At the beginning of the transition, private capital generated just over 20 percent of GDP, and today remaining state-owned enterprises generate less than 10 percent of GDP, but still significantly influence the business environment and hinder the faster growth of domestic small and medium-sized enterprises.
Written by: Marijana Radovanović
The inspiration to write this article came from the World Bank's invitation to speak at the spring meeting, which the World Bank and the IMF organize every year. Within the panel that dealt with state-owned enterprises, I was asked to discuss the reform of state-owned enterprises that was implemented in Serbia. My discussion was narrowly focused on the activities we carried out to complete the restructuring and resolve the status of companies from the Privatization Agency's portfolio. However, the entire panel, its exceptional attendance, and the interest of the global economic public and world leaders in this topic led me to re-examine the philosophy of state capital, its movements, and its effects on our economy. This raised questions such as: what is the current role of state-owned enterprises in our economy, do they still pose a threat to fiscal stability, can they stimulate the economy if private initiative falters – which was somewhat the thesis of the panel that inspired me. Or are we still miles away from completely entrusting our economy to the market? Furthermore, how have foreign direct investments, in which we placed so much hope, and no less state aid, influenced the formation of the economic structure, and where are we today? And finally, how to strengthen small and medium-sized enterprises, which, in our opinion at CEVES, represent the greatest development opportunity for the Serbian economy.
Controlled low prices of goods and services of public enterprises maintain social peace, but at the same time disrupt competition, so one day, when the accounts are settled, the cost will fall on those whose social peace was preserved.
More aboutMore than 20 years have passed since the beginning of privatization and about 10 years since we started the reform (completion of restructuring and resolution of the status of companies from the Privatization Agency's portfolio), which had many elements of success – primarily because it passed without social tensions and made fiscal consolidation feasible and sustainable.
A brief retrospective of the transition is as follows: social and state ownership dominated for decades. In the 1990s, civil wars and the breakup of Yugoslavia occurred, the economy was devastated, and entrepreneurial habits hardly existed. Serbia began its transition to a market economy at the beginning of 2000, opening up to foreign capital and private ownership. By 2008, more than 2,700 companies had been privatized. Those that could not be sold, but were important for the community, were given a special status of companies in restructuring and were thus protected from bankruptcy. Initially, this was intended to be a temporary measure, applied to only a few strategic state-owned enterprises. In practice, the mechanism was increasingly used indiscriminately and became a means of preserving social peace. These companies generally relied on direct and indirect financial support from the state.
It is curious that state capital manifested itself in various ways and was called by different names, which also entailed different regulations, considerably complicating the situation. Thus, we had companies with majority state capital of the Republic of Serbia, social enterprises, large public enterprises at the central level, public enterprises owned by local self-government units, and in some, capital from state institutions, such as the Pension and Disability Fund and the Development Fund, also appeared.
The fact is that these remaining state-owned enterprises operated poorly, incurring significant net losses – it is estimated that in 2013, they amounted to three percent of GDP – so resolving the problems of these enterprises was a significant factor in fiscal consolidation. Then the reform began, which involved the accelerated completion of restructuring and the privatization of companies from the Privatization Agency's portfolio. The key step in resolving their status was the removal of protection from bankruptcy proceedings. The regulations were changed, and phased withdrawal of enforcement protection was introduced, over a period of two years, depending on the size of the company. The tactic of resolving the status of smaller companies first proved to be good – it tested how the process worked in practice, institutions gained the necessary experience, and in the end, it also served as an incentive for implementing more difficult reforms. New privatization modalities were also established by the new law. In parallel, significant measures were taken to mitigate social consequences – a Transition Fund was established, funds were provided for severance payments for redundant workers, and support for early retirement was introduced.
This became a project of national importance. All stakeholders became aware of the importance of the results, and all were involved in the implementation. An Action Plan was also prepared, which treated each company in restructuring individually. At the end of this process, out of about 600 companies under the jurisdiction of the Privatization Agency, only about 50 remained, and these companies receive neither direct nor indirect budgetary support. The status of a large number of companies that were blocked was resolved through bankruptcy, which in our case proved to be a successful tool, as their assets were returned to economic flows in this way.
Yes, foreign investments are needed, but also smart selection, because it no longer makes sense to provide subsidies for factories that will assemble cables. Instead, we should attract industries willing to open research centers here.
At the beginning of the 2000s, private capital generated just over 20 percent of Serbian GDP, while today, remaining state-owned enterprises generate less than 10 percent of GDP. Is this an indication that we have surrendered to private initiative? Although the numbers would suggest so, the historical legacy continues to drastically influence the economy and profile Serbia as a state-centric economy. Firstly, there is still a lot of state capital, it is just inefficient. I don't even know if anyone knows how much capital we have at our disposal.
