Enes Sunel
Robert Grundke
OECD Economic Surveys: Latvia 2026
Abstract
Despite recent progress in digitalising the public administration, its perceived effectiveness remains low. Overlapping functions and weak coordination across the public administration reduce efficiency and increase the administrative burden. Issues related to data sharing across different institutions complicate the implementation of one-stop shops for administrative procedures and the use of data for policy impact evaluation. Conducting thematic and cross-sectoral functional audits to consolidate public bodies would help identify overlaps and reduce the public wage bill. Further improving the exchange and use of data is key for reducing the administrative burden and raising spending efficiency. Improving stakeholder engagement to review, simplify and reduce the existing stock of regulations and simplify administrative procedures is also crucial. This should be combined with simplifying public procurement, while fostering centralised purchasing. Capacities of municipalities should be strengthened by improving municipal cooperation and raising more revenue from property taxes.
Over the past decade, Latvia has implemented significant reforms that have strengthened the rule of law and improved the business environment. The establishment of the Economic Court in 2021 has improved the efficiency of judicial proceedings concerning complex commercial disputes and large economic crime, money laundering and corruption cases, and its remit and resources have been further expanded recently. The digitalisation of the judiciary has improved procedural efficiency and transparency (European Commission, 2025[1]). Moreover, a comprehensive anti-corruption and anti-money laundering strategy, strict party financing rules, and effective conflict-of-interest management have bolstered institutional integrity and the rule of law (see Chapter 1). The digitalisation and simplification of business registration has reduced administrative burdens for starting and operating a business. This was complemented by investor-friendly regulations, EU market access, an attractive corporate tax regime and the expansion of digital infrastructure, supporting foreign direct investment (see the previous OECD Economic Survey of Latvia).
Despite recent progress, the perceived effectiveness of the public sector and trust in institutions remain low (Figure 4.1) (see Chapter 1). Duplication of agencies and weak coordination across the public administration reduce government efficiency and increase the administrative burden for firms and households. The public wage bill remains above the OECD average as a share of GDP, which is related to relatively high wages for lower-skilled public employees and rising public employment. Firms cite regulatory and administrative burdens as a major constraint on business activity (BIAC, 2025[2]; EIB, 2024[3]). Despite some progress in establishing a government-wide data platform, poor data quality as well as limited awareness and skills of staff hinder the effective inter-linkage and use of data, which holds great potential to reduce the administrative burden (OECD, 2024[4]). It also hampers policy impact evaluation and the implementation of performance budgeting, which are key for better prioritising spending and raising spending efficiency. Planning and approval procedures for major investment projects have been accelerated through the work of a coordination council composed of the Prime Minister and five ministers, but as the council’s approval is required for each project, and many firms were given priority status, new bottlenecks have emerged at higher political levels.
Perceptions of public sector effectiveness, higher values indicate stronger perception of effectiveness, 2024
Note: The indicator reflects perceptions of public service quality, civil service competence and independence, quality of policy formulation and implementation and the government's credibility in its commitments. The indicator is measured in standard normal units (ranging from −2.5 to 2.5).
Source: World Bank, Worldwide Governance Indicators.
Further improving the capacity of the public administration is also key for the effective implementation of EU-funded programmes, which play a major role for supporting economic growth and the green and digital transitions. EU-funded investments have accounted for half of Latvia’s public investment between 2014 and 2020, with annual per capita support exceeding three times the EU average (Figure 4.2) (European Commission, 2024[5]). However, complex and lengthy planning and approval procedures and weak governance of infrastructure projects risk hampering the effective implementation of EU funded projects, as exemplified by large delays and cost overruns in the Rail Baltica project, which were more pronounced than in the other Baltic countries (Valsts kontrole, 2024[6]). Improving these planning and approval as well as procurement procedures and the governance of infrastructure projects is key for supporting economic growth and rebuilding trust in institutions. Moreover, as discussed in previous OECD Economic Surveys of Latvia, reducing the heavy reliance of public investment and other expenditures on the EU funding cycles and gradually expanding financing from the national budget would improve planning certainty for the private sector and the public administration. It would also help improve incentives for spending efficiency due to stronger ownership and accountability.
EU Cohesion Policy funding as a share of public investment, average over 2014-20, %
Source: European Commission (2024[5]); OECD Economic Outlook database; and OECD calculations.
Latvia’s public sector is comparatively large, which is costly and might lead to coordination problems and administrative burden (Figure 4.3). Although the unit costs of providing public services are generally higher in smaller countries, public employment and the public sector wage bill are higher in Latvia than in other small OECD economies, such as Estonia and Lithuania. This is partly due to duplications of functions within the central government, which also complicates coordination and increases the administrative burden. Central government employment and wage spending have risen sharply in recent years due to significant public sector wage hikes, expanded budgets for security, health and education as well as EU-funded programmes requiring increased administrative capacity. Relatively high wages for occupations with low skill requirements have also contributed to a high public wage bill. Municipalities account for a large share of the general government workforce, and despite a recent administrative-territorial reform that has merged about two-thirds of the municipalities, room for realising economies of scale and further consolidation of the workforce remains (see below). Without improvements in public sector efficiency, the fiscal burden of the high public wage bill risks constraining economic growth as it needs to be financed through higher taxes or increased borrowing (Fournier and Johansson, 2016[7]).
Source: OECD Government at a Glance 2025.
4.2.1. Improving the organisation of the central government
Overlapping functions among public bodies and enforcement authorities create administrative burdens and raise fiscal costs. Latvia’s central government administration includes over 140 institutions subordinated to line ministries. For example, the Ministry of Defence oversees two procurement agencies, one for logistics and centralised purchasing and another for defence-related real estate and other military facilities. Similarly, the Lottery and Gambling Supervision Inspectorate, set to merge with the State Revenue Service from April 2026, shared responsibilities with the tax authority such as restricting website access, monitoring operations, licensing, supervising taxes and payments, risk analysis and undertaking anti-money laundering measures. Two separate agencies for railway administration and technical inspection under the Ministry of Transport are also due to merge. Market surveillance for non-food products is currently split among 13 institutions, many of which have narrow mandates or are legacy authorities with outdated and highly specialised mandates, such as supervision of tractors and trailers, that no longer justify separate structures.
To identify overlaps and reduce public employment amid defence-related spending pressures, line ministries have conducted functional audits during the 2025-2026 spending review. However, these audits remain fragmented, and primarily react to fiscal pressures, limiting their impact. Although they prompted agency mergers in the agriculture, climate and energy, and finance ministries, and workforce optimisations in agencies under the Ministry of Economics, they lacked focus on reducing administrative burdens and improving strategic workforce management. For example, the Energy and Environment Agency was merged with the State Environmental Service only eight months after its creation without notable workforce reduction. Despite its expanded mandate to foster digitalisation of the public administration, the Ministry of Smart Administration and Regional Development retained functions related to nature conservation, risking overlaps with the Ministry of Climate and Energy, which is responsible for environmental protection. To identify overlapping functions and scope for consolidation across Ministries and their agencies, thematic and cross-sectoral functional audits should be conducted with a view to consolidate public bodies as well as permitting and enforcement authorities, and reduce the public wage bill. If supported by systematic spending reviews and external evaluations, this could also help strengthen coordination and reduce administrative burdens (OECD, 2013[8]). Publishing audit results would promote transparency and strengthen their impact. Ireland’s Civil Service Management Board, comprising all Secretaries General and chaired by the Secretary General to the Government, has successfully coordinated similar efforts on national priorities related to Brexit, COVID-19, and the green transition (OECD, 2023[9]). Lessons from other OECD countries could also guide reforms to further improve organisational efficiency (Box 4.1).
Australia’s Centrelink merges public service delivery in a client-oriented way, offering a one-stop shop for pensions, family support, unemployment benefits, study loans and disability services. Although it required high initial investments in ICT and regional offices, Centrelink improved service quality and was later expanded to include functions like passport delivery, achieving horizontal integration of public service delivery across different parts of the public administration.
Denmark uses ICT to streamline interactions between citizens and government through a unified portal for central and local public services. The Ministry of Finance sets standards to enable smooth communication across agencies. Shared e-government components improve efficiency, reduce costs, and foster a more integrated public sector experience, enhancing accessibility and coordination for both citizens and businesses.
The Spending Review “Operational Management” in the Netherlands identified clusters of executive agencies and ministerial divisions with overlapping functions, such as handling cash benefits to citizens, collecting fines, taxes or debt and paying subsidies to the businesses. Estimates suggested that merging these clusters, despite necessary ICT and investment costs, could save around EUR 250 million in 2015.
Source: OECD (2013[8]).
Expanding shared support services in the public sector can reduce operational costs while improving service quality. Shared service centres facilitate standardisation of finance, human resources, ICT, procurement and real estate services management across the government (OECD, 2015[10]). The recently created shared services centre in Portugal additionally includes a project management function to help improve performance monitoring and deliver efficiency gains across the public administration. Latvia is starting to set up a shared service centre to bundle human resources, training and accounting processes, and this should be fully implemented. Using the centre should be gradually mandated as planned, as in Austria, Denmark and Finland, with support staff transferred from line ministries to the centre. If necessary, opt-out should only be possible with proof of equal efficiency, as in Sweden. Access to the centre should also be extended to all public entities, including municipalities, as it currently covers only central public administration.
There is also scope to reduce the number of political officials supporting ministers. The number of political officials, comprising heads of political bureaus, parliamentary secretaries as well as internal and external advisors, has increased from 107 in 2022 to 124 in 2026. Political officials help balance power between politicians and senior-level civil servants (OECD, 2015[10]). However, an excessive number of political officials appointed by ministers risks exposing the professional civil service to undue political influence. Moreover, frequent turnover of senior leadership, especially followed by ministerial changes can shift the balance of power towards politicians, undermine strategic planning and prioritisation, weaken institutional memory and reduce the quality and effectiveness of public policies (OECD, 2024[11]). The number of political officials should be reviewed.
The reduction of public employment should be carefully managed to not hamper administrative capacity. Replacing retirees only partially could help reduce the large public workforce, as nearly one-third of central administration and half of municipal employees are aged 55 or older (OECD, 2025[12]). Although broad measures, such as hiring freezes or across-the-board cuts could reduce the public wage bill in the short term, they rarely address inefficiencies or evolving skills needs in the public sector (Huerta Melchor, 2013[13]). Instead, managing retirements strategically, tailored to each organisation’s demographic profile, can sustain efficiency and support upskilling. Recruitment could be selectively moderated and concentrated on critical positions including the senior and entry levels. This requires close coordination between the Ministry of Finance, the State Chancellery, and human resource units in line ministries, supported by the planned shared service centre for centralised recruitment.
Delegating more responsibilities to line ministries and state secretaries could also improve government efficiency. The Cabinet of Ministers decides not only on primary legislation but also on secondary regulations and technical matters, such as fast‑tracking permits for specific investment projects or approving the acquisition of land plots for infrastructure projects (see below). To prevent the Cabinet from becoming overwhelmed with items that are not genuinely strategic, certain decisions on more technical and sector-specific issues should be taken by line ministries. In Finland, for example, a network of ministerial committees, thematic groups and functional working groups – often led jointly by senior officials from line ministries – help the Cabinet to align positions, coordinate policies and support strategic decision making (OECD, 2024[14]).
4.2.2. Improving employment policies in the public administration
Weaknesses in compensation, recruitment and human resource management policies continue to weigh on the capacity of Latvia’s public administration (OECD, 2025[12]). The public sector wage premium has fallen around 30 percentage points since 2008, following the strong public sector wage cuts during the global financial crisis. This has contributed to the loss of experienced staff and increased staff turnover, as it remains difficult to retain newly hired talent. In many parts of the public administration, institutional memory has been weakened, weighing on the quality and effectiveness of public policies and services and the efficiency of public spending. Although recent reforms have supported public sector wage growth, public wages for mid‑level managers and skilled professionals remain low compared to the private sector (Figure 4.4). At the same time, further increases in public wages are constrained by mounting spending pressures in defence and other priority areas (see Chapter 1). As the public sector workforce is rapidly ageing and skilled labour shortages in the labour market are projected to further increase, recruiting new workers with specialised or high‑demand skills is a significant challenge (OECD, 2025[12]). Addressing these issues requires improving compensation and recruitment policies as well as more effective human resource management in public administration to better manage the public wage bill.
