06.09.08Zorana Mihajlovic, Advisor for energy sector,

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Is Serbia the only country in the world, or does it belong to the last group of the countries in transition, where energy is determined by governing political parties instead of being determined by clear targets and rules accepted and implemented in all developed countries?
Is the occurrence of dodgy stories and business in this sector a reality or dream? Does the energy sector of Serbia act as a brake on sustainable social development?

The process of privatization is often given as a negative example without any evidence to the public, especially if the change of ownership structure of the basic sectors such as energy and telecommunications is in question. This is understandable, bearing in mind that the privatization of the energy sector, as with any other process connected to the exchange of material goods between subjects of different economic positions, does, by definition, imply the possibility of unclear processes and often corruption, too.

Former experience of the developing countries during the privatization process of this sector has indicated three key factors of its success: the rate at which privatization is on-going, the level of authority in decision making, and the quality and availability of information related to the process of privatization.

Serbia is a country in transition, i.e. a country that has turned to market policy within all sectors (including the energy sector). However, its behavior in this process is unpredictable and progress is slow. The process of restructuring the energy sector is not yet complete, and there is much more talk about ownership transformation than real action. In Serbia, since the end of World War II, material wealth, infrastructure, energy, telecommunications and other highly profitable activities have been under the unquestioned control of the state through public companies. It’s 60 years since then. What has changed? During the regime of Slobodan Milosevic, the domination of the state sector in economy was preserved by postponing ownership transformation in order to provide the financial basis for keeping the new elite in power. There is no need to talk of what happened in that period. It is enough to say that corruption occurred in the management and purposeless disposal of capital and property, which further limited the possibility of the public companies to meet citizens` needs and to fill the state budget.

Unfortunately, I am not sure that things in that domain have changed much since 2000, because we are still witnesses to abuse in the managing of the public companies that has yet to be uprooted, despite the glamorous announcements of past and present leaders. What factors have influenced the undisturbed operating of the mechanisms of corruption within the public companies during the last couple of years? Are we an exception, or is it a rule that becomes law in all countries, where the level of resistance to change is stronger than the willingness to have a normal life and an organized country? Such questions have their black and white, comforting and disastrous sides. Comforting is the fact that we are not the only country in the world, disastrous that unfortunately we are the only one in the region. The aims of the energy policy of Serbia do not differ from the aims of the energy policy of any other developed country, or at least those that are on the way to becoming developed. They are following each other, starting from the provision of secure energy and energy substances supply, increasing the efficiency and competitiveness of the sector, creating an energy market, and diversification of supply, with the first condition of overcoming monopolistic behavior and organization in the sector.

The achievement of these aims in Serbia is going very slowly, always with the “handbrake up” due to there being so many obstacles. And what is the handbrake here? The acts under the law on energy that are still not passed, or failure to adhere to that law? Unadopted particular strategies or failure to conduct the strategy of energy development? Or the fact that the Energy Agency has not started working in her full capacity, or even the lack of control over this Agency by the Parliament of Serbia? “Moaning” about the occurrence of non transparent tender procedures from consultant services to strategic partners or undefined criteria of control, which arouse suspicion of corruption? Or maybe it is managing and conducting this sector between dominant governing parties or minority political parties without the perspective of changing this situation in the near future?

And when it comes to political parties, the sad fact is that the management boards of the public companies, as the highest managing organs, most often consist of former presidents of community centers, instead of professionals in this area. This is one of the main reasons for the slow rate of change within the energy sector of Serbia. However, this is neither the only nor the most important reason.

Serbian energy sector is part of the Energy Community of South East Europe, and share 17.5% of whole total primary energy supply of this Community.

It could be opportunity for developing the sector, in despite of problems, especially in energy balance projection.

