EUROPEAN COMMISSION Brussels, 2.7.2021 SWD(2021) 162 final/2 This document corrects document SWD(2021)162 final of 22.6.2021.



The page numbers in the table of contents have been updated. COMMISSION STAFF WORKING DOCUMENT Analysis of the recovery and resilience plan of Latvia Accompanying the document Proposal for a COUNCIL IMPLEMENTING DECISION on the approval of the assessment of the recovery and resilience plan for Latvia {COM(2021) 340 final}



Table of contents 1. Executive summary 2 2. Recovery and resilience challenges: scene-setter 5 2.1. Macroeconomic outlook and developments since the 2020 country report 5 2.2. Challenges related to sustainable growth, cohesion, resilience and policies for the next generation 8 2.3. Challenges related to the green and digital transition 12 2.3.1. Green dimension 12 2.3.2. Digital dimension 15 3. Objectives, structure and governance of the plan 18 3.1. Overall strategy of the plan 18 3.2. Implementation aspects of the plan 21 4. Summary of the assessment of the plan 24 4.1. Comprehensive and adequately balanced response to the economic and social situation 24 4.2. Link with country-specific recommendations and the European Semester 29 4.3. Growth potential, job creation, economic, institutional and social resilience, European Pillar of Social Rights, mitigating the impact of the crisis, and social territorial cohesion and convergence 37 4.4. The principle of ‘do no significant harm’ 44 4.5. Green transition 46 4.6. Digital transition 48 4.7. Lasting impact of the plan 51

4.8. Milestones, targets, monitoring and implementation 54 4.9. Costing 56 4.10. Controls and audit 58 4.11. Coherence 60

1.Executive summary Latvia’s economy stood up to the COVID-19 crisis relatively well with a sharp decline counterbalanced by a robust recovery. However, achieving a sustainable growth path will be more challenging. Latvia’s GDP contracted by 3.6% in 2020 due to COVID-19 pandemic-related restrictions. After the initial shock in the second quarter of 2020, the economy rebounded strongly during the rest of the year. The economy declined again in the 1st quarter of 2021due to the measures aimed at containing the second wave of the pandemic, however, the setback is expected to be temporary. A significant easing of measures in the second half of 2021 should help the economy recover, to reach a growth rate of 3.5% overall in 2021. The momentum is expected to carry into 2022, when GDP growth is projected to reach 5.6% driven by buoyant private consumption and investments. Over the medium term, Latvia’s growth prospects will depend on its ability to counter the pre-crisis trend of falling labour supply. Employment decline in 2020 has been mitigated thanks to the deployment of furlough schemes, which incentivized businesses to keep people in employment. The number of people employed declined by 2.3% in 2020 with the unemployment rate reaching 8.3% from 6.3% in 2019. However, the recovery in employment is expected to lag GDP growth somewhat, with the unemployment rate seeing a more pronounced improvement only in 2022. Low-wage earners working in the services sector have been disproportionally affected by the crisis, further widening the already existing disparities in income level and adequacy of social protection. Government support to employees and businesses was prompt during the first wave of the pandemic, but faced some delays during the second wave. At the outset of the crisis, Latvia promptly deployed support for businesses and people affected by the crisis and dedicated additional resources to the health sector. As a result, the government deficit increased to 4.5% in 2020 and is expected to reach 7.3% in 2021. The deficit is expected to decline rapidly in 2022, however, as support measures are being phased out. Government debt is projected to increase by almost 10 pps. by the end of 2022 compared to 2019. Latvia submitted its Recovery and Resilience plan on 30 April 2021. Latvia’s plan consists of 6 components, covering a broad range of policy areas and aims to address the country’s key challenges with a balanced set of reforms and investments. The key areas for investments are the twin transitions, health infrastructure, social and regional infrastructure as well as research and innovation. The measures include direct investments in public infrastructure, capacities and processes as well as extensive support programmes for private investment in the twin transitions and innovation. The investments are accompanied by reforms that will make them more effective at achieving their intended policy goals and by helping to attract private investments for bigger impact. In addition, Latvia’s plan includes a few self-standing reforms that aim to address challenges in areas that have been prominently identified in the Country Specific recommendations – tax administration, the judicial system, the capacity of the public administration and public procurement. Latvia requested EUR 1.826 billion and no loans. The plan includes measures addressing all key challenges, constituting an adequate response to the economic and social situation and is expected to strengthen Latvia’s growth potential. The challenges identified in the most recent Country-Specific recommendations pertain to six broad policy areas – fiscal and financial challenges, challenges related to social inclusion and skills, challenges related to productivity growth and convergence, challenges related to the efficiency and accountability of public administration, as well as challenges related to the twin transitions. Latvia’s plan contributes to effectively addressing a significant subset of challenges identified in the country specific recommendations. Moreover, by contributing to effectively addressing Latvia’s key economic and social challenges identified in the country-specific recommendations, the plan presents a comprehensive and adequately balanced response to the economic and social situation, thereby contributing appropriately to all six pillars referred to in Article 3 of the RRF Regulation. The plan proposes significant reforms in health, social inclusion, higher education and skills. The plan’s most ambitious measures are related to the reform of governance and financing of higher education institutions, the preparation of a comprehensive human resources strategy in healthcare, and the introduction of annual indexation of minimum income benefits. These measures are expected to have a lasting impact and to contribute significantly to addressing challenges in higher education, health and social inclusion. Investments in green and digital infrastructure, regional development, as well as extensive support schemes for business investment is expected to bolster Latvia’s growth potential over the medium to long term. Investments and accompanying reforms to the Riga transport system are expected to boost the city’s competitiveness and ability to attract investments and talent. Measures to foster private investments in wind energy are set to contribute to reaching renewable energy targets and becoming a competitive low-carbon economy. Business investment support schemes are set to accelerate Latvia’s pursuit of higher export capacity and productivity growth. Investments in housing and infrastructure for peripheral regions are expected to strengthen Latvia’s lagging regions’ growth opportunities. Altogether, these measures address long-standing challenges of Latvia’s economy – low innovation spending, low uptake of modern technologies as well as significant regional disparities. Latvia’s recovery and resilience plan is compliant with the ‘do no significant harm’ principle. The assessment follows the methodology set out in the Commission’s Technical guidance on the application of ‘do no significant harm’ under the Recovery and Resilience Facility Regulation (2021/C 58/01) and the six corresponding environmental objectives. Where necessary, respect of the ‘do no significant harm’ principle is ensured by milestones. Reforms and investments in clean transport, energy efficiency and climate adaptation, as well as reforms fostering investment in renewable energy will address Latvia’s climate challenges. Latvia’s main green climate transition challenges are to reverse the trend of growing energy consumption in transport and buildings as well as to continue increasing the share of renewable energy in its energy consumption. The greening of Riga metropolitan transport system is expected to contribute to increasing the renewable energy share, reducing energy consumption and greenhouse gas emissions in transport sector through making public transport a more attractive option for commuting. Investments in energy efficiency of public and residential buildings will contribute to the achievement of Latvia’s energy efficiency target for 2030. Investments in the electricity network aimed at facilitating the development of self-generation and extending the electric charging infrastructure to densely populated areas will help promote renewable energy use both in housing and transport sectors. Moreover, Latvia aims to remove barriers to private investments in wind energy, which is crucial to Latvia’s ability to reach its 2030 renewable energy target. Furthermore, a support instrument to businesses will support a variety of green investments, including renewable energy, energy efficiency and green R&D. Finally, greening of Riga transport system and investments in a new customs control post are expected to yield improvements in air quality thus contributing to environmental objectives. Altogether, Latvia’s plan dedicates 37.6% of the available funding to climate-related investments. Latvia’s plan addresses its key digital challenges – poor skills, insufficient rural connectivity and low level of business digitalisation. Poor basic digital skills among the working age population, insufficient uptake of digital solutions by businesses as well as a shortage of ICT specialists are Latvia’s key digital challenges, negatively affecting workforce availability, competitiveness, business digitalisation, use of government e-services and digital innovation. Significant reforms and investments are planned to address the country-specific recommendations in this area. The measures supporting digital objectives account for an amount which represents 21% of the plan’s total allocation. The plan includes sizeable investments in basic and advanced digital skills to foster Latvia’s digital transition. Latvia’s plan also includes measures for the digital modernisation of public administration and the digital transformation of public services, including centralised public solutions. Latvia addresses the challenge also by supporting the digital transformation of businesses, in particular SMEs and R&D as well as by creating the necessary framework for Latvia’s participation in the network of European of Digital Innovation Hubs. The plan includes measures to deploy very high-speed broadband that will help further improve the digital infrastructure. Investments in human capital, digital capacities, research and innovation capacity, and public transport are expected to have the largest impact on the economy’s long-term potential. Latvia’s plan includes investments and reforms aimed at improving skills. The importance of this is reflected by the high unemployment rate differential between the high and the low skilled. There has also been a recurring trend of shortages of qualified workforce and tight labour supply, aggravated by aging and declining population and emigration. A structural improvement in the skills composition has the potential to boost the use of digital solutions, services, exports and to spur regional development. Furthermore, investments in modernising the public IT infrastructure, support for business digitalisation as well as investments in 5G should lead to synergies that will help increase the country’s capacity for use of digital solutions. Support for private R&D investments are aimed at creating sustainable innovation ecosystems that are expected to boost Latvia’s innovation capacity in the long term. Finally, the reform of the governance of the Riga metro area public transport system as well as its associated investments are aimed at improving public transport’s attractiveness and achieve a higher proportion of mobility needs being served by public transport. If successfully implemented, the measures will improve Latvia’s growth potential, and economic and social resilience in the medium term, and facilitate the green and digital transitions. The stakeholder consultation process was overall adequate, enhancing the ownership of stakeholders and supporting the lasting impact of the measures. Latvia has provided estimates of the total costs of the recovery and resilience plan which are to a medium extent reasonable and broadly plausible. Latvia has provided individual cost estimates for all investments included in the plan. The cost breakdown is generally detailed and well-substantiated. The estimates are based on comparisons with past investments of similar nature and on market and price analysis. While Latvia did not provide an independent validation for the cost estimates proposed, the assessment of the cost estimates and inherent supporting documents show that most of the costs are well justified and reasonable. The amounts proposed for financing were deemed appropriate and seen as establishing the plausibility of the cost estimates to a medium extent. Although the costs of most measures are deemed highly plausible that is the amount asked for is in the low to medium range compared to costs of similar reforms or investments, there are a limited set of measures for which the costing is deemed to be plausible to a low extent. Finally, the estimated total cost of the recovery and resilience plan is in line with the principle of cost-efficiency and is commensurate to the expected national economic and social impact. The individual components provide clear information about additional investments from other EU funds. Projects funded by other EU sources are demarcated in time and scope from the projects in the RRP. Furthermore, Latvia has put in place arrangements to avoid double EU funding. The arrangements proposed in the recovery and resilience plan are adequate to ensure its effective monitoring and implementation, including the envisaged timetable, milestones and targets, and the related indicators. The Ministry of Finance will be tasked with monitoring of the plan, whereas line ministries will be responsible for its implementation. The milestones and targets are realistic and relevant, but monitoring mechanisms are not always mentioned. The targets and milestones are robust, but tend to be back loaded in the cases of infrastructure investment and support schemes for business investment. The control system and arrangements proposed in the recovery and resilience plan are based on robust processes and structures used in the existing Cohesion Policy framework. The plan clearly identifies responsible actors for carrying out the internal control tasks. The functions are appropriately segregated and the arrangements for the collection and publication of data on final recipients are adequate.