Rebalancing pay growth would help to attract and retain mid‑level managers and skilled professionals. In the current pay structure, salaries for jobs with higher skill requirements, classified as jobs in mid and high pay grades, are far below the wages for comparable jobs in the private sector (Figure 4.5, Box 4.2) (Cabinet of Ministers, 2025[15]). In the first quarter of 2025, around 10% of public sector vacancies had remained open for at least ten months, with roughly 40% requiring mid‑ to high‑skill profiles (Cabinet of Ministers, 2025[16]). To improve attractiveness of public sector jobs, the 2022 public administration reform aims to raise public wages to at least 80% of median private sector wages for comparable jobs by 2027. Although the State Audit Office found that remuneration expenditure rose by an average of 32% between 2022 and 2024 across 40 public bodies, this target is difficult to achieve due to severe budget constraints that led to zero base salary growth in the 2026 budget (Valsts kontrole, 2026[17]; Ministry of Finance, 2025[18]). As wages for lower pay grades are slightly above wages for comparable jobs in the private sector, there is scope to moderate wage growth in clerical roles to free resources for strengthening pay for mid‑level managers and skilled professionals (Figure 4.5). Carefully reviewing the number of essential senior officials, such as deputy state secretaries, could also help to free resources, as their remuneration, excluding pay for their service on SOE boards, accounts for over 4% of total remuneration spending across ministries (see above). To improve the methodology to define pay rise targets, the benchmarking with private‑sector wages should also control for worker attributes such as age, experience or education, as not controlling for them might bias the computed wage premia (Marcinkowski, Butnaru and Rabrenović, 2024[19]). Overtime pay – which is more widespread in the public sector – should also be considered in the calculations.
Public sector wage premium, by occupational group, compared to formal wage employees in the private sector, %, 2021 or latest
Source: World Bank, Worldwide Bureaucracy Indicators.
Although some flexibility in wage setting exists, limited funding prevents line ministries from fully using this flexibility for occupations that are in shortage. The pay grading system allows to raise salaries above the pay grade ceiling using market coefficients, which can only be applied to IT specialists (Box 4.2). However, because public bodies differ in financial capacity, base pay outcomes vary significantly, putting lower‑paying public bodies at a disadvantage in attracting talent and contributing to persistent capacity gaps, particularly hampering policy planning and impact evaluation (Valsts kontrole, 2026[17]). To level the playing field in competition for skills, the share of jobs eligible for higher market coefficients should be increased in public bodies and positions facing severe skills shortages, supported by additional funding during budget negotiations conditional on recruiting skilled professionals (OECD, 2025[20]). Recent wage increases for specific public jobs not covered by the public administration reform, such as for judges and law‑enforcement personnel, should be also expanded to procurement officers to further reduce corruption risks and support the professionalisation of public procurement (see below) (Valsts kontrole, 2024[21]).
Strengthening the transparency of pay supplements and performance-related payments is key for ensuring pay equity and strengthening motivation of public employees. Although the pay grade rules allow for some flexibility to offer competitive wages to attract and retain talent (see Box 4.2), differences in using additional bonuses leads to a strong variation of total remuneration across ministries. On average, base salary represents slightly over 80% of total pay, a healthy ratio for managing the public wage bill (Marcinkowski, Butnaru and Rabrenović, 2024[19]). However, fixed monthly bonuses, allowances and one-off payments differ widely across ministries, influenced by looser funding constraints in ministries with less staff (Figure 4.6). Ministries also differ in the in-kind benefits they offer, such as covering private health insurance premiums – ranging from EUR 375 to EUR 750 – or reimbursing vision correction devices (Valsts kontrole, 2026[17]). Such disparities distort perceptions of internal equity and complicate the retainment of skilled staff in ministries with less funding (Valsts kontrole, 2025[22]). To raise transparency and ensure consistency, performance-based bonuses should be limited to clearly defined tasks tied to measurable and comparable objectives, and set for a fixed duration. Moreover, adjustments to public wage premiums should primarily rely on pay grade coefficients as well as market coefficients that allow additional flexibility, not on discretionary supplements or one-off payments.
Difference between public and private sector wages depending on the pay grade, 2023, %
Note: The average monthly salary of central government employees as of December 2023 is compared with median private sector wage for comparable jobs in 2022 due to data availability constraints. Estimates understate the negative public sector wage premium, as private sector wages on average grew by 11.5% in 2023 compared to 2022. The 2022 public administration reform aims to raise average wages in the public administration to at least 80% of the median wage for comparable jobs in the private sector by 2027.
Source: State Chancellery; and OECD calculations.
Latvia’s public administration pay system applies to the public administration of the central and local governments. It includes 51 job family groups and 17 pay grades. Jobs are evaluated using a detailed methodology that assesses qualification requirements, job complexity, the level of cognitive and interactive tasks, and decision-making responsibility, with each factor assigned point values that determine a total score for grading. To remain competitive, the median salary of each pay grade is linked to the median wage in the private sector for comparable jobs, though allowing for a negative public sector wage premium, given the non-wage benefits of public sector employment such as greater job security.
Public bodies can flexibly set pay for specialised and senior roles by multiplying the base salary with a coefficient within the statutory range, except where fixed coefficients apply to top management and certain specialised roles. To further increase competitiveness, public bodies can use market coefficients that exceed the statutory maximum coefficient, increasing the monthly salary by up to 50% of the base wage only for IT specialists. About 15% of positions in state or local government institutions and 30% in public agencies are eligible for these additional adjustments. In addition, performance-related one‑off bonuses can range between 55% and 75% of monthly salary for three satisfactory performance rating categories, although the 2026 budget temporarily suspended these bonuses. Poor performance appraisals can lead to salary reductions.
Source: State Chancellery; Cabinet of Ministers (2003[23]); Cabinet of Ministers (2012[24]); and Marcinkowski, Butnaru and Rabrenović (2024[19]).
Improving non-monetary benefits can help make the public sector more attractive. Latvia’s flexible work framework, a key non-monetary benefit to make the public administration more attractive, remains fragmented and limited and should be improved. Only part-time work is an enforceable right, and other flexible work arrangements depend on employer discretion (OECD, 2022[25]). Moreover, flexible work regulations and policies are set at the ministry or agency level, while over half of OECD countries define them centrally for the public administration and guarantee part-time or flexitime work for most public employees. Latvia should consider making flexitime and remote work enforceable employee rights for public employees and introduce a legal right to disconnect, as practiced in more than a third of OECD countries, to protect work-life balance. If expanding flexible work rights is not feasible, public employers should be required to justify refusals upon employee requests for flexible work following Australia’s example. Charters and codes of conduct on remote work should include clear protocols for online and hybrid meetings, problem resolution, and managing work-home boundaries, and be defined centrally rather than at the ministry level to ensure consistency across the public administration (OECD, 2023[26]).
From January to August 2025, %
Note: Staff numbers in each ministry is calculated using full-time equivalent workloads. Bonuses and allowances exclude overtime pay.
Source: State Chancellery; and OECD calculations.
Improving recruitment policies can help make the public administration more attractive. In the Latvian public administration, human resource practices such as talent attraction, recruitment and onboarding are delegated to line ministries to a greater extent than in most OECD countries (OECD, 2025[12]). Centralising recruitment would allow to pool and better train resources to improve outreach, networking and marketing activities (OECD, 2021[27]). Strengthening the public administration’s reputation through clearer communication of its mission and achievements, including through social media is key, as for example youth surveys show social media strongly shapes perceptions of public administration as an employer (State Chancellery, 2025[28]). Collecting and analysing data on employer attractiveness can also help inform marketing campaigns. Expanding outreach activities to international candidates, including the diaspora, and focusing on attracting candidates with experience in the private sector could help boost management and digital skills sets and organisational quality in public administration (OECD, 2025[29]). Centralised recruitment and standardised job profiles can also facilitate mobility of staff across the public administration. As a first step, the State Chancellery created a database for central government positions vacant for more than 12 months, enabling institutions to reallocate vacancies, better monitor human resources budgets and redirect saved funds to improve remuneration (Cabinet of Ministers, 2025[16]). It also established a central contact point to support and inform individuals seeking career opportunities in public administration, the EU and other international organisations. These initiatives should be complemented with centralising other recruitment activities within the planned shared services centre.
Strengthening internal mobility would help to develop and attract talent and improve peer learning, cooperation and coordination across the public administration. Standardised job classifications and uniform employment terms already facilitate internal mobility, but the absence of a centralised mobility strategy, unlike in over half of OECD countries, limits its impact (OECD, 2022[25]). Current efforts to promote internal mobility are limited to encouraging managers to hire people from other departments or ministries, while external mobility is partly supported through salary retention and return rights during secondments or sabbaticals. While onboarding support is common, succession planning, risk assessments and further mobility guidance are inconsistent, fuelling employee concerns about returning to their post after moving. Moreover, there is no central system that tracks staff mobility. Including mobility in individual learning and long-term career planning, providing transparent mobility opportunities, and explicitly considering mobility in promotion decisions could foster mobility. This can be complemented by initially restricting public administration vacancies to internal applicants, as practiced in Italy and the Netherlands (OECD, 2023[26]).
Incentives for learning and professional development in the public administration could be strengthened. Latvia’s human resources management strategy for the public administration considers learning and development in performance evaluations and promotion decisions. Employees also have flexibility to choose training programmes and must spend a minimum amount of time on development. However, data on how training is used in performance evaluation should be collected centrally and the development of individualised learning plans could be made mandatory, as practiced in half of OECD countries. Granting employees additional time off for training and recognising a right to formal training could further increase the voluntary uptake of training. Assigning managers responsibility for ensuring employee participation in training, as in about one-third of OECD countries, and defining development of employees as a skill in the mandatory training curriculum for managers would support learning and professional development (OECD, 2023[26]). Latvia could also learn from Ireland’s experience to include employee development into managerial promotion and progression decisions to encourage managers to invest in employee development (OECD, 2022[25]).
Expanding targeted training to public employees in the use of digital technologies and design of digital services is a priority to raise public administration capacity. Latvia’s digital skills and competence framework for the public administration identifies skills needs by leveraging manager feedback, assessing employee competencies and defining skills required for the digital transformation. Methods to identify learning needs could be improved further by systematic collection and analysis of employee feedback on skills and learning needs as practiced in Australia (OECD, 2023[26]). Developing a strategy for reskilling employees whose jobs will be redundant due to digital transition should complement the framework. Currently, no reskilling training is provided, and employees are only expected to learn new roles on the job. Mandatory training programmes could be introduced for employees whose jobs will likely be made redundant, as practiced in France and Portugal (OECD, 2022[25]).
4.2.3. Improving the governance of state-owned enterprises
State-owned enterprises (SOEs) play a larger role in Latvia’s economy than in most OECD countries (see the previous OECD Economic Survey of Latvia). 63 fully owned and 4 majority-owned SOEs operate in sectors such as energy, transport, telecommunications, forestry and real estate (Valsts kanceleja, 2024[30]). Six of the largest ten companies are state-owned, operating in energy, rail transport and forestry (Statistika Lursoft, 2025[31]). SOE profits represented 8.3% of total profits in 2022 and generated dividend payments equal to 0.9% of GDP in 2023, significantly contributing to the central government budget. Moreover, although the administrative-territorial reform led to consolidation of some municipal companies, about 300 local SOEs remain active in areas such as utilities, public transport, construction but also in health services, sports or cultural activities.
Latvia reviews the rationale for state ownership every five years, but SOE structures have changed little since 2014 despite their broad scope (Valsts kanceleja, 2024[30]). The SOE share of employment has declined since the global financial crisis, mainly due to gradual privatisation of rescued banks, private sector growth and consolidation of municipal enterprises after the administrative-territorial reform, but remains high at around 6% (Figure 4.16, Panel A). According to the law, SOEs that do not correct market imperfections or serve strategic and national security purposes should be divested, but criteria for justifying state-ownership remain relatively vague. Clearer definitions of strategic assets and deeper analysis of market failures and competition effects are needed to make ownership decisions more transparent and conducive to raising social welfare (see the previous OECD Economic Survey of Latvia). The SOEs that so far have been excluded from the assessment, such as the post, railroad, airport, television, radio and theatre companies, should be included in future reviews as planned. For SOEs that remain public, ownership should be fully separated from the state’s regulatory and policy roles to ensure competitive neutrality and foster business dynamism (see Chapter 1).
Further centralising ownership rights would strengthen SOE governance. Recent reforms have enhanced the State Chancellery’s role as a coordinating entity, aiming to establish a unified and strategic approach to SOE management and performance monitoring. As a result, Latvia improved its SOE governance in 2024 compared to 2018 in the OECD Product Market Regulation indicators. Yet, standards for transparency, accountability and performance of SOEs remain fragmented. Board nomination committees lack systematic coordination among institutions, and remuneration for board members and key executives is set by remuneration committees on an ad-hoc basis (OECD, 2024[32]). Moreover, governance of municipal companies remains weak due to ineffective management, including poor documentation, lack of goal-setting and weak monitoring (Valsts kontrole, 2023[33]). The evaluation of the rationale of ownership as well as decisions on share capital increases or profit distribution often lack economic analysis or justification. Following the 2024 OECD Guidelines on Corporate Governance of SOEs, SOE ownership should be centralised in a single entity. This would help clarify objectives, unify transparency, accountability and performance standards and better monitor performance of SOEs.
