The times of COVID-19 pandemic have brought us new challenges, insecurity and changing environment. At the same time, these circumstances give way to new opportunities, which, if we notice and use them, can help carry out economic transformation in Latvia corresponding to such new reality. Nevertheless, in order to succeed, we need to put aside individual ambitions of each of us and to be able to agree on objectives and reforms that would, in the long run, ensure the largest benefit for our country.
New financial mechanisms for recovery of European economy
To prevent the harm caused by COVID-19 pandemic to economy and social field, stimulate the recovery of Europe, as well as to protect and create jobs, in Spring this year, the European Commission (EC) proposed to introduce a large-scale European recovery plan. A significant part of the European recovery funding has been be allocated to the Recovery and Resilience Facility (the RRF) - new budget programme under the centralised management of the EC.
In allocating the funds from the European Union (EU) Recovery Facility, a single approach is planned to all EU Member States, namely, national economic recovery plans must, first of all, include the objectives and the necessary reforms for achieving the objectives, investments for the implementation thereof, including as the last particular projects, by which it is intended to achieve the objectives. Furthermore, the RRF contributions must be closely linked to the recommendations from the EU Council for the relevant Member State.
The creation of the EU support facility of such scale within such a comparatively short timeframe is unprecedented. At the end of 2020, the EU legislators have reached a conceptual agreement regarding the RRF regulation, which is expected to be approved in the European Parliament at the beginning of February this year.
We will not manage to mend the holes
In September last year, the line ministries and independent authorities submitted to the Ministry of Finance (MoF) their intentions and plans for the RRF plan for Latvia. The total amount, for which the projects were filed, comprised EUR 7.5 billion. As the maximum sum of this funding available to Latvia comprises EUR 2.02 billion, already then it was clear that it would not be possible to fulfil all of these intentions. Especially, considering that this not simply "free" money without obligations, being issued to the EU Member States for mending budgetary holes or fast elimination of COVID-19 crisis situations.
In order to receive the RRF funding, Latvia must carefully consider the necessary structural reforms that would meet the EC requirements - support green rearrangement and digital transformation, concurrently strengthening the competitiveness, as well as social and economic integrity of our country.
In order to implement the recommendations of the EU Council for sound and successful growth of Latvia, the work group of the MoF has incorporated in the RRF plan such EU recommendations as directing investments towards green rearrangement and digital transition, focussing investments on innovations, housing offer available in terms of prices, sustainable transport and digital infrastructure. In the field of social inclusion, such recommendations as strengthening health system resilience and availability have been taken into account, inter alia, by ensuring additional human resources and financial resources for the health system. We will also work on reducing the impact of crisis on employment, inter alia, by means of flexible work regime, active labour market measures and enhancement of skills. In turn, in the field of governance, it is planned to implement such recommendation of the EU Council as improvement of responsibility and effectiveness of public sector, as well as prevention of conflicts of interests, especially, with respect to the State and local government enterprises.
Being guided by these recommendations, it is planned to allocate the RRF investments for the implementation of the following structural reforms: transition to sustainable transport, energy efficiency in all sectors (in the field of climate), enhancing the solutions of information and communication technologies in public sector for improvement of entrepreneurial environment (in the field of digital transformation), effectiveness of the network of health services (in the field of reducing inequality), raising productivity, consolidation of higher education institutions (in the field of transformation of economy), strengthening the combating of shadow economy and economic crime (in the field of rule of law).
What will be the benefit for Latvia?
The work group under the leadership of the MoF continues working on the development of the aggregated RRF plan of Latvia. The guaranteed available funding for Latvia comprises EUR 1.65 billion; therewith, for the time being, the RRF plan is being prepared within the scope of this amount. The sum available to Latvia could later grow, reaching maximum financial scope of the plan, namely, EUR 2.02 billion (excluding the potential share of loans), based on the actual data of economic growth dynamics for 2020 and 2021. Funding is available for the time period till the middle of 2026, eligibility of expenditure starts from 1 February 2020.
AT present, the work is organised in 6 reform directions - climate change and sustainability, digital transformation, transformation of economy and productivity reform, health, reducing inequality and the rule of law. Following the EC recommendations, 20% (EUR 330 million) of the RRF funds are planned to be allocated to digitisation and 37% (EUR 610.5 million)- for achieving climate objectives. In accordance with the EC recommendations, first of all, the objectives and directions of reforms are defined, therefore it is still too early to speak about support for separate projects.
It is planned to allocate EUR 330 million (20% of the RRF funds) for reducing inequality, EUR 181.5 million (11%) - to the health sector projects, EUR 165 million (10%) - to transformation of economy and productivity reforms, and EUR 33 million (2%) - for strengthening the rule of law.
To achieve the set climate objectives, investment into greening the Riga agglomeration transport system are being considered, along with developing the use of biomethane in the transport sector. Additional investments are being planned also in energy efficiency of buildings and enterprises, as well as in renewable energy resources, for the purposes of reducing total energy consumption, at the same time, increasing the specific share of renewable energy resources.
In the field of digital transformation, investments are intended into developing digital skills, into public services, by contributing to the open data and digital platforms, as well as in the development of 5G network and digitisation of entrepreneurship.
In the field of health, the discussed steps include the innovation fund for improvement of services, as well as the development of education system, arrangement of hospital network, ensuring environmental accessibility, as well as long-term care services.
To reduce inequality, the allocation of the RRF funds to development of industrial areas and school network, residential tenancies, accessibility of public services and improvement of regional mobility is being discussed.
In turn, the funding for transformation of economy is planned to be allocated to the entrepreneurship support (aid), focussing on research and innovations, as well as the reform of administration of higher education institutions and building capacity of scientific staff.
In the direction of the rule of law, the support to customs, platform of public benefit organisations, investigation of economic crime, as well as improvement of the State and local government administration is being considered.
Serious work still ahead
In December, the MoF organised online thematic discussions, in order to discuss each of the six RRF components with the social and cooperation partners. Approximately 130 representatives from non-governmental sector, line ministries and institutions, as well as from the EC, took part at each of the six thematic discussions.
In parallel, there are active thematic discussions held with the EC regarding the reform directions planned within the scope of the facility that would help Latvia to make use of the possibilities of this funding as effectively as possible. The MoF expects to submit the first version of the RRF plan for Latvia to the Government at the beginning of February. Then the plan will be submitted to the EC, where it will be assessed by experts and the comments will be provided as to whether this plan can be recognised as appropriate for the fulfilment of country-specific recommendations and reform directions.
Eleven other EU Member State have already submitted their RRF plans for the review to the EC. For Latvia to be able to gain maximum outcomes from this new facility and to be able to commence contributions already in 2021, all stakeholders - line ministries in cooperation with the social and cooperation partners must be able to reach a compromise and agree, in order to submit to the EC, within the specified term, the RRF plan of due quality, corresponding to the requirements and suitable for Latvia’s situation.
Ints Dālderis, Advisor to the Minister for Finance
