State-owned enterprises are important economic actors and can enhance economic activity and competitiveness if a level playing field with private companies is ensured. This chapter, along with three sub-dimensions, explores the importance of implementing policy, institutional and legal frameworks that contribute to competitive neutrality between private firms and state-owned enterprises. The first sub-dimension, efficiency and performance through improved governance, assesses clarity of the ownership policy and the board nomination framework, including independent and professional boards and privatisation practices. The second sub-dimension, transparency and accountability, focuses on the financial and non-financial reporting and audit practices, including anti‑corruption integrity measures and protection of minority shareholders. The third sub-dimension, ensuring a level playing field, explores the discrepancies in the legal and regulatory treatment of state-owned enterprises (SOEs) compared to private businesses and the financing conditions of SOEs.
Western Balkans Competitiveness Outlook 2024: Bosnia and Herzegovina
6. State-owned enterprises
Abstract
Key findings
Bosnia and Herzegovina (BiH) performs slightly below the Western Balkans’ regional average on the SOE policy dimension, and progress in implementing the CO 2021 Recommendations has been limited (Table 6.1). Republika Srpska (RS) achieves slightly higher scores than the Federation of Bosnia and Herzegovina (FBiH), reflecting, among other things, the establishment of the new monitoring unit and the fact that many SOEs are overseen by the RS Share Fund, an entity supporting a better separation of ownership and regulatory functions over SOEs.
Table 6.1. Bosnia and Herzegovina’s scores for state-owned enterprises
|
Dimension |
Sub-dimension |
2018 score |
2021 score |
2024 score |
2024 WB6 average |
|---|---|---|---|---|---|
|
State-owned enterprises |
5.1: Efficiency and performance through improved governance |
2.2 |
2.3 |
||
|
5.2: Transparency and accountability |
2.4 |
2.7 |
|||
|
5.3: Ensuring a level playing field |
2.3 |
2.8 |
|||
|
Bosnia and Herzegovina’s overall score |
1.9 |
2.0 |
2.3 |
2.5 |
|
The key findings are:
BiH’s 94 SOEs held by the governments of the FBiH and RS entities operate largely decentralised, without an ownership policy at the state level. RS authorities have strengthened ownership arrangements, including placing many SOEs (19 out of 27) under the Share Fund and establishing the Department for Coordination of Public Enterprise Supervision within the General Secretariat of the Government. This unit could significantly improve state ownership practices in RS once it begins undertaking its foreseen role in developing an ownership policy, advising on SOE practices and instituting an SOE performance-monitoring system.
SOE board nominations are subject to general minimum qualifications criteria applicable to all public appointments in both entities in BiH, including requirements for a public competition. However, there is scope to develop more targeted nomination guidelines to ensure, among others, SOE boards’ adequate private-sector expertise and independence. In practice, SOE board positions are frequently perceived to be awarded based on personal or political connections rather than on professional qualifications.
Significant shortcomings in SOEs’ ownership and board arrangements heighten corruption-related risks. These shortcomings include the lack of clarity regarding SOEs’ objectives and insufficient independence of board members. However, some targeted anti-corruption measures are in place, including regulations barring politicians from serving on boards of directors and requirements that SOE supervisory boards oversee the development of codes of ethics.
SOEs in both entities are subject to the same basic financial reporting requirements applicable to private companies, while nonfinancial-reporting requirements are very limited. Neither entity undertakes aggregate reporting on the SOE portfolio, but the RS Share Fund publishes some reports on its portfolio companies.
Concerning the level playing field with private companies, most SOEs in both entities are incorporated as joint-stock or limited liability companies in line with good practice, but six SOEs in RS are incorporated under the special legal form of “public enterprise”.1 External assessments have found that SOEs in BiH often have tax arrears, market regulatory advantages and/or wage premiums compared to private competitors, which points to corporate or market inefficiencies that distort the level playing field with private companies.
State of play and key developments
The authorities of the FBiH and RS do not maintain centralised databases on each entity’s entire ownership portfolio. However, at least in RS, this can be expected to change in the coming years, as the authorities are developing a centralised data-collection platform for SOEs.2 Without such centralised databases, external studies highlight SOEs’ significant economic footprint in BiH and shed some light on their sectoral distribution and financial performance. The most recent and comprehensive source of information is a 2019 IMF study which analysed the financial statements of 550 SOEs held at all levels of government (including the central level of government) (IMF, 2019[1]). According to this study, SOEs held only by the central-entity governments (notably excluding many municipal utilities companies) employ 58 000 people, accounting for 8.4% of total employment in BiH. These SOEs are notably present in electricity generation, the primary sectors (including, for example, coal mines in the FBiH and the forestry company in RS), manufacturing (including weapons factories) and transportation (including railways and roads).