Improving SOE practices in reporting and disclosure remains a key priority. Latvian practices do not fully align with best international practices in financial and non-financial reporting, separation of accounts related to public service obligations, risk management and external audits (OECD, 2024[32]). Reporting and disclosure practices are particularly weak for municipal SOEs due to delays in updating the enterprise register after the administrative-territorial reform and publishing outdated or fragmented data (Valsts kanceleja, 2024[30]). Weak accounting separation for commercial and public service obligations can complicate investigations on unfair practices of cross-subsidisation and hinder the enforcement of competitive neutrality of SOEs, weighing on business dynamism, innovation and productivity growth (see the previous OECD Economic Survey of Latvia). Moreover, disclosure on remuneration of board members and executives further deviate from best practices. The State Chancellery’s 2024 review found fewer than 40% of SOEs disclosed information that was complete and of sufficient quality as required by the law, and the performance of many SOEs has not improved in the recent years (Valsts kanceleja, 2024[30]). For example, many SOEs reported only aggregate remuneration figures for board members or cited external regulations instead of providing board member-specific information. Additionally, most SOE websites lack transparency and proper formatting, making access to data difficult. Ensuring that large SOEs comply with high standards of transparency and are subject to the same high-quality accounting disclosure, compliance and auditing standards as listed companies, is key for improving accountability and governance, and better enforce competitive neutrality of SOEs.
Listing minority shares in larger SOEs could improve governance, transparency and the separation of commercial activities and activities pursuing public service obligations, including those of statutory natural monopolies, thereby strengthening competitive neutrality. Listings would also subject SOEs to corporate governance frameworks for publicly traded companies, such as binding internal audit obligations, which enhance accountability (OECD, 2024[32]). Adhering to the OECD Guidelines on Corporate Governance of State-Owned Enterprises and G20/OECD Principles of Corporate Governance alongside minority listings would further improve governance, support the enforcement of competitive neutrality, and help attract foreign investors to Latvia’s capital markets (see Chapter 1). To safeguard competitive markets, independent and well-resourced regulators and a well-functioning competition enforcement are key conditions for listing SOEs.
Latvia has made important progress in digitalising administrative procedures for firms and households, easing processes such as business registration or certain licencing and permitting procedures (Figure 4.7). Digitalisation of public service delivery has also increased transparency and access, with the share of individuals using the internet to interact with the government matching the OECD average according to the OECD ICT Access and Usage by Individuals database. However, the government’s capacity to centre the design and delivery of policies and services around user needs could improve (OECD, 2024[34]). Public administration could also more strategically leverage digital tools and data to reduce high administrative burdens for internal government processes and improve data sharing and analysis for public service delivery, policy planning and regulatory impact assessment (OECD, 2023[35]). This would also help raise spending efficiency (see Chapter 1).
OECD Digital Government Index, 2022, score 0 to 1
Note: Data are not available for Germany, Greece, the Slovak Republic, Switzerland and the United States. The OECD Digital Government Index is comprised of six sub-indices of the OECD Digital Government Policy Framework shown: digital by design, data-driven, government as a platform, open by default, user driven and proactiveness. The overall index measures the capacity of the public sector to deliver a coherent and human-centric digital government transformation, as well as the strategic approaches, policy levers, implementation and monitoring mechanisms in place to deliver the digital government strategy. Thus, it captures much more than just digitising analogue processes.
Source: OECD Survey on Digital Government 2.0.
4.3.1. Simplifying regulations and administrative procedures and strengthening the digitalisation of the public administration
There is room to further reduce administrative burdens for firms and households by simplifying regulations and administrative procedures, and improving the digitalisation of the public administration. Digitalisation of administrative procedures through the introduction of e-forms has already shortened the time required to obtain operating licenses or construction permits (Figure 4.8, Panels A and B). Starting a company has also become easier by removing the need to register a fixed business address and publish the establishment of the firm in the official gazette as well as lowering monetary registration costs (Figure 4.8, Panel C). However, the fragmented organisation of registries together with issues related to data quality and exchange still complicate the linkage of registries and implementation of one-stop shops. For example, starting up a personally owned company still requires online registrations with four different agencies to complete seven procedures. Similar steps can be completed through the tax authority in Ireland and New Zealand, and via the e-government website in Greece and Poland (OECD, 2025[36]). Integrating all licensing and registration procedures into a one-stop shop, such as the e-government website business.gov.lv, and providing regularly updated information on all required licenses and permits for starting and running a business would significantly reduce administrative burdens.
Source: World Bank Enterprise Surveys, www.enterprisesurveys.org; OECD 2023-25 Product Market Regulation database.
Efforts to simplify regulation and administrative procedures should apply across the board, and should not lead to unequal treatment across firms, to ensure a level playing field. Latvia introduced a fast-track mechanism allowing public bodies to accelerate administrative procedures for export and investment-oriented companies. Priority investor status was granted at the company level for over 600 firms in 2025, which created new administrative bottlenecks within the fast-track mechanism. While recent amendments have automatically included clean energy and rare earth processing projects and relaxed exclusion criteria based on tax compliance, they have also raised export volume thresholds, which will cut the number of eligible firms by about half. However, instead of singling out specific projects or firms, it should be a key policy priority to review, simplify and reduce the existing stock of regulations and simplify administrative procedures for all firms. Conducting public stocktakes by engaging businesses and citizens to report on regulatory and administrative hurdles in specific areas with broader impact holds large potential to reduce the administrative burden (OECD, 2020[37]). For example, Germany uses workshop-based stakeholder engagement to identify cumbersome regulations and administrative procedures and develop potential solutions to reduce the administrative burden (OECD, 2025[38]). To simplify administrative procedures related to environmental regulations, Latvia could draw on Germany’s approach to designate strategic infrastructure investments as projects of overriding public interest, which has significantly simplified and accelerated licencing and permitting procedures for energy infrastructure. Applying silence-is-consent rules, where licenses or permits are granted in case the respective public authority does not reply until a specific deadline, also hold significant potential to accelerate administrative procedures. Recently introduced simplification measures and streamlined support applications for small firms are welcome.
Similarly, there is room to further reduce administrative burden for households. The time to obtain a construction permit has been significantly reduced in recent years (Figure 4.8). However, property owners still have to interact with three different agencies to apply for construction permits, register the building in the cadastre and enter it in the land register. This leads to repeated information requests and costly procedures for citizens and municipalities. The recently introduced digital one-stop shop for building registry should be integrated with the relevant registers and extended to other administrative procedures. It is also important to ensure compliance with the EU Once-Only Technical System to facilitate digital infrastructure and data sharing across the EU and contribute to harmonising administrative procedures. Latvia can learn from Lithuania’s one-stop shop portal which merges multiple registries within and across levels of government and provides access to a wide range of e-services for firms and households. This approach has also enabled Lithuania to centralise administrative tasks such as managing health insurance registrations, which had previously been managed by municipalities. This helped free resources to raise local administrative capacities (see below), while strengthening interoperability between registries across government levels and EU member states, thereby also reducing internal administrative burdens for the public administration (OECD, 2025[12]; Europan Commission et al., 2025[39]).
The digitalisation of the public administration should be closely coordinated with efforts to reduce the administrative burden, as digitalisation is a key instrument and process to simplify and harmonise regulations and administrative procedures. Latvia has partially acted on previous OECD recommendations to consolidate funding for digitalising the government into a single ministry (OECD, 2021[40]). The Ministry of Smart Administration and Regional Development coordinates the digital transformation agenda, aimed at improving data infrastructure and exchange and harmonising administrative procedures. However, the initiatives to reduce administrative burden are coordinated through a working group, co-chaired by the leaders of the Chambers of Commerce and the State Chancellery and comprising representatives of public institutions at the central and local level, business organisations, civil society organisations and scholars (OECD, 2024[14]). The digital modernisation agenda led by a thematic Cabinet committee could be better coordinated or more directly integrated with centre-of-government efforts to reduce the administrative burden.
Issues related to data quality, awareness and funding for digitalising information hamper the effective sharing of data across the public sector to reduce the administrative burden and improve public service delivery. Robust data sharing systems, supported by appropriate safeguards and a risk-based approach to privacy and security, are key for delivering integrated public services and ensuring interoperability to reduce administrative burdens (Box 4.3). Latvia’s digital public infrastructure is highly fragmented, with around 700 state IT systems. To facilitate data exchange across the public sector, the Ministry of Smart Administration and Regional Development has introduced a centralised data exchange platform to streamline and optimise data sharing across state institutions and local governments, complemented by a data repository, providing unified metadata-level descriptions to enhance interoperability. Smart contracts for data exchange concluded through the platform have cut the time required to finalise a single data sharing agreement from the previously estimated 6-24 months to just 10 days. While uptake has risen sharply in 2025, smart contracts still represent only slightly more than 3% of all existing data exchange agreements, and the central data exchange platform is connected to municipal IT systems only through social benefits data, excluding many local government registries. Progress has been made in integrating single identifiers for firms and natural persons into public administration IT systems, but challenges persist in linking them with EU-level identifiers. In some cases, domestic registers cannot be connected using personal identifiers, as common classifications are inconsistently applied and the quality of meta-data is weak (OECD, 2024[4]). Some registers are still maintained in human-readable formats and non-standard spreadsheets, complicating integration.
Lithuania’s State Information Resources Interoperability Platform. The platform is managed by the State Digital Solutions Agency, with the mission to advance the information society through ICT development, efficient resource use, and expanding digital services in areas such as healthcare, migration and business activities. The platform includes an interoperability system which allows to access and link different data sets and registries across and within levels of government. It features the e-Government Gateway, a one-stop shop for citizens, businesses, and public sector to digitally access public services. It also supports document verification, e-signatures, and secure identification, including e-identification for foreigners.
Estonia’s Data Exchange Layer (X-tee). X-tee is an interoperable system that enables secure data exchange among its members through agreed protocols. With many systems connected, members can access each other’s services to streamline processes. For example, police officers can verify driving licenses directly from the Transport Administration database, eliminating the need for physical documents.
Spain’s National Data Intermediation Platform (PID). PID acts as a broker, enabling authorities to access data services from trusted sources for public service delivery. It includes an authorisation process to ensure public interest and EU General Data Protection Regulation compliance. PID supports secure data exchange across public entities.
Japan’s Co-operation Network System for Personal Information (NWS). NWS is managed by the Digital Agency of Japan and operates to securely transmit personal data linked to Individual Numbers between public entities, reducing the need for citizens to submit multiple documents. NWS excludes private access and does not store data, relying on decentralised records held by individual government organisations.
Source: State Digital Solutions Agency (2023[41]); and OECD (2024[42]).
Although legal provisions mandate the exchange of data across the public sector for specific purposes, awareness issues and differing legal interpretations act as important barriers to data exchange. The State Administration Structure Law requires public institutions to obtain necessary information from other authorities, if possible, rather than requesting it from individuals or firms, so that information is requested only once for all interactions with public bodies (the once-only principle) (Saeima, 2024[43]). It also mandates cooperation and electronic information exchange between public institutions for other purposes, such as regulatory enforcement, policy planning and impact evaluation, granting the Cabinet the authority to define the related procedures. However, these legal requirements are often overlooked when public authorities define data access regulation or develop ICT systems, and fragmented interpretations of legal provisions lead to resistance to data sharing. Continuing to strengthen data governance, improve data quality and interoperability, and enable secure cross-sector data reuse for administrative procedures is essential to fully realise the benefits of the once-only principle. Better clarifying in law the restrictions on information exchange between public bodies and ensuring a coherent interpretation across public bodies would prevent data sharing approval issues from escalating to higher political levels and foster administrative cooperation to exchange data and improve public service delivery.
To digitalise and link existing registries and information to the central data exchange platform and improve data quality, more funding and capacity building is needed. The development of e-forms and the connection of municipal registries and IT systems have significantly reduced the administrative burden and facilitated data sharing. However, effective implementation of the central data exchange platform requires multi-year funding for development, operation and maintenance from domestic sources in addition to cyclical EU structural funds, to avoid reducing planning certainty and to ensure continuity in IT management. Moreover, setting mandatory common IT standards and data formats is key to ensure machine-readability, and establish interoperable IT systems that allow for secure data exchange. This would also help harmonise and simplify administrative procedures across municipalities. Fostering joint procurement initiatives of municipalities, while obliging all ICT service providers to comply with these standards, holds large potential to reduce costs and foster competition among providers. Collaborating with non-public stakeholders for the design and management of the platform could help acquire funding and expand the database to also include private sector information. Latvia can learn from Norway’s joint digital solutions initiative, which integrates population, company and cadastre registers with services used by nearly 70% of all public agencies (OECD, 2024[42]).
