State-owned enterprises (SOEs) are important economic actors and can enhance economic activity and competitiveness if a level playing field with private companies is ensured. This chapter, along 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 SOEs compared to private businesses, and the financing conditions of SOEs.
Western Balkans Competitiveness Outlook 2024: Serbia
6. State-owned enterprises
Abstract
Key findings
Serbia performs better than the Western Balkans’ regional average on the overall state-owned enterprise (SOE) policy dimension (Table 6.1) – although its score remained broadly unchanged. A new law, adopted in September 2023, successfully enshrines in law many of Serbia’s SOE strategy’s planned improvements to SOE ownership and governance arrangement. Yet many of these improvements envisaged in the new law have not yet resulted in higher scores, as the new law's implementation only commences in September 2024.
Table 6.1. Serbia’s scores for state-owned enterprises
The key findings are:
Serbia’s new state ownership strategy for 2021-27 effectively constitutes a policy that has introduced greater clarity regarding what the state expects of its 225 centrally owned SOEs.1 The majority of these SOEs, with exceptions for those operating in electricity and gas production and transmission, will henceforth be subject to centralised ownership and monitoring under the Ministry of Economy, in line with good practice. The new Law on the Management of Business Companies Owned by the Republic of Serbia (henceforth the Law on SOE Governance)2 adopted in September 2023 enshrines many elements of the state ownership policy in law.
Although the Law on SOE Governance establishes new basic qualifications criteria for SOE board members, the authorities have yet to put in place a more detailed SOE board nomination framework that manifestly ensures that SOE board nominations are fully transparent, competitive and merit-based. Current legislation and regulations do not clearly specify the full process related to SOE board nominations and do not require their public disclosure.
The new Law on SOE Governance foresees several measures that can be expected to help mitigate risks of corruption in the SOE sector. These include requirements for all SOEs to develop codes of ethics and integrity plans, together with several provisions that aim to curtail the use of SOE resources for political party financing or support.
SOEs are generally subject to high standards of financial reporting and auditing, including requirements to report in accordance with international financial reporting standards (IFRS), but requirements do differ according, among other things, to the SOEs’ size and classification as “public-interest entities”.
Concerning the level playing field with private companies, the majority of SOEs are incorporated as joint-stock or limited liability companies in line with good practice. The remaining 20 SOEs currently incorporated under the special legal form of “public enterprise” are scheduled for transformation into joint-stock or limited liability companies, as per the Law on SOE Governance. Many SOEs in Serbia either do not achieve significant rates of return or are outright loss-making, pointing to structural issues that hamper efficient resource allocation.
1. Data on total number of central SOEs in Serbia is based on reporting by the Serbian authorities (the Statistical Office of the Republic of Serbia) in the context of this assessment, drawing on data available through the Agency for Business Registers for the 2021 financial year.
2. The text of the new Law on the Management of Business Companies Owned by the Republic of Serbia can be accessed at: https://www.paragraf.rs/propisi/zakon-o-upravljanju-privrednim-drustvima-koja-su-u-vlasnistvu-republike-srbije.html.
State of play and key developments
The central government oversees a portfolio of 225 SOEs employing 137 000 people and valued at EUR 22.4 billion.1 An additional portfolio of approximately 60 companies held by the central government is scheduled for privatisation and is not included in these figures, although those enterprises would be considered SOEs by OECD definitions.2 Of the 225 SOEs that are expected to remain in the state’s ownership portfolio, 205 are incorporated as limited liability or joint-stock companies and operate primarily subject to the Law on Companies, while 20 have the special legal form of “public enterprise” and operate primarily under Serbia’s Law on Public Enterprises. 27 of the 225 SOEs that are incorporated as companies are also subject to the Law on Public Enterprises, by virtue of their involvement in performing public-interest activities.3
SOEs are an important part of Serbia’s economic landscape. They account for 5% of national employment and 6% of national non-agricultural employment, and are present in many structurally important sectors, such as electricity and gas, transportation (railways and roads), postal services, water management, telecoms and finance. As measured by value, the majority of SOEs are concentrated in the electricity and gas sector (40% of all SOEs by value), followed by transportation (26%), manufacturing (13%) and the primary sectors, which include a number of forestry and mining enterprises (9%). As measured by their employment share, the largest SOE sectors are electricity and gas (25% of all SOEs by employment), transportation (24%) and manufacturing (19%) (Figure 6.1).
