Last year, 549 public companies made a loss of five million euros with 244 million euros in subsidies, while in 2018, public companies in total achieved a positive business result, according to data from the Business Registers Agency. If there were no state subsidies, the losses would be much higher
It is as if someone turned the switch, so public companies moved from a loss of almost 366 million euros in 2014 to a positive zone, something that has not been seen for a long time, of 109 million euros in 2015. In 2014, fiscal consolidation began, negotiations with the IMF began, and the agreement was officially concluded in February 2015. It is difficult to say how the huge deficit turned into profit, since even after five years, the IMF believes that the reform of public companies has made the least progress from all the goals set in the arrangement.
Positive external factors helped them, however, the fall in interest rates to record low levels and the strengthening of the dinar against the euro, which affected them as net debtors. The privatization of the Smederevo Ironworks and RTB Bora, which was the biggest debtor for electricity, also helped, as well as the introduction of order in the payment of gas by the heating plants and factories of the petrochemical complex.
However, this honeymoon did not last long. The profit of public companies, which are companies founded by the Republic of Serbia or local self-governments and which perform activities of public interest, grew significantly until 2017, when it reached 212 million euros. And then comes the downfall. In 2018, the profit of this group of companies dropped to 30 million euros, and in 2019, a total of 549 companies ended in a deficit of slightly less than five million euros, according to the Annual Bulletin of Financial Statements for 2019 issued by the Business Registers Agency.
During this period, there were no unfavorable developments on the international financial market, on the contrary, money has never been cheaper, so interest rates in Serbia continued to fall, while the dinar against the euro strengthened by more than four percent in nominal terms, and even more realistically. Most importantly, in 2018 and 2019, the Serbian economy recorded the highest GDP growth (4.4 and 4.2 percent) since 2008.
Namely, the operating profit is lower by 23% than in the previous year, and compared to 2016, when it amounted to 508 million euros, it is even three times lower. Since 2016, operating expenses have grown faster than operating revenues each year. Authorities boasted that public companies were filling the budget, and on the other hand, their balance sheets were rushing back to losses, which had accumulated more than three billion euros in previous years.
To make matters worse, that profit from business does not really exist. Namely, subsidies to public companies last year amounted to 244 million euros. According to the accounting regulations, subsidies are recorded as business income, and as we can see, if they did not exist, public companies would not have a profit from business, but a loss of around 80 million euros. The good news is that the amount of subsidies was reduced in 2019 by almost 100 million euros compared to 2018.
Although there are 549 companies in this group, their total result is determined by several huge companies such as EPS, Srbijagas or Putevi Srbije. According to Sasa Djogovic from the Institute for Market Research, some of these companies can pull down the overall result of all public companies with a bad result.
“The business result of some of the large public companies could suffer if there were no timely investments, if costs were increased or for some other reason. In any case, in market conditions, a failure in business would take away the responsibility of management, just as in the case of profit, directors would receive bonuses. That is not the case with us. Supervisory boards should take care that resources are not wasted irrationally in public companies, but in our country they are mainly used for filling pockets and raising hands. That is why, in addition to the executive board, the supervisory boards should not be absolved of responsibility,” Djogovic said.
Unfortunately, the individual financial reports of the companies have not been published yet, and when it will be a big question is, since the deadline for submitting reports has been moved from June to August. The real state of affairs is certainly known in the ministries of economy and finance, to which public companies have to send quarterly business reports, but we have not received an answer from them about what led to the losses of public companies last year.
For Milorad Filipovic, a professor at the Faculty of Economics in Belgrade, this is just a demonstration of the quality of management in public companies.
“This is nothing new, unknown or surprising. I’m not even quite sure about the profits that were made in previous years. Nothing has been done in the reforms of public companies except to some extent in the Railways, under the pressure of the IMF and Eurofima, to which the Railways owed a lot of money. Over 40,000 people worked at the Railways in the early 2000s, and now there are fewer than 20,000. It is also the only public company in which the number of employees has been seriously reduced. In the others, there is little that has been done,” notes Filipovic.
Professor Filipovic describes large republican public companies as “a state within a state”. According to him, there are big losses in them, which sooner or later are transferred to the taxpayers, and the money is extracted in various ways.
The key to solving the problem of public companies is in professional management, but it has already become worn out due to its strong use.
“For at least 20 years, there has been talk of professionalizing the management of public companies. In the early 2000s, they called it departmentalization. But the public company is still considered the winning prey after the elections. As long as public resources are managed in this way, we will be the wild east in the eyes of the West,” Filipovic estimates.
It does not have to be a problem exclusively in state ownership, since there are state-owned companies in developed and highly market economies, but as Filipovic explains, “the management is set in them according to expertise, and not according to merits in pasting posters”.
Ljubodrag Savic, a professor at the Faculty of Economics in Belgrade, also expresses doubts about the accuracy of the data in the balance sheets. He reminds of some interesting cases from previous years, such as when the Electric Power Industry of Serbia made a profit of 20.80 million euros in 2015, and then 71 million euros the following year, and after two years recorded a loss.
“These are large systems that are characterized by business stability, except in extraordinary circumstances such as floods. What has changed so much in business that it makes a big profit in one year and a loss in the other. So I don’t believe much in this loss, just as I don’t believe in the profits of previous years. Everything can be shown in accounting as it suits, and everything depends on what the state wants from the company,” Savic is skeptical.
He also reminds of the situations with EPS when they paid dividends to the budget, and then the state guaranteed them loans. After a record profit in 2016, when EPS paid 25 million euros into the budget, at the beginning of 2017, the state guaranteed a loan of 45 million euros that the German KfW gave to EPS for ecology.
“You can see that something is wrong here. Nowhere do public companies do business perfectly. You have examples with companies that have made losses over the years, such as Air France. But public companies are the biggest source of privileges in Serbia. It is difficult for a group of people to manage so many resources somewhere,” notes Savic.
Finally, on the positive side, public companies managed to reduce indebtedness last year, primarily short-term loans. From 5.2 million euros, short-term liabilities were reduced to 4.48 billion euros, mainly by reducing short-term loans by 1 billion euros. At the same time, long-term liabilities increased by about 12.5 million euros.
Also, according to APR data, 115,474 workers were employed in public companies, which is 2,284 workers less than in the previous year. Although the number of employees in public companies was reduced by two percent, the cost of salaries increased by three percent during 2019, Nova Ekonomija reports.
