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OPINIONNovember 30, 2023

Reforming Serbian State-Owned Enterprises May Unleash Growth and Investments

This opinion was written by Nicola Pontara, World Bank Country Manager for Serbia, and originally published in NIN magazine on November 30, 2023. 

When the World Bank released its New Growth Agenda for Serbia in 2019, the key message was that Serbia could growth as much as 7% per annum and double its per-capita income in a decade if the country significantly improved its physical, human and institutional capital, deepened its financial sector and improved competition. Four years later, Serbia’s annual growth remains stuck between 2% and 3%. The analysis also highlighted the need for lowering the government’s footprint in the economy, by reforming the remaining large State-Owned Enterprises (SOEs) and unleashing the growth of the private sector.

The ECA Experience

Many governments in Europe and Central Asia (ECA) have been unable, or unwilling, to truly reform SOEs, which remain active beyond the traditional network industries such as water, electricity or transport. State ownership and oversight of SOEs, moreover, remains fragmented and weak, negatively impacting the state’s capacity to play the role of an active shareholder and to optimize the performance and economic impact of its SOE portfolio (Figure 1). Experience from across the region has also showed that the presence of SOEs, particularly if they are viewed by the private sector as receiving preferential treatment by government, can severely depress private investment. This situation calls for a modernization and better harmonization of legal and regulatory frameworks governing SOEs; greater centralization and strengthening of the state’s SOE ownership and oversight function; improved financial and non-financial reporting by SOEs and monitoring of their performance, together with fair application of competition policy and the principles of competitive neutrality. A more proactive ownership and oversight of SOEs can also help better anticipate and manage fiscal risks while allowing SOEs to catalyze private investments (instead of budget transfers) and to address potential distortions to competition.    

What about Serbia?

In Serbia, SOEs continue to play a key role in the economy both at the central and municipal level, where they provide several services such as district heating, and water and wastewater management. They employ nearly 200,000 people (or 9% of the registered workforce) but account for just under 6% of total business sector revenues. In addition, some important SOEs – such as Elektroprivreda Srbije (EPS) and Srbijagas – incurred significant financial losses during the energy crisis of 2021 and 2022, with adverse repercussions on public finances. Importantly, the underlying factors that allowed these fiscal risks to materialize still need to be addressed. Priorities include the need to strengthen the management of EPS, achieve full cost recovery, scale-up and improve the efficiency of investments, and build buffers in readiness for future shocks. A changing climate, coupled with the medium-term need to decarbonize Serbia’s power sector, are likely to continue placing significant pressures on the company.

To be sure, Serbia has realized important progress in the last decade. In rail and road, the sustainability and competitiveness of SOEs were strengthened, by rightsizing the companies, changing their legal form, strengthening their financial resilience, and refocusing operational priorities. Serbia, with World Bank support, also reduced the number of state-owned banks from 6 to 2 and cut state-owned non-performing loans from US$3.9bn to below US$1bn between 2016 and 2022. Serbia’s new Law on SOEs Management, adopted in September 2023, which introduced a centralized ownership and management system embedded in the Ministry of Economy (except for energy companies) is an important first step to improve the management of the SOE sector. The next steps are to establish a strong multi-disciplinary team in the ownership entity; prepare a clear ownership policy and performance contracts; strengthen corporate governance as well as the independence and capacity of SOE boards and managers.   

Back to Growth

A simple simulation suggests that if Serbia's GDP per capita grew at a rate of 2.8% per year (i.e., the average of Serbia's per capita GDP growth during 2010-21), it would converge with the average EU GDP per capita in 2074. An average growth rate of 5%, however, would allow Serbia to close this gap as early as 2043! Given the critical role that SOEs play in the Serbian economy, their performance matters not only for citizens and public finances but also for economic growth. Continuing to reform the remaining large SOEs and putting them on a more sustainable financial path will reduce the need for handouts from the state budget, boost competition, and attract private investments and technological innovation in sectors that are key for the Green Transition – such as energy and transport. Serbia can do it!


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