Latvia: Riga – a Dynamic City of Change in the Baltics

A report by DrJur. Edward Lestrade, Director & Lead Lawyer, Lestrade Law Associates LLC (www.lestradelawassociates.com) following an interview on Friday 26th September 2005 with Mr Aivars Aksenoks, Mayor of Riga in connection with the City’s development plan for Riga in 2005 and beyond. The meeting took place at the City Hall in the old city and covered the frank view of Mr Aksenoks for the new shape of Riga and how that might be achieved, earlier rather than later, with the help of private investors, joining with the municipality in public-private-partnership (PPP) projects.

Riga, the capital of Latvia, is widely recognised as the Baltic business capital and one of the main economic centers of the region. The city as a junction point between Western Europe and the emerging Eastern markets is a powerful attraction for business activities in Europe. Furthermore, in the 14-15th centuries when Riga became a significant trade centre of the Hanseatic League, the city achieved special rights by the adjoining states to transport goods along its Daugava river further to the East. Today, Riga is also recognised as an important transit centre as a result of its harbour, international airport and well-developed rail and road networks. This well-developed transportation infrastructure facilitated Riga's position as the major industrial and business centre in the Baltic region.

Latvia, as a former occupied state of the former Union of the Soviet Socialist Republics (USSR) since 1940, gained its independence in 1991 after the dissolution of the USSR. As a legacy of the USSR's influence in Latvia, the Russian minority amounts for around 30% of the population. Latvia joined both NATO and the EU in the spring of 2004

Latvia’s objective of EU membership was always at the top of its foreign policy. After the signing of a free trade agreement with the EU in 1994, followed by the more comprehensive Europe Agreement in 1995 which came into force in 1998, the basis of Latvia’s pre-accession partnership with the EU had been established. Latvia started accession negotiations in late 1999 and made good progress towards its goal of EU accession which was acknowledged by the EU Commission's pre-accession reviews in 1998 and 1999. In February 2000, eight chapters of the EU’s acquis communautaire, relating to SMEs, research, education, external relations, the EU’s foreign and security policy, competition policy, statistics, culture, and audio-visual policy were negotiated. Another eight were opened for negotiations during late 2000: industrial policy, European monetary union, freedom to provide services, free movement of capital, company law, fisheries, transport, health and consumer protection. All chapters 31 chapters were successfully negotiated by the time of Latvia's accession to the EU in May 1^st 2004.

Latvia is in Northern Europe and borders the Baltic Sea, between Estonia and Lithuania. Its area is 64,589 sq km of which 63,589 sq km is soil and 1000 sq km is water. Its neighbours are: Belarus 141 km, Estonia 339 km, Lithuania 453 km, Russia 217 km. Its coastline is some 531 km. Its maritime claims gives it a territorial sea amounting to some 12 nm with an exclusive economic zone of 200 nm and a continental shelf provision of 200 m depth, or to the depth of explotiation. Latvia's climate is generally wet with moderate winters for the region. It has a generally low plain with its lowest point being the Baltic Sea (O m) and the highest, Gaizinkalns (312 m).

I met the Mayor in his office in downtown Riga in September 2005 together with his press secretary, Laila Spalina who was there to assist with background information. The meeting centered on the discussion of the Mayor’s plans for the development of Riga and how, Latvia’s joining the EU in May of last year had opened up avenues for confident public-private-partnership projects to assist in the redevelopment and modernization of the city.

At our meeting, Mr Aksenoks was quietly confident of his wide-ranging development plans for Riga. Riga is the capital of Latvia, a new EU state in the Baltics which has a population of some 2.3 million. Riga itself has around 1 million inhabitants, making it the natural heart of Latvia and the largest city in the Baltics. As the city’s new Mayor, Mr.Aksenoks, the former Minister of Justice of Latvia, exuded the warmth and confidence of Riga’s proud inhabitants in the future growth of their city.

Mr.Aksenoks explained that the new development plan, now at its second reading and which was due to be accepted in October 2005, would map the city’s development though to 2018. According to Mr.Aksenoks, the plan would focus on solving the city’s existing infrastructure challenges as well as catering for those of the future.

We discussed the concept and origins of PPP. To explain, PPP, or ‘public-private partnership’is as system that provides for a service previously run solely by the public sector to be effected through a partnership between the government/ public body and one or more private sector organisations. It is a variation of ‘privatisation’. However, unlike a full privatization setup, where a new venture is expected to work like any other private business, the public body, or government continues to participate in some way. PPP is also referred to a P3. Usually, the private sector organisation, or consortium incorporates a special company called a "special purpose vehicle" (SPV) to construct and service the asset. The PPP company, or organisation is usually made up of a building contractor, a maintenance company and a bank lender. However, it is the SPV that signs the contract with the government and with subcontractors to build the facility and then maintain it. A good examply of a PPP scheme would be a hospital facility financed and built by a private developer and then leased to the hospital authority, or the state. The private developer then acts as the building owner/ leasor and provides the usual maintainance and non medical services while the hospital itself provides medical services. The deal for the PPP company is that it has a guaranteed market/ buyer for its services, or facility.

For example, since January 2003 the London Underground has operated in PPP mode. All infrastructure is maintained by private companies but the Underground is still owned and operated by the state Transport Authority. The London Municipality engaged the American Bob Kiley (who had PPPed the New York Subway using public bond finance) to develop the London Underground along PPP lines.