Information sources vary regarding the number of SOEs held by the FBiH and RS entity-level authorities. The aforementioned IMF study reports entity-level portfolios of 45 and 49 SOEs, respectively, in the FBiH and RS (IMF, 2019[1]); the authorities reported smaller portfolios in this assessment: 38 SOEs in the FBiH and 27 SOEs in RS (of which the government directly holds eight and 19 by the RS Share Fund). Some of the differences may reflect evolutions in SOE portfolios since the IMF study was undertaken in 2019, but available data do not allow for definitive conclusions on this. Limited centralised data on SOE portfolios reflect the larger issue of highly decentralised state ownership portfolios and the associated limited performance monitoring by the entity-level authorities.
More detailed data are available in the portfolio of the RS Share Fund, whose SOEs employ nearly 10 700 people, accounting for 3.7% of total employment in RS. The four largest individual employers among the 19 SOEs are Forests of RS (JPŠ Shume Republice Srpska) (4 800 people), followed by the postal services company Pošta Srpske (2 500 people), the railway company Željeznice Republike Srpske (1 800 people) and the energy holding company (the parent company of several electricity generation and distribution companies), Elektroprivedra Republika Srpska (495 people). As measured by their corporate valuation, the largest four SOEs in the RS Share Fund portfolio, valued collectively at around USD 2.5 billion (around EUR 2.3 billion), are Roads of the Republic of Srpska, the energy holding company Elektroprivedra Republika Srpska, the forest-plantation company Industrijske Plantaže and the railway company Željeznice Republike Srpske.
Concerning the performance of SOEs in BiH, the aforementioned IMF report found that SOEs are plagued by “low profitability, high leverage, and low liquidity” (IMF, 2019, p. 11[1]). According to this study, 66 of the total 550 SOEs reviewed (in this case, including SOEs held by cantons and municipalities) had accumulated sufficient losses to post negative total equity values equal to 2% of GDP, with the highest proportion of losses occurring in the mining and quarrying, manufacturing and energy sectors. The study highlighted high wages as one potential source of these performance woes, estimating that, on average, SOEs offered a 40% wage premium compared to private enterprises (IMF, 2019[1]). This points to a situation where SOEs are manifestly not generating sufficient value for their ultimate “shareholders”, the general public. Not only does SOEs’ underperformance present an opportunity cost as funds invested in SOEs could be channelled to more productive activities, but it also creates significant fiscal risks in the context of already limited public finances.
Sub-dimension 5.1: Efficiency and performance through improved governance
Concerning clarifying ownership policy and rationales, neither the FBiH nor RS has elaborated a state ownership policy outlining why the state owns enterprises and what overarching objectives it expects them to achieve. A Law on Public Enterprises in force in both entities implicitly establishes the rationale for state ownership of certain SOEs. It defines the public enterprises under its purview as those established to serve the public interest. However, many SOEs in BiH do not have an obvious public-interest activity (e.g. those operating in the manufacturing sector) and either do not fall under the scope of the aforementioned SOE-specific law or otherwise remain in state ownership for unclear reasons. In addition to not clearly defining the rationales for state ownership, the state as a shareholder generally does not set clear performance objectives for SOEs, which are frequently loss‑making.
Although efforts to professionalise state ownership practices have been limited in BiH overall, they have undergone some recent improvements in RS, where a Department for Coordination of Supervision of Public Enterprises was established in 2022, within the General Secretariat of the Government of the RS. The unit’s responsibilities are mostly related to SOE performance monitoring, but its establishing legislation also mandates the unit to perform some ownership and/or advisory functions. These include, among others, developing a state ownership policy and making recommendations to line ministries to improve the performance of specific SOEs in their portfolios, for example, through restructuring plans. This unit's establishment resulted from work on SOE reform spearheaded by a Government Working Group for Reform of Public Enterprises established in 2020. At the time of writing, the RS Government was revising an Action Plan on SOE reform for the 2022-26 period, which could result in more significant changes in state ownership practices. Moreover, the 2024-26 Programme of Economic Reforms, adopted by the National Assembly of RS in December 2023, sets several ambitions related to SOE reform, including 1) the establishment of more co-ordinated supervision, improved governance and heightened transparency of SOEs and 2) the restructuring of individual SOEs in the energy and railways sectors to improve their efficiency (National Assembly of Republika Srpska, 2023[2]). In the FBiH, an informal co-ordinating unit was previously established in the FBiH Prime Minister’s office, but this unit did not have the formal authority to co-ordinate ownership decisions.