Figure 6.1. Distribution of employment and value of centrally owned SOEs by economic sector in Serbia (2021)
Sectoral shares in value and employment are expressed in percentages
Note: The SOE value denotes the book value of shareholders' equity. The healthcare and social services sectors are not represented since these SOEs account for less than 1% of total employment and total value in the entire SOE portfolio.
Source: OECD calculations based on information provided by the authorities of Serbia for the Competitiveness Outlook.
Concerning their performance, the SOE portfolio as a whole posted an average 1% return on assets in 2021, with negative average returns recorded in the electricity and gas, transportation and healthcare and social services sectors. The highest performing sectors, as measured by their return on assets in 2021, were the primary sectors (7.8%), manufacturing (3.4%) and telecoms (3.2%). To some extent, the negative returns in the energy, transportation and healthcare and social services sectors may be at least partly explained by the expectation that some of these SOEs pursue non-commercial objectives, such as the provision of affordable rail transport services, electricity and healthcare for citizens. In cases where such non-commercial objectives are not directly financed by the state budget, they may be cross-subsidised by SOEs’ commercial revenues, jeopardising commercial performance. However, the authorities have not undertaken to systematically identify the structural sources of SOEs’ underperformance, which likely also include corporate inefficiencies that are not related to public policy activities. A recent report by the Fiscal Council of Serbia noted significant financial issues faced in particular by the energy sector SOEs Srbijagas and Elektroprivreda Srbije (EPS), for which government support to cover losses contributed to nearly half of the state’s budget deficit in 2022 (a deficit totalling nearly 4% of GDP). Although the report notes that external market circumstances – as a result of the energy shock caused by the Russian war of aggression against Ukraine – led to losses for both companies, it also identifies corporate mismanagement as a significant contributing factor (Republic of Serbia Fiscal Council, 2022[1]).
Sub-dimension 5.1: Efficiency and performance through improved governance
Concerning the clarification of ownership policy and rationales, Serbia has made important progress through the April 2021 adoption – and the ongoing implementation (with full implementation planned for 2027) – of a state ownership strategy document that essentially constitutes a state ownership policy. In line with good practice, the document defines the rationales for state ownership, the state’s role in the governance of SOEs, and the roles and responsibilities of the primary implementing institution (and new primary shareholding institution), the Ministry of Economy. The stated objective of the strategy is to achieve sustainable and efficient management of SOEs, reflecting the state’s commitment to reform SOEs and increase their benefits to citizens (Ministry of Economy of the Republic of Serbia, 2021[2]). The strategy sets forth that the purpose of state ownership is to create value for citizens through an efficient allocation of resources. Additionally, it details that SOEs should remain in state ownership only if they achieve one of the following objectives (otherwise they are to be liquidated or privatised):
to resolve situations in which markets for certain products or services do not exist or do not function properly
to contribute to the achievement of social and environmental goals
to contribute to the achievement of economic and industrial goals
to ensure the fulfilment of national strategic interests.
The strategy sets out two subsidiary special objectives: 1) to create a unified framework of state ownership for all SOEs, including a centralisation of the state ownership function, and 2) to improve SOEs’ corporate governance arrangements, including through the establishment of independent and professional boards and adequate risk management and internal controls.
