Local and regional governments have invested the European Union (EU) funds available for business development in the 2014–2020 programming period in the construction of roads and related infrastructure mostly, which was not the main priority of the support program. In its turn, the State Audit Office of Latvia has concluded in the audit that insufficient cooperation among local and regional governments, the Latvian Investment and Development Agency (LIDA) and programming regions is one of the reasons why the implemented projects have not made the best contribution to business development and do not promote the attraction of private investment in the regions.
BRIEFLY
- Local and regional governments have implemented 229 investment projects by investing almost 0.5 billion euros in total, including 294.5 million euros of the EU co-financing and 195.6 million euros of the national financing.
- Local and regional governments have invested the European Union funds available for business development in the 2014–2020 programming period in the construction of roads and related infrastructure mostly, which was not the main priority of the support program.
- Due to historically recognized indicators, the implemented projects for 98,675,843 euros or 20% of the total financing have no measurable impact on business development.
- Local and regional governments do not always conduct a comprehensive analysis of the area of businesses and investment attraction based on data and calculations.
- LIDA’s cooperation with local and regional governments needs to be improved in order to facilitate a more active inflow of foreign investment into the regional economy.
“The State Audit Office of Latvia does not doubt that the infrastructure in local and regional governments needs to be improved, but one cannot deny that the funding was used more for other purposes than directly promoting the competitiveness of businesses, including small and medium-sized enterprises, which would create new jobs for residents, opportunities for entrepreneurs and attract private investment. Local and regional government had almost half a billion euros available to invest in economic growth in general thus attracting private co-investment and increasing tax revenues in municipal budgets, but the audit has concluded that most projects have a negative financial return currently. The State Audit Office of Latvia has found that after the implementation of projects, the audited local and regional governments develop a negative balance of at least 1,019,904 euros annually which can reach up to 20,513,466 euros during the repayment of loans received. Taking into account the recent shortage of financial resources identified in Rēzekne City Municipality, the State Audit Office of Latvia calls on local and regional governments to assess the impact of implemented projects on the budget and, if necessary, introduce measures to mitigate such risks in order to avoid a similar situation in the foreseeable future,” indicated Mr Oskars Erdmanis, Council Member of the State Audit Office of Latvia.
During the 2014–2020 EU funds programming period, local and regional governments had access to financial resources for the first time from several specific support objectives (SSOs) within the framework of the priority axis “Competitiveness of SMEs” including SSO 3.3.1 “Increase the volume of private investment in the regions, making investments in business development in accordance with the economic specialization of the territories determined in the municipal development programs and based on the needs of local entrepreneurs” and SSO 5.6.2 “Revitalization of territories by regenerating degraded territories in accordance with the integrated development programs of local and regional governments”.
Local and regional governments have implemented 229 investment projects by using the available funding and investing 489,839,170 euros in total, including 294,510,457 euros of EU co-financing and 195,628,713 euros of national funding. However, only 32% of project activities involve the construction or reconstruction of buildings, which creates new space for businesses such as a place to locate a production facility, equipment and create new jobs. Although road infrastructure is not highlighted as a priority problem for promoting the competitiveness of small and medium-sized entrepreneurs in SSO 3.3.1 and 5.6.2, in fact, the largest amount of funding was directed specifically to this purpose.
“The focus of local and regional governments on large public infrastructure projects is understandable considering the costs of such projects, however, all planning documents emphasize the importance of cooperation partners and co-investments in the implementation of projects. Local and regional governments had the opportunity to implement projects in cooperation with a business by attracting private investments (co-investments), thereby reducing the need to attract public funding, while it would be possible to support more projects for the development of small and medium-sized enterprises with less public co-financing,” added Mr Oskars Erdmanis.
Investment projects could be implemented both by local and regional governments creating a universal business infrastructure themselves and receiving 85% EU co-financing, and by local and regional governments attracting an enterprise as a cooperation partner and creating an infrastructure adapted to business but receiving only up to 55% co-financing from EU funds. However, the form of cooperation like attracting an enterprise as a cooperation partner was never implemented. It means that all possible risks and responsibility for achieving the output indicators planned in the projects were assumed in fact by local and regional governments, enterprises did not participate with co-financing and, therefore, are not co-responsible for achieving the output indicators.
During the 2014–2020 programming period, the European Commission drew special attention of EU Member States to the assessment of the effectiveness of public investments, which was the responsibility of each EU Member State. Although the Ministry of Environmental Protection and Regional Development included a requirement in laws and regulations, which the State Audit Office considers to be favourable, for the recognition of the outcome indicators of projects implemented by local and regional governments as approved in advance, namely, in the two-year period before the submission of project applications, with the aim of expanding the possibility for local and regional governments to apply for EU co-financing for projects implemented by them, it did not create a clear control environment for assessing the intervention logic in these projects. Similar risks can be seen in projects in which the outcome indicators were achieved during the project implementation. It raises concerns for the State Audit Office of Latvia as to whether the projects implemented in the 2014–2020 programming period for EU funds amounting to 98,675,843 euros or 20% of the total funding, have the highest possible efficiency.