In both the FBiH and RS, SOE oversight responsibilities are generally dispersed across the public administration and not subject to a common ownership policy to guide shareholding decisions. In both entities, state ownership responsibilities are by law the purview of the government as a whole, but in practice, ownership decisions are often delegated to sectoral line ministries, which sometimes also exercise regulatory functions. This mixing of ownership and regulatory functions is partly mitigated in RS for the 19 SOEs in the portfolio of the Share Fund since the Share Fund does not exercise a sectoral regulatory function. However, sectoral line ministries still play a shareholding function over the SOEs in the Share Fund portfolio. In the FBiH, seven separate ministries have delegated responsibilities for exercising the government’s ownership rights over distinct portfolios of SOEs. The largest number of SOEs in the FBiH (19 enterprises) are held by the Ministry of Energy, Mining and Industry, followed by the Ministry of Transport and Communications (10 enterprises).
Some preliminary efforts to establish a robust board nomination framework for SOEs have been undertaken in both entities, where SOE board nominations are subject to general requirements applicable to all governmental appointments (outlined in respective Laws on Ministerial, Government and other Appointments). The related legislation requires, for example, open and competitive procedures and establishes some general minimum qualifications such as age requirements and the absence of a criminal record. These rules ensure some degree of transparency in SOE board nominations and constitute a step towards professionalising related procedures. However, since these procedures apply to all public sector nominations (they are not specific to SOEs), there may be scope for the authorities to develop more targeted guidelines on SOE board nominations – for example, to incorporate requirements related to board candidates’ qualifications, e.g. specific skills, private sector expertise and independence.
Concerning board nomination procedures in individual entities, in the FBiH, all SOE board nomination procedures must by law be published in the Official Gazette and in at least one daily newspaper, as per the aforementioned Law on Ministerial, Government and other Appointments. A dedicated regulation in the FBiH sets forth that for new SOE board appointment procedures, the government must appoint a dedicated commission comprising an odd number of members that is responsible for submitting to the shareholders’ assembly (the government for wholly owned SOEs) a list of all candidates that meet the established qualifications requirements (based on applications submitted through the public competition). Exceptions to the established procedures and qualifications criteria are possible through temporary appointments allowing board service for terms of up to three months and until the termination of the public competition. In RS, the authorities report that in practice, for an SOE with non-state shareholders, the decision to undertake a board nomination procedure is made at the shareholders’ meeting and then publicly announced. Following the announcement, an SOE-specific commission – comprising three representatives of the competent ministry and two representatives of the concerned company – will interview candidates and submit a ranked list to the shareholders. A majority vote of shareholders then appoints board members. For SOEs in full state ownership, the procedure for board appointments similarly involves a public announcement, while the government of RS performs the function of the shareholders’ assembly and appoints board members by majority vote. Neither entity maintains a database with a pool of potential SOE board candidates that can be drawn upon for future board appointments, a practice that could increase efficiency in the nomination process.
External assessments point to significant shortcomings regarding establishing independent and professional boards in SOEs in BiH, despite the aforementioned regulations that establish certain transparency and general qualifications requirements. In both the FBiH and RS, boards of directors are generally perceived to operate as extensions of line ministries rather than as independent corporate organs that can effectively shield management from political interference. Neither entity has requirements for a certain number or proportion of board members independent of the state shareholder and from SOE management.3 In the most extreme cases, SOEs are often perceived to operate under the control of political parties, pointing to significant corruption-related risks (U.S. Department of State, 2022[3]). At the same time, SOE boards in BiH often include private-sector professionals, rather than primarily civil servants, which may make them better equipped to oversee corporate decision making. The Law on Public Enterprises in force in both RS and FBiH prohibits persons holding office in a political party from serving as management board members in SOEs. At the same time, the Law on Ministerial, Governmental and Other Appointments establishes a similar requirement for supervisory boards in RS (no such legal requirement applies to supervisory boards in the FBiH). The FBiH authorities report some lack of legal clarity regarding the definition of persons “holding office in a political party” and have underlined that acting politicians can be appointed to SOE management boards directly after stepping down from their political roles.
