Latvia’s sustained and impressive growth is due to a combination of location and popular will. Since regaining independence in 1991, this Baltic country has put itself on the map, first by redrawing the boundaries of the former Soviet Union (FSU), and second by offering foreign companies a competitive place, secured by NATO and EU membership, from which to expand eastward into Russia and beyond. Given its famous 15% corporate tax rate, ice-free ports near growing FSU markets and the political stability to ensure that lawmakers make their voices heard in the EU, it is easy to see why foreign investment into Latvia has soared and GDP growth has averaged more than 7% for the past five years.
The transport sector is a traditional Latvian strength and remains a vital element of the country’s continued economic growth. Since Germans first brought timber and other raw goods out of the Russian hinterland in the 13th century, Latvia has been a focal point for east-west trade in Europe. After a Soviet-era pause, raw material flows have surged westward again.
Finished western products are also moving east, and new modes of transport on new routes are changing the face of logistics, creating opportunities that were unthinkable a century ago. Large-scale transit projects running north and south are in the works, and Riga Airport is already becoming a hub for people from all over the globe as well as for Asian goods destined for the Russian market.
“We’re actively promoting private investment in transport,” says minister for economics Arturs Karins. “Traditionally, Latvia was a major transport hub and the buildings in Riga were largely constructed on transit money. We see that east-west trade will be a growing activity because of the development in the east. This makes our location, in the EU and with the ports closest to Moscow, a prime location for western European firms looking to push east of Europe.”
As shown by the case of goods flying from China to Riga before going overland into Russia, Latvia’s EU accession in 2004 has had a dramatic effect on how it is perceived by the business community.
Two ice-free ports on the Baltic Sea give Latvia an important advantage in a region where winter often comes early. The ports at Liepaja and Ventspils, as well as the Port of Riga, are also elements of three of Latvia’s four special economic zones (SEZs). Investment in the ports, which feature a mixture of Soviet-era and newer infrastructure, is a priority. This is reflected in the Latvia Investment and Development Agency (LIDA) having a vote on the board of the Latvian Port Council.
LIDA director Andris Ozols, who also sits on the Liepaja SEZ board of directors, stresses: “We are aware of the need to create the necessary logistics infrastructure in Latvia, and we are especially interested in working with partners with know-how in the field.”
While all three ports handle various Russian fuel exports, the Freeport of Riga handles more than 90% of Latvia’s east-bound container traffic. In particular, LIDA expects that cold storage capacity at the port will need to be increased as Russian demand rises. Expansion is envisioned, and central to this is a migration from the city centre towards the Gulf of Riga. In December 2005, the decision was taken to incorporate new land for everything from value-added services to bulk cargo handling, and 1200 hectares have been set aside for development, says Vladimirs Makarovs, strategic planning and project management director at the Freeport of Riga Authority.
Both the greenfield opportunities at the Freeport of Riga and the existing industrial and transport facilities at all three ports have been as attractive to potential investors as the substantial tax and savings incentives that the government has offered.
“A full 60% of the firms physically residing in the Leipaja SEZ have not opted for direct support and have taken advantage of indirect methods such as loans,” says Mr Ozols.
According to Mr Karins: “The real attraction is the synergy that comes about from having something produced in a factory being a trolley push away from a port.”
At the same time, those goods can be “a trolley push away” from an east-bound train. One hundred years ago, Latvia had three different gauges of railway track. Two survived the 20th century: Russian broad-gauge track now runs throughout the country, and standard-gauge track can still be found and is planned for use on the Rail Baltica line.
Transport minister Ainars Slesers says that there are investment opportunities throughout the rail sector. “Private equity has a chance both in developing the logistics systems needed and in such basics as rolling stock. EU structural funds are a temporary solution for replacing Soviet-era rolling stock, but 40 new trains will be needed as well,” he says.
Mr Slesers says: “There’s an advantage in having broad-gauge track in an EU country. It’s part of the Baltic connection with the rest of Europe.” There are no issues of compatibility: freight is not delayed by a change of bogies.
Silk Road vision
Moving freight overland from eastern Asia to Europe is as ancient as the Silk Road, and this major east-west corridor is a focal point for Latvia’s vision of the future.
Although physical issues such as security and road surfaces are taken into account, Mr Ozols emphasises that establishing a common political will is the critical first step. “Once the leaders are agreed that this is a priority, then the logisticians can step in and work on upgrading the infrastructure. At this point, setting up green corridors for channelling movement and working on documentation issues will speed transit times more than anything else.”
A proof-of-concept run in 2005 demonstrated both the time savings possible for a China-Latvia road haul and the need for unified paperwork management. “Getting visas and customs paperwork issues ironed out is essential,” Mr Ozols adds.
Although international co-operation on overland traffic is still pending, Latvia has devised a plan for its own road improvements. The Via Baltica project, a road linking Tallinn in Estonia with southern Baltic routes, is a major upgrade for the highway system. In Latvia, the project is heading for completion in 2009.
“By 2013, every major road in Latvia will be at EU standards,” says Mr Slesers. “This is costly, of course, and we’ve used EU structural funds. However, we’re keen on public-private partnerships (PPPs) and are looking at implementing a PPP model for our road construction projects.”
Riga Airport is also a site for major construction projects for both the private and public sector because it is growing explosively as a regional centre for passenger and freight movement. It handled one million passengers for the first time in 2005, a growth rate of 77% on 2004’s figure. In January 2006 alone, passenger throughput was up 60% on the same period last year.
Mr Slesers foresees continued growth: “We’re looking at Riga Airport becoming the prime Nordic region airport and preparing to see 10 million passengers yearly by 2013 or 2015.”
The air transport boom is evident in the freight business and is expected to continue until 2015. “Air cargo from China is already coming to Riga Airport and then being moved overland to Russia,” Mr Slesers points out.
Chinese manufacturers in particular favour Latvia’s greater efficiency, flexibility and better costs. “We’ve got a more transparent and secure logistics system in place, and with NATO and the EU backing us up, we’re in a unique position,” says Mr Slesers.
Latvia’s position is enhanced by its stable political landscape. Unlike some western FSU governments, Latvia has no far-left contingent, allowing the administration to focus on fine-tuning its economic policy. “The government is required by law to meet with business representatives regularly to discuss legislation,” says Mr Karins. “In our last meeting in 2005, the private sector’s people formally stated that there are no more large-scale issues. We’ve come to the point where we can focus on streamlining processes.”
PPP-related legislation was passed in 2005 so the country now has mechanisms for co-operation on long-term, large-scale projects.
Relations with Russia are an important focus for the government and being an EU member country is crucial. Mr Karins says: “We have put the removal of Russian tariffs against items moving through Baltic ports as one of the EU’s conditions for Russia joining the World Trade Organization.” Despite Russia’s current tariffs on oil and rail traffic, Latvia is still a major attraction for transport. Freeport of Riga’s Mr Makarovs believes: “Russia simply doesn’t have the capacity and can’t build fast enough to handle its own growth. We will always be a step ahead.”