Table 1 / Serbian Energy Balance / mill t oe

Source: self calculation

For a larger resolution of the image above, please Click Here

It should not be forgotten that the non-existence of a clear and concrete strategy for economy development, as a part of a strategy for the sustainable development of the country, has direct effect on the impossibility of a clear vision of future development in the energy sector. Furthermore, bad and inadequate personnel structure in key positions in this sector, i.e. a high level of incompetence and ignorance, can not cause anything other than a lack of any kind of good layout or control. Because of that we should not neglect the ominous truth- there is corruption within this sector, and we can only hope that it has not become the only model of behavior.

There are reasons, from these visible ones, to those that can be only sensed hovering around in the air. At first sight, it is obvious that there are no clear rules, criteria nor control. What is invisible is that this sector does suffer from corruption. There is no other way to explain the slowing down of the process of its development, the stagnation and regression. One step forward and two backwards, and are easy to see where we are today. Where can corruption occur within the energy sector? Almost everywhere, because the state, by doing nothing, has created an atmosphere in which corruption is the way of thinking and acting in this sector? Within these loopholes, corruption is strongest and most obvious in ill-defined programmes for company transformation, insufficiently clear procedures for carrying out the process of privatization, procurements, “strange” methods in the tender commissions (the criteria of member selection, reports, and such like), violation of the principle of unbiased decision making (it is enough to look at the announcements of main officials to understand that they are indirectly lobbying for particular buyers…), the appearance of conflicts of interest and power used for improper purposes (for example, the Assistant Minister who appears on the behalf of a public company as a consultant in the sector for which he is the Assistant minister, whilst signing a cooperation memorandum with a foreign company during his directorship)…etc.

If someone is in a position to decide on anything, he is actually in a position to be corrupted. If it turns out that the people nominated for responsible functions fulfill just one criterion- membership or support of a certain political structure, the possibility of their being corrupted is more than 50%. This relates to all from the highest state officials to local authorities. All those who possess resources, limited goods or those who manage monopolies can be the object of corruption.

Whether some are corrupted because of 100 litres of petrol, unauthorized connection to an electricity meter, the shady selection of a strategic partner, or what is done for 1000 euros or a million euros, these are not the most important thing, but what is important is to realize that the money goes to private pockets instead of being invested in the development of the country, creating in that way a horrible image in the world. It is important to realize that this is like a cancer, and can be stopped only with rigid methods, though it can not be stopped at all levels. One of the methods is to abolish monopolies in this sector. Their disastrous effects on society and its development can be illustrated with the main consequences of their operating. Monopolies prevent competition and the development of market structures, and hence result in disabling the development of a higher level of economic and energy efficiency. We can not delude ourselves; there can be no progress in the Serbian energy sector without this abolition. Who benefits there? The consumers and the state benefit the least. The greatest beneficiaries are the individuals active in the business operations of the big financial oligarchs.

To avoid confusion, the workers afraid of restructuring neither are not to be blamed, nor the trade unions that oppose it because in that way their members will be reduced, as well as their power, nor even the management of the public companies that resist, because they will not be presidents of “the state within the state” any longer.

They are not to be blamed. They just want to achieve their interests, working within the confines defined by the state, if the state did anything at all. And how can we explain that a director of a public company is more powerful than a departmental minister, or in some cases even the Prime Minister?! Therefore, if we are to attack financial magnates, large companies, workers, trade unions or the directors of the public companies, we are wrong. Those who set the rules and make the criteria are at the right address, and that is the state. It is not the child who is guilty, but the parent.

The most obvious example for this may be the limited offer of resources. The state takes responsibility for allocating resources, as is the case with electric power, and it offers electric power from its company, from a single monopoly (EPS), at a price that is lower than that formed at the right moment on the market, if such a market exists. On the other hand, when it comes to oil and petroleum products, the situation is different. Again by Directive, in order to protect its two refineries, the state passed a regulation according to which, no one has the right to import petroleum products, but instead must refine crude oil in the national refineries. This is disastrous from an economic standpoint, and inefficient and unreasonable from an energy one. It was and it is a source for corruption.