Concerning their responsibilities, the company law in both RS and the FBiH establishes board members’ duty of loyalty and care to the company. SOE boards are granted the authority to appoint and dismiss the CEO in both entities, which aligns with good practice. In RS, the parent body of the Share Fund, the Investment-Development Bank, sends recommendations to government-appointed SOE board members concerning how they should vote at annual general meetings, raising some concerns regarding SOE board members’ independence in practice.4
Regarding privatisation practices, there are some basic elements in place in both entities that establish a minimum degree of transparency concerning planned state divestments and oversight over completed privatisations. In the FBiH, privatisations are the responsibility of the Privatisation Agency, which prepares an annual privatisation plan, subsequently approved by the government, announcing all SOEs scheduled for privatisation in the near term. A dedicated Agency for Review of Privatisation is responsible for enhancing the public transparency of privatisation processes, identifying any irregularities in privatisations and presenting information to the public on successful privatisations. There have been no significant privatisation transactions in the FBiH in the past five years. In RS, annual privatisation plans are prepared by the Investment-Development Bank (the parent body of the Share Fund) and adopted by the government. The 2023 privatisation plan of RS foresaw the privatisation of one SOE in 2023, while five SOEs were privatised in the five years preceding 2023. Although there is currently no standing committee dedicated to reviewing the probity of planned or completed privatisation, a large number of privatisations (153 in total) undertaken since 2005 were subject to post-sale audits for probity and protection of the public interest by a dedicated Commission on Privatisation Review. This commission was disbanded in 2019. Applicable legislation in RS requires public disclosure of planned privatisations 15-30 days before sale completion. In addition to the aforementioned privatisation plan, the government has also adopted a Decision regarding specific strategic SOEs that should not be subject to privatisation until further notice. The RS Law on Privatisation of State Capital in Enterprises identifies privatisation as an important element in the RS national development strategy. In light of this, it is not clear why the authorities chose to disband the Commission on Privatisation Review, whose mission to protect the public interest could still add value for future privatisations.
Sub-dimension 5.2: Transparency and accountability
Concerning financial and nonfinancial reporting, in both the FBiH and RS, SOE disclosure requirements are set forth in the respective Laws on Public Enterprises, which require that all SOEs prepare annual financial statements in accordance with applicable accounting and auditing standards. SOEs are generally required to submit their annual financial statements to a central registry that subsequently makes them available on line. In the FBiH, external assessments have found that, in practice, SOEs’ financial statements are frequently not available on line and have noted that they are only accessible subject to payment of a fee (IMF, 2019[1]). Requirements and practices regarding nonfinancial reporting are very limited in both entities. The Annual General Meetings (AGM) of SOEs in the FBiH must submit reports on “work and employment” to the parliament at least annually, but these do not constitute traditional nonfinancial reports. SOEs in RS are required to prepare three-year business plans submitted to the auditor-general and the competent ministry. Although the business plans touch upon some nonfinancial issues, such as environmental protection and employee issues, they do not constitute standard nonfinancial reports. The publication of sustainability reports is not a widespread practice in either entity, reflecting the broader absence of sustainability-related goals applicable to the SOE sector despite a growing international consensus that SOEs can be key vehicles in supporting the low-carbon transition and responding to climate-change risks.5
Regarding broader SOE transparency efforts, neither authority produces annual aggregate reports on SOEs. However, the Share Fund of RS produces annual reports for the 19 SOEs in its portfolio.
Additionally, legislation establishing the RS Department for Coordination of Supervision of Public Enterprises mandates it to oversee the development of a modern Information Technology (IT) platform for centralising data on SOEs and to produce quarterly and yearly reports on SOEs, including on their size and basic financial results, for the government. The new IT platform was still under development at the time of writing. Related legislation was under preparation to enable the Department to collect the requested data directly from SOEs and clarify the responsibilities of all institutions and enterprises expected to contribute data to the system. The authorities report that there are plans to make some of the centralised data publicly available through a searchable online platform that links to SOEs’ financial reports.