The Latvian recovery and resilience plan is coherent, with consistent, mutually reinforcing reforms and investments, and synergies between the different components. The recovery and resilience plan contains measures for the implementation of reforms and public investment projects that represent coherent actions. The six components structure the investments and reforms and show their thematic relation and interlinkages well. Coherence is ensured within the components, with investments accompanying relevant reforms, as well as between the different components in the plan. The components included in the RRP of Latvia form a single framework for reforms and investments, the core task of which is to promote productivity, reduce inequalities, as well as promote the climate transition and digital transformation. The six components are mutually reinforcing and coherent in their aims. Table 1: Summary of the assessment of the Plan under the RRF criteria (1)

Balanced Response (2)

CSRs (3)

Growth, jobs… (4)

DNSH (5)

Green target (6)

Digital target (7)

Lasting impact (8)

Milestones & Targets (9)

Costing (10)

Control Systems (11)

Coherence A A A A A A A A B A A 2.Recovery and resilience challenges: scene-setter 2.1.Macroeconomic outlook and developments since the 2020 country report Macroeconomic developments since the 2020 country report The Latvian economy shrank by 3.6% in 2020, in the wake of the COVID-19 crisis. In particular, the first two quarters of 2020 saw a significant fall in output due to restrictions. The economy mounted a strong recovery in the third quarter before slowing at the end of the year amid renewed restrictions in response to the second wave of infections. Demand for household consumption and exports saw the largest decline as consumers stayed home and travel restrictions made exports of services more difficult. Investments held up better than initially expected, remaining at the 2019 level, largely helped by the construction sector’s continued activity during the first wave of the pandemic. Employment held up better than GDP, thanks to furlough schemes. The average unemployment rate increased by 1.8 pps. in 2020 compared to 2019. The unemployment rate increased significantly in the first half of the year before decreasing somewhat during the summer and early autumn. However, the second wave of the pandemic reversed this trend and the unemployment rate started to increase again in December. Most jobs were lost in sectors directly affected by restrictive measures – hospitality, catering, transport and other service sectors. Moreover, the job losses mostly affected low-wage earners. As a result, wage growth slowed only marginally compared to its pre-crisis pace, recording 5.3% growth in 2020. It is estimated that the emergency measures to protect incomes during the COVID-19 crisis, together with the pre-existing tax-benefit system, cushioned about 78% of the shock on household incomes in Latvia, almost half of the effect due to furlough schemes. Social conditions were improving before the COVID-19 crisis, thanks to an improving labour market, but the COVID-19 crisis is likely to exacerbate the pre-existing inequalities. Poverty declined noticeably since its peak in 2011, with the share of people at in poverty rate declining by more than 10 pps. This is largely attributable to the continuous improvement of the labour market. Inequality, on the other hand, has largely remained steady over the past 10 years. The share of people at risk of poverty or social exclusion fell slightly from 28.4% in 2018 to 27.3% in 2019, but remained among the highest in the EU. Macroeconomic outlook The macroeconomic scenario included in Latvia’s Recovery and Resilience plan (RRP) expects GDP to rebound, reaching 3.0% growth in 2021. The scenario assumes the restrictions related to the pandemic will be lifted in the second part of the year, giving a boost to the private consumption and exports. In 2022, the scenario expects GDP growth to reach 4.5% as investments take over as the main growth driver. Growth is expected to moderate thereafter at around 2.8%. Compared with the macroeconomic scenario of the Latvian government, the Commission forecast is somewhat more optimistic for both 2021 and 2022 due to differences in the appraisal of government support measures for 2021 and inflow of EU funded investments for 2022. Latvia’s forecast dates back to early February when part of the support measures for 2021 had not yet been announced and there was less clarity about the timeline of both the RRF investments and other EU-funded investments. According to the Commission’s forecast, inflation is set to recover from a near standstill in 2020 to 1.7% in 2021 and 2.0% in 2022. Employment is expected to follow a similar path to economic growth. The unemployment rate is expected to decline towards the end of 2021 thanks to the jobs gained in the second part of the year when most services hit by pandemic restrictions are expected to reopen. The unemployment rate is set to decline further in 2022, reaching 6.9%. The tightening of the labour market is expected to lead to increased pressure on wage growth, which is expected to remain modest in 2021. The budget deficit increased to 4.5% of GDP in 2020 and is expected to increase to 7.3% of GDP in 2021 before declining sharply in 2022. The government deficit increased from 0.6% in 2019 to 4.5% of GDP in 2020. The sharp worsening reflects the drop in tax revenue, in line with the decline in consumption, the loss of jobs, and the impact of temporary support measures for households and businesses. The government deficit is projected to further increase to almost 7¼% of GDP in 2021 due to temporary support measures, before narrowing to 2% by 2022. The government debt-to-GDP ratio increased from 37% in 2019 to almost 43.5% in 2020. The debt-to-GDP ratio is expected to reach around 47% in 2021, but to decline in 2022, on the back of the lower fiscal deficit and the rebound in GDP. The 2020 Debt Sustainability Monitor projects debt to peak in 2026 at slightly below 50% of GDP before resuming to decline. Hence, Latvia’s fiscal policy remains on a sustainable path at the beginning of 2021. A delay in the COVID-19 vaccination strategy is considered to be the main negative risk to the macroeconomic scenario. The macroeconomic scenario included in Latvia’s plan assumes that the government’s target of 70% of the adult population having been vaccinated by the end of summer will be met, allowing for a return to close to unrestricted economic activity by that time. However, vaccine availability and vaccination rollout may slow, leading to delayed easing of restrictions. On the positive side, Latvia’s scenario does not account for the full range of support measures for 2021 and its forecast of EU-funded investments for 2022 is markedly cautious. Table 2: Comparison of macroeconomic developments and forecasts 2.2.Challenges related to sustainable growth, cohesion, resilience and policies for the next generation