Who profits by refining crude oil for almost seven years in the Serbian refineries, at prices of refinement sometimes even three times higher than neighboring prices? Are large and small companies so willing to sacrifice their profits and make loss because of a small Serbian market? The answer is no, as it is certain that they do not suffer such a loss. Everything else is clear. It is also clear that the restructuring and privatization of the energy sector is a serious matter, because it is an area behind which are employees, trade unions, the state, politicians, local and regional authorities, managers, and of course potential buyers. Changing ownership causes a new balance of power of different interest groups. Someone will reduce their influence and others will increase it. If the procedure is not open, then such changes of relations bring problems, affairs and bitter experience, but most of all they create a bad image. Procedures may be amended, but with control, it seems to me, it is even unknown whether control exists as an option, and if nothing else, carrying out control is a sign of good manners. However, bearing in mind the results of carrying out some “attempts at control”, many reasonably raise the question of the suitability of its execution. There are many examples, the affair of privatization water company Knjaz Milos, the affair of concessions of mineral on Crni vrh, the attempt to sign various memorandums on cooperation and strategic partnerships, not to mention the controlled outcome of the privatization of former own state oil company Beopetrol. What are interesting are the unarticulated answers of the departmental ministry in charge of this privatization i.e. prolonging the terms for fulfillment of the contract. The concern of the departmental minister, which he expressed while explaining the reasons for prolonging the contract to Lukoil-Beopetrol is also interesting. Is this a rule, or are there different buyers whose concerns are also different?

Can anyone who is intelligent today explain how it is possible that a company such as Lukoil, for a certain period of time, has not fulfilled its obligations in such an organized country as Serbia? What can be expected from the others then, when the state in this case does not use the instruments given it by the Constitution? Because of that, it is natural that there is suspicion and questions about what stands behind this story. Even if everything was done perfectly, once born, suspicion can not be easily overcome, making great loss for the state of Serbia. On the other hand, there must be clear lines between transparency and business secrets. During contracting with new buyers, their wishes for the competition not to have an insight into all details of the contract must be considered. However, everyone and all must have insight into the terms offered by potential buyers. When they have insight, then the loss of business is just a matter of sport and competition, because the better has won, and it is not a question of disputes in courts, where the smartest at lobbying and corrupting has won.

The worst option is to mix transparency and publicity. Then everyone loses. However, the transparency of the process, which includes availability of information, its relevance, the observance of the rules of the game and of procedures, as well as control, must not be tied to the governing political establishment and political parties from which it comes. Transparency can be provided only by the institutions, because only they are above the individual. If this does not exist, suspicion is completely justified.

The magic word in this process is control.

It is high time to start controlling the processes of restructuring and privatization within the energy sector of Serbia, or we may wake up one morning and see that EPS has become a kindergarten and the refineries have been transferred to neighboring countries. Irrespective of whether the countries are large or small, developed or undeveloped, rich or poor in energy resources, they are or will be faced with the energy security problem.

That further means that Serbia must have clearly defined action programmes for several directions: towards energy saving in all spheres of the society, methods of use and full utilization of renewable energy sources, more extensive use of the liquid natural gas, determination towards building gas-fired electric power plants, as well as towards clear measures for the reduction of noxious gases emissions, primarily greenhouse gases.

Until clear goals are defined, with even clearer ways of their achievement, Serbia can not count on reaching the secure energy supply. Without the secure energy supply, besides the disturbances in the energy system itself, consequences will be felt also in the future development of the country, non-attractive investment trends, reduction of the growth rate of the gross domestic product and the increase of the non-employment.

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Reader's Comments

Date	Comment
Darko Bjelopavlic 7.31.11	Now, when a new Energy Law has been voted, the Serbian energy sector could start the process of restructuring and privatization. But, what it will be difficult to do that, I think, is not the political problem, but the economical and technological misunderstanding of the current energy market. Until we change the social aspect of price, we won`t be able to make any progress. D. Bjelopavlic

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