Regarding auditing practices, only certain types of SOEs in BiH are required to have their financial statements audited by an external commercial audit firm, while state audit institutions sporadically undertake financial statement audits in an ad hoc manner. In the FBiH, the Law on Accounting and Audit establishes that external commercial audits must be undertaken for all firms exceeding a certain size threshold. In RS, external audits are required for all public interest entities, presumably including all or most SOEs. All joint-stock companies, including all 19 SOEs in the RS Share Fund portfolio, must establish an audit committee. Additionally, in both RS and the FBiH, as per the Law on Public Enterprises, all SOEs must establish an internal audit function. In RS, the head of the internal audit function is appointed by the auditor-general or the board audit committee if the auditor-general does not exercise this right. The head of the internal audit department (who is not employed by the enterprise) can only be removed by the board or management after written approval by the auditor-general. This points to a system in RS where SOEs are run more as extensions of the public administration – subject to public administration internal audits – than as commercial entities subject to independent oversight by boards of directors. In RS, the 2022-26 Action Plan on SOE Reform foresees the elaboration of measures to strengthen follow up on the results of external audits, for example, by elaborating sanctions in case SOEs or their ownership institutions do not implement the state auditor's recommendations.
Concerning anti-corruption and integrity measures for SOEs, external reports point to significant corruption-related risks in SOEs in BiH. For example, a 2022 report by the US Department of State suggests that SOEs are, in practice, “controlled by political parties, increasing the possibilities for corruption and inefficient company management” (U.S. Department of State, 2022[3]). In both entities, significant shortcomings remain in SOEs’ ownership and corporate governance arrangements that exacerbate corruption-related risks. These include that SOEs are often run by line ministries not subject to a common ownership policy or clear objectives (increasing the risk that political objectives influence corporate decision making) and that SOE boards do not include independent members who could help shield SOEs from political interference. Neither entity has adopted legislation barring using SOEs as vehicles for political-party financing. In the FBiH in particular, the law does not specifically protect whistleblowers within SOEs, while legislation in RS on reporting corruption does contain provisions to protect whistleblowers.
All of this being said, elements have been introduced in both entities to mitigate corruption-related risks in the SOE sector. For example, all SOEs in both the FBiH and RS are required by the Law on Public Enterprises in force in each entity to establish an internal audit function that is appointed by the auditor‑general (or the board) and must elaborate codes of ethics containing certain minimum elements outlined in the law. Codes of ethics must, among others, address issues related to conflicts of interest and the duties of board members and employees. The Law also contains several provisions that seek to minimise conflicts of interest and ensure that related parties do not receive advantageous business conditions at the expense of the enterprise. Fines or other penalties are foreseen for certain related offences committed by responsible persons, such as entering into an apparent or actual conflict of interest with the enterprise, disclosing trade secrets to third parties, or engaging in criminal or illegal acts that cause material damage to the company. The authorities did not provide information on SOEs’ compliance with these provisions, pointing to the scope for strengthened monitoring in this area. Practices also vary across the SOE sector. For example, in the FBiH, the authorities report that some, but not all, SOEs developed dedicated integrity plans in the context of the 2019 National Anti-Corruption Strategy.
The protection of minority shareholders is particularly pertinent regarding state ownership practices in BiH since many SOEs include private minority investors in their shareholding structure. In FBiH, almost half of the SOEs (17 companies) held by the central government have non-state minority shareholders. Of the 19 SOEs in the portfolio of the RS Share Fund, 11 include minority non-state investors. In line with good practice, the company law in force in both entities establishes sound basic protections for minority shareholders, including the right to equitable treatment and to redress through the courts in case of alleged violation of their rights. Like many other Western Balkans economies, the law on companies applicable in both RS and the FBiH establishes additional rights for shareholders with at least 5% of shares, such as the right to nominate a representative to the supervisory board. In RS, the right to all shareholders’ equal access to company information, including in cases where some shareholders have preferential voting rights, is explicitly enshrined in the company law. However, this is not the case in the FBiH. The extent to which minority shareholders avail themselves of their rights varies; FBiH authorities report that many non-state minority shareholders practice their right to appoint supervisory board members, which is less common in RS, according to its authorities. No recent cases of alleged abuse of minority shareholder rights in SOEs have appeared in recent online media, based on a non‑exhaustive review conducted in the context of this assessment.