Smart, sustainable and inclusive growth Strong economic and fiscal fundamentals enabled Latvia to provide necessary support to the economy, but challenges related to the social safety of vulnerable groups have become more apparent. The COVID-19 pandemic had a significant impact on economic activity and business sentiment. The government reacted swiftly to the challenges posed by the COVID-19 crisis and adopted a support package to ensure the necessary liquidity for businesses and income support for households. The support made available in 2020 to businesses and citizens amounted to EUR 1.3 billion, or 4.5 % of GDP. However, the support granted turned out to be lower than initially expected. This was partly due to strict eligibility conditions and the relatively high prevalence of envelope wages among the groups most severely affected by the crisis. This experience highlighted the interlinked challenges of the shadow economy and social safety nets. Latvia’s main economic objective remains to ensure steady income convergence with the EU average. In 2020 Latvia’s income per capita declined by 3% compared to 2019, however, over a 5-year period it had increased by a 12%. Yet in 2019 it stood at only 69% of the EU average in purchasing parity standards. The income difference compared to the richer EU countries remaining a powerful driver of emigration. Therefore, continued convergence remains Latvia’s key challenge in terms of improving its population’s living standards. However, a number of structural issues raise concern about sustained convergence: firstly, the country’s declining population weighs on the sustainability of social systems, shrinks the domestic market and raises infrastructure costs per capita. Secondly, the high share of the shadow economy holds back fair competition, weakens affected workers’ social protection and increases occupational risks. It is also among the main reasons for lacklustre credit growth. The lack of affordable housing also inhibits internal labour mobility. Finally, Latvia’s innovation performance is relatively low and stagnating. Latvia’s fiscal position remains strong and sustainable, but poor tax compliance persists and there are insufficient resources for critical public services. Strong growth and a prudent fiscal policy helped Latvia maintain its debt level at sustainable levels – 43.5% of GDP at the end of 2020. Moreover, Latvia’s pension and health systems do not pose a fiscal challenge in the long term. However, Latvia’s tax revenue as a share of GDP remains among the lowest in the EU, limiting its redistributive power to improve critical public services like healthcare and social assistance. Furthermore, weak tax compliance has been a long-running issue in Latvia, with undeclared transactions, envelope wages, undeclared income and tax fraud all being part of the problem. There are difficulties in ensuring that growth benefits all parts of society. Inequality remains high and peripheral regions are lagging behind the Riga region. The divergent population dynamics, with a growing population in the Riga metropolitan area and a rapidly declining population in the rest of Latvia, have created challenges for the quality of service delivery across regions, as well as the quality of the public administration at municipal level. Latvia’s labour force is declining, while employment conditions differ across regions and skill levels. There is a shortage of skilled workers, especially in STEM (science, technology, engineering, mathematics) sectors. Meanwhile, low-skilled, older workers, ethnic minorities and those living further away from the regional centres have more limited access to the labour market. As only a small share of the unemployed register with the public employment service, many cannot be reached with upskilling, reskilling and job search measures. The delivery and composition of active labour market measures have to be strengthened and adapted to mitigate the impact of COVID-19 crisis. Job opportunities are concentrated in urban centres, while labour mobility is hampered by the lack of affordable housing and limited transport connections. Furthermore, social partners' capacity remains limited, restricting their engagement to reinforce equal opportunities and jobs for all and deliver on the European Pillar of Social Rights. Research and innovation in Latvia has still an ample scope in developing its potential to contribute to the diversification and competitiveness of the economy. With an R&D intensity of 0.64% of GDP, the R&I system is hindered by underfunding, making it less attractive to researchers. Human capital imbalances represent a significant bottleneck of the Latvian research and innovation landscape and are evident in the current shortage of R&D personnel and skills, both in the private and public sectors. Research-industry and intra-industry links remain key challenges. In spite of the recent advances in the development of a technology-oriented start-up ecosystem, Latvia lags behind other EU Member States in terms of the innovative capacity of start-ups and SMEs. Social and territorial cohesion Regional economic and social disparities remain among the widest in the EU. While Riga’s GDP per capita reached 91% of the EU average in 2018, in the Latgale region in the east of the country it was only 25%. Population is decreasing in all regions of Latvia (NUTS3) due to natural change and migration, except for the Pieriga region where numbers are on the rise. The Latgale region has the highest unemployment rate, the highest risk of poverty, the lowest wages and the lowest economic activity in the country, it is also experiencing the most rapid depopulation. The quality of public services varies considerably among Latvian regions. The shortages of health and social workers outside Riga restrict access to quality care. Ensuring inclusive and quality education for all remains a challenge for smaller rural schools. Private housing conditions in rural areas are worse than in urban areas. Some regions outside the Riga metropolitan area still struggle with providing utilities like central sewerage and water. The road network is of low quality with poor public transport connections. In 2020, Latvia adopted an administrative-territorial reform that significantly reduces the number of municipalities. Its aim is to consolidate local authorities’ administrative capacity, improving their services and governance, allowing for better planning and cost savings. However, the municipalities will need reforms and investments to ensure that quality public services are accessible to all, including to those living further away from the new administrative centres. Latvia is lagging behind in the completion of the TEN-T conventional rail core network. The main TEN-T corridor railway infrastructure (the Rail Baltica railway corridor connecting the Baltic States to the standard-gauge European network) is not yet in place, but construction has started. Only 14% of railway lines are electrified. A projected decline in international rail freight transport will force a shift from freight to more passenger rail services. Multimodal transfer points between Rail Baltica and national and regional transport networks need to be developed.



Health, economic, social and institutional resilience Weak health outcomes are linked to poor lifestyle choices and an under-resourced health system. Their effect on the health status of the population impacts negatively on labour supply and Latvia’s growth potential too. Many of the challenges in the sector – workforce shortages, lack of timely access to affordable health and long-term care, and limited disease prevention – are linked to low public financing. Latvia spent around 3.7% of GDP on healthcare in 2019, the second lowest ratio in the EU. Access to publicly funded healthcare services is limited by a quota system and lack of health workforce; this has led to a high level of unmet needs and a high prevalence of out-of-pocket payments. Moreover, the quality and efficiency of service delivery is uneven, with service delivery focused more on hospital care (which is more expensive) and less on the use of home care and community-based services. Whilst the intensive care capacity has increased during the COVID-19 pandemic, the Latvian health system has still come under immense pressure. Relative poverty in Latvia remains high and is increasing, while spending on social protection remains low. The poor funding of the social system is the main driver of income inequality. Income distribution is more unequal in Latvia than in the EU on average. While the inequality of market incomes is about average, redistribution through taxes and social transfers is among the lowest in the EU. The poor funding of the social system is linked indirectly with the relatively low tax intake as a share of GDP, limiting the amount of funding that can be spent on social programmes. The elderly, the unemployed and persons with disabilities are the most affected groups. Despite the recent increase in 2021, the guaranteed minimum income remains significantly below the poverty threshold and lacks a clear indexation mechanism. As a result, the share of people at risk of poverty or social exclusion and the poverty gap both remain wide. Income inequality is associated with unequal access to healthcare, which is significantly more difficult for low-income groups, who cannot afford private healthcare. Access to adequate housing is a challenge, particularly for low-income groups. The share of people facing severe housing deprivation is high. The social housing stock is low and often not fit for living, while waiting lists are long. The lack of affordable housing is among the main barriers to labour mobility and regional development. A comprehensive housing strategy is not yet in place, nor are the strategies to address homelessness and housing exclusion. Latvia has a generally favourable business environment, but some areas suffer from expensive administrative obstacles and legal uncertainty. Latvia ranks 19th on the World Bank Doing Business index, reflecting its quick firm establishment process, openness to trade and robust legal framework. This is thanks to such measures as company registration e-service, introduction of “Zero Bureaucracy” and “Consult first” approach to public services. Latvia has also put efforts into boosting its start-up ecosystem, by providing various types of support including financial support, a special tax regime for start-ups, a start-up visa program, acceleration funds and incubation support. As a result, the number of start-ups has increased four times since 2012, reaching 450 active start-ups in 2020, which have attracted EUR 303 million of investments. At the same time, construction and wind energy sectors face notable barriers to investment related to lengthy administrative procedures and legal unpredictability. Getting a construction permit and other construction-related approvals is a lengthy and costly process, particularly in Riga. This has been among the key factors holding back investment in buildings. Moreover, implementation of onshore wind energy investments face legal unpredictability related to municipalities’ competence regarding final approval of the projects. Despite having successfully completed of an extensive and lengthy environmental impact assessment process, the projects may still be rejected without giving a justified reason. Moreover, the appeal process of municipalities’ decisions are lengthy. Municipalities’ decisions are often influenced by community opposition to wind projects. In this regard, an equitable profit sharing mechanism that would benefit local communities is missing and could be explored as another means to foster wind energy deployment. Due to this risk, investment in onshore wind in Latvia has been paltry. Finally, administrative and tax obstacles have hindered business investment in skills. The main areas of public administration facing hurdles include tax administration, law enforcement and the judiciary, and public procurement. The VAT gap in Latvia is estimated to have markedly declined over the past years, slipping below the EU average indicator in 2019. Nevertheless, other measures point to a persistently high level of shadow economy and its prevalence is estimated to have increased in 2018-2019. The large shadow economy partly reflects a lack of efficiency in the tax administration, which needs to adapt its organisation, operational practices and information sharing throughout the country to fight tax evasion and fraud more effectively. Overall, Latvia’s performance in the area of public procurement is satisfactory. Latvia’s main difficulties reside in the share of procedures with a single bidder (32%) and public procurement procedures negotiated without any call for bids (8%). This means that there is less competition and therefore public procurers have less options to get better value for money. The low number of tenders in public procurement can be due in some case to insufficient number of suppliers on the market. It can also be linked to the way the technical specifications are drafted and to the awareness of public procurers of the importance of competition. Moreover, public procurers often lack capacity to prepare and carry out large and complex procurement projects effectively. Policies for the next generation, children and young people, including education and skills