4.3.2. Raising the quality of regulations through better ex-ante impact assessment
Better impact assessment of regulations is key for reducing the administrative burden and improving public spending efficiency (OECD, 2020[44]). However, limited analytical capacity and weak enforcement have weighed on the effectiveness and systematic adoption of regulatory impact assessments in Latvia (Figure 4.9) (OECD, 2024[4]). All draft legal acts are subject to mandatory ex-ante impact assessments, which aim to define problems, policy objectives and target groups, analyse potential solutions, and evaluate their impacts, including administrative costs. However, assessments are rarely based on data or comparative analysis of alternative options to identify the most effective solutions in terms of a cost-benefit analysis (OECD, 2024[4]). In many cases, conducted regulatory impact assessments are tailored to justify intended solutions, as deadlines are tight and assessments occur late in the drafting process when alternatives to proposed regulation are no longer viable. However, comparing the benefit of alternative policies against their cost is key for improving the effectiveness of policymaking and avoiding unnecessary administrative burdens on firms and households. About half of OECD countries require evaluating multiple alternatives in regulatory impact assessments (OECD, 2024[45]). For example, the UK’s adoption of a risk-based approach to online safety, which aims to reduce online harms at the lowest possible cost, was the result of an evaluation of costs and benefits of several alternative solutions (OECD, 2025[46]). Latvia should improve the enforcement of its framework for regulatory impact assessment, including the evaluation of alternative options early in the legislative process and clearly defining assessment criteria, as in the other Baltic countries (OECD, 2024[45]).
Limited analytical capacity further hampers the quality of regulatory impact assessments (Figure 4.9). Although the State Chancellery provides guidance to line ministries on using Cost-Benefit Analysis or Cost-Effectiveness Analysis to support the legislative process, these advanced methodologies are rarely applied due to weak analytical capacities in ministries, except for a few exceptions in the Ministry of Finance and the Ministry of Economics. Raising training resources and developing targeted programmes through the Latvian School of Public Administration could help raise capacity for regulatory impact assessments. Moreover, it should be a key priority to facilitate knowledge exchange between experts of line ministries through informal networks. For example, the Netherlands has adopted cross-departmental regulatory impact assessment guidelines to address key challenges among a dedicated working group, chaired by the Ministry of Justice and Security, which meets monthly to share best practices among departmental expertise teams (OECD, 2024[4]). Establishing a centralised agency to provide technical assistance on the regulation of digital technologies in line ministries, as done in France, could also support regulatory impact assessments (OECD, 2025[46]).
Given limited analytical capacity in the public administration, a proportionality principle should be introduced, so that more detailed impact assessments are only required for laws and regulations with significant impacts. At present, impact assessment requirements are not systematically adjusted to the expected impact of primary laws or secondary regulations, unlike in other Baltic countries (OECD, 2024[45]). Prioritisation should be based on qualitative approaches such as early stakeholder consultations as well as improved quantification of administrative burden. This can be achieved by systematically releasing impact assessment documents for all legal acts for public consultation, as practiced in around half of OECD countries. Notifying stakeholders in advance when an assessment is planned through roadmaps or similar early‑warning instruments, as in Iceland and Lithuania, would further strengthen transparency. For example, the Netherlands uses online questionnaires for stakeholders to inform early estimations of administrative burden implied by proposed regulation and determine thresholds above which detailed regulatory impact assessment is mandated (OECD, 2025[46]).
Performance of ex-ante regulatory impact assessment systems, 2024, higher value indicates better performance
Note: The indicator measures the quality of regulatory impact assessment systems on a scale of 0 to 4.
Source: OECD Indicators of Regulatory Policy and Governance (iREG) Survey 2024.
Improving the exchange and quality of data across the public sector is also key for strengthening regulatory impact assessment. Current regulations restrict public institutions to using data solely for its original purpose and prohibit cross-sectoral data sharing, limiting policy planning and evaluation as well as public service improvement (OECD, 2024[4]). A recent proposal by the President aims to facilitate the use of data for policy analysis and research by giving the Central Statistical Bureau the authority to access and combine data, including personal information from state registers, and conduct analysis for other public authorities (OECD, 2021[40]). Although this proposal is welcome, monopolising data access and analysis risks creating bottlenecks for policy impact evaluation due to capacity constraints at the statistics agency. Many OECD countries have implemented data sharing systems that allow all public bodies to conduct policy impact analysis (see Box 4.3). Improving the quality of data, including through capacity building managed by the statistics agency, would enable data exchange and policy impact analysis (see above).
Better quantification of the implied administrative burden of regulations would help raise awareness and improve regulatory impact assessment. Costs for complying with new regulations are calculated in 19 OECD countries for all primary laws and in 14 OECD countries for all subordinate regulations (OECD, 2024[45]). In Latvia, the administrative burden for firms has increased in recent years (Valsts kontrole, 2021[47]). To prevent further increases in administrative burden, the introduction of a “one-in-one-out” rule was planned in 2019 but has not been implemented. Such a rule would require that the increase in administrative burden due to new laws and regulations is compensated by an equal reduction in administrative burden due to changes of other existing legal acts. Currently, monetary assessments of the administrative and compliance costs of new legal acts are collected in the online portal for draft legislation. The State Chancellery then consolidates the data to quantify increases and reductions in administrative burdens in monetary terms, disaggregated by year, number, responsible institutions, type and origin – national versus EU – of legal acts. However, the implementation of this assessment has been hampered by weak analytical capacities in line ministries to quantify the administrative burden implied by regulations. To improve analytical capacities, the statistics agency could collaborate with the State Chancellery to better support line ministries in calculating the administrative burden implied by regulations. Establishing a one-in-one-out rule could help improve incentives for reducing the administrative burden. It should apply to all laws and regulations, including the implementation of EU regulation, and include not only administrative burden for businesses, but also that for households and the public administration itself (Valsts kontrole, 2021[47]).
Improving the quality of legislation through better quality assurance would help to reduce the administrative burden. Poorly drafted laws can lead to legal uncertainty and large economic costs on businesses and households (Morelli et al., 2025[48]). The Ministry of Justice reviews draft laws to assess their compatibility with existing legislation and compliance with international and EU obligations, while the State Chancellery verifies compliance with drafting rules and the quality of regulatory impact assessments. However, quality assurance remains constrained by the absence of mechanisms to prioritise high-impact laws and weak internal monitoring (OECD, 2024[4]). The Ministry of Justice’s focus on legal compliance limits the ability to provide substantive feedback on regulatory impact assessments. Few draft laws are rejected for poor-quality of regulatory impact assessments or legislative drafting, despite widespread stakeholder concerns about overly complex laws such as the procurement law (Valsts kontrole, 2024[21]). Strengthening the capacities of the State Chancellery to better scrutinise the regulatory impact assessments of ministries and raise awareness among legislative drafters could help improve the quality of legislation. This could be supported by publishing the number or percentage of regulatory impact assessments returned for revision as is done in Norway or Luxembourg. Setting up a parliamentary body for reviewing the quality of the regulatory impact assessment system as a whole, as is done in Finland, could also help (OECD, 2024[45]). In addition, regulatory impact assessments should mandatorily include an assessment of the digital readiness of regulations, which should be scrutinised by the ministry responsible for the digitalisation of the public administration (see above).
Involving stakeholders earlier in the legislative process would also strengthen the quality of legislation (OECD, 2025[12]). Line ministries are required to publish consultation notices and draft legislation on a digital portal, where public bodies and external stakeholders can comment (OECD, 2024[4]). However, this often takes place late in the legislative process, limiting systematic integration of stakeholder perspectives. Moreover, the frequent use of fast-track procedures, introduced during the COVID-19 pandemic to ease regulatory burdens on the public administration, has further shortened deadlines for external feedback. Allowing for earlier stakeholder engagement and sufficient time for comments would help improve the quality of regulation.
4.3.3. Improving regulatory enforcement
Using risk-based approaches for the enforcement of regulations would help reduce the administrative burden, while improving the attainment of policy objectives and freeing resources for other uses in the public administration. Reducing reporting requirements while using risk assessment to focus enforcement on high-risk areas allows the attainment of policy objectives more efficiently and with less burden for firms and households (OECD, 2025[46]). In Latvia, however, reporting requirements for firms and households are high and enforcement agencies conduct inspections across the board instead of focusing resources on inspecting high-risk cases. The lack of risk-based approaches is due to the absence of common methodologies, weak quality of data and its interlinkage and a lack of awareness and digital skills (see above). Improving the public digital infrastructure should be complemented with requiring regulatory enforcement authorities to base inspection and enforcement activities on risk criteria, as practiced in one-third of OECD countries (OECD, 2024[45]). Improving cross-border data sharing and collaboration would also help detect risks and improve enforcement (OECD, 2025[46]). Larger authorities could establish risk management and planning units to ensure consistent application of risk‑based practices and provide targeted training and clear methodological guidance. Effectiveness of enforcement should be measured by outcomes, such as improved consumer or worker safety, reduced costs and fewer accidents rather than inspection counts. Digitalising complaint management and strengthening stakeholder engagement would also help enhance compliance. Moreover, reporting requirements should be reduced and made proportionate to risk. The implementation of the once-only principle could also help to reduce reporting requirements for firms and households (see above).
Weak local administrative capacities and differences in administrative procedures across municipalities contribute to high administrative burdens for firms and households. Municipalities implement and enforce national regulations by issuing their subordinate rules such as bylaws and guidelines, and administering licensing and permitting procedures (OECD, 2025[46]). Introducing central digital solutions for state legislation, such as the mandatory unified information system for benefit payments, and monitoring their effective use would help support local administrations and harmonise administrative procedures across municipalities. This should be accompanied by requiring regulators to systematically assess regional impacts for all primary laws and subordinate regulations, as in Estonia, to identify and reduce municipal regulatory burdens (OECD, 2024[45]). Accelerating the rollout of the centralised data exchange platform and fostering knowledge exchange are also key to strengthen local impact assessment capacities. A coordination mechanism managed by planning regions would help harmonise the implementation of regulations. Italy has created knowledge exchange platforms between levels of government, to support consultation and coordination on key legislative decisions. The Netherlands has established an initiative between the central government and associations of local governments and regional water management authorities to advise central and local authorities on the implementation of EU regulation (OECD, 2025[46]).
4.3.4. Strengthening ex-post regulatory impact assessment
Ex-post regulatory impact assessment for high-impact laws and regulations should complement ex-ante approaches to reduce the administrative burden and improve public spending efficiency (OECD, 2020[44]). Ex-post evaluations help track the effects of implemented regulations and policies and allow adjustments when objectives are not met or costs exceed benefits. Although ex-post impact evaluations of laws and regulations are generally less developed than ex-ante approaches across OECD countries, they are particularly weak in Latvia (Figure 4.10). They are not mandatory, even for high-impact legal acts, except for some subordinate regulations, and are applied only since 2024, due to limited awareness of their purpose and benefits (OECD, 2024[4]). Ex-post evaluations should gradually be made mandatory for all laws and regulations above clearly defined thresholds, for example related to implied administrative burden or fiscal costs, to promote systematic adoption while ensuring proportionality, as practiced in other Baltic countries (OECD, 2024[45]). Allowing evaluations to be deferred or frontloaded to bundle impact assessment exercises, as in Sweden, could facilitate compliance and reduce the administrative burden.
The lack of a methodological framework and weak analytical capacities in line ministries have complicated the systematic adoption of ex-post impact evaluations (Figure 4.10). The introduction of a methodological framework for ex-post impact evaluations of laws and regulations in 2025, as approximately done by 70% of OECD countries, including other Baltic states, will support systematic adoption (OECD, 2024[45]). The new framework also requires ex‑ante evaluations of legal acts to state whether an ex‑post evaluation is planned, including its scope and timeline. To further strengthen systematic adoption, ex-post impact evaluations should compare actual impacts with predicted ones, assess performance against alternative options and identify unintended effects, as practiced in the Slovak Republic (OECD, 2024[45]). Moreover, ensuring that every existing major law undergoes evaluation before revision, in line with the EU Better Regulation Agenda and the State Audit Office recommendation regarding the reform of the procurement law, would foster systematic adoption of ex-post impact evaluations (OECD, 2024[4]; Valsts kontrole, 2024[21]). Improving the public digital infrastructure and facilitating data access and exchange across the public sector would raise the quality of ex-post impact evaluations (see above).
The lack of dedicated analytical units in most line ministries complicates consistent and comprehensive ex-post evaluations. To strengthen internal capacities for impact evaluation, regular training through the Latvian School of Public Administration, complemented by commissioned modules taught by evaluation experts, should be introduced, as practiced in Lithuania (OECD, 2024[45]). Moreover, leveraging the experience of public institutions with established analytical capacity is essential to strengthen impact evaluation across the government. About one-third of OECD countries, including Lithuania, have whole-of-government coordination mechanisms for ex-post evaluation (OECD, 2024[45]). In Latvia, ministries such as Finance, Economics, and Agriculture have developed internal evaluation capacity to comply with EU structural fund conditions, while the State Audit Office regularly provides assessments of laws and regulations (Valsts kontrole, 2023[49]).