Serbia’s new state ownership strategy outlines clear plans to further professionalise state ownership, notably through a stronger centralisation of the economy’s state ownership function under the Ministry of Economy, albeit with some exceptions for SOEs operating in the energy sector. This foreseen centralisation, along with many other related improvements to Serbia’s SOE performance-monitoring and transparency arrangements, were enshrined in legislation through the aforementioned September 2023 adoption of the Law on SOE Governance.4 As per the state ownership strategy, the Ministry of Economy is newly mandated to undertake several key ownership functions, sometimes in co-ordination with other ministries. These include: approving SOEs’ strategic plans and monitoring their implementation; setting dividend expectations; appointing SOE board members; and reporting on the performance of SOEs, as well as on its own performance as state shareholding entity, to the government and the National Assembly (Ministry of Economy of the Republic of Serbia, 2021[2]). Provisions of both the state ownership strategy and the Law on SOE Governance also strengthen procedures for setting and monitoring the achievement of SOEs’ commercial and non-commercial objectives. The Law notably requires the elaboration of yearly Guidelines documents – developed by dedicated government commissions involving representatives of the Ministry of Economy, the Ministry of Finance and relevant sectoral ministries – that outline overarching enterprise goals and key performance indicators, all of which are to be subject to regular monitoring and reporting by the Ministry of Economy. That ministry’s foreseen role in SOE board appointments has not yet been enshrined in law or supplementary regulations. Although the provisions of the Law exclude electricity production and supply companies from the centralised monitoring activities of the Ministry of Economy, its provisions remain applicable to those companies, with implementation being the responsibility of the Ministry of Energy.5
Serbia currently does not have a robust board nomination framework applicable to all SOEs. The legislation and policies in force do not require that SOE board member recruitment processes be competitive or open to the public. Although the Law on SOE Governance establishes new basic requirements regarding SOE board member qualifications, it does not outline details on the foreseen nomination process, only stating that the development of additional conditions for board appointments is within the purview of the government. Still, the inclusion of the new basic requirements in the recently adopted Law does constitute an improvement, since previously only the board members of the 48 SOEs subject to the Law on Public Enterprises were subject to legislated qualifications criteria, while the board members of state-owned companies not performing public-interest activities were subject to no minimum qualifications criteria. The basic criteria set forth in the Law include, for example, five years of work experience requiring higher education, three years of managerial experience, knowledge of corporate management and the absence of conflicts of interest. New provisions also require that all board members (and SOE directors) undergo corporate management training to be organised by the Ministry of Economy. SOE board nomination procedures can be expected to improve with the continued implementation of the state ownership strategy, which explicitly envisages a harmonisation and improvement of SOE board nomination practices across the state’s portfolio.
While the legal framework applicable to SOEs in Serbia includes some preliminary measures to promote independent and professional boards, there remain significant shortcomings, including notably SOE boards’ limited role – and the state’s comparatively strong role – in management oversight, as well as insufficient measures to ensure board members’ independence. Concerning their weak role in management oversight, it is the state, and not the board of directors, that is responsible for appointing and dismissing the chief executive officers (CEOs) of SOEs undertaking public-interest activities and thus falling under the scope of the Law on Public Enterprises. This applies regardless of SOEs’ legal form. (According to the Law on Public Enterprises, the supervisory board can submit a proposal to the government for CEO dismissal, but in this case, it performs more of an advisory function than a corporate supervisory function.) In such cases, boards are deprived of their crucial good-practice function of monitoring management and serving as a shield against excessive political interference in SOEs’ corporate decisions. Additionally, SOEs organised as private limited liability companies are not legally required to establish boards of directors: in practice 21 such SOEs under the purview of the Ministry of Economy operate only under a general assembly and a managing director. The newly adopted Law on SOE Governance may mitigate this shortcoming somewhat, through a provision requiring that all medium and large SOEs operate under a “bicameral” governance structure, i.e. with a supervisory board, to which the Law on Companies grants the power to appoint the CEO. The authorities may need to take additional steps to ensure that, going forward, this new provision is fully implemented in the SOEs to which it applies.
Concerning board member independence, the laws in force at the time of writing contain some related requirements, but there is scope to strengthen the criteria to ensure that all SOE board members nominated as “independent” directors indeed have a degree of independence from political influence. Both the Law on Public Enterprises (applicable to 48 public-interest SOEs) and the Law on SOE Governance (applicable to SOEs incorporated as joint-stock or limited liability companies) require that supervisory boards include one independent member, but the definitions of independence vary between the two pieces of legislation, with only the Law on Public Enterprises barring members of political parties from being considered independent.6 In practice, some SOE boards include acting politicians, which significantly jeopardises these SOE boards’ ability to make decisions in the corporate interest with no political interference. As the authorities move forward with their ambitions, set forth in the state ownership strategy, to improve the SOE board recruitment process, they should take steps to ensure that SOE boards comprise a sufficient proportion of private sector professionals who can make decisions with no political influence.
Another corporate governance issue that has been the subject of some criticism is that the legislation in force (both the Law on Public Enterprises and the new Law on SOE Governance) allow for the appointment of “acting CEOs” who need not undergo the public competition foreseen by law, and can be appointed for mandates of up to one year. Critics of corporate governance practices in Serbian SOEs point to the recurrent practice of appointing these “acting CEOs” to avoid the scrutiny imposed by the public competition normally foreseen. According to research by Transparency Serbia, in 2020 more than 70% of the 34 SOEs subject to the related requirements were operating under “acting CEOs” who had not undergone a public procedure and who had, in addition, surpassed their mandated one-year term limits (Transparency Serbia, 2020[3]). The 2021-27 state ownership strategy includes an explicit objective to limit the use of such “acting directors”, but the recently adopted Law on SOE Governance does not include any provisions to further curtail the practice.
