EPS Unwillingness to Reform: Should Serbian Citizens Continue to Pay the Price

July 4, 2016

Tony Verheijen, Country Manager for Serbia B92 Blog

For an outsider such as me, EPS is a bewildering phenomenon. The company pays the highest salaries in the country, delivers mediocre services (at best), is unable to stop electricity theft that, by its own account, costs 0.2 percent of GDP, and is unwilling to invest in clean technologies, even if they are financed, on a concessional basis, by a major bilateral donor. Yet, all these facts tend to be overlooked in the ongoing discussion on EPS reform, and those interested in the status quo have successfully managed to focus public attention to the single issue of 1,000 net reduction in employment.

This overlooks some pretty daunting facts that, unfortunately, tend to be left out of the public debate.

The first and most important is the cost of not doing anything. The Financial Consolidation Plan approved by the Government in June 2015, calculates the cost of non-reform in EPS, the result would be a negative result of 2 billion Euro by 2019, more than Srbijagas debt today. In our analysis, the fall in prices has actually aggravated the situation, making it even more urgent to take action. If nothing is done, EPS will again need the help – money – from the state and ultimately the taxpayers will pay for that.

The second is that when it comes to preventing EPS from falling off a cliff (and outdoing all the results of financial consolidation achieved so far), there are three important factors: price, staff cost and investment planning. Other elements, such as closing five redundant facilities, internal restructuring, improved management of procurement, cutting distribution losses and reducing theft, are also important, as they improve revenue to cost ratios. However, the big ticket items that will determine whether EPS becomes the next iceberg to the titanic are the three I will discuss in more detail now.

On the first element, price, Serbia still has the lowest prices for households in Europe. In part, it is because production is cheap, but in part also because EPS has not been allowed to adjust to market rates. There is therefore still scope for adjustment, and, as Minister Vujovic pointed out last year, even the increase of last August was equivalent to a few packs of cigarettes for most households.

On the second element, the EPS financial consolidation plan foresees a 15 percent reduction in staff cost as a critical element of cost cutting, which must be achieved to prevent ‘falling off a cliff’. This can be managed in many ways: by reducing salaries in EPS (and they are the best paid workers in Serbia; they even raised salaries in 2015 by RSD five billion compared to 2014), by across the board cuts, or by intelligent staff reductions focusing on those areas where overstaffing is evident.

Our preference is always for the last one, but in order to have a substantive discussion on this, EPS needs to first produce its new systematization act, which will show where the scope for reduction is. Unfortunately, instead of focusing on this, vested interests have managed to divert the discussion to one over severance levels, which is in many ways a secondary question. Besides, severance depends on how financially strong the company is and as we just noted it is rather weak…

Finally, there is the EPS investment plan. Here, EPS management has presented plans to increase investment by 300 percent over current annual levels. To us, this is unrealistic; no company in the world is able to increase its absorption and implementation capacity in a manner to triple investment expenditures in a few years; at best a gradual increase is achievable. We do believe this is important as EPS wants to remain competitive in the regional market, and this means improving its facilities, and Serbia will need to improve environmental management in the context of its EU accession negotiations.

The problem is that, in our analysis, even a modest increase in investment levels will worsen the financial situation of EPS unless cost (price and labor) are adjusted. For this to happen, there are three choices:

First, a balanced approach blending tariff increases with right sizing, with the increased revenue and decreased cost cutting the gap between revenue and expenditure and allowing for an adjustment in investment levels.

Second, right sizing only and tariff adjustments only to account for inflation. This would require an increase in the 15 percent cost reduction target agreed in 2015.

Third, no - or a smaller - labor cost reduction and a larger price increase. This is the scenario where Serbian consumers, households and businesses, will pay the price for an overstaffed and overpaid work force in EPS. This is what vested interests seem to really want…

In the end, the fundamental question is, should Serbian citizens really be paying for the high cost of running an inefficient company?  


Originally published on B92 Blog on July 4, 2016