Latvia should complement capacity building initiatives with stronger oversight and quality control of ex-post regulatory impact evaluations. Monitoring of ex-post impact evaluation in Latvia remains largely confined to EU structural funds, with limited application to domestic policies. The Ministry of Finance, as managing authority, oversees evaluations of European Structural and Investment Funds, supported by thematic committees and an independent evaluation unit. Evaluations are often outsourced to specialised institutions, but complemented with innovative internal approaches in some line ministries, such as the Ministry of Agriculture. This robust system is driven by EU requirements and the significant share of EU funds in Latvia’s budget (Figure 4.2). However, outsourcing of evaluations has reduced incentives for ministries to build internal analytical capacity, and good practices have not spilled over to national programmes. Establishing a more comprehensive oversight and quality control system would help foster an evaluation culture beyond EU-funded programmes. Line ministries should frame annual evaluation agendas, signalling which policies will be assessed. For example, the Netherlands requires ministries to identify evaluation needs over a three- to four-year horizon and report annually to parliament, enabling continuous improvement (OECD, 2024[4]). Introducing a similar requirement to report to the parliament for planned ex-post evaluations would enhance oversight and increase visibility. This could be complemented by creating an independent body to review the quality of ex-post evaluations, as practiced in one-third of OECD countries (OECD, 2024[45]).
Performance of ex-post impact evaluation systems, 2024, higher value indicates better performance
Note: The indicator measures the quality of ex-post impact evaluation systems on a scale of 0 to 4.
Source: OECD Indicators of Regulatory Policy and Governance (iREG) Survey 2024.
Improving ex-post impact evaluation capacities at the municipal level is particularly important for reducing the administrative burden and raising spending efficiency. Although municipalities account for over a quarter of general government expenditure due to their broad responsibilities, impact evaluations are rarely conducted at the municipal level (OECD/UCLG, 2022[50]; OECD, 2024[4]). Moreover, municipalities implement and enforce national regulations and administer licensing and permitting procedures. Accelerating the digitalisation of administrative procedures and the roll-out of the centralised data sharing platform should be complemented with better knowledge transfer (see above). This could be reinforced by creating a dedicated evaluation unit at the central government to assist other public bodies who conduct ex-post evaluations, as practiced in about one-third of OECD countries, including Lithuania and Norway (OECD, 2024[45]). Such a unit could share best practices with municipalities via workshops, seminars and conferences co-organised by the state government and planning regions. For instance, Colombia leveraged a national competition to promote regulatory improvement among subnational governments (OECD, 2025[46]).
Well-functioning public procurement is key for delivering high-quality public services, ensuring the efficient use of public resources and supporting competitive markets (OECD, 2025[12]; OECD, 2025[51]). Latvia’s public procurement spending as a share of GDP is higher than the average OECD country (Figure 4.11). Given high spending pressures from defence and other policy priorities such as health, education and social protection (see Chapter 1), raising the efficiency of public procurement could help improve the fiscal situation. To this end, it is key to reduce administrative burden related to procurement regulations, integrate fragmented e-procurement tools and foster centralised purchasing and joint procurement among public bodies, especially across municipalities (Valsts kontrole, 2024[21]). Strengthening transparency and professionalisation of public procurement would help improve trust in institutions and raise spending efficiency (see Chapter 1) (Ingram, 2021[52]). In addition, weak infrastructure planning, including poor stakeholder participation, and risk management in related procurement have led to significant cost overruns and time delays in large infrastructure projects, such as Rail Baltica (Valsts kontrole, 2024[53]). This also complicates access to EU funds, which are key for improving infrastructure and supporting economic growth.
General government procurement spending, % of GDP, 2024
Source: OECD Government at a Glance indicators, yearly updates.
4.4.1. Improving public procurement
The quality of procurement law should be improved to reduce the administrative burden in public procurement. Latvia’s public procurement law has been revised more than eight times in the last five years, more frequently than in 60% of OECD countries (OECD, 2024[54]; OECD, 2025[55]). Although revisions to the procurement law were often prompted by updates to EU procurement legislation, they have nonetheless added layers of complexity to the national framework that go beyond what EU rules require. For example, the procurement law is overly detailed and not self-contained, with articles often comprising extensive cross‑references to other laws and Cabinet regulations. This fragmentation forces users to consult multiple legal sources to understand basic requirements and increases the administrative burden: a 2020 survey found that only 16.5% of suppliers considered the law comprehensible (Valsts kontrole, 2024[21]). To address these issues, the law should be revised to use plain and accessible language, its internal coherence should be strengthened, and overlapping or contradictory provisions should be eliminated in line with the OECD Council Recommendation on Public Procurement (OECD, 2025[51]). Since no comprehensive impact assessment has yet been carried out for the procurement law, planned reforms of the procurement system – informed by some preliminary analyses – should, where possible, be guided by the results of an ex-post evaluation of the legislation, consistent with this Survey’s recommendations to review and simplify the existing regulatory stock.
The inclusion of secondary policy objectives in public procurement is fragmented across ministries, increasing the administrative burden. In Latvia, each line ministry develops separate procurement‑related policy documents to include environmental, innovation and social objectives, without a unified prioritisation framework or systematic assessment of how procurement contributes to strategic goals (OECD, 2024[54]). Granting the Procurement Monitoring Bureau centralised authority to define how secondary objectives should be included in public procurement, as done in more than a third of OECD countries for green and innovative procurement, would improve consistency and provide suppliers with clearer expectations. This should be complemented by strengthening methodologies to measure and integrate policy objectives into procurement, including cost‑benefit analysis for high‑impact procurements, as practiced in Norway (OECD, 2025[55]). In this respect, strengthening carbon pricing as a complementary instrument to support green procurement remains a priority (see Chapter 2). Where procurement is used as a policy instrument, specific product categories on positive lists could be prioritised, as applied in Estonia for green procurements and in Iceland for innovation procurements.
Supplier exclusion rules can stifle competition and create high administrative burdens. Over a quarter of public procurements in 2025 attracted only one bidder, and in an additional 16% of tenders all other bidders were excluded as they did not meet the bidding requirements (IUB, 2026[56]). A key driver of low competition is the mandatory exclusion of suppliers with tax debts without a binding judicial or administrative decision, accounting for 90% of all mandatory exclusions. Instead, suppliers are excluded for tax debts higher than EUR 151, based solely on State Revenue Service certification. This prevents suppliers who are resolving tax issues from participating in public procurement and deprives public buyers of potentially better value offers (Valsts kontrole, 2024[21]). It also generates significant administrative burden, as both suppliers and public buyers must continuously monitor and report tax debt status, which is particularly problematic for foreign suppliers. EU procurement rules require exclusion when non‑payment of taxes or social security contributions has been confirmed by a binding judicial or administrative decision, and suppliers may not be excluded if they have settled tax debts or entered a binding arrangement to settle their obligations (OECD, 2025[55]). Planned reforms granting suppliers more time to resolve tax debts, including by entering binding settlement arrangements with the tax administration to avoid automatic exclusion, are welcome. Allowing public buyers to admit bidders with a strong overall tax rating despite minor outstanding tax debts could strengthen competition, improve procurement outcomes and improve spending efficiency. Further gains could be achieved by carefully reviewing and reducing other domestic mandatory exclusions that could instead be treated as optional under the EU Directive, as exemplified by Estonia.
There is room to make domestic regulation for lower value procurements less stringent. Domestic procurement regulation is relatively strict, as even smaller procurements require establishing a procurement commission and submitting detailed financial and compliance documentation (Box 4.4). As a result, public bodies and bidders face significant administrative burden, as around three‑quarters of public procurements are regulated under domestic law (Valsts kontrole, 2024[21]). Thresholds determining whether direct contracting, defined as negotiated procedures without publication, or simplified procurement procedures are allowed have been rarely revised and are not indexed to recent high inflation, causing many smaller procurements to cross into more regulated categories (Box 4.4). For example, the threshold below which direct contracting for purchasing goods and services is allowed is EUR 15 000 and simplified procurement is allowed until EUR 70 000 in Lithuania, while in Latvia these thresholds are EUR 10 000 and EUR 42 000, respectively. These thresholds should be indexed to inflation, and administrative procedures should be simplified for lower value procurements (OECD, 2025[55]). A current government proposal to raise thresholds below which direct contracting is allowed up to EU procurement thresholds should be reviewed, as this could significantly reduce transparency and increase corruption risks, reduce competition and jeopardise spending efficiency. Despite the relatively low existing thresholds, about 8% of all procurement procedures in Latvia are direct contracts with companies without any calls for bids, which is above the EU average and three percentage points higher than in Lithuania, according to EU scoreboard data.
Simplifying procurement regulation for smaller procurements should be complemented with further raising transparency and improving the red flag system to detect bid rigging. Latvia’s centralised e-procurement system helps reduce information asymmetries and lower barriers to bidder participation, particularly for smaller and younger firms, fostering competition and reducing costs (Fazekas and Blum, 2021[57]) (Box 4.4). It also facilitates joint procurement across the public sector to take advantage of economies of scale and gains from specialisation (Allain-Dupré, Hulbert and Vincent, 2017[58]) (see below). However, public buyers are exempted from using the e-procurement system when a negotiated procedure is applied, when required submissions cannot be digitalised or must be provided in non‑standard formats due to poor data quality, or when the system cannot ensure the necessary level of information protection. This reduces transparency and the functioning of the red flag system to detect bid rigging and corruption. One main issue is that data from the procurement notification platform managed by the Procurement Monitoring Bureau cannot be merged with information from the e‑procurement system managed by the State Digital Development Agency’s due to differing electronic identifiers and weak data quality. Plans to centralise the management of both platforms under the Procurement Monitoring Bureau are welcome, but the independence of the Procurement Monitoring Bureau should be strengthened and its cooperation with the Competition Council should be improved to strengthen competition enforcement. The use of the e-procurement platform should become mandatory for all public bodies and all regulated procurements. To further raise transparency, publishing contract award notices and expenditure information should become mandatory, including for direct contracting without call for bids. Information in the existing internal red flag system should be improved, for example by including bidding prices of other bidders than the final contractor. Moreover, collecting and including data on direct contracts in the red flag system would allow to investigate strategic splitting of procurement projects to avoid procurement regulation and could help to raise competition and spending efficiency and fight corruption.
In Latvia, procurement of goods and services below EUR 10 000 and construction works below EUR 20 000 are unregulated and contracts can be awarded directly by the public buyer. Procurements above these thresholds and up to EU thresholds are regulated under the domestic law and require establishing a procurement commission, publishing the tender in the central notification platform of the Procurement Monitoring Bureau as well as the e‑procurement system, and follow strict compliance rules (Table 4.1). However, small procurements up to an intermediate threshold benefit from a simplified regime with fewer mandatory supplier exclusion checks, shorter tender submission deadlines, the option to evaluate bids on price alone, no requirement to stop the procedure when only one bid is submitted, no obligation to prepare a procurement report, no standstill period after notifying tenderers and no possibility to file a complaint with the Procurement Monitoring Bureau.
There is also room to further improve the functionality of the e-procurement system. Including e‑invoicing and contract management modules in the e-procurement system would support the contract execution phase and can significantly reduce the administrative burden for suppliers and public buyers (Figure 4.12). Introducing e‑auctions, as practiced in Lithuania, would further boost transparency and competition by publicly displaying bid information throughout the process, increasing trust and reducing manipulation, while encouraging bidders to lower prices (OECD, 2024[54]). Publishing plans to tender further in advance would give bidders sufficient time to prepare their bids, help facilitate access for younger and smaller firms and significantly reduce the share of single bidding (OECD, 2025[59]). Current deadlines – 20 days for regulated tenders and 10 days for small procurements – often do not allow sufficient time to prepare bids, if the bid requires partnering with other firms (Valsts kontrole, 2024[21]). Developing standard bidding documents, model contracts and reporting templates for suppliers, as practiced in Estonia, would facilitate preparation of bids for SMEs, improve access to tenders and foster competition (OECD, 2024[54]). Allowing full dataset downloads and providing an English interface for the Procurement Monitoring Bureau's data visualisation tools as well as the e-procurement system databases would also improve transparency and accessibility, and facilitate monitoring by the civil society (IUB, 2026[56]; Fazekas and Blum, 2021[57]).
Functionalities provided by national/central e-procurement systems, 2024
Source: OECD (2024), Survey on Public Procurement.