In the FBiH, some legislative provisions establish potentially problematic differences in legal treatment between minority shareholders and the state shareholder. In particular, a Government Decree on Executing Authorities in Companies with State Capital Share establishes that the CEO and supervisory board members must act in the interests of the capital owner (the state shareholder). In cases where the interests of the state shareholder may contradict those of the enterprise and/or other shareholders, this legal provision may lead to situations where decisions are made in the interest of political goals rather than corporate performance. Although this is partly mitigated by provisions in the company law requiring that board members and CEOs act conscientiously and in the company's interest, the decree still seems to establish some special treatment for the state shareholder.
Sub-dimension 5.3: Ensuring a level playing field
Concerning SOEs’ legal and regulatory treatment, most SOEs in both the FBiH and RS are incorporated according to general company law (operating as either joint-stock or limited liability companies), which aligns with good practice. However, six SOEs in RS have the special legal form of “public enterprise” (javno preduzeće) and operate only according to a dedicated Law on Public Enterprises.6 Although the Law on Public Enterprises also applies to state-owned joint-stock and limited liability companies undertaking public-interest activities, its provisions do not establish any major differences in legal treatment that might distort the level playing field with private companies. On the contrary, the Law on Public Enterprises in force in both entities contains some provisions related to fair competition, such as a provision barring any state aid that could distort competition. Nonetheless, SOEs in practice do appear to benefit from preferential treatment, in particular when it comes to tax and social security contributions, for which, according to the IMF, arrears owed by SOEs, mostly in the railway and mining sectors, totalled 4% of GDP (IMF, 2019[1]). Other external assessments highlight that SOEs also frequently benefit from an advantageous market position and regulatory treatment, particularly in sectors where the state has historically held a monopoly, such as telecommunications and energy (U.S. Department of State, 2022[3]). SOEs may face some legislated advantages in the FBiH related to creditors' payments. For example, the Law on Financial Consolidation of Business Companies establishes that in the context of “financial consolidation” procedures, forced collection of claims over the assets of a majority state-owned company cannot be initiated. On the other hand, SOEs may face operational disadvantages due to their state ownership. For example, SOEs in RS must comply with public sector procurement policies, which may burden these companies more than private companies.
Concerning SOE financing conditions, most SOEs in both the FBiH and RS obtain financing from the commercial marketplace. Although there is limited information available on the terms of such financing, it is likely that commercial lenders perceive at least an implicit state guarantee on SOE debts, which may lead to more favourable terms than private companies. According to the authorities, explicit state guarantees are sometimes provided for large investment projects but are not a common practice. The FBiH authorities report that only one SOE, JP Elektroprivreda BiH, currently benefits from an explicit state guarantee on its commercial debt with one bank for implementing a large construction project. Beyond state guarantees, a fundamental issue concerning SOE financing conditions is that the authorities of the FBiH and RS do not establish expected rates of return for SOEs and many SOEs, according to available data, do not achieve economically significant rates of return.7 This effectively constitutes a cost of equity capital that is not market-consistent. Some SOEs, such as Zeljeznice Republike Srpske, are consistently loss-making, pointing to structural issues that should be investigated and addressed. The IMF study mentioned earlier found that a total of 66 SOEs in BiH (albeit also including those owned by cantons and municipalities) had sufficient accumulated losses to achieve negative equity values (IMF, 2019[1]). SOEs are regularly kept afloat by direct government subsidies in both entities.
Overview of implementation of Competitiveness Outlook 2021 recommendations
BiH’s progress in implementing the CO 2021 recommendations has been limited overall, with neither entity having developed a state ownership policy, updated SOE board nomination procedures or corporatised SOEs operating under the special legal form of “public enterprise” (Table 6.2). However, the recent establishment of a performance-monitoring unit for SOEs in RS could inform improvements in ownership practices and strengthen transparency of the state shareholder, if the state decides to publish the performance data that it collects and use the data to develop clearer performance objectives for SOEs.
