Tony Verheijen, World Bank Country Manager for Serbia

The most worrisome fact about the current status of Serbian reforms is that citizens still do not feel the progress, which is obvious on the level of the overall economy,” says Tony Verheijen, World Bank Country Manager for Serbia. “It is probably due to the fact that reforms haven’t yet materialised in terms of stronger employment. But once the loss of jobs as a part of the process of on-going reforms in the public sector is over, it will be much more visible than the private sector and foreign investments are giving strength to the economy and the job market.

While the new government has a lot of tasks ahead in finishing that process, it is good to know that even during the election process technical work on many aspects of reforms hasn’t stopped,” says Verheijen.

What is your view of the overall economic situation in Serbia today?

– The economic situation in Serbia shows improvement in terms of growth and fiscal performance, and, for both aspects, the country is performing better than expected. Given the early elections, which created some uncertainty as well as a delay in reforms (though not as much as might have been feared), the better-than-expected growth numbers come as a positive surprise.

What is even more important is that the acceleration of growth is based on improved export performance and more broadly based on foreign direct investments (FDI). What is of concern is that, as in many other countries, improved fiscal performance and growth are not being felt by citizens who continue to perceive a decline in living standards.

While often this is due to delayed effects of economic indicators on the income of citizens, it is concerning that in Serbia there is a perception of decline while economic and fiscal performance is improving.

In part, this is probably due to the increase in private sector employment being offset by reduced employment in the public sector, so that the net increase in employment remains very low. We would assume that once the adjustment in public sector employment will be completed, though this will take some more time, job creation in the private sector will start pushing up perceptions on living standards.

The government continued with technical work throughout the election period on virtually all economic reform programme issues, hence the expectation that a lot of time would be lost due to elections has not materialised

Is it possible for the new administration to catch up with the schedule set by the agreement with the IMF or has the pace of reforms been somewhat lost?

– I would like to emphasise that technical work continued throughout the election period on virtually all economic reform program issues, hence the expectation that a lot of time would be lost due to elections did not materialise. However, some fundamental decisions, in particular on right-sizing, could not be taken and have now become really urgent. If there is more delay on these decisions, this will have a serious impact on the financial sustainability of utilities and transport companies. It is therefore critical that the new government proceed with these decisions as a matter of urgency.

In that respect, what do you think of the overall progress made in sorting out problems with companies in restructuring?

– I would say that, if someone would have told us two years ago that we would reach the situation where we are today, where most of the companies in the portfolio of the former Privatisation Agency are in an advanced stage of resolution, we would have had strong doubts that this could be feasible. This, given the long history of unsuccessful resolution efforts.

This does not take away from the fact that important decisions remain to be taken, notably on the pre-packaged bankruptcy process and management contract for RTB Bor, an agreement on Petrohemija, the privatisation of Galenika and finding a resolution for Resavica mines. While risks remain as long as these four main companies are not finally resolved, we should acknowledge the long way the government has come on this issue.

What about reforms in the Electric Power Industry of Serbia, Srbijagas and the Serbian Railways?

– This is an issue for the long haul, and the truly thorny problems that have been created over two decades and have driven up debt levels in these companies cannot be resolved overnight.

The entanglement of weak financial discipline and poor corporate governance have created a situation in which it will take several years to put these companies back in any shape that will allow them to be sustainable and competitive in the long term.

As an example, Srbijagas’ huge debt of over EUR 1.6 billion is caused by a combination of years of non-payment of bills by socially owned enterprises (SOEs) and district heating companies, the use of Srbijagas as an instrument of social policy, a dubious investment policy and the contracting of expensive debt to cover deficits. Resolving Srbijagas debt issues is therefore impossible without also resolving commercial SOEs and instilling financial discipline in municipal utility management. Such a comprehensive resolution process is now being worked out, and this is a good start.

The situation is much the same for EPS, though for this company the concern is about medium-term sustainability rather than current debt levels. The cost of not addressing collection rates, distribution losses, overstaffing and the continued operation of redundant facilities, combined with low tariffs, would, by 2019, create a situation wherein EPS liabilities could wipe out all the hard-won earned gains of fiscal consolidation. This instead of EPS delivering on the potential it has to become an important regional player in the energy market in the Western Balkans and beyond.