Concerning privatisation practices, Serbia has undertaken a large number of privatisations in the past decade, completing those of 71 SOEs since 2015, 6 of which were undertaken in 2021-22. Privatisations are undertaken by the Ministry of Economy, which currently maintains a portfolio of 60 enterprises scheduled to be privatised. The Ministry of Economy maintains an up-to-date list of ongoing and planned privatisations and bankruptcies on its website (Ministry of Economy of the Republic of Serbia, 2023[4]). The Serbian authorities report that most privatisations in the past five years were equity sales through auctions. Privatisations are regulated by the Law on Privatisation, which includes provisions regarding public disclosure of forthcoming privatisations planned by the Ministry of Economy. The ministry must publish an invitation to submit a letter of interest within 30 days of initiating the privatisation procedure, and must subsequently make a public announcement of concluded sales. The required public disclosures must appear on the Ministry’s website and in at least one daily newspaper widely distributed across the territory of Serbia. The foreseen institutional arrangements for privatisations do not involve the establishment of an independent oversight commission to ensure that privatisations are transparently executed in the public interest. Post-privatisation audits, as foreseen in the legislation, are mostly limited to ensuring that any contractual obligations for the buyer, which are usually limited to a two-year period post-privatisation, are met. They do not assess the impact of privatisations on the public interest or the propriety of the privatisation process. The Law on Privatisation establishes that an entity scheduled for privatisation must establish a fair market value for its assets and liabilities; usually this value is determined by an external audit firm selected by the company.
Sub-dimension 5.2: Transparency and accountability
The 2021-27 state ownership strategy has announced the development of a common disclosure policy for all SOEs, which can be expected to strengthen SOEs’ financial and non-financial reporting practices going forward. The newly adopted Law on SOE Governance has already introduced several new unified requirements for the public disclosure of information by SOEs, allowing the Ministry of Economy to determine additional requirements going forward. The Law notably requires that SOEs publish on line their annual audited financial statements, annual business plans, and the aforementioned Guidelines documents outlining their agreed yearly goals and key performance indicators. Previously, most SOEs were simply required to submit their financial statements to the company registry, which subsequently made them publicly available. The new requirements therefore constitute a significant improvement in SOEs’ required transparency to the public.
Most SOEs are separately subject to various other disclosure requirements established through multiple pieces of legislation applicable to all companies in Serbia. For example, provisions in the Law on Accounting require most SOEs, including those incorporated as “public enterprises”, to report in accordance with international financial reporting standards (IFRS), and those exceeding a certain size threshold to have their financial statements audited by an external auditor. According to monitoring by the Ministry of Economy, 7 of Serbia’s 48 public-interest SOEs did not prepare audited financial statements in 2022, as their small size exempted them from the requirement for an external audit.7 The Law on Accounting requires that all companies, except for small and micro companies not engaged in public-interest activities, prepare an annual report. Large legal entities of public interest that employ over 500 people must produce non-financial reports that include information on activities related to environmental protection, social and personnel issues, respect for human rights, and anti-corruption and bribery issues. While there is no common requirement for SOEs to publish sustainability reports, the Serbian authorities communicate that 15 of the 48 SOEs under the purview of the Ministry of Economy did publish such reports, or include information on environment, social and governance (ESG) issues in their annual reports, in 2022.8 An example of such a report, published by Serbia’s largest SOE Elektroprivreda Srbije, details information related among other things to the company’s environmental and employee health impacts (Electric Power Industry of Serbia, 2021[5]). Given their prominence in sectors with a high carbon footprint, such as energy production, manufacturing and mining, there is scope to strengthen SOEs’ related disclosure requirements, as part of broader efforts to strengthen their role in supporting the low-carbon transition. In line with good practice, the new Law on SOE Governance recognises environmental sustainability as an overarching goal to be sought as the new centralised ownership framework for SOEs is implemented.
Concerning reporting by the state shareholder, Serbia does not currently produce an aggregate report on the performance of the SOE portfolio. However, the new state ownership strategy and related provisions of the new Law on SOE Governance mandate the Ministry of Economy to publish an annual report on the performance of all SOEs, including with respect to the key performance indicators outlined in the foreseen Guidelines documents. Furthering the strategy’s objective to develop a centralised monitoring system for SOEs, the Business Registers Agency has developed a searchable database of SOEs in Serbia, which provides detailed enterprise-specific information such as financial reports (as available), as well as a list of all shareholders, board members and the CEO (Serbian Business Registers Agency, 2023[6]). The site also provides up-to-date information on recent corporate changes within SOEs, for example relating to their statutes or board composition. Some reporting on SOEs’ performance, insofar as it could engender fiscal risks, is furthermore included in the government’s annual “Fiscal Strategy”, which is submitted to parliament.