A key challenge for education in Latvia is to ensure a comparable quality of education across schools and regions. Access to inclusive and quality education remains dependent on place of residence, with larger urban schools outperforming smaller rural ones (as per the latest PISA report). Latvia has started to consolidate its large and inefficient school network, but progress is slow, delaying gains in quality and efficiency. The share of students in vocational education and training remains lower than in general education, and graduate tracking is not yet in place. Renewing the teaching workforce is a challenge and teacher shortages are becoming apparent, especially in sciences and maths. Furthermore, COVID-19 restrictions exposed digital and social inequalities (availability of hardware and internet connections), leading to uneven access to distance learning. The main challenge for Latvia’s higher education is taking action to reduce the fragmentation of the higher education system, which hinders its quality and competitiveness. The inefficient higher education governance model coupled with non-performance based funding impairs scientific excellence and the attractiveness of the public science base for business and international partners. A set of reforms of the governance of higher education institutions in general and of academic careers in particular is under way and could increase higher education’s strategic capacity and academic competitiveness. Existing plans to reduce the fragmentation of study programmes need to be given new momentum. Labour market skills shortages remain. The low level of digital skills among the labour force, flagged ‘critical’ on the Social Scoreboard, limits the use of digital technologies by businesses and the potential for innovation. The adult learning participation rate is low, especially among the low-skilled. The challenge remains to strengthen the governance of the skills system, including planning, and to deliver high-quality adult learning to all, especially to vulnerable groups. 2.3.Challenges related to the green and digital transition 2.3.1. Green dimension The recovery and resilience plan should include a minimum level of 37% of expenditure related to the green dimension. The measures in the plan are expected to contribute to achieving the climate neutrality and the 2030 energy and climate targets entailed in the National Energy and Climate Plan. They should also contribute to meeting the environmental targets for waste, water, pollution control, sustainable mobility, biodiversity protection and restoration, marine and water resources, and support the transition to sustainable food systems as well as to a circular economy as appropriate, while ensuring that nobody is left behind. This can be achieved by equipping workforce with adequate green skills and providing support for sustainable innovation and competitiveness. Reducing energy consumption in transport and buildings and boosting its renewable energy capacity are Latvia’s key energy and climate policy challenges. Latvia’s greenhouse gas emissions per capita are among the lowest in the EU. This is because its energy consumption per capita is lower than the EU average, while its share of renewable energy is also among the highest in the EU. Nevertheless, Latvia faces major challenges over its non-ETS emissions reduction, which have been increasing due to rising energy consumption in transport and buildings. As a result, to meet its 2030 target for greenhouse gas emissions, Latvia would need to break the current trend of increasing energy consumption and emissions in transport and buildings. It would also need to continue increasing the share of renewables, which it has successfully done in heating and power generation, thanks to the widespread use of biomass-based cogeneration. Looking forward, the scope for increased use of sustainable biomass is limited and Latvia will need to tap the potential of wind and solar power as long-term solutions. Latvia also needs to boost its recycling rates and improve circular economy and the sustainability of its agricultural and forestry practices. Renewable energy Latvia already achieved its 2020 renewable energy target of 40% in 2019. Latvia has set a renewable energy share of 50% in gross final energy consumption for 2030, but risks falling short of it if the speed of renewables deployment is not accelerated, especially for wind energy. Latvia would therefore benefit from policies and measures to help speed up renewables deployment. Reducing the legal uncertainty and investment risk to onshore wind farm developers is necessary to boost wind energy, which plays a central role in Latvia’s plans to reach its 2030 contribution on renewable energy. It is equally important to make low-cost long-term financing available for green investments, including investments in renewables. Latvia needs to develop an enabling framework for the uptake of local renewable sources other than biomass, focusing instead on sources such as ambient, geothermal, wind and solar energy, including promoting renewable self-consumption and renewable energy communities and citizen energy communities. Latvia plans to achieve a 7% share from renewable energy in transport by 2030. It plans to achieve 3.5%with advanced biofuels and by increasing the electrification of rail and through electro-mobility. Latvia needs to provide sufficient safeguards for the production of advanced biofuels in accordance with Annex IX to the Directive (EU) 2018/2001. More specific policies would be welcome to diversify and increase the uptake of renewables in transport. Energy efficiency For Latvia to achieve its energy efficiency target for 2030, it needs to break the trend of rising energy consumption. The transport and buildings sectors are the largest contributors to rising energy consumption. The key to curbing energy consumption growth in transport is to incentivise a modal shift from cars to public transport, particularly within the Riga metropolitan area, where more than half the country’s commuter traffic takes place. To achieve its 2030 energy efficiency target, Latvia should speed up building renovation. Current renovation plans fall significantly short of the efforts needed to achieve the 2030 national contribution. Speeding up renovation (in line with Renovation Wave) involves: (i) scaling up current support programmes; (ii) reducing the administrative cost of building renovation, including through project standardisation and aggregation; and (iii) greater availability of low-cost, long-term financing and private capital to reduce the public cost of renovating private buildings. Energy efficiency measures combined with renewable solutions should be encouraged, and due attention to energy poverty should be given when designing support measures. The long-term renovation strategy (required under the Energy Performance of Buildings Directive) should be used as basis for undertaking renovation measures with a view to decarbonising Latvia’s building stock by 2050. Circular economy Latvia’s performance in the transition to a circular economy is improving. In 2019, Latvia’s municipal waste recycling rate (including composting) was 41%, up from 25% in 2016. However, a rate of 4.7% circular material in 2019 remains below the EU-27 average of 11.9%. Latvia is taking steps to move towards a more circular economy. Nevertheless, it falls behind in its re-use and recycling targets as a lack of incentives for municipalities holds back investment in separate collection, in particular in Riga. Furthermore, the quality of data on waste collection could be improved. Latvia stands to benefit from boosting recycling and separate collections of waste, including bio-waste. Land use Latvia reduced its greenhouse gas emissions from agriculture between 1990 and 2018, but recent years and projections show a renewed, increasing trend. Although Latvia’s agricultural sector emits less greenhouse gas emissions than the EU average, the share of its total emissions stemming from agriculture is relatively high, particularly for agricultural soils. At the same time, there has been a significant decrease in total net greenhouse gas emission removals in LULUCF (land use, land use change and forestry) sectors, mainly due to the increase in logging and the extension of peat. Forests cover 54.9% of the country’s territory. Latvia could focus efforts on: (i) fostering sustainable forest management and promoting the efficient use of sustainable biomass; (ii) enhancing the multi-functionality of forests; (iii) promoting forest protection; and (iv) restoring forest ecosystems. Biodiversity

The economic growth of Latvia in the latest decades has intensified pressures on the environment and biodiversity. The main pressures are agricultural, industrial and urban pollution and land use change. The latest report required by Article 17 of the Habitats Directive on the conservation status of habitats and species shows that less than 10% of protected habitats and less than 40% of species have a favourable conservation status. Adopting conservation objectives and measures to maintain and upgrade species and habitats of community interest to a favourable conservation status and mainstreaming biodiversity conservation and sustainable use in other areas, notably forestry, agriculture, fishery and tourism could help address that situation. Air quality Measures targeting reducing air pollution and emissions, particularly from transport, agriculture and through improved energy efficiency of housing would support the National Air Pollution Control Programme and help Latvia comply with the 2020 commitments for nitrogen oxide (NOx) and ammonia (NH3) emission reduction according to the National Emission Reduction Commitments (NEC) Directive ((EU) 2016/2284. The table below gives an overview of Latvia’s objectives, targets and contributions under Regulation (EU) 2018/1999 of the European Parliament and of the Council of 11 December 2018 on the Governance of the Energy Union and Climate Action. Table 3: Latvia’s national targets and contributions regarding energy and climate National targets and contributions Latest available data 2020 2030 Assessment of 2030 ambition level Binding target for greenhouse gas emissions compared to 2005 under the Effort Sharing Regulation (%) 8 +17 -6 As in ESR National target/contribution for renewable energy: Share of energy from renewable sources in gross final consumption of energy (%) 40% 40% 50% Adequate (50% is the result of RES formula) National contribution for energy efficiency: Primary energy consumption (Mtoe) 4.6 5.4 4.1 Modest Final energy consumption (Mtoe) 4.1 4.5 3.6 Modest Level of electricity interconnectivity (%) 50% 10% 60% n/a Source: Assessment of the final national energy and climate plan of Latvia, SWD (2020) 926 final. 2.3.2. Digital dimension The recovery and resilience plan should contribute to the digital transition and at least 20% of the financial allocation needs to contribute to digital objectives. The measures in the plan should, inter alia, contribute to the digital transformation of the economic and social sectors (including public administration, public services, and the justice and health systems). The objective of the measures in the plan should be to improve not only the competitiveness, but also the resilience, agility and security of companies and public actors, all while ensuring inclusiveness. Latvia ranks 18th in the European Commission’s Digital Economy and Society Index (DESI) for 2020. It is three ranks lower than the 2019 DESI and progressing slower than other EU Member States. Source: 2020 DESI report Note: EU aggregate corresponds to EU28, based on 2020 DESI report. While Latvia is a front-runner in broadband coverage and take-up, and is well prepared for the 5G rollout, problems in ensuring accessibility to fast and reliable internet in rural regions remain. The country's main strengths are the extremely advanced coverage of fast broadband (NGA) (93% against the EU average 86%), and near complete average 4G coverage (99% against EU average 96%). In 2018, Latvia signed a memorandum of understanding for the Via Baltica 5G corridor with Estonia and Lithuania. In 2020, Poland also joined the Via Baltica 5G initiative. Latvia also performs well as regards to very high capacity networks (VHCN) and reaches coverage rates of almost 90%, far above the EU average of 49.6%. Fixed broadband coverage in Latvia is around 95 %, with wider disparities in rural areas at 80%. Ensuring fast and reliable broadband access to rural regions remains a challenge, highlighted by the difficulty these regions faced in organising distance learning during the COVID-19 pandemic. Extensive investments in middle-mile connections in rural regions have been made; however, private investment in last-mile connections has not taken place due to such investments’ lack of commercial viability. For this reason, public funds are needed to ensure fast internet access to rural regions. Also, regulatory changes as well as investments are needed to lower the administrative cost of 5G infrastructure deployment, and for connected and automated mobility development. The low level of digital skills in Latvia hampers its digital transformation. Latvia is far below the EU average in all indicators in the human capital dimension, ranking 24th in the EU. As of 2019, 57% of the Latvian population lacked basic digital skills and Latvia had the lowest share of ICT specialists among its workforce in the EU. The shortage of digital skills is a key obstacle to more widespread use of digital solutions by the private sector. Almost half of Latvian firms that tried to fill vacancies for digital specialists find it difficult to do so. The digital provision of public services is strong, Latvia ranking fifth in the DESI. The number of e-government users continues to increase and there was a further improvement in the provision of online public services. The government adopted its 2020-2023 public service development plan, which aims at proactive service provision, user-centricity built around key life events, coordinated and integrated approach in service design, cross-border services, digital-by-default and digital-first principles. Overall, the plan continues promoting the use of ICT as a tool to build a knowledge-based economy and to improve the overall quality of life. At the same time, only 14% of companies are highly digitalised with Latvia ranking 23rd among EU Member States in the DESI. Latvian firms make limited use of cloud services and big data. Latvian firms also engage in less e-commerce than their EU counterparts: only 11% of Latvian SMEs sell online (compared to the EU average of 18%), and the SME turnover generated from e-commerce (5%) is less than half of the EU average (11%). Latvian enterprises also lag behind their EU counterparts in electronic information sharing, use of social media and selling online cross-border, despite recent progress. Box 1: Progress towards the Sustainable Development Goals Sustainable Development Goals and the four dimensions underpinning the Annual Sustainable Growth Strategy This section outlines Latvia’s performance with respect to SDGs with particular relevance for the four dimensions underpinning the recovery and resilience plans (green transition, fairness, digital transition and productivity, and macroeconomic stability), indicating possible areas where investments and reforms in line with the objectives of the Facility could further accelerate the progress on the SDGs.