Surprisingly to some, the reform process in the railways has evolved significantly, with the unbundling and asset division processes almost complete and the right-sizing process prepared, but being held up because of the lack of a final decision on principles to be applied across all utilities and transport companies.

While many challenges are ahead, the government did much more when it comes to shaping up the public companies and those in the portfolio of the privatisation Agency than anybody would have expected two years ago

Was the government right in postponing the rise in price electricity or it jeopardised the restructuring of the EPS?

– Regional electricity prices have evolved and we need to analyse how this impacts on EPS sustainability. This analysis can only be done based on the final financial results of the company in 2015, which will be available end June. Based on this, we will conduct an analysis of the impact of regional price trends on EPS sustainability and how this would impact on the price increase trajectory. Even without this analysis, however, it is clear that further price adjustments will be needed to make EPS sustainable in the medium term.

How close we are today to another reform goal – a merit-based public service system and an efficient public administration?

– On this reform, we are still in the process of creating the fundamental conditions for the development of an efficient and merit-based public service system. 

The law on the maximum number of employees, the public sector wage law, along with the functional reviews, which are being finalised shortly, should allow the government to move forward on this agenda.

In doing this, it is important that the government makes full use of the opportunities provided by new technologies in drastically changing the way public services are provided to citizens, reducing staff numbers in back-office functions, which remain significantly overstaffed (unlike the specialist level in the administration, where there is a shortage of capacity). This would provide a better quality of services at a lower cost and would then allow the government to invest in the capacity it will need to become, in the future, an effective member state in the EU.

If we assume that all those reforms are done more or less in line with the initial plans, would it be enough to reverse the trend of the rising indebtedness?

– Yes, it would definitely do so, but we should remember that especially on EPS the risk is too long term sustainability (and fiscal impact if this is not achieved) and that measures are taken now have the main objective of preventing debt from rising again.

DB welcomed a new trend of smaller but more widespread foreign investments. To what extent can it be explained by the better position on Doing Business list?

– I believe that while the DB rating may help, investors make their decisions on an assessment of the fundamentals. In this respect, the progress on EU accession is, in my view, more important. A decline in the business climate, however, would definitely be a deterrent for investors and in this respect it is important.

How likely it is that Serbia may make another leap on the list this year?

– This is very difficult to say. Serbia has definitely made further progress on reforms, but given that this is a relatively rating, where Serbia finds itself will depend as much on Serbia’s own performance as on how well other countries with ratings close to Serbia have performed.

How do you see new efforts made by the government and NALED to further remove the obstacles for businesses?

– The removal of obstacles to businesses is very important as it is one ingredient in the broader set of factors that businesses use to determine where to invest.

In which areas does the business climate need to be improved further?

– In recent discussions that my colleagues from the Doing Business team had with some 40 enterprises in Serbia, two issues emerged as most prominent. The number one issue that was raised in the performance of commercial courts, of which I wrote in my recent B92 blog.

Weak capacity in the judiciary, perceived high levels of corruption and para-fiscal charges and taxes levied by local governments remain the main challenges for companies, and need to be addressed

The lack of predictability of judicial processes, weak capacity in the judiciary and perceived high levels of corruption are mentioned as critical factors driving poor performance. The second issue is para-fiscal charges and taxes levied by local governments. Finally, performance issues remain in the tax administration, which needs significant streamlining and modernisation.

Having in mind that you have considerable experience with the transformation processes in Central and Eastern Europe in the context of their EU accession, how would you assess the progress Serbia made so far?

– Serbia started from a significantly disadvantageous situation, with the significant destruction of infrastructure, the legacy of a large and unviable commercial SOE sector and more than a decade of economic isolation. It also inherited a relatively strong public sector, which unfortunately was then eroded by politicisation and frequent staff turnover.

All in all, Serbia had significantly more ground to make up than some other countries in the region, but it was held back by many years of indecision on fundamental reform. The current process of reform is, in many ways, the final chance for the country to catch up and take its rightful place in the European economic and political community.