Consolidating the high number of public buyers could improve procurement outcomes and raise spending efficiency. More centralised procurement can reduce prices through economies of scale, limit duplicative administrative processes, improve information sharing between suppliers and public buyers, and lower corruption risks (OECD, 2025[59]; Fazekas and Blum, 2021[57]). Due to consolidation and better specialisation within the centralised purchasing body, it also facilitates procurement planning, improves the drafting quality of technical specifications and compliance documentation, and supports more consistent evaluation, exclusion checks and sanctions (OECD, 2025[55]). However, Latvia’s procurement landscape remains highly fragmented: despite 80 purchasing bodies accounting for around 90% of all procurements, the number of all public buyers surpasses 600. Centralised purchasing, conducted by some centralised purchasing bodies within the central government, covered around 20% of procurement values subject to EU rules in 2023, but less than 10% once domestically regulated procurements below EU thresholds are included (IUB, 2026[56]). It also has declined in recent years, especially for larger procurements (Figure 4.13). In contrast to Latvia, Estonia and Lithuania have expanded centralised procurement through centralised purchasing bodies in ICT and health sectors, respectively (OECD, 2024[54]). Ireland combines a government‑wide central purchasing body with sector‑specific bodies for health, defence, education and local governments, which has led to strong cost reductions and better management (OECD, 2023[60]). Latvia should consolidate existing purchasing bodies into sector-specific centralised purchasing bodies, which could also conduct procurement for municipalities, particularly in the health sector (see Chapter 3).
Expanding centralised procurement at the municipal level has a particularly high potential to raise spending efficiency. In Latvia, municipalities account for about 80% of all public procurements, well above the OECD average of 60% (OECD, 2025[55]). Yet, one-third of municipalities did not use centralised purchasing in 2022-23, and 20% have never done so (Valsts kontrole, 2024[21]). Centralised procurement has been found to significantly reduce costs compared to local procurement, for example in Italy by 60% in pharmaceuticals (Fazekas and Blum, 2021[57]; Baldi and Vannoni, 2015[61]). Low municipal uptake of centralised purchasing reflects limited procurement capacity, weak incentives to cooperate with other municipalities, and insufficient centralised purchasing options provided by the central government. Establishing regional central purchasing bodies, as practiced in Lithuania and in 40% of OECD countries, could complement sector-specific centralised purchasing bodies to foster joint procurement across municipalities (OECD, 2024[54]). The municipality of Ljubljana in Slovenia not only centralises purchasing for its public buyers but also provides them with capacity‑building support, which helps raise spending efficiency (OECD, 2025[59]).
Share of centralised purchasing within selected procurement categories, %
Note: Regulated large procurements include all large procurements under domestic regulation and under EU regulation. Regulated small procurements are small procurements regulated by domestic procurement regulation (see Box 4.4).
Source: Procurement Monitoring Bureau; and OECD calculations.
There is room to further expand the list of products and services that must be purchased centrally and improve the existing central e-order platform. Latvia has introduced the legal requirement to purchase specific standardised goods and services centrally, if the procurement value exceeds EUR 1 000 for central government bodies and EUR 10 000 for local governments. Although the list of products and services has been expanded in recent years, successful examples of centralised procurement remain limited to timebound purchases of fuel and electricity (Valsts kontrole, 2024[21]). The weak capacity of existing central or cross-municipal purchasing bodies and legal exemptions for cases, where requested products and services are not offered by the central purchasing body, hinder centralised procurement, particularly for smaller procurements (Figure 4.13). Extending mandatory centralised purchases to standardised goods such as vehicles, energy supplies and construction materials as well as services such as building management, transport, and events and travel organisation, and reducing legal exemptions to opt out of mandatory centralised procurement including existing thresholds, would significantly raise spending efficiency (Fazekas and Blum, 2021[57]). Moreover, to facilitate centralised procurement of other standardised products and services, an e-order platform has been established, where all public bodies including municipalities can conduct their purchases without the usual administrative procedures mandated by procurement regulation. This has significantly reduced administrative burden. However, the range of products and services offered on the e-order platform remains limited and the number of approved suppliers per certain products or services is very low, limiting competition and variety. Increasing the powers and resources of the State Digital Development Agency to negotiate framework agreements and create and expand product catalogues or delegating some of tasks to other centralised procurement bodies would foster competition and enhance spending efficiency.
Improving the professionalisation of public procurement, which is a complex function, is key for raising its quality. Moreover, although centralisation of procurement could allow for specialisation to reduce the complexity for smaller public buyers, it requires strong organisational capacity and skilled staff with cross‑cutting expertise (Fazekas and Blum, 2021[57]). Latvia has introduced a competency model for public procurement but lacks a certification framework, and many public bodies with high procurement activity employ very few procurement specialists (OECD, 2025[12]; Valsts kontrole, 2024[21]). Latvia could draw on Lithuania’s model by introducing a certification framework for procurement officials and requiring at least one certified official on procurement commissions, except for low‑value procurements (OECD, 2025[55]). Moreover, procurement skills are insufficiently developed in the labour market, as tertiary education offers no dedicated undergraduate programmes for procurement specialists. Training programmes for procurement officers also show major gaps – such as in e‑procurement, assessment of needs, contract management, risk management, competition and SME access – and often rely on cyclical EU funding, limiting their continuity (OECD, 2024[54]). Strengthening training and introducing university programmes dedicated to public procurement, as in Austria and Germany, would help raise the supply of skilled procurement professionals.
Recognising procurement as a distinct professional occupation and strengthening the remuneration of public procurement officials are key for supporting the professionalisation of procurement and reducing corruption risks. The public administration reform in 2022 classified procurement-related positions within mid‑range pay grades (9-12) (see Box 4.2). However, it did not account for the fact that procurement officers manage specific risks such as corruption risks and have to comply with strict conflict‑of‑interest rules that restrict financial relationships with suppliers for two years after contract awards (Saeima, 2025[62]). Furthermore, procurement is not formally recognised as a distinct job family in many public bodies and is often compensated through bonuses or allowances rather than the base salary. This often leads to the assignment of unrelated tasks to procurement officers and creates uncertainty about required competencies and corresponding pay (Valsts kontrole, 2024[21]). These factors have contributed to wide pay disparities among procurement officials across the public sector, undermining motivation and encouraging risk‑averse behaviour such as awarding based on lowest price only. The pay grade mapping between procurement roles and comparable public sector job families should be reviewed and consistently applied in all public bodies. This should be complemented by providing higher base salary to procurement officials through statutory or market coefficients rather than pay supplements (see above). This is also key to attract more students to the procurement profession.
Improving public procurement also requires a robust performance measurement framework. Current performance indicators focus on reducing single‑bidder tenders, increasing monetary value and time savings and limiting procedures without publication (OECD, 2024[54]). However, there are no clear goals to guide centralised or joint procurement, despite available data on framework agreements and e‑procurement uptake (Valsts kontrole, 2024[21]). The evaluation of public procurement could be expanded to include key performance indicators on administrative efficiency, as in Lithuania. Italy’s central purchasing body, for example, uses unit price savings and reduction of energy consumption and CO2 emissions as key performance indicators for centralised public procurement, allowing to measure energy efficiency of public buildings and services, and set new targets to improve performance (OECD, 2025[55]). Adopting the OECD public procurement performance measurement framework could support the development of a similarly comprehensive set of performance indicators for the public procurement system in Latvia (OECD, 2023[63]).
4.4.2. Improving public investment management
Despite recent improvements, weaknesses in public investment management persist. Latvia has improved the use of evidence in strategic planning and procurement of transport infrastructure (Figure 4.14). Streamlining permitting and licensing has also increased regulatory predictability and reduced contingent liabilities, supporting fiscal sustainability of infrastructure projects. However, weak political consensus on long‑term infrastructure planning, shortcomings in project prioritisation, and limited stakeholder engagement and management complicate the governance of large infrastructure projects such as Rail Baltica and contribute to significant cost overruns (Box 4.5). Weaknesses in land‑use planning, coupled with delivery models poorly aligned with project size and complexity, lead to large delays in infrastructure projects (Valsts kontrole, 2024[53]) Improving contract management practices is a key priority to achieve project completion while minimising cost overruns and project delays. This should be combined with simplifying administrative procedures for EU‑funded projects and improving coordination and ownership at the municipal level. Corruption risks should be addressed by strengthening internal controls and external oversight and better use risk‑based approaches to ensure compliance (OECD, 2023[64]).
Better incorporating and managing external stakeholder demands into long-term infrastructure planning would help limit cost overruns. Costs are uncertain in the early planning stages of infrastructure projects and can rise on average by up to 50% during the permitting phase alone (Eliasson, 2025[65]). Cost overruns are often an outcome of dynamic political bargaining between stakeholders including central government bodies, municipalities, regulators and other non-government organisations, as projects evolve through negotiations that reshape scope, design and costs beyond what can be credibly specified ex ante (Gil, 2023[66]). Moreover, once included in national investment plans, projects are rarely cancelled, even when costs rise or benefits decline. In Latvia, the absence of national guidance on stakeholder participation for infrastructure projects often leads to the late involvement of stakeholders and poor management of stakeholder demands during the design and procurement phase, contributing to cost overruns (OECD, 2022[67]) (Box 4.5). Drawing on Finland’s example, Latvia should introduce national guidance for stakeholder involvement in infrastructure projects and facilitate the use of digital tools for stakeholder engagement (OECD, 2022[67]). Engaging stakeholders earlier in long‑term planning and project appraisal, as practiced in around 40% of OECD countries and in Lithuania, could help better manage bargaining power of stakeholders, which is key for containing cost overruns during permitting phases. Incorporating environmental impact analysis into project planning, prioritisation and appraisal, and improving the monitoring of environmental impacts throughout the asset life cycle are also key for ensuring that infrastructure investments align with green objectives and minimise harm to ecosystems and human health (OECD, 2023[64]) (see Chapter 2).
Performance ranging between 0 (worst) and 1 (best)
Source: OECD Infrastructure Governance Indicators, https://infrastructure-toolkit.oecd.org/governance/.
Improving public procurement strategies before and after tendering is key for the successful delivery of large infrastructure projects and for enhancing spending efficiency. In Latvia, public infrastructure procurement is conducted transparently (OECD, 2023[64]). However, the limited systematic use of cost-benefit analysis outside EU-funded transport and digital infrastructure projects, and public‑private partnerships and the weak integration of delivery model choices into procurement decisions undermine spending efficiency and hamper the implementation of major infrastructure projects. For example, Latvia opted to construct two main stations within the Rail Baltica Project, one at the airport and one in the city centre, strongly increasing costs, whereas Estonia opted to build its main stations outside the city centre which are connected to the city centre or the airport by tramway (see Box 4.5). Moreover, the initial reliance on a sequential procurement approach in the Rail Baltica project, separating the tendering of technical designs from construction works, might have proved ill‑suited to the project’s size and complexity, given weak in-house capabilities and characteristics of suppliers, and contributed to cost overruns and delays. In response, the project operator has gradually shifted towards procurement strategies that transfer a greater share of design and technical risks to construction contractors.
Applying the OECD’s Support Tool for Effective Procurement Strategies (STEPS) across the pre‑tendering, procurement, and delivery phases could help mitigate similar risks in future projects and substantially improve spending efficiency (OECD, 2026[68]). Inland transport infrastructure investment alone averages nearly 1% of GDP across OECD countries, with water, public buildings and other network infrastructure raising this share further (ITF, 2021[69]). Therefore, even small improvements in infrastructure procurement strategies can have sizeable fiscal impacts, as unmanaged uncertainty and misallocated risk often translate into significant price premia in competitive tenders (Makovšek and Bridge, 2021[70]). By enhancing risk assessment, market analysis and information planning, the OECD STEPS tool aims to reduce these avoidable price premia and, when applied systematically, can generate efficiency gains that may reach up to 1% of GDP in OECD economies (OECD, 2026[68]). For example, implementing STEPS to a major project in Germany supported the public infrastructure buyer to build the necessary in-house capabilities, inform the packaging into contracts and the targeted risk allocation across each contract (OECD, 2025[71]).
Improving land‑use planning would reduce conflicts and delays in infrastructure projects. In Latvia, infrastructure planning often fails to clearly designate and safeguard transport corridors and zones in the early stages of large transport infrastructure projects. As a result, lengthy administrative procedures to acquire numerous small land parcels, which require Cabinet approval for each case, hinder the implementation of large infrastructure projects (Saeima, 2025[72]) (see Box 4.5). Latvia can learn from Lithuania’s example, where once a territorial plan defining a transport corridor is deemed to serve an overriding public interest, acquiring the land within it during the project implementation is greatly facilitated, which reduces administrative burdens and enables more effective management and protection of multimodal corridors, including roads, railways and public transit (Seimas, 2026[73]). If corridor‑based land acquisition is not feasible, land readjustment provides an alternative that facilitates land use for public infrastructure, while compensating owners, recovering part of the costs and minimising displacement, as practiced by Japan (OECD, 2022[74]).