Green transition. Latvia has achieved a relatively high share of renewable energy in electricity and heating, but to achieve its long-term climate goals it will need to invest substantially in wind and solar energy and promote renewables in transport. Latvia’s performance in energy efficiency has been more modest, and significant investments in buildings and transport sectors are needed to achieve country’s energy efficiency goals. Latvia lags behind in resource efficiency and its circular material use rate is below the EU average. Fairness. While poverty has declined significantly in the past decade thanks to a higher employment rate, income inequality in Latvia remains high. The high income inequality primarily reflects the weak social safety net. The most vulnerable groups are the elderly, the unemployed, persons with disabilities and families with 3+ children. Digital transition and productivity. Latvia has achieved remarkable productivity growth over the past two decades and remains on a solid path going forward. However, a declining population, poor innovation performance and struggling private investments pose a challenge to productivity growth in the medium term. Latvia enjoys world-class digital connectivity and has generally wide availability of public digital services; however, the population’s digital skills and use of digital solutions among businesses are low. Macroeconomic stability. Latvia has pursued a prudent fiscal policy and its public debt, at 43.5% of GDP, remains sustainable. Its current account is balanced, and house prices and credit growth remain low. However, labour costs have been rapidly rising in recent years, raising some concerns about the country’s price competitiveness. 3.Objectives, structure and governance of the plan 3.1.Overall strategy of the plan Latvia’s Recovery and Resilience Plan aims to support the recovery from the COVID-19 pandemic, promote sustainable growth and job-creation based on increased productivity and exports, and stimulate Latvia’s economic convergence, while contributing to the twin transition. The plan is based on the priorities of the National Development Plan 2021-2027, National Industrial Policy 2021-2027, Latvia’s Smart Specialisation Strategy, Post-COVID-19 Economic Resilience Strategy and the National Energy and Climate Plan (NECP ). Furthermore, Latvia’s plan takes into account sectoral development strategies, joint EU-level priorities, Latvia’s international commitments and long-standing challenges to social and economic convergence. The strategy of Latvia’s plan is to exit from the COVID-19 crisis with a stronger and more resilient economy than when it entered the crisis. According to the plan, Latvia’s exit strategy contains three phases: stabilisation (2020), reorientation (2021-2022), and new growth (from 2023 onwards). While budgetary means and crisis-response instruments have been used for short-term financial stabilisation, the plan is expected to foster medium-term economic reorientation and renewed growth. In the reorientation phase, the plan is expected to create new opportunities for businesses by supporting innovation, digital transformation, life-long learning and upskilling, by structural changes in the economy and targeted public sector intervention. In the new growth phase, the plan is expected to help economic transformation by boosting exports, stimulating productivity, driving digital transition and automation, supporting fast-growing firms, industries and innovation ecosystems. Latvia's plan (for EUR 1 826 000 000 in non-repayable support) is divided into six components: green transition, digital transition, reduction of inequality, healthcare, productivity and the rule of law. The components broadly correspond to the six pillars of the RRF. All the components contain both reform and investment measures. However, investments are somewhat more prominent than reforms. Across the components, the Plan contains 85 measures in total, including 24 reform and 61 investment elements. Table 4: List of components and associated costs in Latvia’s RRP Component Costs (€ million) 1. Green transition (sustainable transport, energy efficiency, renewable energy and decarbonisation of electricity grids, climate adaptation) 676.2 2. Digital transition (public and private sector digitalization, e-government services, data management, digital skills, 5G and last-mile connectivity) 365.3 3. Reduction of inequality (road renovation, school infrastructure, affordable housing, industrial parks, social services, long-term care, upskilling) 370.0 4. Healthcare (hospital and ambulatory care infrastructure, human resources, resilience, public health) 181.5 5. Productivity (innovation governance, boosting private R&D investment, higher education and science governance, research careers) 196.0 6. Rule of law (combating economic crime, justice sector training, AML, public administration, procurement) 37.0 Green transition. Comprising EUR 676.2 million or 37.6% of the total allocation of the plan, the green transition component is the largest component of the plan. This component aims to address the challenges identified in Latvia’s National Energy and Climate Plan, such as energy efficiency of buildings, emissions from transport, deployment of renewables and de-carbonisation of electricity. The component contains two main reforms – the creation of a joint multimodal transport network in the Riga metropolitan area and the overhaul of fire and rescue services. Another reform – incentives for wind power development through better regulatory framework, improved community relations and reduced legal uncertainty for investors – is associated with the modernisation of the electricity grid to make it fit for decentralised electricity generation and infrastructure for electric charging. In this component, 46% of investments will target energy efficiency in multi-apartment buildings, central government, historical and municipal buildings and the business sector, while 43% – a sustainable transport system in Riga metropolitan area. It is planned that 81 km of rail lines will be electrified, 7 new electric battery powered trains and 21 low-emission busses and trams procured and 60 km of cycling lanes will be developed in the Greater Riga area. In addition, the investments will enable the State Fire and Rescue Service to build 8 new modular depots and help implement 29 polder and dam projects to reduce flood risks in 59 000 ha of Latvia’s territory. As a result, Latvia aims to save 36 241 tons of CO2 and 49 812 MWh/year in primary energy use. Digital transition. With EUR 383.8 million or 21% of the total allocation of the plan, the digital component (EUR 365.3 million) and separate measures in rule of law and inequality components aim to address the challenges for Latvia identified in EU’s Digital Society and Economy Index (DESI), notably, the low level of digital skills, low uptake of digitisation by businesses, and missing last-mile digital connection infrastructure. The component also aims to improve e-government, interoperability of systems and data management and to develop ICT supporting infrastructure and e-services. The component includes 7 reforms, such as centralised planning of ICT development; consolidation of public IT systems, platforms and infrastructure; improved data management; full-cycle support to business digitisation; a reform of general and digital skills delivery as well as common broadband infrastructure standards (for 5G and last-mile connections). In this component, 35% of investments will target public sector digitisation, 34%for the– private sector, and 26% for digital skills. According to the plan, Latvia intends to modernise 11 e-government solutions, develop 15 centralised platforms/systems, place 10 systems on the national federated cloud, help more than 7000 businesses to digitalise, improve the digital skills of 54,500 individuals, 62,900 public sector employees, 3000 businesses, educate 1000 high-level ICT professionals, and make 26,620 digital equipment available for schools to ensure access to ICT for all schoolchildren. The plan is expected to ensure 100% broadband connectivity along the Via Baltica route and link up to 1500 homes, businesses and socio-economic drivers to last-mile broadband connections. The level of population with at least basic digital skills should increase from 43% in 2020 to 54% in 2026. Reduction of inequality. Accounting for EUR 370 million or 20% of the total allocation of the plan, this component attempts to address the twin challenges of territorial and social disparities in Latvia. The objective of the component is to reduce inequality by creating more jobs in the regions, improving regional connectivity and access to services, providing more affordable housing, improving school infrastructure, helping to up-skill and re-skill workers and unemployed, strengthening the social safety net, improving accessibility to private and public buildings for persons with disabilities, and construction of new long-term care facilities for the elderly. The component includes two reforms – the ongoing administrative territorial reform and a minimum income reform, which foresees setting the minimum income level at 20% of the national median income and introducing annual indexation. In the component, 70% of investments target territorial disparities, while 30% target social inequality. On the basis of the plan, Latvia will renovate 210km of regional roads, construct 4 regional industrial centres, upgrade the infrastructure of 20 schools, procure 15 low-emission school busses, train 1300 municipal employees, provide 700 affordable housing units, upskill 20,450 jobseekers, provide accessibility to private homes for 259 persons with disabilities and to 63 public buildings and build long-term care facilities for 852 elderly persons. Planned investments should take into account regional and local development strategies, thus ensuring an integrated approach and sustainability of investments. Healthcare. With EUR 181.5 million or 10% of the total allocation of the plan, the component aims to contribute to the accessibility, efficiency and resilience of Latvia’s health system, which was heavily tested during the COVID-19 pandemic. The component contains three broad reforms – building a human-centred, integrated and resilient care system through development of a health infrastructure investment strategy, recommendations for integrated and epidemiologically safe care provision, guidelines for oncological care, participation in the “Genome for Europe” project and the development of a digital health strategy; improvement of human resources and skills through the development of a human resource strategy and mapping; and strengthening the effectiveness, governance and sustainability of the health system through more effective service delivery and assessment and piloting of new service models. In the component, 82% of the investments target the improvement of infrastructure of 3 university hospitals in Riga, 7 regional hospitals and 40 ambulatory care institutions. Productivity. This component accounts for EUR 196 million or 11% of the total allocation of the plan and responds to the R&I challenges identified in the European Semester, such as low private sector investment in R&D (business expenditure on R&D was 0.18% of GDP, and total R&D investment was 0.64% of GDP in 2019) and a fragmented research and innovation system. The component contains two main reforms – improved innovation governance through an ecosystem approach and full-cycle support for innovation clusters and continuation of a higher education and science governance reform through consolidation of higher education institutions and support for research and academic careers. In the component, 58% of the investment measures target support for stimulating private sector R&D, while 42% target consolidation, academic careers and research grants. Owing to the investments, 5 functional innovation clusters would be developed and supported, 4-6 universities would receive consolidation grants in exchange for mergers, 315 students will receive doctoral and post-doctoral grants, and 90 researchers research grants. Rule of law. With EUR 37.0 million or 2% of the total allocation of the plan, this is the smallest component and responds to the long-standing challenges in dealing with economic crime (including tax evasion), effectiveness of public administration and professionalism in public procurement. The component contains 8 reforms: improved analytics and data management in tax and customs administration; development of remote imaging; modernisation of money-laundering and other economic crime investigation and judicial procedures; training of public officials; development of public procurement contract registry; fostering the competition culture; development of a procurement professionalisation strategy and IT and analytical capacity-building in public procurement. The component also contains various diverse investment projects, including procurement of customs technical equipment, a Judicial Training Academy, capacity-building of NGOs, and training of more than 16.000 officials in ethics, integrity, anti-corruption and more than 20.000 officials in leadership, change management, strategic planning and related competences.

