Serbia’s surge in public investments: Transparency and sustainability concerns highlighted by Fiscal Council

The recent report by Serbia’s Fiscal Council provides a comprehensive analysis of the country’s public investments, revealing a significant increase in investment levels but also highlighting various issues regarding transparency, efficiency, and long-term sustainability. Here’s a detailed summary of the key points and recommendations from the report:

Unprecedented public investment levels

• High investment relative to GDP: Serbia’s public investments have exceeded 7% of GDP, the highest in Central and Eastern Europe (CEE) and a rare figure globally. From 2021 to 2023, the country allocated around €5 billion annually to public investments, making it the third-largest budget expenditure after pensions and public sector salaries.

Issues and criticisms

• Lack of transparency and justification: The report criticizes the lack of transparency in the economic and social justification of large state projects. There is poor explanation or no explanation at all of project costs, priority selection, and contractor choices.
• Bypassing standard procedures: Many projects are executed through special procedures that bypass general legal regulations, including public procurement laws, expropriation, and planning norms. This practice deviates from usual international standards and is seen as an expedient but non-systemic approach to increasing public investments.

Historical context and institutional weaknesses

• Comparison to past investments: In 2015, Serbia’s public investments were below 3% of GDP due to inefficiencies in project implementation. Recommendations then focused on improving transparency and efficiency.
• IMF recommendations: The IMF in 2016 also highlighted the inefficiency in executing public investments and recommended enhancing institutional mechanisms for project management.

Factors behind investment growth

1. Special procedures and exemptions: Since 2018, many infrastructure projects have been implemented via special procedures exempt from standard regulations. Examples include bilateral agreements and domestic laws like the lex specialis for significant projects.
2. Security sector investments: There has been a marked increase in spending on defense and police, which now constitutes about 1% of GDP, significantly up from previous levels.
3. Healthcare investments: During the COVID-19 pandemic, investments in healthcare surged, often bypassing standard procurement procedures.
4. Energy and commodity reserves: Large procurements for energy and commodity reserves were notable, especially in 2022, in response to the energy crisis.

Positive impacts and risks

• Economic growth and employment: Increased public investments have positively impacted economic growth, employment, and private investments, without significantly raising the country’s debt.
• Negative long-term effects: The lack of systematic and transparent project selection and execution poses risks. The report notes arbitrary project selection, questionable costs, and frequent cost escalations post-contract.

Sectoral imbalance and project justification

• Neglected Sectors: Important sectors like environmental protection and education have been neglected due to the arbitrary selection of projects.
• Debatable Projects: Investments in projects like a vaccine factory and various sports facilities are seen as of questionable justification.

Recommendations for improvement

1. Return to standard procedures: Future projects should adhere to regular procedures including the Law on Public Procurement and the Law on Expropriation, aligning with EU requirements.
2. Institutional reforms: Immediate reforms are necessary to remove bottlenecks in public investment implementation, ensuring efficiency in existing laws on procurement, planning, and expropriation.
3. Feasibility studies and long-term planning: Publish feasibility studies for large projects, adhere to long-term planning obligations, and regularly monitor public investments.
4. Development plan compliance: The Government needs to comply with the legal requirement for a ten-year Development Plan and ensure timely preparation and approval of relevant documents.
5. Limit discretionary practices: The procedure for declaring projects as of special importance should be made more rigorous and limited to exceptional cases.
6. Public-private partnerships (PPPs): Incorporate PPPs into the investment management system to enhance transparency and efficiency in public fund usage.

Conclusion

The Fiscal Council’s report underscores the need for Serbia to adopt a more systematic, transparent, and sustainable approach to public investments. While the high investment levels have driven positive short-term economic effects, the current practices are not sustainable long-term and risk negating the benefits due to inefficiencies and lack of transparency.