Strengthening the management of contractor‑related risks would support more effective delivery of infrastructure investments. Infrastructure projects require the coordination of interdependent activities across multiple contractors. Therefore, weaknesses in managerial and supervisory capacity, extensive subcontracting or contractor failures often lead to unplanned changes, rework and cascading delays (Sun and Meng, 2009[75]). Moreover, while strong competition at the bidding stage can reduce prices, it may also result in a “winner’s curse,” whereby the lowest bidder seeks to renegotiate contractual terms after award (Fazekas and Blum, 2021[57]). Although contracts often include indexation and risk‑sharing mechanisms to address cost shocks such as unexpected inflation, limited experience among Latvian procurement authorities in supervising external contractors, together with weak risk management practices, weigh on project delivery (see Box 4.5). Establishing central guidelines and methodologies for identifying, assessing and allocating risks in infrastructure projects and making risk management mandatory in public procurement for infrastructure would help improve project delivery (OECD, 2022[67]). Existing tools for risk management of transport infrastructure projects have rarely been used (Valsts kontrole, 2024[6]). Implementing the OECD’s STEPS methodology could help strengthen risk management by identifying distinct work packages, analysing their economic attributes – such as uncertainty, bargaining power of suppliers, recurrence of demand for the work package and market structure – and assessing whether activities should be outsourced or retained in-house. Moreover, introducing standard contract clauses and escalation procedures for contract renegotiation would help better manage contractors and streamline renegotiation procedures (OECD, 2023[64]).
Reducing administrative burdens in application procedures for EU funds would help increase absorption and crowd in private investments. Latvia benefits significantly from the EU’s Cohesion Policy investments in energy, digital infrastructure, innovation, climate mitigation, business competitiveness and social inclusion (see Figure 4.2). The Recovery and Resilience Facility further supports public investment as well as training and digital adoption in small businesses. However, slow implementation of EU regulation, high administrative burdens and limited administrative capacity have generated planning uncertainty for firms, households and municipalities, and reduced funding absorption (Figure 4.15). An unnecessary high number of criteria for assessing applications and weak inter‑institutional coordination have led to long waiting times. Implementing this Survey’s recommendations to accelerate the implementation of the once-only principle through the rollout of the central data exchange platform, require regulatory enforcement authorities to use risk-based criteria for inspections and monitoring, and improve procurement practices would help reduce administrative burdens in application procedures for EU funds.
Rail Baltica, a greenfield investment to connect the Baltic states to the rest of the European rail network, has faced the largest cost overrun among large EU transport infrastructure projects. Estimated costs have increased from EUR 5.8 billion at 2017 prices to EUR 23.8 billion at 2023 prices, reflecting immature early estimates, project scope changes and incomplete designs for around two thirds of the route. Cost overruns, together with delays in completion of designs and land acquisition, prompted a revision of the delivery strategy into two phases: a single‑track railway to be completed by 2030, followed by full construction without a defined timetable. As a result, completion of the first phase will be more than four years later than initially planned, with further cost increases likely, given that operating and maintenance costs remain excluded from revised estimates.
The Latvian segment. Rail Baltica’s Latvian segment faced a near three‑fold cost overrun – around 25% above the average cost overrun in the project – mainly due to evolving design standards, changing stakeholder demands, scope expansions and unexpected inflation. Construction costs increased further following the addition of regional stations and more stringent technical and safety requirements. Latvia is also expected to bear roughly 45% of additional operating and maintenance costs, even after assuming that freight revenues could cross‑subsidise passenger services. Delays by early 2024 mainly stemmed from limited progress in technical designs (54%) and land acquisition (13%). The revised delivery strategy prioritises a single‑track railway, with fewer regional stations and no cargo terminals in the first phase.
Evolution of the procurement model. Rail Baltica, including the Latvian segment, initially followed a Design-Bid-Build procurement model, which clearly separated the procurement of studies and design services from construction works, reflecting traditional EU public‑works practice suited to early route definition, permitting and funding compliance. From around 2019-21, mounting risks of cost overruns and delays, and increasing system‑interface complexity prompted a strategic reassessment of delivery models, which enabled a flexible selection of alternative contract forms in procurement. The practical transition became explicit in 2024 with the launch of the Control‑Command and Signalling subsystem as a pan‑Baltic Design‑and‑Build procurement, transferring design, integration and lifecycle risks to a single contractor. By 2025, negotiated Design‑and‑Build procedures for these systems were firmly established, while civil works continue under a hybrid Design-Bid-Build/Design-and-Build model, applied selectively based on asset complexity and risk profile.
Source: RB Rail AS (2017[76]); (2024[77]); (2024[78]); (2026[79]); Valsts kontrole (2024[53]); European Court of Auditors (2026[80]).
There is also scope to improve the management and monitoring of EU funds. The Ministry of Finance is responsible for EU fund management across the full project lifecycle, from advising applicants and selecting projects to contracting, beneficiary support and implementation oversight. Monitoring and ex-post evaluation practices are aligned with EU standards and are often outsourced to independent institutions (OECD, 2024[4]). However, cost-benefit analysis of infrastructure projects outside EU-funded transport and digital infrastructure projects and public‑private partnerships remains limited, typically excluding life‑cycle cash‑flow estimates, business case assessments or cost‑effectiveness analysis. Incentives to develop analytical capacity in line ministries are also weak (OECD, 2022[67]) (see above). Strengthening analytical capacity in line ministries, improving cost-benefit analysis methodologies and making such analysis mandatory for major infrastructure projects would improve the management of infrastructure projects and EU funds. Developing performance indicators for infrastructure asset management would help strengthen cost-benefit analysis of infrastructure investments (OECD, 2025[12]). Existing ex-post impact evaluation methodologies should be expanded to programmes financed from the national budget.
Cohesion policy financial implementation for 2021-27, in per cent of planned total cost, as of 31 March 2026
Note: “Decided” refers to financial resources allocated to selected projects. “Spent” refers to expenditure reported by the selected projects.
In Latvia, municipalities are responsible for diverse public services including education, health and social care, culture and sports activities, issuance of commercial permits and licenses, law enforcement, utilities, public transport, housing as well as policies to foster local economic development (OECD, 2025[12]). Skilled labour shortages and financial constraints have weighed on administrative capacity and the quality of public services in many municipalities, which has prompted an administrative-territorial reform in 2021. This reform has strengthened municipal finances, enhanced planning flexibility and enabled more competitive municipal wages (Box 4.6). Before the reform, municipalities with small population sizes faced significantly higher per capita service delivery costs, weighing on their budgets (Vilerts, Zutis and Benkovskis, 2019[81]). The merging of municipal budgets increased flexibility for development project planning and supported the modernisation of administrative services, while ensuring the continued provision of core municipal functions. In some cases, mergers between municipalities led to consolidation of municipality-owned enterprises, reducing duplication. However, uneven administrative capacity among smaller municipalities before the mergers contributed to slow workforce adjustments, with the share of municipal employment in general government starting to decline only two years after the reform (Figure 4.16). There is still scope for further raising spending efficiency by reaping economies of scale and reducing the workforce (see above). Wage adjustments occurred faster than adjustments in employment, partly due to the 2022 public administration reform, targeting public sector wages at 80% of private sector levels by 2027. Municipal wages remained below central government levels (Figure 4.16) but have increased to 78% of private sector wages in the first quarter of 2026.
Note: In Panel A, state- or municipality-owned enterprises include entities where central or local government holds at least 50% of capital or exercises control, as well as foundations, associations and funds. Their workforce is estimated by subtracting the general government workforce from the public sector workforce. The administrative-territorial reform took effect on 1 July 2021.
Source: Central Statistical Bureau; State Chancellery; and OECD calculations.
The administrative-territorial reform aimed to strengthen local administrative capacity and the quality of public services provision, including infrastructure investment planning. The number of municipalities was reduced from 119 to 43 in 2021 and 42 in 2025. Although the reform was compulsory, the need to respond to rising spending pressures, advance modernisation of the public administration, and strengthen local economic development has helped build acceptance for the reform. Performing their administrative functions across larger geographic areas has required significant initial efforts from merged municipalities. The newly created municipalities were also tasked with delivering additional services in public order as well as climate change mitigation and adaptation. To meet these demands, almost all municipalities had to hire additional administrative staff, for example spatial development planners and business support specialists. Early findings from the ongoing impact evaluation of the reform indicate that municipal budgets, planning flexibility for large and complex projects and EU fund absorption have increased and administrative services have been increasingly modernised and digitalised. Core functions in education, social care and administrative services remained largely uninterrupted despite the expanded municipal territories.
Source: Ministry of Smart Administration and Regional Development (2022[82]).
4.5.1. Improving administrative capacities at the local level
Skilled labour shortages driven by demographic decline in rural regions and unattractive working conditions will continue to weigh on local administrative capacity. The European Commission projects population decreases of over 30% in Vidzeme, Zemgale, Latgale and Kurzeme planning regions, and over 15% in Riga and Pierīga planning regions by 2050. Recruitment and retention of qualified staff also remain difficult due to low municipal wages compared to the central government, despite improvements after the administrative-territorial reform (Figure 4.16). Accelerating the use of shared services, fostering cooperation between municipalities, bundling scalable tasks and transferring certain functions to the state are key policy levers to strengthen local administrative capacity (OECD, 2025[12]).
Although the administrative-territorial reform increased the standardisation of municipal population sizes, capacity constraints remain in sparsely populated and remote municipalities. Latvia’s average municipal area was greater than 6 times that in the average OECD country in 2025. Municipalities with low population density face high unit service delivery costs due to long travel distances, extensive infrastructure requirements and limited economies of scale (De Mello, 2019[83]). Moreover, municipal mergers in some cases did not integrate urban centres with surrounding areas, constraining efforts to strengthen urban-rural linkages and complicating the coordination of public transport, infrastructure and regional development policies. Following the reform, rural residents expressed stronger intentions to migrate and stronger expectations for local governments to address future demographic pressures (Dahs et al., 2022[84]). Citizen satisfaction with education and health services also declined in 2023 compared to 2021, highlighting the need for a comprehensive review of strategies to maintain public service quality in the regions against the perceived benefits from the reform (OECD, 2024[85]).
Transferring tasks that are easy to digitalise and require fewer local interactions to the central government could free resources to improve local administrative capacity. The 2026 budget assigns additional tasks to municipalities, including climate-related obligations, crisis management units, civil protection, firefighting, mandatory social services for families and children with disabilities, maintenance of roads transferred from state to municipalities and operation of digital service centres in libraries (Cabinet of Ministers, 2025[86]). While some of these services are well-placed at the local level as they require intensive local interactions, others could be managed more effectively at a centralised level. For example, climate change adaptation measures or road maintenance require strong coordination and often involve large economies of scale, making it more efficient to provide these services at a more centralised level, such as through coordination by planning regions. Health insurance registration, social benefit applications and issuance of birth, marriage and death certificates also remain municipal responsibilities, but could be digitalised and centralised, as in many other OECD countries (OECD, 2025[12]). Any transfer of functions to the central government level should be accompanied by a revision of the municipal financing model to ensure it remains proportionate to the assigned responsibilities.
Further strengthening cooperation across municipalities in public service delivery could enhance municipal administrative capacity. Planning regions, which are governed by municipal representatives, already coordinate regional development, spatial planning and investment programmes, and provide an institutional framework to further strengthen municipal cooperation in public service delivery. This framework could be strengthened by establishing dedicated taskforces for crosscutting issues, such as water supply, sanitation, utilities or social benefits, with regular reporting to mayors or chairs of municipal councils, or legally requiring municipalities under a specified population threshold to cooperate as in Greece and Iceland. The transfer system between levels of government could also be adjusted to provide financial incentives for municipalities to co-operate. Sharing best practices through the Latvian Association of Local and Regional Governments and informal networks would further support knowledge exchange (OECD, 2021[87]; OECD, 2023[35]). For example, the German federal state North-Rhine Westphalia created a central contact point to promote municipal cooperation, while Brandenburg supported informal networks for knowledge exchange on urban and regional development and transport services (OECD, 2025[38]).
Improving digitalisation at the municipal level is another priority to strengthen administrative capacity. Although many municipalities collect data through e-forms, interoperability between IT systems could be further strengthened to better support data sharing and analysis. The centralised data exchange platform introduced in 2023 aims to enable secure and fast data flows across levels of government (see above), but its use is hampered by data quality issues, limited financial resources and a need to strengthen digital skills, particularly at the local level. EU structural funds will support integration of municipal systems into this platform, which should be combined with introducing mandatory common IT standards and data formats across all levels of government (see the previous OECD Economic Survey of Latvia). This should be complemented by targeted training for public employees on digital technologies and service design, improving peer learning through workshops and online courses and certification of successfully digitalised government services (see below).