At the same time, the State Audit Office of Latvia points out that the control mechanism provided for in the legal framework has not ensured that ineffective and inefficient investment projects are excluded in full. Currently, one still has not been able to find tenants for several sites. One of the reasons for this situation is the shortcomings in the municipal development planning strategies where identifying an assessment of the problems of the business sector based on data and calculations was not always possible. The selection of project ideas took place in several rounds, and it was ensured by the Regional Development Coordination Council, which did not include the LIDA. The latter was also not involved in the process of implementing municipal investment projects and organizing auctions for rental sites.
Insufficient cooperation among programming regions, LIDA and local and regional governments hinders the attraction of private investment in the regions. Responsibility for the implementation of such projects under SSO 3.3.1 and SSO 5.6.2 that have not promoted businesses and facilitated the attraction of investment in local and regional governments sufficiently is actually the responsibility of all parties involved such as local and regional governments, programming regions, the Regional Development Coordination Council, the Ministry of Smart Administration and Regional Development, and the Central Finance and Contracting Agency.
In the opinion of the State Audit Office of Latvia, no agreement has been reached at the regional level and the development planning documents do not specify the economic specialization or profiling of regions and local and regional governments in business areas contrary to what was initially planned. Such an approach would allow planning and directing the available funding for the economic growth of a local or regional government in accordance with its strengths. It would reduce negative competition in regions and local and regional governments for investments and labour. Currently, the role of programming regions in business and investment attraction is formal and does not provide much added value to local and regional governments in facilitating businesses and attracting investments but at least consultative support and practical activities in approaching potential investors would be expected. A positive example of cooperation is that, in cooperation with the LIDA, the Latgale programming region has attracted a foreign company in Balvi in 2022 whose sewing factory employs around 200 employees.
However, the LIDA’s cooperation with local and regional governments can be improved in general to facilitate a more active inflow of foreign investments into the national economy. Already in 2010, the LIDA began to introduce and implement an investment attraction and servicing tool, id est, the POLARIS methodology. One of the most important activities of the methodology is the ability to prioritize nationally significant investment projects in cooperation with all parties involved. The State Audit Office of Latvia has concluded in its audit that the basic principles of the system still “remained on paper”, and only 10% of local and regional governments understand its essence.
The investment map created on the state platform for business development, business.gov.lv, which provides an opportunity to place information on potential investment objects in each local and regional government in one place, has not been popularized among local and regional governments sufficiently. It creates information fragmentation and administrative burden because local and regional governments submit information to the LIDA only upon request currently as well as maintain relevant sections on their websites. The State Audit Office of latvia considers that such a system does not contribute to the speed and completeness of information exchange for investors who obtain information on potential investment objects in Latvia on their own.
“During the audit, we identified a significant investment project that might have been implemented as a result of the application of an effective POLARIS methodology process. However, this methodology was not applied and the state did not receive approximately 5 to 10 million euros in investment. The State Audit Office of Latvia expects that the LIDA will become an ally of local and regional governments in their daily work by providing up-to-date information and data, providing advisory support and engaging in the implementation of potential investment projects directly,” emphasized Mr Oskars Erdmanis.
Recommendations of the State Audit Office of Latvia #PēcRevīzijas
The audit provided 10 recommendations to the audited local and regional governments, the Ministry of Smart Administration and Regional Development and the Latvian Investment and Development Agency whose implementation shall ensure the following: (1) economically sound investment projects will be implemented in local and regional governments; (2) the established monitoring indicators in the field of businesses and investment attraction will be monitored systematically; (3) negative impact on municipal budgets will be prevented; (4) the LIDA will assume a coordinating role by developing an action plan and framework for promoting cooperation with local and regional governments and centralized use of the state platform for business development business.gov.lv; (5) the MSARD will provide a monitoring system by developing unified monitoring indicators for local and regional governments in the field of businesses and investment attraction; (6) “negative competition” among local and regional government will be reduced by facilitating the exchange of best practices and experience on the advantages and prospective opportunities of economic specialization of local and regional governments aimed at strengthening their economic growth; (7) more effective and efficient implementation of investment projects will be promoted by improving the functioning of the internal control system of EU projects.
Additional information – audit report summary.
About the State Audit Office of Latvia
The State Audit Office of the Republic of Latvia is an independent, collegial supreme audit institution. The purpose of its activity is to find out whether the actions with the financial means and property of a public entity are legal, correct, useful and in line with public interests, as well as to provide recommendations for the elimination of discovered irregularities. The State Audit Office conducts audits in accordance with International Standards of Supreme Audit Institutions of the International Organization of Supreme Audit Institutions INTOSAI (ISSAI), whose recognition in Latvia is determined by the Auditor General. Upon discovering deficiencies, the State Audit Office of Latvia provides recommendations for their elimination, but it informs law enforcement authorities about potential infringements of the law.
Additional information
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