For economically significant SOEs and those undertaking public-interest activities, the rules governing their auditing practices appear to be of a high standard. In particular, all SOEs undertaking public-interest activities, together with all medium-sized and large companies in Serbia (including those that are state-owned) must have their financial statements audited by an external (commercial) auditor. Audit committees are required for all medium-sized or large SOEs, as per the recently adopted Law on SOE Governance. That same law introduces the requirement that all SOEs establish an effective system of internal controls to ensure continuous monitoring of business and compliance risks. The 2021-27 state ownership strategy notes that 19% of SOEs had established an internal audit function as of 2021 and announced the target of 100% by 2027. SOEs’ financial statements can also be audited by the supreme audit institution, but these are performed in addition to, and not in place of, external commercial audits.
A 2015 assessment of Serbia’s national integrity system by Transparency Serbia accorded a score of 25 out of 100 to SOE oversight practices related to corruption prevention, suggesting that SOEs were “under the control of political parties” and highlighting the aforementioned problematic practice of the government appointing “acting CEOs” as exacerbating the issue (Transparency Serbia, 2015[7]). An additional weakness stems from the fact that the state, rather than boards of directors, is responsible for CEO appointment and dismissal in those SOEs that are regulated by the Law on Public Enterprises. The practice of allowing the government to appoint CEOs creates a channel for increased political interference in corporate management, and raises the risk that SOEs are used for political or personal gain. As mentioned previously, recent legislative amendments may partly address this problem as fully corporatised medium and large SOEs will henceforth be required to establish supervisory boards, which have the authority to appoint the CEO under the Law on Companies. However, it will take some time to implement these provisions, which also will not apply to any medium or large “public enterprises” until they have been transformed into joint-stock companies.
In this context, there have been some efforts to implement targeted anti-corruption and integrity measures in Serbian SOEs, including notably provisions in the Law on Public Enterprises, applicable to 48 SOEs, that foresee:
collective and individual liability, respectively, of the board and the CEO in case of negligence or unscrupulous behaviour to the detriment of the company
penalties in case the CEO is found to have used the SOE for political purposes
the development of integrity plans for SOEs that have more than 30 employees.
Anti-corruption measures have historically been more limited for SOEs not engaged in public-interest activities, but the new Law on SOE Governance contains several provisions that seek to better mitigate corruption risks in all SOEs. These include notably provisions calling for the dismissal of board or management representatives that undertake actions to the detriment of the company, with several explicit references to any actions involving the use of the company for political purposes, including in the context of election campaigns. The Law also requires that all SOEs develop codes of ethics and integrity plans. Other pieces of legislation affecting the framework for anti-corruption in SOEs include the Law on Companies, which establishes that companies can pursue lawsuits against directors considered not to have fulfilled their duty of care. The Law on the Prevention of Corruption further criminalises bribery of public officials, explicitly includes SOE officials (board members and CEOs) in its scope and requires that SOE managers and other employees undergo training on ethics and integrity. The Serbian authorities report that in 2023, over 34 000 SOE managers and employees (including of sub-national SOEs) completed such training9. The state’s ongoing efforts to centralise state ownership, abolish special legal forms for SOEs and establish more competent and independent boards can be expected to contribute to a stronger framework for reducing corruption-related risks in SOEs.
Regarding the protection of minority shareholders, sound legislation is in place to ensure basic minority shareholders’ rights in Serbia, which apply equally to the minority shareholders of SOEs. The Law on Companies establishes equal treatment of all shareholders of ordinary shares and provides that those with at least 5% of capital can convene an extraordinary general meeting and propose agenda items. Amendments to the Law on Companies enacted in November 2021 have strengthened minority shareholder rights. New measures are notably in place to prevent abuse-related party transactions in limited liability and joint-stock companies. These include the requirement to disclose to the board any transactions exceeding a certain size threshold that involve a “personal interest” of shareholders or directors, as well as new provisions allowing for shareholders to undertake legal action in case such transactions were not properly disclosed or were not concluded at fair value. Additionally, amendments were introduced to promote shareholders’ long-term engagement. The Serbian authorities report that 15 SOEs include minority non-state investors. Because these companies were not previously monitored by the Ministry of Economy, there is limited information available on minority investors’ role in corporate decision making such as board nominations.