4.5.2. Improving the public finances of municipalities
Latvian municipalities depend heavily on central government transfers to finance a wide range of core functions. Spending pressures for municipalities have risen in recent years due to public sector wage increases, rising energy prices, a higher guaranteed minimum income threshold, growing interest expenditures and costs related to the integration of Ukrainian refugees and to cybersecurity, policing and civil protection. Although municipal tax revenues as a share of GDP returned to their pre-pandemic level in 2024, these tax revenues covered on average only about 49% of municipal expenditures in 2024, while unconditional transfers, including the municipal equalisation scheme and earmarked state grants financed roughly 39% of spending. Non-tax revenues from tariffs, fees and dividends from municipally owned companies accounted for around 9% of spending. Municipal tax revenues are projected to increase in the near term, as the municipal share of personal income tax (PIT) revenue was raised from 75% to 78% in 2025, while municipalities continue to receive 100% of revenue from recurrent taxes on property (Cabinet of Ministers, 2025[86]). Nonetheless, new municipal responsibilities assigned through the 2026 budget negotiations risk offsetting these additional revenue gains.
The horizontality and cost-based structure of the municipal equalisation system could be further strengthened. The municipal equalisation system reduces disparities in fiscal capacities across municipalities, while preserving incentives to develop local economic activity (Figure 4.17, Box 4.7). A recent reform proposal plans to further narrow disparities in fiscal revenue across municipalities but will remove horizontal contributions from richer municipalities and exclude revenue from recurrent taxes on property from the equalisation fund, while shifting its financing entirely to a vertical allocation of PIT revenue based on the average cost of public service provision. Instead of making the equalisation system more vertical, its horizontality and cost-based structure could be further strengthened. Greater direct interaction among municipalities and benchmarking of costs for public service provision among peers could help improve spending efficiency in receiving municipalities, as for example done in other horizontal equalisation systems in Finland or Australia (OECD, 2021[88]). This should be combined with defining a minimum level of public services that should be guaranteed by the equalisation system. Moreover, the existing equalisation formula should be adjusted to reflect the costs of expanded functions of municipalities after the 2026 budget through a needs-based approach. In particular, this should include revisiting the low weight of territorial size and explicitly including the length of local roads and streets among the cost factors, as in Lithuania, and accounting for demographic decline and ageing, as in Sweden (Moisio and Vidal Bover, 2023[89]). Australia updates its cost‑equalisation methodology annually and reviews it every five years to ensure it captures real cost pressures.
Allocating part of PIT revenue according to place of work could help better link revenues with the cost of delivering local public services and strengthen incentives to foster local economic development. Currently, the allocation of PIT revenues to municipalities is by residence, partly because workplace-based PIT payment data were lacking until 2026 (see Box 4.7). This has strongly incentivised municipalities that surround urban centres to invest in community amenities, recreation and culture to attract higher‑income residents who often continue working in urban centres. Low-density developments outside urban centres and commuting by private car have strongly increased, which has hampered efforts to reduce carbon emissions (see Chapter 2). It has also increased pressure on the transport infrastructure in urban centres, while the PIT tax base of urban municipalities eroded due to urban sprawl. The recent territorial reform has not improved the situation, as in some cases urban municipalities were not merged with surrounding municipalities, even though the reform increased the share of people living and working within the same municipality. The newly collected workplace-based PIT payment data could be used to allocate part of PIT revenue to commuters’ place of work, as practiced by Denmark and Sweden through an agreement where income tax is paid in the county of employment. This would also require closely monitoring the fiscal capacity of the most affected municipalities, to help better fund urban transport infrastructure. It would also better encourage municipalities to attract businesses and foster local economic development, for example by facilitating local administrative procedures or investing in infrastructure needed for business development. This should be complemented by promoting inter-municipal cooperation in functional urban centres, as in France, to help reduce regional disparities in economic development.
Tax revenues and transfers, municipal level, euros per capita, 2024
Note: Diamonds show the effect of the municipal equalisation scheme and other unconditional grants on municipal revenue. Triangles indicate the additional impact of conditional transfers on municipal revenue, building on the effect of unconditional grants.
Source: Ministry of Finance; State Treasury; and OECD calculations.
Unconditional transfers from the central government to complement the municipal equalisation fund, are not automatic and are negotiated each year in the preparation of the national budget (see Box 4.7). This introduces high uncertainty in budget planning for municipalities and complicates longer-term spending commitments, for example for infrastructure projects. It might also blur incentives for spending efficiency, as municipalities might expect a bail-out by the federal government (OECD, 2016[90]). The government provides municipalities with a tax revenue forecast for the next three years and guarantees forecasted personal income tax revenues to municipalities for each current year to reduce budget uncertainty for municipalities. However, government transfers to cover the deficit in the municipal equalisation fund are still decided each year during the state budget negotiations. Making these transfers dependent on clear criteria would help raise transparency and reduce funding uncertainty for municipalities.
Financing a high share of local expenditure with central government transfers might hamper spending efficiency, by reducing incentives for local populations to scrutinise local governments for their spending decisions (Herrmann, 2022[91]; Blöchliger and Kim, 2016[92]). This is a particular problem for conditional grants, which make up around 28% of municipal expenditures on average and comprise transfers to finance base salaries of teachers, wages of medical and elderly care staff, investment projects, road maintenance, public transport and social protection. Such earmarked grants tend to reduce incentives for spending efficiency, in particular if co-funding by the municipality receiving the grant is limited or not required, and because monitoring conditionality is difficult in many cases (Bergvall et al., 2006[93]). Conditional transfers should be gradually reduced and replaced by developing local tax bases and increasing revenue from property taxes (see below). This would provide more flexibility for local governments to allocate spending according to local needs. It would also strengthen the accountability of spending decisions and raise public service quality and spending efficiency, as residents are more likely to hold local governments accountable (OECD, 2016[90]). In addition, monitoring and enforcement of conditionality should improve for remaining conditional grants.
Revenue from recurrent taxes on immovable property is low in international comparison, despite a doubling of housing and land prices during the last decade according to the OECD Analytical House Prices Indicators (Figure 4.18). Relying more on recurrent taxes on immovable property would make local revenues less sensitive to the business cycle and raise planning certainty for long-term infrastructure projects (Bergvall et al., 2006[94]). It would also help reduce high income and wealth inequality (see Chapter 1). However, cadastre values currently used for property taxation are not aligned with market prices, leading to a situation where raising property tax rates could exacerbate inequalities. Thus, it should be a key priority to modernise the cadastre system, managed by the central government, and regularly update cadastral values of properties and land with market prices. While plans to update cadastre values by mid‑2027 are welcome, these revisions will not take effect in redefining the immovable property tax base until 2029. To incentivise municipalities to raise revenue from recurrent taxes on immovable property, the municipal equalisation scheme should include tax capacity based on updated cadastre values (see Box 4.7). Regular knowledge sharing and benchmarking among municipalities could also create peer pressure to better use local tax bases. In addition, minimum tax rates could be raised to prevent detrimental tax competition, while in the particular case of idle land in urban areas higher minimum tax rates would also help improve land use efficiency. To support cash-poor but asset-rich households, tax deferrals could be introduced as in Canada, Denmark and Ireland, with unpaid taxes settled upon sale or inheritance. The state government could temporarily finance such deferrals to guarantee property tax revenue for municipalities (Dougherty and Kim, 2023[95]).
Municipalities should be compensated for additional tasks or increased spending pressures due to decisions at the central government level. Under the 2026 budget, municipalities receive additional responsibilities that are not fully covered by increases in shared tax revenues or grants, even with the planned rise in their PIT revenue share (Cabinet of Ministers, 2025[86]). For example, additional funding for maintenance of roads transferred from the state to municipalities is based on cost estimates that were not indexed to inflation. To compensate municipalities, they could also receive parts of national value-added tax revenues, as done in many other OECD countries, including other Baltic countries (Figure 4.18). This would also make local tax revenues more independent from the business cycle and raise planning certainty for municipalities. In Germany, the federal government compensated municipalities for its legislation increasing social transfers to migrants paid by municipalities with cost-based increases of shared value added taxes (OECD, 2025[38]).
Strengthening financial management capacity would improve local finances. Although accounting standards are harmonised across municipalities and the central government, and municipalities undergo independent audits, financial performance varies widely (OECD, 2021[88]). The aggregate fiscal balance of municipalities deteriorated from a surplus of 0.2% of GDP in 2024 to a deficit of 0.4% of GDP in 2025. Rising interest expenses and high debt constrain investment in several municipalities, such as Ādažu where municipal debt per capita was twice the national average in 2023. Other indebted regions, such as Rēzekne and Valka, where municipal debt per capita is above 2.5 times that in the average municipality, could partly finance investments through substantial state grants, suggesting scope for better financial management. Weak digital skills in municipalities also undermine spending efficiency. For example, most municipalities failed to use the mandatory unified information system for benefit payments for over two years after its launch, resulting in poor targeting of benefits worth 5% of municipal budgets (Valsts kontrole, 2025[96]). Including aggregate municipal expenditures in the multi-annual expenditure ceiling (see Chapter 1) and delinking aggregate borrowing limits for municipalities from annual budget negotiations would strengthen predictability of financing for municipal investments and raise spending efficiency (Vammalle and Bambalaite, 2021[97]). In this respect, sharing Riga’s recent experience of performance-based budgeting could foster peer learning and help capacity building in other municipalities to conduct spending reviews.
In Latvia, taxes on goods and services and corporate income are exclusively received by the state government under the tax sharing agreement between the state and local governments. Until 2024, municipalities received 75% of PIT and 100% of recurrent taxes on property collected from residents in their jurisdiction. The municipal share of PIT revenue was raised from 75% to 78% in 2025, while municipalities continue to receive 100% of property tax revenues. The shared taxes are allocated to municipalities according to the residence of taxpayers.
Tax revenue per capita strongly differs across municipalities, as regional economic disparities are high (Figure 4.17) (OECD, 2023[98]). The municipal equalisation system redistributes part of local tax revenues to reduce disparities in fiscal capacity across municipalities, taking into account initial tax revenues and the cost of core municipal functions (Figure 4.17). The equalisation formula uses a needs-based approach but remains relatively simple as it only uses a few cost-related variables, such as the age structure of the population or territorial size, largely exogenous to municipalities (OECD, 2021[88]). Fiscal capacity before equalisation is calculated as total PIT and property tax revenues per capita, while using population weights to reflect the costs of providing childcare, education and elderly care services depending on the demographic structure as well as weights to reflect infrastructure and transport costs linked to territorial size. The equalisation scheme guarantees each municipality 60% of the national average fiscal capacity, while allowing them to retain 40% of their fiscal capacity before equalisation to preserve incentives to support local economic activity. Municipalities with initial fiscal capacity below 60% of the national average capacity receive transfers from the equalisation fund, while those above it contribute to the fund. However, these horizontal contributions of richer municipalities are capped at a different threshold each year, so that contributions are not fully covering the transfers to poorer municipalities. Thus, each year unconditional transfers from the central government are needed to finance the equalisation fund and guarantee the minimum fiscal capacity to all municipalities. These transfers covered about one fifth of the equalisation fund in 2024. To further reduce disparities remaining after the municipal equalisation, poor municipalities receive additional state supplementary grants, which increase with the gap between their fiscal capacity after equalisation and that of the richest municipality.
Planned reforms to the municipal equalisation system will remove property taxes from the definition of initial fiscal capacity subject to equalisation so that municipalities would retain all property taxes in their jurisdiction. It would also allow them to retain 30% of their initial PIT capacity, which is adjusted for cost-related variables as describe above. The reform also plans to remove horizontal contributions from richer municipalities, so that the equalisation fund will be financed entirely through vertical allocation of PIT revenue based on the average cost of public service provision. Although the reform would significantly weaken the horizontal character of the equalisation system, municipalities will retain a similar amount of their tax revenue before equalisation, as property taxes are around 10% of total municipal tax revenue.
Source: Ministry of Finance; State Treasury; and Cabinet of Ministers (2025[86]).
Improving the management of EU funds at the municipal level is key for fostering regional development. Latvian municipalities manage regional infrastructure and land-use planning, and account for about 40% of general government investment (OECD/UCLG, 2022[50]). However, limited capacities for strategic planning and project management contribute to large disparities in local public investments. Project preparation and implementation are often weak, reflecting limited knowledge to conduct cost-benefit analysis, unclear interpretation of eligibility rules for general‑purpose and targeted investments, and capacity constraints that lead to delays, cost overruns and risks of losing EU financing (Valsts kontrole, 2024[99]). Legal uncertainty and inconsistent oversight further increase compliance risks, discouraging investment initiatives and undermining the effectiveness and credibility of regional development policies. Following the administrative‑territorial reform, most municipalities hired spatial planners and business support specialists to manage larger investment and procurement projects (see Box 4.6). This should be complemented by strengthening the coordination role of planning regions to enhance inter-municipal cooperation and improve infrastructure planning capacity (see above). Gradually shifting the funding of training programmes for local planning and procurement from EU funds to domestic conditional grants would ensure lasting improvements to support regional development (see above). To reduce barriers for competition and investment as well as scope for corruption, it is key to improve internal control and audit systems and increase transparency at the municipal level (OECD, 2023[64]).
Source: OECD Revenue Statistics; and OECD calculations.
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