, trade and professional associations as well as individual entrepreneurs) held a favourable opinion of the progress made by the government in simplifying business procedures and stimulating paperless interactions with the public administration. The sustained and constructive dialogue nurtured by the government with the business community regarding inputs and co-design reforms was also particularly appreciated. The positive climate for reform is confirmed by the acknowledgement of the government of the generally constructive and responsible attitude taken by business in collaborating on the reform programme – an attitude which in turn has encouraged responsiveness and commitment to institutional learning.

There are, in other words, very good framework conditions in place for further reform actions in Latvia. Both the reformers within the public administration and among the reform beneficiaries enjoy a high level of credibility and trust. The approach to reforms also appears to be seen as an asset. With regard to administrative simplification measures at least, it is consensual and participatory, where the responsibilities of all parties involved in the reform endeavour are recognised and leveraged. In this respect, the lack of systematic quantification and measurement efforts by the government to guide the direction of the simplification initiative does not seem to be considered negatively by either party.

Despite the fact that the project itself is still in its early stages of implementation, the approach taken to elaborating the “Consult First” project may be considered the epitome of the Latvian model to reform. It well illustrates the willingness between several actors to enter into constructive dialogue; to listen to the challenges and the constraints faced by both regulators and the regulated; to share good practices and leverage ideas; and to seek a comprehensive scope of application of the innovative solution reached.

The scope of the reforms appears to be quite wide and comprehensive, although challenges remain in relation to the strategic co-ordination, monitoring, accountability and communication of the reform.

As highlighted above, the remit of measures undertaken to simplify and digitalise the public administration encompasses most of the typical areas covered by regulatory policies in OECD countries. Also in terms of ensuring an evidence-based regulatory process, arrangements and guidance are in place that reflect international standards. More generally, regulatory policy elements are embedded in the government’s strategic documents and rules of procedure.

Nonetheless, no single, formal, whole-of-government document spells out the regulatory policy of the government. This may hamper the overall effectiveness of the Latvian better regulation agenda, if it prevents the elaboration and implementation of a strategic vision of the reforms. Such a risk may emerge also in light of the relatively dispersed allocation of responsibilities for individual parts of the regulatory reform. In the case of administrative simplification, for instance, leadership, design and management of parallel reform dossiers are spread between the State Chancellery, the Ministry of Justice, the Ministry of Economics, and the Ministry of Environmental Protection and Regional Development, as a minimum.

The lack of standing, institutionalised mechanisms for co-ordination is coupled with a relatively soft power that those ministries can deploy to ensure compliance with the reform targets and deadlines across the state administration. Political discussion at ministerial level must often compensate for failing to formally enforce reform programmes. While it allows for a less hierarchical and potentially more co-operative attitude towards administrative simplification, this approach may not prove the quickest and most effective approach to delivering change.

A further consequence that appears to result from the lack of a centralised policy and a more cohesive leadership to the reform is the rather weak accountability that line ministries appear to enjoy when implementing administrative simplification programmes. To date, neither a regulatory policy in general, or individual reform initiatives in particular, are systematically evaluated in terms of performance against the agreed pace and scope of the reforms. Communication of such progress to the public is also not regular or comprehensive.