Sub-dimension 5.3: Ensuring a level playing field
SOEs’ legal and regulatory treatment differs from that of private companies, for the 20 SOEs that have the special legal form of “public enterprise” (javno preduzece in national nomenclature) and whose primary legislation is the Law on Public Enterprises, rather than the Law on Companies. These public enterprises are governed by a five-member supervisory board whose members are selected by the founding institution (e.g. the government), but many corporate decisions require the consent of the founding institution, greatly weakening these boards. As mentioned previously, the supervisory boards of public enterprises do not have the right to hire or dismiss the CEO; CEOs are selected by the government following a public selection process. Although this should change as provisions of the new Law on SOE Governance come into force, additional monitoring may be merited to ensure that at least all of Serbia’s large SOEs operate under professional boards of directors with the authority to appoint CEOs.
The Serbian authorities have committed to phasing out the separate legal form of “public enterprise”, as outlined in the 2021-27 state ownership strategy as well as the Law on SOE Governance (Ministry of Economy of the Republic of Serbia, 2021[2]). In line with this commitment, Elektroprivedra Srbije (EPS), which supplies coal-powered electricity and is Serbia’s largest company by revenues, was converted from a public enterprise into a (closed) joint-stock company in April 2023.
Regarding SOE financing conditions, transfers from the state budget to ailing SOEs have historically been a common practice in Serbia. According to World Bank estimates, in 2019, SOEs received approximately 60% of all corporate subsidies in the economy (World Bank, 2019[8]). SOEs can benefit from an explicit loan guarantee for investment projects and, if their financing is exclusively or predominantly from the state budget, cannot enter bankruptcy proceedings. As a European Union (EU) candidate economy, Serbia is expected to phase out any forms of state aid that could distort competition with private companies. The Commission for State Aid Control was established in 2019 as part of Serbia’s commitment to align its legislation and practices with the EU acquis in this domain. Perhaps a more fundamental issue concerning SOE financing conditions is that many SOEs in Serbia either do not achieve significant rates of return or are outright loss-making. As highlighted earlier, sectoral performance data point to net losses in 2021 in the electricity and gas, transportation, healthcare and social services, and real estate sectors. While in some cases SOEs’ losses could stem from uncompensated public policy objectives, there are limited data on the extent of such objectives or their actual cost to SOEs. When SOEs achieve negative returns on equity, this effectively constitutes a cost of equity capital that is not market-consistent, signifying an inefficient allocation of resources in the market.
Overview of implementation of Competitiveness Outlook 2021 recommendations
Serbia has announced or commenced reforms in all areas subject to Recommendations on state ownership in CO 2021 (Table 6.2). Planned reforms as outlined in the 2021-27 state ownership strategy are poised to substantially enhance state ownership practices in Serbia. Although the strategy is not expected to be fully implemented until 2027, several implementing measures have already been taken. In particular, the new Law on SOE Governance enshrines in law many of the strategy’s ambitions, including the further centralisation of state ownership under the Ministry of Economy and establishing a process for elaborating, and monitoring the achievement of, clearly defined goals for SOEs.
Table 6.2. Serbia’s progress on past recommendations for state-owned enterprises
The way forward for ownership and governance of state-owned enterprises
The Serbian authorities have already established a sound blueprint for SOE reform in the new state ownership strategy, which includes planned measures to begin addressing the bulk of the Recommendations previously set forth in CO 2021. The authorities should maintain their commitment to implementing the targeted measures set forth in that strategy with a particular emphasis on the following:
Continue strengthening and centralising the state ownership function. Given its expanded ownership functions, it will be important to ensure that the Ministry of Economy has adequate financial and human resources to effectively fulfil these new tasks. Additionally, as the ministry moves forward with implementing the new state ownership policy, including through necessary legislative reform, it should ensure that the tenets of the ownership policy are applicable to the state’s entire portfolio of SOEs. Any exceptions should be clearly and publicly justified. SOEs in the energy sector should be subject to the same high standards of governance and transparency as all other SOEs. Moreover, as the Ministry of Economy expands its SOE performance-monitoring functions, it should analyse in greater detail the sources of SOEs’ underperformance and quantify the impact of any public policy objectives on SOEs’ finances. Good practice calls for the costs of SOEs’ public service obligations to be clearly identified and compensated from the state budget.
