Well-educated specialists are the foundation of competitive companies, which in turn means well-paid jobs, consumers with purchasing power and taxes in the state coffers; at the same time, companies must make a profit, without which investment to secure future growth is impossible.

That is what Gundars Bērziņš, Rector of the University of Latvia, says in an interview with Dienas Bizness. He points out that the University of Latvia is currently going through a process of very significant change, as both its governance system and its funding model are changing.

What is in the spotlight at the moment?

The focus is on the start of the new academic year and the successful running of the events associated with it, as well as on the reorganisation of the University of Latvia, as a result of which we have gone from 13 faculties to six through an administrative reform. The Faculty of Education Sciences and Psychology and the Faculty of Law will continue in their previous form, while all the others have been reorganised and will operate within new structures with a single dean's office. That means new structures, new heads of those structures, and a different organisation of academic administration (which will handle student mobility matters, maintain links with foreign educational institutions and so on), but these reforms will in no way affect students' studies, because the study programmes have not changed and the lecturers will be the same as well. The aim of such changes is to make administrative processes more efficient and to raise the level of service for students. The greatest effect will come when we can start working in the House of Letters, still under construction, as a result of which 90% of all University of Latvia studies will be concentrated at the Academic Centre in Torņakalns. The plan is to bring together students of the social sciences, humanities, education and technology in the House of Letters, with the aim of generating an exchange of ideas and synergy between different fields, thereby fostering understanding, because those studying the humanities look at the world from a different vantage point than those studying the exact sciences.

Alongside the above, a new funding system for the University of Latvia is also being introduced, on which an agreement is due to be signed with the Ministry of Education and Science. The most significant difference is that until now the Latvian state allocated funding on the basis of student numbers, whereas now it will be based on the number of graduates of the higher education institution in specific study programmes. The University of Latvia is currently going through a process of very substantial change.

But the plan for the Academic Centre provides for several more buildings besides the House of Letters that is already under construction!

Those are plans for the future, and putting them into effect requires time and funding too. The long-term development plan for the Academic Centre provides for a Sports House, a Health House, a Technology House, and a Students' and Guests' House. There is no denying that these are major plans, which will be assessed not only in terms of the funding needed to realise them, but also in terms of need. Under the plan, once the House of Letters is put into operation (most likely in 2025), the next facilities would be the Sports House and the Health House, whose function and size have already been outlined. It is possible that the two could be combined into a single building, since sport and medicine are closely related fields. While the House of Nature (2015) and the House of Science (2019) were built with European Union co-financing, the House of Letters is being created using a loan from the European Bank for Reconstruction and Development and the European Investment Bank, which the University of Latvia will cover through the sale of what are now former faculty buildings. The fact that the University of Latvia is developing in a single location is very important, because it ensures an active exchange of ideas and knowledge between researchers and students from different fields; an agreement has also been signed on implementing a science mile, which means that the University of Latvia's libraries, laboratories and material and technical facilities are also used by students of other institutions — Riga Technical University, Rīga Stradiņš University, the Latvia University of Life Sciences and Technologies — and vice versa. That in turn means that safe travel is also needed, for example by cycle path, from the University of Latvia Academic Centre in Torņakalns to the RTU complex on Ķīpsala and the RSU complex in Anniņmuiža.

Is the infrastructure of the Torņakalns neighbourhood — the streets, utilities and public transport system — ready to serve almost 15,000 students and more than 4,000 staff of the institution, particularly if on a working day everyone heads to the Academic Centre in the morning and in the opposite direction in the evening?

Yes, at full capacity the Academic Centre will have 15,000 to 20,000 people every day, and suitable infrastructure will be a very significant factor. Back when the University of Latvia Academic Centre in Torņakalns was still only at the planning stage, Riga City Council was informed about the infrastructure and utilities it would require, and the municipality had plans for how to address these matters. Public transport is already the biggest challenge, since only one route — the number 23 bus — runs past the Academic Centre itself. That means there is, and will be even more, a heavy load on the public transport that stops at the National Library of Latvia. At the same time, the pavement over the railway bridge across Jelgavas iela is too narrow on one side to be used, for instance, by a person in a wheelchair without using some small part of the carriageway. People walking in opposite directions along this stretch of the bridge will also find it hard to pass one another without stepping onto the carriageway. There is also a safety problem in that there are no traffic-light-controlled junctions or pedestrian crossings, about which the University of Latvia has written to Riga City Council asking for the matter to be resolved. Of course it is positive that Jelgavas iela is connected by the new pedestrian and cycle bridge (over the Ķīleveins ditch) to Mūkusalas iela, where a few more public transport routes run (buses 10 and 26, trolleybus 27). But the question is whether these public transport routes and the existing infrastructure of streets, pavements and cycle paths will be able to serve the daily travel of 10,000–15,000 people to the University of Latvia Academic Centre? Unfortunately, they will not. Yes, alongside the construction of the RailBaltica line, a pedestrian and cycle crossing over the Daugava is planned (the first phase has already been completed on the coach station side), which would 'arrive' at the University of Latvia Academic Centre, but when this will be carried out — only time will tell. There is an idea to 'shift' Torņakalns railway station closer to the University of Latvia Academic Centre during the RailBaltica construction process. At one time, a tunnel was planned under the railway embankment that would connect Daugavgrīvas iela with Vienības gatve, thereby relieving the junction of Valguma iela and Akmeņu iela while improving access to the University of Latvia Academic Centre and reducing traffic intensity on the first stretch of Jelgavas iela and Vienības gatve. As for the timescale for realising this idea, however, there is currently no news at all.