3.2.Implementation aspects of the plan Consistency with other programmes, including the National Reform Programme, is ensured. Latvia’s plan is broadly consistent with the National Reform Programme, National Climate and Energy Plan, National Just Transition Plan (in negotiation), Partnership Agreement (in negotiation) and Operational Programmes (in negotiation). The plan makes appropriate references to demarcation and complementarities across the various funding programmes. In general terms, Latvia intends to use the RRF funding first, and other funding programmes afterwards, as RRF is a more time-limited instrument. However, in certain areas, such as social housing, de-institutionalisation, youth, education content, support to SME IPOs and some others, Latvia has made a conscious choice not to use RRF, but Cohesion Policy instruments linked to thematic logic. While Latvia’s RRF allocation is sizable in relation to the country’s GDP, it is not with respect to the magnitude of the challenges, especially, in green transition and social policy, RRF funding will therefore serve as a top-up to existing support schemes, funded by Cohesion Policy, such as in increasing energy efficiency of multi-apartment houses and helping businesses with the green transition. The plan is broadly consistent with the challenges and priorities identified in the most recent euro area recommendation. The draft Council recommendation on the economic policy of the euro area recommended to euro area Member States to take action, including through their recovery and resilience plans, to, inter alia, ensure a policy stance which supports the recovery, including by strengthening the coverage, adequacy and sustainability of the health system. The RRP contributes to EAR 1, as it pursues reforms and investments to support provision of integrated and human-centred health care, raise the capacity of health institutions to adapt to crisis situations and addresses the shortages of health workforce included in the component 4 on health, while component 3 on inequalities reduction will improve the adequacy of the minimum income support system. The Council recommendation also recommended euro area Member States to, inter alia, further improve convergence, resilience and sustainable and inclusive growth, including by ensuring effective active labour market policies and support to job transitions, notably towards the green and digital transition, as well as by improving the functioning of public administration. Components 1 and 2 include reforms and investments to promote the climate change adaptation and mitigation and digital transition respectively, while component 3 on reducing inequalities includes measures aimed to improve the labour market participation. The component 6 contains significant reforms to improve the functioning of public administration such as increasing the efficiency of tax administration, strengthening the competencies of the justice system, modernizing public administration and improving the quality and efficiency of public procurement. The plan sets out a clear administrative organisation for its implementation. Latvia’s Ministry of Finance, which is the Managing Authority for Cohesion Policy programmes, will also be the national coordinator for the RRF. The Ministry of Finance will work closely with line ministries, the State Chancellery and the Central Finance and Contracting Agency in order to ensure and monitor the implementation of the plan. The plan’s implementation set-up will be based on the existing cohesion policy framework. On 18 August 2020, the Cabinet of Ministers adopted a decision that the implementation process of the RRF will be ensured in the framework of the existing management and control system for EU funds 2014-2020. Based on this and the RRF regulation, the Cabinet of Ministers regulation for RRF implementation will be adopted by the end of 2021. The Cabinet of Ministers shall lay down the procedures for implementing and monitoring recovery and resilience plan and the procedures for using the IT system KPVIS. Latvia plans the implementation of various measures to promote gender equality and equal opportunities for during the implementation phase of the key investments. With regard to gender equality and equal opportunities for all, the plan describes existing national challenges mainly in terms of gender equality and needs of persons with disabilities, and explains which investments are expected to contribute to overcoming the challenges identified. The challenges are supported by statistics disaggregated by gender. This description includes a wider reference to legislative and policy initiatives that are due to complement the reforms and investments in the plan in order to overcome the identified national equality challenges. The RRP was the subject of various public discussions and debates, which covered the plan’s main elements. Series of thematic public consultations open to civil society organisations, social partners, local authorities and other stakeholders have been organised between December 2020 and March 2021. Representatives from social partners, business organisations, local governments and other stakeholders have been taking part in the Plan negotiation process between the Commission and the Latvian authorities. Partners’ suggestions for the draft Plan are publicly available and have been published along with the draft plan. From 8 February to 9 March 2021, all interested parties had the opportunity to submit their views and comments by taking part in the public consultation on the draft plan. Stakeholders’ engagement in the implementation is planned to be established through the management and control system used for the implementation of the Cohesion policy support, where stakeholders’ representatives form an integral part of the EU funds Monitoring Committee. A preliminary security self-assessment is included in each component and enlists the measures that have a security dimension. Latvia will address cybersecurity and other digital security aspects of these measures during implementation. Overall, investments are contributing to strengthen the digital security. However, the types of controls employed to mitigate the risks are not explained in detail and the described security self-assessment is rather general. Strategic measures mentioned in the security self-assessment would need to be closely monitored during the implementation of the plan. The Latvian RRP includes the following cross-border projects: ·Via Baltica 5G corridor: Latvia has planned a series of measures that support the objectives of the EU’s digital sovereignty, including investments in connectivity at European level – the VIA Baltica 5G corridor. Latvia has concluded a memorandum of cooperation with Estonia, Lithuania and Poland on the development of this corridor. ·Baltic States’ X-ray image exchange system (Baxe): Within the framework of the reform and investment direction "Reducing the shadow economy for the promotion of fair business", the planned investments envisage the expansion of the Baltic States’ X-ray image exchange system (Baxe), by connecting the uniform image exchange system of x-ray equipment in the three Baltic States. ·Latvia has identified potential linkages with several European transnational project initiatives, including those whose activities are expected to be co-financed under the Digital Europe Programme, e.g. Establishment of the Latvian Federal Cloud and linking the development of the National Data Sharing Platform to the Single European Data Infrastructure and Service, as well as the United Public Administration Priorities, network of European Digital Innovation Hubs, Genome Europe, etc. ·GoLatvia project: The development of the genomic reference of Latvian citizens will be implemented in the framework of the European Union’s 1+MG initiative involving 23 European countries. The RRP broadly outlines Latvia’s communication plans. The objectives of the communication strategy are in line with the RRF Regulation and aim to raise awareness about the RRP’s contribution to the Latvian and European recovery and to the twin transition. Moreover, the RRP related communication will be integrated in the overall communication strategy of EU funds, EU Funds Communication Management Group. Latvia plans to target three main groups, consistent also with the geographical and thematic scope of the RRP: specific target audiences (potential applicants and final recipients, entities participating in the implementation of the RRP, social partners and NGOs), corporate (internal) target groups and the general public. A wide range of communication channels will aim to provide objective and comprehensive information to all the above-mentioned target groups. A single EU funds homepage (to be developed in 2021) will provide a direct access to all information and communication materials. The communication channels used will range from information sessions (workshops, conferences, trainings, press conferences), advertising, printed material, as well as social media, in line with the specificities of the target audience. It is expected that Latvia will ensure the necessary funding of all these measures. The plan foresees a series of coordinated communication activities with the European Commission, including joint press releases, social media posts, possible events with the participation of Commissioners and members of the European Parliament. These would focus on key areas such as the greening of the Riga Metropolitan Area Transport System, improving energy efficiency in public, residential and historic buildings, climate change adaptation, digital transformation of the public administration, digitalisation and innovation of SMEs, digital skills at all levels, reducing inequality, strengthening the health infrastructure. State aid and competition rules fully apply to the measures funded by the Recovery and Resilience Facility. Union funds channelled through the authorities of Member States, like the RRF funds, become State resources and can constitute State aid if all the other criteria of Article 107(1) TFEU are met. When this is the case and State aid is present, these measures must be notified and approved by the Commission before Member States can grant the aid, unless those measures are covered by an existing aid scheme or comply with the applicable conditions of a block exemption regulation, in particular the General Block Exemption Regulation (GBER) declaring certain categories of aid compatible with the internal market in application of Articles 107 and 108 TFEU. When State aid is present and it requires notification, it is the duty of the Member State to notify State aid measures to the Commission before granting them, in compliance with Article 108(3) TFEU. In this respect, the State aid analysis carried out by Latvia in the recovery and resilience plan cannot be deemed a State aid notification. In as far as Latvia considers that a specific measure contained in the recovery and resilience plan entails de minimis aid or aid exempted from the notification requirement, it is the responsibility of Latvia to ensure full compliance with the applicable rules. 4.Summary of the assessment of the plan 4.1.Comprehensive and adequately balanced response to the economic and social situation