In Central Europe, Hungary has a good track record of successful PPP initiatives. It delivered the M5 motorway in 2003 which was followed by the M6. The M6 deal was financed in the international markets with the co-operation of a number of City law firms.

Generally, there are three main criteria that a country's legal system must deliver to provide for a successful PPP initiative:-

1. A strong private law framework that is respectful and that provides for the enforcement of deals struck between the public and private sectors. PPPs are heavily contract-reliant and the PPP investor needs to know that it can rely on its negotiated deal being enforced in court.

2. A clear and transparent procurement regime. The private sector will not compete unless it is sure that it is doing so on a fair basis.

3. Strong finance and securities laws that allow the revenue stream fundamental to PPP to be achieved for the benefit of the project lenders.

In most Central and Eastern European countries – in particular, the new EU states, these criteria are largely met to the satisfaction of potential PPP investors as EU procurement procedural standards are applied generally. However, the use of PPPs as a model for public procurement requires a large change in the way the public sector is required to think and the experience of the new PPP-implementing countries is that this change can be achieved only with clear, high-level political support. The key to PPP is the commitment of the decision-making politicians.

The joining the EU has brought the prospect of significant financial subsidies for public infrastructure development. For the period 2004-06, more than €8bn (£5.5bn) has been available to the new accession countries. This, together with international confidence in the security of the new EU states, provides a good platform for PPP initiatives in 2005.

In the view of Riga’s Mayor, the rapid and dynamic modernization and development of the City could be best achieved through innovative PPP projects and as such, those international private concerns willing to join with the municipality for the projects were warmly invited. Some of the key, current areas for PPP projects were identified as follows:-

PPP investors and entrepreneurs would be welcomed by the municipality to join with it for the development of large-scale conference centres and hotels so as to cure the current insufficiency of these facilities for the international business market wishing to use Riga’s key location as a base for business and conference activities.

The river Daugava which adjoins Riga, has a special traditional significance for its inhabitants and as such the municipality’s important development objective was to unify the old city with the Daugava. This would be achieved by the relocation of the separating road to an underpass and to put in its place, promenades and walkways joining the old city with the river.

To ease traffic congestion, there was a need to expand city road traffic capacity by moving the traffic flow from the city to around it. These city bypass highways would redirect through-flow traffic from the inner city and free up traffic congestion in the centre. They could operate with Park and Drive establishments.

Riga’s traffic capacity needs could be addressed by the building of two bridges crossing the river Daugava. One of the bridges may be optionally a tunnel for the city’s north side (a high priority) which is estimated as a 600 million EUR project.

An important part of the municipality’s development plan for the city involves the modernization of its public transport system to include the implementation of low floor/ fast tram systems and also the rebuilding of the existing tram lines for more capacity.

The city administration is keen to establish entreprenuer zones – the allocation of areas within Riga for particular development purposes (eg., housing, supermarkets, green areas, etc.) so as encourage entrepreneurial planning.

The development of Mežaparks, Riga’s ‘garden city’ within a city, home of with some of the most beautiful residential buildings of old. A public conference is planned to take place in Riga on September 2005 for its development for recreation and residential purposes. The council is keen to maintain this beautiful part of Riga for leisure and recreation and in that respect is interested in joining with private concerns for its development as there are only currently two suitable, modern resorts for family entertainment and recreation in Riga - Līvu aquapark and ‘big’ LIDO. The council is particularly keen to develop large-scale indoor recreation centres which can be accessed by families all the year round.

There is strong interest to move the harbour away from the main city area, leaving that area for office/ conference centre and residential housing and the interest of private developers for this project.

The territory of Lucavsala is lacking in basic infrastructure (eg., water supply) is in need of development and PPP investment is welcomed.

The network of schools is well developed in Riga, however, the buildings need renovation . and modernization and up-to-date facilities (especially IT equipment; sports equipment and swimming pools). There are pressing needs for day care centres/ kindergartens and in all these area PPP investment is warmly invited.

The responsibility for the administration of hospitals and emergency care facilities is split between the state and the municipality. A concession agreement between the parties would enable the rationalization of these healthcare services. For hospitals, as many occupy premier locations in the Riga centre and could do with a rationalization of functions for more efficiency, the city development plan envisages hospitals to be moved out of the centre to the suburbs by the merger of some smaller ones with the larger ones in the suburbs for reasons of costs efficiency. Furthermore, the area vacated could be used for the development of hotels and conference centres (which are key needs for the city). The Ministry of Health could offer PPP investors the considerable experience in the merger/rationalization of hospitals.

At present there are 10, 000 families waiting for flats and there is a pressing need for the construction of low-cost housing for low-income families on a ‘build for rent’ basis.

There are plans to build a new National Library; an Acoustic Concert Hall and a Modern Art Exhibition Hall.

Riga city green areas are in need of development and modernization and the city’s current priority is the redevelopment of these ‘green’ areas.

The Mayor, was keen to point out that private concerns, especially from Britain and the other larger EU countries, with competency in any one of the development areas above and who were able to bring a financing package for a relevant PPP project engagement would be warmly welcomed. Additionally, suitable experienced law firms and other consultancies in Riga are encouraged to join with the municipality in its efforts to attract well-qualified PPP investors for its development plans for the city.

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