How will you achieve the goal you have set — for the University of Latvia to be the most modern classical research university in the Baltics and a world Top 500 university — all the more so if other higher education institutions have a similar goal?

It is a significant goal, and it cannot be achieved in a very short time. There is no single measure or instrument that would make it possible to reach this goal, just as there is none in the development of a country. It is clear that we have to work on raising research capacity, because it is largely scientific achievements that form the basis of the rankings. Stepping up scientific research is the most essential thing if we are to gain recognition in Europe and the world and, at the same time, to enter the world Top 500 university ranking. But getting into the Top 500 ranking is not an end in itself; rather, it is an instrument that would give Latvian society, students and prospective students confidence that world-class studies and research are available here. At present the most important thing is to secure the maximum possible support for research by attracting researchers of Latvian origin who currently work abroad (to carry out research in Latvia or together with Latvian colleagues), and by competing far more for various EU research projects (thereby not only gaining new knowledge and expertise, but also attracting funding and raising our profile). It is not as if we have to start from scratch, because the University of Latvia has already attracted funding of around 20 million euros from participation in various projects, but that is not the ceiling and it must be increased substantially by taking part far more actively in various research programmes and projects. The University of Latvia is the lead research institution in one of the EU's cancer research projects, which involves 98 institutions and has a total budget of 34 million euros over five years, of which the University of Latvia's share is 5 million euros. That is a good example, and equivalent projects are needed in other fields. At present the University of Latvia is taking part in a 5 million euro project on the use of artificial intelligence to combat disinformation. The University of Latvia cannot carry out any EU-level project on its own, which is why consortia are formed with other research institutions. At the same time, the University of Latvia's task is to involve students in research so that during their studies they gain experience not only of practical work but also of research, which is a very important part of a research university.

Of course, the University of Latvia cannot influence the plans and activities of other higher education institutions, which may affect the overall result in the Top 500 university ranking, but it can concentrate on doing its own homework.

Where does the University of Latvia plan to attract students from, given that the birth rate in Latvia is falling rapidly and the number of prospective students in our country will decline in future, while competition to attract them will only grow?

At present the University of Latvia is the leader in attracting prospective students (for most of them, their first choice of studies is a University of Latvia programme); the various higher education institutions have very different specialisations, different study programmes and consequently different strategies. For example, Rīga Stradiņš University works very actively to attract prospective students from abroad, as did the private business school Turība. Foreign students study at the University of Latvia too, yet the main target group has been, is and will be prospective students from Latvia. The University of Latvia's aim is to create an international environment in Latvia (both attracting foreign lecturers and students and creating opportunities for students from Latvia to study abroad through exchange programmes), and work is being done on that so that young people do not have to go abroad to study. The University of Latvia is a kind of guarantor of young people's potential future, because a good education and skills are an excellent opportunity to get a well-paid job not only in Latvia. Proof of that is this year's admissions data, which show that the University of Latvia has had its best intake in the past 10 years.

Graduates of which professions are most in demand among employers? Are there graduates of any professions who run a high risk of being left without work in Latvia?

The most in demand are the study programmes in medicine, psychology, law, computer science and business management. Interestingly, following this year's furore over the shortage of teachers and, at the same time, hopes of a pay rise, demand for study places in education is also much higher. Monitoring of University of Latvia graduates shows that almost 92% of graduates find work in Latvia, and moreover the pay of these young specialists five years after graduation is on average 60% higher than that of people without higher education. These data are very important for motivation — why go and study at the University of Latvia — you will be employed and well paid too.