The plan includes a balanced set of reforms and investments aimed at addressing the country’s key challenges, stimulating the recovery from the COVID-19 crisis and laying the foundation for its long-term growth. The plan includes 85 measures (21 reforms and 64 investments) that are structured around the country’s main challenges and the policy areas of European relevance, thus covering all ‘six pillars’ in a balanced way. The plan includes 6 components: green transition, digital transition, inequality reduction, health, productivity, and rule of law. The components’ objectives are complementary and the reforms leverage the impact of associated investments, notably by bringing structural change and increasing the participation and financing of private agents. However, the plan is stronger on the investments side than on the reforms side. Latvia submitted its National Reform Programme on 14 April 2021. The information provided in the National Reform Programme is being considered and jointly assessed in this Staff Working Document together with the Recovery and Resilience Plan. Overall, the plan is balanced and focuses on Latvia’s main challenges: the twin transitions, social inclusion, including healthcare, social safety net and regional disparities, skills, including digital skills, adult learning, and higher education, productivity, including research and innovation and support for business investments, and administrative capacity, including tax administration, public procurement and the judicial system. As a result, the balance among the six pillars is sufficient. The coverage of the Latvian plan’s components toward the six pillars is summarized in Table 5. below. The green and digital pillars also meet the allocation targets. Table 5: Coverage of the six pillars of the Facility by the Latvian RRP components Green transition Digital transition Smart, sustainable & inclusive growth Social and territorial cohesion Health, and economic, social and institutional resilience Policies for the next generation 1. Green transition ● ● 2. Digital transition ● ● ● 3. Inequality ○ ● ● 4. Health ● ● 5. Productivity ● ● 6. Rule of law ○ ● Key: “●” investments and reforms of the component significantly contribute to the pillar; “○” the component partially contributes to the pillar 1st Pillar: green transition The plan adequately covers the ‘first pillar’ with one main component ‘green transition’. Measures under the component 1 ‘green transition’ directly contribute to the ‘first pillar’. The aim of this component is to support the transition to climate neutrality: improvements of energy efficiency of public and private buildings, support to businesses to improve their energy efficiency, increase of the production and use of renewable energies, greening of the transport system of the Riga Metropolitan area (including developing multimodal connections to Rail Baltica and cycling infrastructure), support to increase the production of electricity from renewable sources and the modernisation of electricity transmission and distribution networks (smart grids), also contributing to the synchronisation of the Baltic electricity networks with the Continental European network. Latvia’s recovery and resilience plan puts particular focus on sustainable mobility. This is reflected by measure 1.1.1 Riga - Transport reform. As part of the green transition and to reduce greenhouse gas emissions in Riga, the measure proposes an investment programme to decarbonise and improve public transport. The plan will focus on railway solutions (electrification of 81 km of railway) and zero-emission electro-mobility (acquisition of 4 low-floor trams, 17 electric buses and 7 electric bus charging stations, construction of cycle roads ). The Plan also has a strong pillar focused on energy efficiency improvement (subcomponent 1.2). This subcomponent notably includes energy efficiency measures for multi-apartment buildings (1.2.1.1), businesses (1.2.1.2), municipal buildings and infrastructure (1.2.1.3) as well as public sector buildings, including historical buildings (1.2.1.4) with business being the largest recipient of funds. Lastly, beyond energy efficiency, this subcomponent is completed by a measure supporting the modernisation of electricity transmission and distribution networks and the deployment of renewable energy (1.2.1.5). The Plan also has a pillar focused on climate change adaptation (subcomponent 1.3). This subcomponent consists in a fire prevention measure renovating fire rescue centres as newly built energy efficient buildings as part of an overall reform (see explanation above 1.3.1.1i. Strengthening the capacity of the rescue services). It also includes flood prevention measures including the rehabilitation of polder pumping stations, the restoration of protective dikes and of regulated sections of rivers. This contributes to the objective of climate change adaptation. These measures contribute to the green transition and help to enhance energy efficiency. Based on the methodology for climate tracking set out in Annex VI to Regulation (EU) 2021/241, the quantitative assessment of the plan in relation to the climate target finds a contribution of 37.6% of the total allocation, thereby complying with the minimum threshold of 37%. 2nd Pillar: digital transition The plan adequately covers the ‘second pillar’, with 3 main components directly contributing to the ‘digital transition’. Measures under the digital transition component (component 2) directly contribute to the ‘second pillar’. The component addresses the main digital challenges - a lack of basic and advanced digital skills and low digital integration of the businesses. Moreover, the component addresses all the aspects of the digital transformation - public and private sector, skills and connectivity. The measures planned aim to develop the necessary infrastructure, capacities and skills, improve efficiency, digital processes and data management in public administration, provide support to the digital transformation of businesses and improve connectivity. There is considerable support for digital skills which shall have a significant long-term impact on digital transformation. Measures fostering business digital transformation, and measures aimed at fostering connectivity, would also contribute to this pillar. Some measures under the component 6 (rule of law) and component 3 (inequality) are also expected to contribute to the ‘second pillar’ and benefit from it. These measures address the participation in the labour market of the unemployed, job-seekers and people at risk of unemployment (3.1.2.5.i.) and modernising the technical and analytical capacities for the implementation of rule of law enforcement, including using AI solutions (6.1.1.1.i., 6.1.1.2.i., 6.1.1.3i., 6.1.2.1.i.). The accompanying digitalisation efforts of the procurement and tax reforms also contribute to the digital transformation. Based on the methodology for digital tagging set out in Annex VII to Regulation (EU) 2021/241, the quantitative assessment of the Plan in relation to the digital target finds a contribution of 21% of the total allocation, therefore complying with the minimum threshold of 20%, with a direct contribution from 3 Components out of 6.