Table 6.2. Bosnia and Herzegovina’s progress on past recommendations for state-owned enterprises
|
Competitiveness Outlook 2021 recommendations |
Progress status |
Level of progress |
|---|---|---|
|
Develop a state ownership policy and improve the central monitoring of SOEs |
There has been no progress in developing a state ownership policy in either entity, but the RS authorities have announced plans in the 2024-26 Economic Reform Programme to improve management and supervision arrangements for SOEs. Establishing an SOE performance-monitoring unit in RS could contribute to improvements in state ownership practices, centralise data on SOEs, and inform the development of clear performance objectives for SOEs. |
Moderate |
|
Strengthen SOE board competencies by improving the nomination framework |
Neither entity has taken steps to improve the SOE board nomination framework. |
None |
|
Ensure a level playing field when SOEs compete in the marketplace |
The RS authorities have not taken steps to corporatise the SOEs currently incorporated under the separate legal form of “public enterprise” or to liquidate the no longer active SOEs. In the FBiH, all SOEs are already incorporated as joint-stock or limited liability companies. |
None |
|
Review minority shareholder rights and participation in SOE decision-making bodies |
No steps have been taken to review minority shareholder rights or participation in SOE decision making. |
None |
|
Improve transparency at the level of SOEs and the state as owner |
No significant steps have been taken in either entity to improve transparency by SOEs or by the state as shareholders. However, the recent establishment of an SOE performance-monitoring unit in RS can improve transparency if its performance-monitoring mandate's results are ultimately made public. |
Limited |
The way forward for state-owned enterprises
The most significant state ownership reform undertaken in BiH since the previous assessment has been the establishment of an SOE performance-monitoring and co-ordination unit in RS. However, the pace of state ownership reforms in other areas that were the subject of OECD Recommendations in 2021 has been much slower, making most of the earlier Recommendations largely relevant today. These policy Recommendations, with some elements added to fine-tune them, are as follows:
Develop a state ownership policy and continue improving central monitoring of SOEs. In the context of BiH’s decentralised ownership arrangements, a state ownership policy outlining the government’s rationale for ownership should be elaborated in each entity to guide ownership decisions and practices. The ownership policy could provide a useful foundation for eventually developing enterprise-specific financial and nonfinancial performance objectives, the implementation of which could be monitored and used to guide structural changes to improve SOE efficiency. The authorities of both entities should centralise data on SOEs to allow for an evidence-based identification of performance issues and to inform the subsequent development of clear financial and non-financial objectives. The recent establishment of the Department for Coordination of Public Enterprise Supervision has improved ownership arrangements in RS. It should be drawn upon to strengthen SOE objectives setting and performance monitoring going forward. Doing so would align with the ambitions for strengthened management and monitoring of SOEs set forth in the 2024-26 Programme of Economic Reforms. The Department’s foreseen role in advising on ownership and legislative reforms and instituting a centralised data‑collection system for SOEs has the potential to transform the exercise of ownership in RS for the better. The authorities should ensure that the unit is adequately resourced and bolstered by necessary legislation to fulfil its foreseen functions. Box 6.1 provides a snapshot of the institutional development of the Governance Coordination Centre in Lithuania and information on the SOE-specific data available on its website. That example may inspire the RS authorities as they build their own SOE performance monitoring unit.
Box 6.1. Spearheading more professional state ownership practices: Example of Lithuania’s Governance Coordination Centre
Lithuania’s Governance Coordination Centre is a public institution that is today charged with a variety of SOE-oversight functions, including co-ordinating the selection of SOEs’ independent board members, overseeing SOEs’ implementation of strategic plans, preparing aggregate reports on SOEs’ performance and governance, and advising on ownership policy development. The scope of its work has significantly expanded since its establishment in 2010, when its mandate related primarily to monitoring and reporting on the implementation of disclosure standards for SOEs, notably through the development of aggregate reports on SOEs. Its institutional development over the years – from a primarily performance-monitoring and reporting body to a state ownership centre contributing to key shareholder functions such as board nominations – shows ownership co-ordination units' potential to spearhead more professional state ownership practices in the long run. Its website includes extensive information on the state ownership landscape in Lithuania, including links to all relevant state policies, legislation and guidelines, an index rating SOE governance practices, and extensive enterprise-specific information. The enterprise-specific information includes the following:
a fully updated list of all SOEs, including their legal form, assets and sales revenues, number of employees, sector of operation and responsible ownership institution
a list of all board members serving on SOEs
detailed financial statements and highlighted key financial indicators, such as profit/loss figures, return-on-equity and return-on-assets, debt-to-equity ratio and dividend payout rate
enterprise-specific performance indicators (for example, traffic-hazard indicators for the national railway company or customer satisfaction data for the postal services operator).
Source: Public Enterprise Governance Coordination Centre (2023[4]).
Strengthen SOE board competencies by improving the nomination framework. While the legislation seeks to ensure that SOE boards are not subject to conflicts of interest, there appears to be scope to improve their professionalism and private-sector expertise. The authorities should consider strengthening and publishing the professional criteria applicable to SOE board appointees to ensure that members have a sufficient diversity of expertise (e.g. financial, corporate strategy and industry-specific expertise) to effectively oversee necessary strategic and structural decision making within SOEs, in the interest of improved enterprise performance.