After 20 years of counting, we can finally say how many state-owned enterprises there are in Serbia, as their register has been published on the APR website, but only those with majority state capital. We are still estimating how many enterprises are owned by local self-government, how much capital is tied up in bankruptcy estates, and what the value of assets owned by the Republic of Serbia is. And the estimates are rough, with huge ranges.
The influence of state capital, however, is strongly felt through monopolies over natural resources, the main ones being EPS (electricity producer and distributor), Srbijagas (gas distributor covering almost the entire gas supply), Srbijashume (which owns and manages almost half of the forests), Srbijavode and Vode Vojvodine, which monitor and maintain all navigable waterways. They are also entrusted with significant regulatory power. A particular problem is their practice of non-competitive and non-transparent public procurement, which can discourage investment and the competitiveness of small and medium-sized enterprises. This effect in Serbia is extremely strong, as the value of public enterprise procurement reaches four to five percent of GDP. Therefore, they have a significant impact on the overall business environment, and especially on small and medium-sized enterprises, which, with limited resources, cannot cope with the excessive bureaucracy of public enterprises. Especially since they are usually insufficiently transparent and leave a lot of room for unfair competition, even when they offer cooperation to the private sector.
Another way – which many will call positive – the influence of public enterprises on the business environment is reflected in maintaining controlled low prices for certain energy sources. In this way, on the one hand, social peace is maintained, but on the other hand, competition is undermined, so one day, when the accounts are settled, the cost will fall on those whose social peace was being preserved. In other words, public enterprises represent switchmen for private capital from its natural and healthy course, and the disruptions they cause significantly hinder the fertilization of private capital.
Although all citizens would benefit economically from reforms that would result in better management and higher economic growth rates, many actually benefit from corrupt practices in public procurement and hiring outside of public tenders. In addition, the main obstacle to reforms is the majority support for populist measures that keep the prices of goods and services of public enterprises at an artificially low level.
As a strong advocate of private ownership, I would like the activities defined by the Strategy and Action Plan for the Management of State-Owned Enterprises to be completed as soon as possible, and for only those companies that make sense to be state-owned to be left under state management. But, even for those enterprises, we have a lot of work ahead of us to improve their performance, strengthen capacities, increase transparency, change corporate culture, and above all, despite great political resistance, entrust their management to professional management.
State-owned enterprises that could not be sold by 2008 and were strategically important were given special status and protected from bankruptcy. In practice, this mechanism was increasingly used indiscriminately and became a means of preserving social peace.
The counterweight to state capital is foreign direct investment. On this basis, more than 35 billion euros have flowed into the country since 2008. Foreign direct investments have managed to saturate the investment-hungry country and contributed to solving the problem of unemployment due to privatization and bankruptcy. Significant and often disputed funds were allocated for investor subsidies, and the main criterion for obtaining them was usually the number of employees. Investors mainly came to Serbia from labor-intensive sectors, whose products have low added value. Although a certain growth in capital-intensive foreign direct investments is observed, the criterion for granting subsidies is still the number of employees, regardless of the fact that this is no longer such a big problem in Serbia, as the unemployment rate has been reduced to about 10 percent. Serbia today has bigger problems than that, as more qualitative jobs are now sought, for which salaries are expected that most existing companies cannot afford. Slowly but surely, an inadequate economic structure is becoming an increasing problem, and it is becoming clear that Serbia needs industries that create products with higher added value. Unfortunately, one gets the impression that the creators of economic policy have not yet realized that the circumstances have changed. Yes, Serbia needs foreign investment, but we also need smart selection, especially if they are subsidized with the money of all taxpayers. Or more precisely, there is no need to continue attracting factories with public money where our citizens will be wiring cables. Instead, it would be very beneficial to attract industries willing to open research centers here, where our people will gain new knowledge and skills.
Domestic small and medium-sized enterprises account for 40 percent of merchandise exports and as much as 60 percent of total production, excluding agriculture. Their strength is inversely proportional to the status they enjoy with economic policymakers.
Finally, the question arises as to how domestic, not to say homegrown, small and medium-sized enterprises can get the place they deserve. Especially since they account for 40 percent of merchandise exports and as much as 60 percent of total production, excluding agriculture. Their strength is inversely proportional to the status they enjoy in society and with economic policymakers.
They were created solely on the energy of individuals, silently, gradually, almost in the shadows, without the public fanfare that accompanies the arrival of every new foreign investor. In the meantime, the community of successful small and medium-sized enterprises has grown so much that today it can be safely said that the economic future of Serbia depends on its further development. These companies also showed great resilience during the pandemic and significantly contributed to Serbia having a milder GDP decline in 2020 than the vast majority of other countries. Precisely because of all this, they must be given a real chance, which they have not received so far.
The author is a development advisor at the Centre for Advanced Economic Studies
The text was published in NIN, issue 3784, of July 13, 2023.