Ensure that state ownership policies and practices take into account SOEs’ central role in contributing to the low-carbon transition. Given their presence in sectors with an important carbon footprint, such as energy production, manufacturing and mining, Serbian SOEs have an important role to play in supporting efforts towards the low-carbon transition.10 As the authorities continue to elaborate sustainability-related commitments for the broader economy, they should ensure that such commitments are adequately communicated as shareholder expectations and integrated by SOE boards into SOE-related policies and practices. The inclusion of environmental sustainability as one of the goals of centralised ownership laid out in the Law on SOE Governance is in keeping with this ambition.
Move forward with plans to strengthen boards of directors through a unified nomination process. The new SOE board nomination framework should ensure that board appointments are transparent, competitive and merit-based. Good practice calls for the use of independent commissions to weigh in on board appointment processes, and suggests that ownership-co‑ordinating bodies (in the case of Serbia, the Ministry of Economy) can usefully contribute to the development of qualifications requirements and help harmonise board appointment processes through the development of related guidelines (OECD, 2013[9]). Serbia’s board nomination framework should ensure that SOE boards are sufficiently independent and comprise the appropriate mix of skills and experience to effectively oversee SOE management. Independent board members should be independent not only of company management but also of political influence. Efforts should also be made to strengthen the responsibilities of SOE boards of directors – including by granting all SOE boards the right to appoint and dismiss the CEOs of SOEs – so that they can fulfil their important functions of supervising management and shielding enterprises from political interference. The authorities should take steps to curtail the practice of appointing “acting directors” to SOEs so that the state’s requirements for competitive recruitment procedures for CEOs are applied in practice.
Continue improving disclosure practices by SOEs and by the state shareholder. Serbia’s authorities should build on SOE data compiled in the database of the Business Registers Agency to produce an aggregate report on SOEs, as well as to identify gaps in disclosure of financial and non-financial information by SOEs. Box 6.1 provides an overview of the suggested content of SOE aggregate reports, as set forth in the OECD Guidelines on Corporate Governance of State-Owned Enterprises (2015[10]). Aggregate reports could also usefully include information on SOEs’ contributions to broader areas of current policy relevance, such as the low-carbon transition. The state should develop a common disclosure policy applicable to all SOEs and ensure that at least all large SOEs disclose financial and non-financial information in accordance with international good practice.
Accelerate efforts to abolish the legal form of “public enterprise”. The authorities’ stated goal to phase out the special legal form of “public enterprise”, which applies currently to 20 SOEs, is in line with good practice. The corporatisation of SOEs should be undertaken in tandem with equally important reforms to make the state’s new rules on board nominations and disclosure applicable to all SOEs, regardless of their legal form or commercial orientation.
Box 6.1. Strengthening accountability of the state shareholder: Aggregate reporting provisions from the OECD SOE Guidelines
The OECD SOE Guidelines recommend that the state acting as shareholder publish annual reports on SOEs, called “aggregate” reports because they aggregate information on the state’s entire portfolio of enterprises. It is recommended that these reports be made available on line so that the general public – who are considered the ultimate “shareholders” of SOEs – can access them. The SOE Guidelines recommend that the aggregate reports include information related to the following:
the state’s ownership policy and its implementation, including how the ownership function is organised within the state administration
the total value of the SOE portfolio and its financial performance
other key financial indicators including turnover, profit, cash flow from operating activities, gross investment, return on equity, equity/asset ratio and dividends
performance related to non-financial indicators
SOE boards of directors and stakeholder relations
the operations and performance of significant individual SOEs.
Source: OECD (2015[10]).
References
[5] Electric Power Industry of Serbia (2021), 2021 Environmental Report, https://www.eps.rs/eng/Documents/energyEfficiency/PE%20EPS%20Environmental%20Report%202021.pdf.
[4] Ministry of Economy of the Republic of Serbia (2023), Privatization, https://privatizacija.privreda.gov.rs/Ministry-of-Economy/211/Privatization.shtml.
[2] Ministry of Economy of the Republic of Serbia (2021), Strategy of State Ownership and Management of Companies Owned by the Republic of Serbia for the Period from 2021 to 2027 (in Serbian language), https://privreda.gov.rs/dokumenta/propisi/strategije/strategija-drzavnog-vlasnistva-i-upravljanja-privrednim-subjektima.
[11] OECD (2022), OECD Investment Tax Incentive Database – 2022 Update: Tax Incentives for Sustainable Development, OECD, Paris, https://www.oecd.org/investment/investment-policy/oecd-investment-tax-incentives-database-2022-update-brochure.pdf.