Ensure a level playing field when SOEs compete in the marketplace. The authorities should review SOEs’ operational requirements to identify any regulatory or operational differences that hinder healthy competition with private companies in the markets in which they operate. The authorities should also fully corporatise SOEs that undertake primarily commercial activities but are still organised under the separate legal form of “public enterprise”. Moreover, the authorities should ensure that all SOEs create value alongside private companies, which may necessitate structural reforms in individual SOEs. The authorities of RS should, in particular, move forward with their stated ambitions to undertake structural reforms in the state-owned energy and railway sectors to improve these enterprises’ economic efficiency.
Review minority shareholder rights and participation in SOE decision-making bodies. A significant proportion of SOEs in BiH are partly owned by minority private investors, underscoring the need to ensure that their interests are credibly and consistently taken into account in corporate decision making, so that SOEs can continue to benefit from needed private capital. An in-depth review of the strength of minority shareholder protections in practice goes beyond the scope of this assessment. Still, it would be a useful undertaking for the authorities to consider as they seek to continue broadening SOE ownership to include private investors.
Improve transparency at the level of SOEs and the state as owner. There is scope for SOEs to go beyond financial reporting and produce more detailed non-financial reports. These could include (as relevant) information on SOEs’ achievement of public-public objectives and/or their contributions to broader sustainability commitments, particularly relevant for SOEs operating in sectors with a high carbon footprint. The authorities should undertake an in-depth review of SOEs’ reporting practices to identify and address weaknesses in their financial and non-financial reporting practices. The state, as an owner, should begin producing publicly available reports on the performance of the SOE sector, using the information collected from individual SOEs. In RS, the recently established SOE monitoring unit could play a key role in such an undertaking.
References
[1] IMF (2019), State-Owned Enterprises in Bosnia and Herzegovina: Assessing Performance and Oversight, https://www.imf.org/en/Publications/WP/Issues/2019/09/20/State-Owned-Enterprises-in-Bosnia-and-Herzegovina-Assessing-Performance-and-Oversight-48621.
[2] National Assembly of Republika Srpska (2023), “Programme of Economic Reforms of Republika Srpska for the Period 2024-2026” (in Serbian language), https://www.narodnaskupstinars.net/?q=la/akti/ostali-akti/program-ekonomskih-reformi-republike-srpske-za-period-2024%E2%80%922026-godine.
[4] Public Enterprise Governance Coordination Centre (2023), Homepage, https://governance.lt/en/ (accessed on 13 June 2024).
[3] U.S. Department of State (2022), 2022 Investment Climate Statements: Bosnia and Herzegovina, https://www.state.gov/reports/2022-investment-climate-statements/bosnia-and-herzegovina/#:~:text=Bosnia%20and%20Herzegovina%20(BiH)%20is,under%20the%20indue%20influence%20of (accessed on 1 March 2024).
Notes
← 1. In FBiH, 13 SOEs operate according to a specific Law on Public Enterprises, but they are all incorporated as joint-stock or limited liability companies subject to the company's law.
← 2. According to the IMF, the FBiH Government previously maintained a database on centrally owned SOEs, but it was only accessible through the Official Gazette. The RS Share Fund also published a database for its portfolio companies, but it has not been updated since 2014 (IMF, 2019).
← 3. Stock exchange-listed companies in RS are an exception since their boards must comprise a majority of non-executive members, of which at least two are independent members.
← 4. According to the Investment-Development Bank’s website, SOE board members are subsequently requested to report on whether they voted in accordance with the recommendations and, if not, to explain why. See https://www.irbrs.org/azuro3/a3/index.php?id=84.
← 5. For general information on the role of SOEs in the low-carbon transition and international practices with setting related objectives, see https://www.oecd.org/publications/climate-change-and-low-carbon-transition-policies-in-state-owned-enterprises-e3f7346c-en.htm.
← 6. Concerning SOEs’ legal treatment, the RS authorities report that all SOEs, regardless of their legal form, are subject to the Law on Public Enterprises and that provisions of the Law on Companies only apply in cases not regulated by the Law on Public Enterprises.
← 7. In the context of this assessment, the RS authorities reported that most SOEs achieve economically significant rates of return but that they do not gather or assess financial performance data on all SOEs.