It may be surprising that the University of Latvia has study programmes that train specialists who 'theoretically' have no employment prospects. For example, the University of Latvia trains philosophers and physicists, even though in the past 33 years of independent Latvia there has not been a single job advertisement seeking a physicist or a philosopher. At the same time, in the study programmes of any classical research university you will find programmes in both physics and philosophy, and their graduates are very much in demand on the labour market, because they are able to think precisely and solve complex problems.

Since the Latvian labour market is comparatively much narrower than in countries with large populations, the best solution in our country would be graduates with two specialisations, one main specialisation and an additional one. Latvia is too small to be able to afford to train top-class specialists in a very narrow (low-capacity) specialisation at bachelor's level, with narrow specialisation instead being built up in master's-level education. For example, that same physicist with a specialisation as a data analyst will be very much in demand on the labour market. Such a system would make it very much easier for a student who has become a graduate to find work opportunities in Latvia and not give in to the lure of job opportunities abroad. For those same philosophers, meanwhile, an additional specialisation could be, for example, history teaching. Of course, beyond all of the above there are all those spheres connected with the Latvian language, literature, culture, everything Latvian, because nowhere else in the world are there, or will there be, study programmes of such importance to the Latvian state and people. Just as research in anthropology, political science, sociology and history is hardly likely to be carried out in any other country. Essentially, the University of Latvia's humanities programmes provide the reason why an engineer or an ICT specialist should live and work in Latvia, since work in that segment can be found anywhere in the world. At the same time, well-educated specialists are a good magnet for competitive companies to invest and develop in Latvia, which in turn means well-paid jobs, consumers with purchasing power and taxes in the state coffers.

How can we ensure that the best minds build up Latvia's science and research rather than that of other countries, and create innovations that in the aggregate raise prosperity?

For students — graduates — to stay in Latvia, we need globally competitive, modern companies with high technological potential, in which young people can realise their plans and ambitions, which are not local but even global. That description fits companies that manufacture in Latvia but sell their output worldwide, or at least across Europe, as well as companies that provide services not only in Latvia but across a much wider region. It means that the young graduate works in an international environment, even though physically they are in Latvia. It is essential that all these production, sales and logistics processes are managed from Latvia; that is the model the Netherlands introduced many years ago. At the same time, abroad the leading research universities are cooperation partners for these technology companies and provide a basis for innovation, which in turn raises the university's quality and its research potential indicators in all the rankings. The University of Latvia also wants to create such an ecosystem of business and higher education and research institutions. Both the university and businesses benefit — businesses earn income and profit, which can then be invested in further development, innovation and research, which again means increased competitiveness, new jobs and larger tax payments into the state coffers.

But recently the political forces in power have been discussing a concept unusual in a market economy — excess profit and a possible tax on it. Is it bad to make a profit?

Without profit no company can develop, because profit is a source of investment, which in turn is a generator of growth. In a market economy there is no other means of growth than profit alone. Of course, in theory a company can pursue its development on borrowed money, but as recent years show, in financing development projects potential lenders (and not only banks) want to see how much risk the author and developer of the idea is bearing themselves. If the potential project developer has a substantial part of the necessary funding in the form of profit, then lenders will also be much more willing to invest their money or lend it for a specific period. But potential investors, and lenders too, will hardly be scrambling to lend to a company that has no profit.

In a market economy another axiom has to be taken into account — the greater the profit and, alongside it, the higher the taxes that substantially reduce the share left over, the smaller the motivation to engage in business, which involves by no means small risk. If an entrepreneur risks their own capital in order to make a profit, but the state decides to take so much of it that so little is left that it is not economically worthwhile to pursue it at the given level of risk, then before long the state will have no taxes and no jobs at all from that entrepreneur, or even from an entire sphere. Quite simply, the entrepreneur will decide not to take any risk at all — not to engage in business, or to take the risk in some other country where the state will not 'take' so much from them. A decision on investment is based on an assessment of the ratio between risk and the return on what is invested. If this ratio is positive — the return is greater than the alternatives, taking into account the level of risk — then the investment is made; if not, then such investment makes no sense, because the return relative to the risk is too small. Classically, a high tax leads to entrepreneurs ceasing to invest because there is no motivation to do so, while on the other hand an extensive system of state support reduces the desire of all parties involved to engage in creating added value. In other words, if you create a system with many high taxes and at the same time a great deal of support, then enterprising people and employees alike are demotivated from taking part in creating added value. With such an approach in a market economy, what you get is not economic growth but, at best, stagnation and, at worst, decline.

The state's task in a market economy is to create a system in which some are stimulated in various forms to create added value and others to take an active part in the added-value chains, which in the aggregate creates greater value and thus means a larger GDP, larger tax payments and residents with more purchasing power.

What does the appearance of excess profit in politicians' discussions mean – stagnation or decline!?