3rd Pillar: smart, sustainable and inclusive growth, including economic cohesion, jobs, productivity, competitiveness, research, development and innovation, and a well-functioning internal market with strong SMEs The plan adequately covers the ‘third pillar’, with 3 main contributing components. The plan’s components related to green and digital transition, and productivity (i.e. components 1, 2 and 5) contribute most to the ‘third pillar’. The key measures that contribute to the third pillar are the greening of Riga metro area transport system, the development of the digital services economy, the investments in basic and advanced digital skills, the investments in 5G infrastructure for automated mobility, and the grant support programmes for business investment in energy efficiency, uptake and production of renewable energy and digital solutions, as well as in innovation. These measures are expected to help improve the country’s competitiveness, resilience, productivity and innovation capacity, as well as the availability of workforce. Moreover, the business support schemes are expected to benefit primarily SMEs. Moreover, an ambitious reform of the higher education institutions is expected to achieve improvements in the quality of higher education and the universities’ research output. Measures at reducing the shadow economy and measures aimed at promoting the competition for public tenders is expected to contribute to levelling the playing field. Finally, investments in affordable housing, industrial infrastructure, and roads in peripheral regions will help support territorially inclusive growth. 4th Pillar: Social and territorial cohesion The plan adequately covers the ‘fourth pillar’, with 2 main contributing components. The plan’s inequality and health components (i.e. components 3 and 4) include measures that aim at improving social inclusion and addressing regional disparities. An introduction of the annual indexation of minimum income, as well as investments in social infrastructure and services (under component 3) are key measures of the plan to address social challenges. Investments and reforms aimed at improving accessibility to healthcare services (under component 4) will strengthen the inclusive provision of healthcare. Finally, a major administrative territorial reform (under component 3), which was passed in 2020 lays the foundation of Latvia’s plan to provide peripheral regions with better growth opportunities and citizens with better quality local public services. Investments and reforms in social inclusion and healthcare are expected to strengthen social cohesion and social protection. The introduction of indexation of minimum income benefits will ensure they will be annually adjusted to the median wage growth, maintaining their adequacy levels. Under the previous system, indexation of minimum income benefits followed a haphazard pattern which in practice led to their decrease in real terms over the previous 8 years. This measure is expected to improve the livelihoods of some of the most vulnerable parts of the society and therefore contribute to Latvia’s social cohesion. Combined with the increase of the minimum income benefits from around 10% of the median income to 20% which was introduced starting from 2021, these measures are expected to improve Latvia’s performance on the Social scoreboard, where income inequality and the impact of social transfers have been Latvia’s main challenges. Furthermore, investments in health infrastructure combined with a reform aimed to attract more human resources to the sector are expected to improve accessibility of healthcare, the lack of which has predominantly affected the low-income earners and people living in peripheral areas. The administrative territorial reform coupled with investments in affordable housing, industrial infrastructure, schools and renovation of regional roads comprise Latvia’s efforts to help its lagging regions develop. There are marked income level differences within the country – with Riga and its surroundings enjoying approximately twice the income level of the rest of the country. The peripheral regions have suffered from a vicious cycle of labour emigration and diminishing work opportunities on the one hand and dwindling resources for essential public services on the other hand. Latvia’s plan refers to the recently adopted administrative territorial reform, which will merge the number of municipalities from 119 to 42, thus making them stronger and better capable to ensure the provision of quality public services and to make the investments necessary to create more employment opportunities. Building on this reform, Latvia’s plan includes measures that would improve public services and their accessibility, through investments in roads, hospitals, schools and some social infrastructure. Furthermore, it includes investments in affordable housing and industrial infrastructure. Investments in affordable housing should help foster labour supply for businesses in peripheral regions which has been hampered by the lack of housing opportunities in the places with the best employment opportunities. Investments in industrial infrastructure are aimed at attracting private sector investors to these regions. Taken together, these measures make up a sizable effort of creating better growth opportunities in peripheral regions and therefore reducing regional disparities. 5th Pillar: Health and economic, social and institutional resilience, with the aim of increasing crisis preparedness and crisis response capacity, among others The plan adequately covers the ‘fifth pillar’, with 2 components directly contributing. The resilience of Latvia’s health system is expected to improve as a result of the measures proposed in the component on health (component 4). As the health sector has become one of the most vulnerable during the COVID-19 pandemic, strategic investments have the potential to improve its resilience and reduce its vulnerability to shocks. The reforms and related investments planned in the RRP focus on modernising infrastructure and organisational processes to ensure greater resilience and preparedness of the health system for epidemiological crises. The reform shall put in place guidelines for integrated care and epidemiological preparedness, while complementary investments in the necessary infrastructure of three university and seven regional hospitals will support the provision of integrated health services and will raise the capacity of health institutions to adapt to crisis situations. Improved human resources development shall be ensured through better planning, new remuneration model and improved training of health professionals. The long-term impact of these reforms shall be ensured if the measures are financed over the long run. The institutional resilience of the public administration shall be strengthened through reforms and investments included in the component on rule of law (component 6). To improve the institutional resilience and crisis response, the plan contributes to a broader reform plan for the modernisation of the public administration. The measures aim to strengthen policy development, implementation and evaluation capacity, increase transparency and integrity of public administration, attract the necessary human resources, centralise public administration support functions, and improve digital service delivery. This reform will be coupled with investments in professionalisation of public administration, training for horizontal policies, and fostering of the innovation capacity of the public sector. These actions contribute to strengthening the capacity and resilience of the public administration that in return should improve the response to crisis, and better support policy development and implementation. Furthermore, measures on strengthening NGOs (6.3.1.4.) also contribute to the ‘sixth pillar’, by improving representation of socially vulnerable groups in dialogue with public administration. 6th Pillar: Policies for the next generation, children and young people, such as education and skills The plan extensively covers the ‘sixth pillar’, with 3 main contributing components. Policies aiming at ensuring access to quality of education across schools and regions (component 3) shall contribute to the ‘sixth pillar’. The inequality component shall support the efficiency of the network of general education institutions to ensure more equal access to quality education and bridging the urban rural divide. The mobility of students while optimising the school network shall be ensured through purchase of zero-emission vehicles for the municipalities. The digital component includes pilot project on “computer libraries” that aim to ensure not only access to technology, but also to develop a framework for remote learning and in each municipality and to all schoolchildren. Measures on higher education under the productivity component (component 5) shall also contribute to this pillar. A comprehensive reform of governance and financing of the higher education institutions is expected to improve their efficiency, quality, promote excellence and international competitiveness in higher education. The structural changes are set to contribute to higher quality study programmes and equip students with the knowledge and skills required for the labour market.

Measures to equip people with the skills required for the labour market, included in 2 components (components 2 and 3), shall also contribute to the ‘sixth pillar’. The component 2 on digital transition includes reforms aimed to create sustainable and socially responsible system for adult learning and improved skills management framework. It is envisaged to establish new approaches for the organisation of the adult learning process, notably by piloting the Individual Learning Accounts for individual needs-based adult learning and the Skills Funds’ approach to enterprise- and sector-based adult learning. Investments are planned for development of digital skills for society, including for young people. Reskilling and upskilling measures for unemployed are also included in the component 3 on reducing inequalities as part of Active Labour Market Policy investments. Taking into consideration all reforms and investments envisaged by Latvia, its Recovery and Resilience plan represents, to a large extent a comprehensive and adequately balanced response to the economic and social situation, thereby contributing appropriately to all six pillars referred to in Article 3 of the RRF Regulation, taking the specific challenges and the financial allocation of Latvia into account. This would warrant a rating of A under the assessment criterion 2.1 in Annex V to the RRF Regulation. 4.2.Link with country-specific recommendations and the European Semester The six components of Latvia’s plan cover a broad range of Latvia’s key challenges. Latvia’s plan includes measures addressing to varying extent all six broad challenges stemming from 2019 and 2020 CSRs – fiscal, human capital, public administration, productivity and the twin transitions. The plan includes an extensive set of mutually reinforcing reforms and investments that contribute to effectively addressing a significant subset of the economic and social challenges outlined in the country-specific recommendations addressed to Latvia. These measures are expected to boost the growth potential of the economy in a sustainable manner. The recommendations related to the immediate fiscal policy response to the pandemic can be considered as falling outside the scope of Latvia’s plan, notwithstanding the fact that Member State has generally responded adequately and sufficiently to the immediate need to support the economy through fiscal means in 2020 and 2021, in line with the provisions of the General Escape Clause. Moreover, the recommendation to achieve the medium-term budgetary objective in 2020 is no longer relevant, due both to the lapsing of the corresponding budgetary period and the activation in March 2020 of the General Escape Clause of the Stability and Growth Pact in the context of the pandemic crisis.



Fiscal Measures aim to improve compliance and reduce the shadow economy (CSR 1, 2019). Weak tax compliance is a long-running issue in Latvia with undeclared transactions, undeclared income and tax fraud all being part of the problem. The component on rule of law through its reform and investment strand 6.1.Reducing the shadow economy to promote fair entrepreneurship aims to address the challenge to reduce the shadow economy and improve tax collection that relates to the 2019 CSR on improving tax compliance. A National Institutions Work Plan for Restraining the Shadow Economy for 2021-2022 will be adopted and will address unregistered and illegal economic activity, undeclared employment, tax fraud and others. Investments will strengthen the analytics and data management in the field of tax administration and customs. The CSR on reducing taxation for low-income earners by shifting it to other sources (CSR 1, 2019) is not addressed in the plan. Further steps are taken to strengthen the anti-money laundering (AML) framework (CSR 1, 2019 and 4, 2020). The anti-money laundering system was overhauled in 2018. In particular, Latvia banned the servicing of non-resident shell companies and amended a number of laws. The capacity and capability of key supervisory, financial intelligence and law enforcement institutions was strengthened. Supervision of financial institutions has been tightened considerably. However, most reforms so far have been aimed at the financial sector. Less attention has been paid to recognise money laundering of domestic origin, which takes place mostly outside of the banking sector, e.g. through purchases of real estate, cars or other liquid valuables. Moreover, the police capacity has not received the level of attention that it deserves in this context. The plan is expected to continue work on the implementation of the AML strategy by reforming the cooperation, information exchange and training systems between law enforcement agencies involved in the identification, investigation and trial of economic crimes, while strengthening their technical capacity. In addition, it is planned to strengthen the capacity of civil society organisations, in particular, to improve the representation of interests of vulnerable groups. Human capital Investments in healthcare partly address concerns about access, quality and integration across care levels. Low public spending and unhealthy lifestyle choices are the main reasons for the population’s poor health outcomes. Timely and equal access to healthcare is limited. There is a shortage of health workers in Latvia, in particular nurses, which hinders the provision of health care and threatens the success of health reforms. Spending on health in Latvia remains among the lowest in the EU. Despite recent boosts in government spending on health, further financing and a sustainable solution for it is needed to address the longstanding shortcomings in health care. These challenges have been exacerbated in particular by the crisis caused by the COVID-19 pandemic. The component on health partly addresses the challenges related to resilience, accessibility, quality and cost-effectiveness of the health system and its human resources (CSR 2, 2019, CSR 1, 2020). The health component aims to improve the resilience, accessibility and quality of healthcare through two key reform strands – integrated healthcare and strengthening the health workforce. The new remuneration model for healthcare staff shall include a transparent wage calculation mechanism and streamlines the wages across the health sector contributing to improving the availability and quality of services. Significant investments are planned for the infrastructure in university and regional hospitals, as well as in secondary outpatient settings, with the goal of providing integrated health services, reducing the spread of infectious diseases and meeting epidemiological requirements. The component does not contain measures for sustainable increase of the healthcare financing from the national budget (CSR 1, 2020).