[10] OECD (2015), OECD Guidelines on Corporate Governance of State-Owned Enterprises, 2015 Edition, OECD Publishing, Paris, http://www.oecd-ilibrary.org/governance/oecd-guidelines-on-corporate-governance-of-state-owned-enterprises-2015_9789264244160-en.
[9] OECD (2013), Boards of Directors of State-Owned Enterprises: An Overview of National Practices, OECD Publishing, Paris, https://www.oecd-ilibrary.org/docserver/9789264200425-en.pdf?expires=1707211688&id=id&accname=ocid75017716&checksum=888C9442173A41B890A9E4B587C61CCA.
[1] Republic of Serbia Fiscal Council (2022), Assessment of the proposed Supplementary Budget of the Republic of Serbia for 2022, https://www.fiskalnisavet.rs/doc/eng/FC_Summary_Assessment_supplementary_budget_2022.pdf.
[6] Serbian Business Registers Agency (2023), Search of Economic Entities in which the Republic of Serbia has Ownership, https://pretraga2.apr.gov.rs/EvidencijaPSRS.
[3] Transparency Serbia (2020), Transparency Serbia Submitted a Proposal to Delete Illegal Representatives of State-Owned Companies from the Register, Transparency Serbia, https://transparentnost.org.rs/en/110-english/naslovna/11658-transparency-serbia-submitted-a-proposal-to-delete-illegal-representatives-of-state-owned-companies-from-the-register.
[7] Transparency Serbia (2015), National Integrity System Assesment: Serbia 2015, Transparency Serbia, https://www.transparentnost.org.rs/images/dokumenti_uz_vesti/TS_report_NIS_2015.pdf.
[8] World Bank (2019), Reforming State Aid for Growth: Serbia’s New Growth Agenda, https://thedocs.worldbank.org/en/doc/525621576650023118-0080022019/original/SRBCEMStateAidsm.pdf.
Notes
7.5
Notes
← 1. The size of the SOE portfolio is as reported by the Serbian authorities in the context of this assessment and may exclude some enterprises that the OECD would consider SOEs. Information provided by the authorities related primarily to those SOEs that will be subject to the new centralised monitoring framework under the Law on SOE Governance, which notably excludes: banks, insurance companies and other financial institutions; companies that manufacture weapons and military equipment; and enterprises scheduled for privatisation or undergoing bankruptcy proceedings.
← 2. Several categories of SOEs are exempted from the scope of application of the new law. This applies to state-owned banks, insurance companies, non-profit organisations, companies manufacturing military equipment, institutes, and SOEs that are undergoing privatisation or insolvency proceedings.
← 3. The identification of enterprises subject to the Law on Public Enterprises (a portfolio of 48 companies, of which 27 are fully corporatised and 21 have the special legal form of “public enterprise”) is based on a list of companies provided by the Ministry of Economy in the context of this assessment.
← 4. The Law on SOE Governance is separate from, and will eventually replace, the Law on Public Enterprises. Until the entry into force of the Law on SOE Governance (scheduled for September 2024), provisions of the Law on Public Enterprises remain in force.
← 5. Separately, state-owned enterprises managing the natural gas transmission system are, as per the Law on SOE Governance, under the ownership responsibility of an independent state body responsible for energy networks and subject to separate bylaws.
← 6. The Law on Public Enterprises sets forth that to be considered “independent”, a board member must not have been responsible for auditing the SOE’s financial statements in the previous five years, be a member of a political party, or be employed within the SOE. The Law on SOE Governance references only the board members’ independence from the company and application of the independence criteria set forth in the Law on Companies for public joint-stock companies.
← 7. The Law on Accounting establishes that external audits of financial statements are required for all large and medium-sized entities, while the Law on Public Enterprises applies this requirement to all SOEs performing activities of public interest and thus subject to the Law (with no limitations related to their size). Based on these legislative requirements, it is not clear why small public-interest SOEs may be excluded from the scope of the Law on Public Enterprises’ requirements for external audits.
← 8. Information on sustainability reporting provided by the Serbian authorities is based on self-reporting by the SOEs under the purview of the Ministry of Economy.
← 9. The Law on the Prevention of Corruption (in Serbian language) is available here: https://www.paragraf.rs/propisi/zakon-o-sprecavanju-korupcije.html.
← 10. For general information on the role of SOEs in the low-carbon transition and international practices for setting related objectives, see OECD (2022[11]).