The State Audit Office publishes a case study report “What challenges do we face in drafting and implementing the Latvia’s Recovery and Resilience Plan?” It summarises the facts about the drafting, content and financing of the Latvia’s RRP for the implementation of the measures included in the plan, incl. its impact on the state budget, as well as on the risks of the implementation of the plan and control measures. The case study results show that the implementation of the RRP may have a positive impact on the development of the Latvian economy, but the decision-makers and those involved in the investment planning and implementation process need to address significant risks. The risks assessment was performed by analysing the assessment of the expert group of the Fiscal Discipline Council (FDC) and the Latvian Productivity Council (LPC) on the Latvia’s RRP.
BRIEFLY
- Investment planning should be based on a social and economic benefit analysis.
- Large public investment projects, incl. grants of the Recovery and Resilience Facility (RRF) should be considered together with all available financial resources, assessing their impact on the achievement of the Latvian National Development Plan 2021–2027 (NDP2027) objectives.
- The potential impact of the implementation of the Latvia’s Recovery and Resilience Plan (RRP) on the state budget must be assessed.
- The State Audit Office plans to audit the implementation of reforms and investments included in the Latvia’s RRP and the achievement of objectives.
Ms Ilze Bādere, Member of the Council of the State Audit Office, stated, “Significant grant of 1.82 billion euros from the Recovery and Resilience Facility is an opportunity to make a significant contribution to the development of the Latvian economy after the COVID-19 pandemic. This opportunity provided by the EU must be used as effectively as possible to address the identified risks in a timely manner that could hinder the successful implementation of the RRF reform and investment plan.”
Key results of the case study
- The selection criteria for reform and investment should be based on a social and economic benefit analysis
“Best practice would be to ensure transparency and openness throughout the investment planning process. The question is, are we satisfied that we base our planning for significant public investment on political choices rather than the analysis of social and economic benefits? Namely, without assessing the social and economic benefits and long-term impact, the risk of not achieving the country’ long-term goals is too high,” indicated I. Bādere.
Ms Bādere explains that the criteria for the reform and investment of the RRF are set out in the RRF Regulation, the most important of which are compliance with the RRF areas (pillars) and effective European Semester solutions addressed to the Member State concerned. In accordance with these criteria and following the NDP2027, the line ministries and the State Chancellery submitted 150 reform and investment proposals amounting to more than 7.5 billion euros for the Latvia’s RRP initially, which significantly exceeded the amount of RRF funding for Latvia. Consequently, the submitted reform and investment proposals were prioritised to include the most appropriate ones in the Latvia’s RRP, however, the decisions on the inclusion or non-inclusion of measures in the plan cannot be fully traced. According to the Ministry of Finance, the inclusion of investment and reforms in the RRP was a political choice. The social and cooperation partners indicated that they were involved in the preparation of the plan late and fragmentarily.
- Large public investment projects (including RRF grants) should be considered by assessing the impact on the achievement of the NDP2027 objectives
The final assessment of the implementation of the NDP (2014-2020) concluded that just over a third of the objectives were fully met, while some of the objectives were not funded. One of the reasons for this situation could be the fact that there was no integrated investment planning with a long-term vision of how all available financial resources (EU funds and other foreign financial instruments, state budget bases and development expenditures) contributed to the implementation of the NDP objectives.
I.Badere shared, “Taking into account the lessons learned in the previous NDP period, the question is – shouldn’t large public investments in this period be planned together with all available resources for the implementation of the NDP2027 goals? This would make understanding the weaknesses and possibly planning more strategically for the diversion of available funding possible.”
The FDC and LPC expert group has also indicated that “the components and elements of the plan in each individual group live “their own life”, it would be necessary to link the Latvia’s RRP more closely with other national planning documents, especially NDP2027 (..)”.
- The potential impact of the implementation of the plan on the state budget must be assessed
In addition to the forecasts on the positive effect on the economy and budget revenues, the implementation of the RRP will also generate the costs of at least 32.3 million euros for the state budget (administrative, control and monitoring costs, VAT on some reform and investment measures, translation and publicity costs, etc.).
A significant difference from other EU funds is that disbursements of the RRF are only conditional on the achievement of 100% of the specific reform and investment milestones and targets set out in the RRPs, which Member States have committed to in their RRPs. If the reform and investment indicators envisaged in the Latvia’s RRP are not achieved for 100%, this will have significant consequences because the funds spent for the implementation of those reforms and investments shall be covered from the state or municipal budgets, as they will not be financed from RRF.
The State Audit Office has submitted the case study report to the representatives of the Saeima and the government. “We expect that the implementation of the Latvia’s RRP will be closely monitored and that the responsible authorities will be invited to report regularly on the progress of the plan to address the risks identified in the report in a timely manner. Taking into account the significant financial resources of the RRF, which will flow into the Latvian economy and for the uptake of which the ministries will be responsible, the State Audit Office plans to audit the implementation and achievement of the goals and investments included in the Latvia’s RRP,” indicated I.Bādere.
About the Recovery and Resilience Facility
The RRF is a new budget instrument centrally managed by the EC of 672.5 billion euros to overcome the economic and social consequences of the COVID-19 pandemic and to make countries more resilient to crises through sustainable reforms and investment in policies of European interest, in particular by facilitating the transition to a green and digital Europe. The EU Member States will receive funding from the RRF in the form of grants and, at the request of a Member State, also in the form of a loan. The EU Member States will be able to use RRF funding for reform or investment projects until 3 August 2026. Funding covers six policy areas (pillars) of European interest aimed at promoting economic, social, and territorial cohesion in the EU.
The RRF funding available to Latvia for the implementation of the reforms and investments under the Latvia’s RRP is indicatively 1.82 billion euros[1]. According to the forecasts of the FDC and LPC expert group, the implementation of the Latvia’s RRP (2022–2026) could increase budget revenues by more than 500 million euros, reduce the investment gap by at least 25-30% over the next five years, and increase productivity by 3.5% per year (2022-2029). Latvia’s RRP includes 85 measures (24 reforms, 61 investments) with specific achievable goals, and one plans to implement it by 2026.
Additional info
- Case study report. The purpose of the case study is to summarise the facts on issues of public concern without drawing conclusions or making recommendations.
Additional information
Ms Signe Znotiņa-Znota
Head of PR and Internal Communication Division
Phone number 67017671 | M. 26440185 | E-mail: signe.znotina-znota@lrvk.gov.lv
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[1] Latvia has not yet applied for a loan from the RRF. The amount of loans indicatively available to Latvia for additional reform and investment measures would be approximately 2 billion euros.