The fiscal strategy envisages a reduction in subsidies to 1.9% of GDP by the end of 2023, which is almost 40% less than the amount of state aid in pre-crisis 2019. Bearing in mind that subsidies for agriculture, railway infrastructure, environment and science is strategically important, it follows that budget support to public enterprises would have to be significantly reduced. And here the whole bill falls into the water, according to the Fiscal Council.
The state plans to reduce subsidies and other forms of budget support below the pre-crisis level in the next three years – from a record 5.2% of GDP in 2020 due to the anti-crisis package of support to the economy and citizens, to 1.9% of GDP by the end of 2023 years. This direction in fiscal policy is good, but the main question is how realistic the planned plans are, the Fiscal Council estimates.
Namely, over the years, Serbia has allocated almost three times more for subsidies than comparable countries in Central and Eastern Europe (CEE). In the period from 2005 to 2019, our country spent on average 3.4% of GDP for these purposes, compared to the CEE average of 1.2% of GDP. Since then, the lowest level of these expenditures was recorded in 2019, when it amounted to 2.6% of GDP, which is almost 40% above the new medium-term goal.
However, the fiscal strategy does not mention comprehensive reform measures that should enable the realization of such an ambitious task. It is clear that subsidies will be mostly reduced because no extraordinary expenditures are planned for anti-crisis measures as in 2020, but the calculation shows that even without them, expenditures on this basis by the end of 2023 would amount to 2.7% of GDP. This is significantly more than the envisaged goal, so the question is how the state intends to achieve it, especially if we keep in mind that some subsidies are strategically important for further development.
This primarily refers to subsidies for agriculture, for which about 0.8% of GDP is allocated from the budget, and if the necessary support for the improvement of environmental protection, railway infrastructure and science is added to that, the total costs of about 1% of GDP. At the same time, some of these expenditures, such as those for ecology and railway infrastructure, would have to grow in the coming period.
It follows that the necessary reduction would have to come from the part of subsidies that totals 1.6% of GDP, and most of all it relates to support for state and public enterprises. For that to happen, their business would have to improve significantly over the next three years. The proposed measures in the fiscal strategy, however, are not enough for business progress, which would provide the planned reduction of this type of budget support, according to the Fiscal Council.
The price of electricity cannot cover irrational costs
When it comes to railway infrastructure, comparisons with the pre-crisis year of 2019 show that railway companies, despite generous subsidies of around 118 million euros, had a loss of almost 42 million euros. The biggest problem is the poor infrastructure, due to which the railway traffic is not even close to a competitive alternative to road transport. In addition, railway closures are frequent due to reconstructions, especially on profitable routes, which also hinders efficient business, especially Srbijavoz. At the same time, the loss of Srbijakarg’s market share in freight traffic indicates shortcomings in the management and establishment of an appropriate tariff system.
Insufficient traffic volume also means lower revenues from the fee for access to infrastructure, which should be the basic income of the Serbian Railway Infrastructure Company. A preliminary analysis of business for 2020, conducted by the Fiscal Council, indicates that the business of railway companies further deteriorated due to the pandemic, and in December last year, 2.5 million euros were transferred to Srbijavoz from the budget reserve.
It is very likely that such intervention assistance for some of the railway companies will be in the future, so instead of the announced reduction, it is much more certain that subsidies will increase, primarily those for improving the railway infrastructure.
The plan for the restructuring of Elektroprivreda Srbije (EPS) is equally unrealistic. This public company, which according to the Fiscal Council is probably the most important for the domestic economy, would have to invest 600 million euros in the renovation of existing and construction of new plants, in order to meet the growing demand for electricity and meet minimum environmental standards. However, since the essential reforms of this company are constantly being postponed, the state had to unplannedly subsidize EPS with around 40 million euros last year.
The plan for the restructuring of Elektroprivreda Srbije (EPS) is equally unrealistic. This public company, which according to the Fiscal Council is probably the most important for the domestic economy, would have to invest 600 million euros in the renovation of existing and construction of new plants, in order to meet the growing demand for electricity and meet minimum environmental standards. However, since the essential reforms of this company are constantly being postponed, the state had to unplannedly subsidize EPS with around 40 million euros last year.
The measures set out in the fiscal strategy do not assure that there can be a more serious turn in the business of EPS. First of all, the labor cost optimization mentioned in this document refers only to the plan that expired in 2019, without indications whether the rationalization will continue in the future. The announced transformation of EPS into a joint stock company and the separation of distribution into a separate company, as well as promises to improve collection, cannot eradicate all the problems that this company has been facing for years.
The only planned measure that can significantly improve the company’s balance sheets is a change in tariff policy. But if the increase in the price of electricity is not linked to a reduction in costs, especially labor, to cover the costs of regular operations, purchase of energy from renewable sources and investments – it would have to be so much that it undermines the implementation of this measure assessed by the Fiscal Council.
About public companies on the local
Similar conclusions are reached by analyzing the operations of Srbijagas. It is getting worse from year to year, primarily due to the growth of the purchase price of gas, so the profit of this company dropped from almost 144 million euros in 2016 to 55 million euros in 2019. The pandemic has further shaken the company’s liquidity, but according to its fate, the old structural problems are much more dangerous: the discrepancy between the purchase and sale price of gas and the insufficient collection of current receivables.
The recently adopted plan for reforms in Srbijagas indicates the determination of the republican government to finally move them from the deadlock. However, although the decisions on the separation of activities within Srbijagas into separate companies, on the release of dependent companies that burden its balance sheets and changes in the tariff policy are good, they are not enough for a significant improvement of business. Srbijagas has long needed a fundamental reform, and the consequences of its further delay could be disastrous. Especially since the price of purchased gas – on which the company’s business crucially depends – is constantly rising, and only during the last three years it has increased by almost 50%, which can ultimately spill over into the budget. The Fiscal Council reminds that the state has already taken over the repayment of the loan of over one billion euros, which Srbijagas took in the period from 2008 to 2012.
A medium-term plan to reduce subsidies would be more convincing if the fate of the remaining state-owned enterprises in the privatization process were decided more decisively. Namely, a large number of state-owned companies have not generated sufficient revenues to cover basic production costs for years, and with their poor business operations, they negatively affect the operations of other public companies that are their suppliers, especially EPS and Srbijagas. Of the remaining 70 state-owned companies in the privatization process, the biggest problem will be reaching appropriate arrangements with potential strategic partners for Resavica, Petrohemija and MSK Kikinda.
In addition to the listed shortcomings in the fiscal strategy, the reduction of subsidies is called into question by the fact that this document does not address the numerous problems of local public enterprises, and subsidies paid from municipal and city budgets are still high – ranging from 0.3% to 0.5% of GDP per year. Planned expenditures on that basis for 2021 are at the level of the previous two years, ie they amount to about 0.3% of GDP, but it is not possible to determine how many local subsidies are planned for the next two years, nor is any fiscal strategy exposed, BiF reports.