All of the above applies to a classically pure market situation, but it does not apply to cases of market failure. At the same time, it has to be borne in mind that the financial system works differently from classical business, which provides services and manufactures goods. Specifically, in banking the preservation of capital is far more important than making a profit, whereas in classical business it is the other way round — creating new added value is more important than preserving capital, because as soon as we invest capital its value begins to shrink rapidly. For example, we invest in a new production plant, but if it is not working, its value falls continuously. Another important aspect is that banks mostly take risks with other people's capital, which must not be lost, and that is precisely why commercial banks have a different view of risk. The tax system is closely linked to the assessment of risk in Latvia, so it should be looked at from an entirely different vantage point — what (how great) is the risk of investing in Latvia. Perhaps even comparing it with other countries. If the state wants a potential investor to invest in Latvia in creating competitive, high-value-added products or services, then it should be considering how the state can reduce the risk for that entrepreneur, or for whoever is prepared to finance such investment. Such an approach will have a better effect than introducing an excess profit tax on some sector. If anyone thinks that introducing an excess profit tax on banks will motivate them to lend more money to businesses and individuals, then with risk unchanged I doubt that more loans will be issued. Banks think differently — they would rather pay higher taxes just so as not to lose the capital they have attracted. Investment is very much needed in Latvia, but the most important aspect of attracting it is how to reduce the level of risk, how to manage these risks and thereby encourage enterprising people to invest.

If we talk about productivity, which, put simply, is Latvia's GDP (the value produced) against the total hours worked by all Latvian employees, then on this indicator Latvia lags substantially behind its neighbours. It means that on average, in one working hour Latvian companies and employees earn less. The productivity figures of Latvian companies lag substantially even behind the European averages, because, for instance, there are few so-called full-cycle companies that produce a finished product ready for sale on the market rather than an industrial raw material or a component for a finished product. So-called excess profit, meanwhile, does not even reach Latvia along the global chain. Compared with Latvia, Lithuania has far more companies operating in higher-value-added chains and consequently 'bringing in' more money from abroad. And if someone in Latvia should also want to impose some additional tax on those companies that produce finished products rather than their components or raw materials, then the owners of these high-value-added product and service companies will be demotivated not only from investing in future development, but even from continuing to do business in Latvia. Every so often there is talk that those working in some sector make a large profit, but comparing that with the European average for the same industry, one has to conclude that at times it is not even at the 50% level.

So there is currently no basis for an excess profit tax in Latvia; historically, it seems, during the First World War many countries introduced a tax on 'excessive' corporate profit, and Latvia has already had differing profit tax rates too, because in 1993 the Supreme Council, as it still was then, decided that the profit tax rate for banks, insurers, traders and currency exchangers would be 45%, and moreover that companies with a state or municipal shareholding would pay an increased profit tax of 35% rather than the standard 25%.

There are industries in which there is no proper competition in the market-economy sense, and that is precisely why there is talk about one specific sector — banks — which in the present circumstances are earning very well (in another interpretation, 'disproportionately'), while at the same time the economy has problems with the availability of credit resources. Yes, the Bank of Latvia and the Latvian government have implemented several measures to dampen the problems of financing availability, but at the same time both private and indeed public investment is at a very low level. And we come back to what was concluded earlier — no investment, no development; or little investment, minimal development, while GDP, albeit only minimally, has nevertheless declined. If there is profit, it means the risk is small; if there is no profit, then the risk is too great, and so the risk factor has not been properly assessed at state level. In the banking sector, meanwhile, there is such enormous regulation that the barriers to entry are so high and expensive that competition from new entrants does not develop in this sector, because there effectively are none, while the existing players can maintain comparatively high service costs on the market. A study was carried out recently which concluded that competition in the banking sector is sufficient relative to the size of Latvian society, but that the regulatory requirements in terms of the amount of work to be put in are just as great as for the economy of a country many times larger, which also means a very high level of costs.

But there are also ideas circulating much more quietly about possibly taxing the profit not distributed as dividends in previous years — around 6 billion euros — which could bring impressive sums into the state coffers!

The corporate income tax reform carried out in Latvia in 2018 was and is a significant step towards the accumulation of capital, which makes it easier to make investments and attract lenders. The profit accumulated over these years has been a good safety cushion that has made it possible to carry out growth projects, attracting bank loans for them, or to survive critical moments in sales markets. By way of comparison, the level of company capitalisation in Estonia is almost twice as high as in Latvia, because in that neighbouring country the exemption of reinvested profit from corporate income tax has been in operation since the turn of the century. There are countries in which profit tax does not have to be paid on the share that a company invests in science, research and development.