Serbia Faces Battle Over Reform of Public Companies

Tuesday, 2 August, 2005

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Milan Culibrk

Serbia's government faces the first big test of its plans to reform public companies with the case of the national air carrier, Yugoslav Airlines, JAT.

While JAT's flight schedule is significantly reduced, owing to an ongoing strike, no one can predict the ultimate fate of the company that is incurring big annual losses.

Planes have been grounded for three weeks now because of the strike by aviation mechanics and engineers demanding payment of late salaries.

Workers downed tools after the company failed to pay part of November and December 2004 salaries. The Serbian finance ministry refused to forward the money, saying the company had used up its 2004 budget for salaries by the first half of November.

The ministry's refusal to break its guidelines was a sign of a toughening stance towards public sector overspending.

Determined to make the public sector companies restructure and improve cost-efficiency, the government has imposed a 7 per cent limit on any increase in salaries.

This effectively means wage cuts in real terms, as the 7-per-cent limit is 2.6 per cent lower than this year's expected inflation rate.

Most economists support the hard line, as public sector salaries remain two or three times higher than average monthly wages, worth around 185 euro. At the same time, many of these public companies run at a loss.

While the public companies face countless problems in restructuring, such as large work forces, debts and outdated equipment, no government since the fall of Slobodan Milosevic in 2000 has seriously tackled the issue, fearing a wave of social unrest.

But it has become increasingly apparent that no overall reform of the economy is possible without applying market-economy principles to these companies.

A major disincentive to undertaking serious reform is their sheer size. The state firms employ only 10 per cent of the Serbian workforce but generated a fifth of the country's total revenues in 2003 and 27 per cent of the economy's total losses.

According to an analysis by the former finance minister, Bozidar Djelic, the foreign debts run up by the four largest public companies - EPS, the electric power company, NIS, the oil company, ZTP, the railways, and JAT - alone amounted in 2003 to 2.3 billion euro in total.

Of this figure, 747 million euro was owed to the Paris Club and 536 million to the International Financial Corporation.

International financial institutions, starting with the IMF, with which Serbia signed a three-year arrangement in 2002, insist on the restructuring of the public companies as a condition for further cooperation.

The most recent IMF report early this year said the public sector firms' excessive share of the country's GDP was one reason for the difficulties the economy was facing.

Shaken by these calls, the Serbian government has said it plans to transform eight major public sector giants this year: EPS; NIS; ZTP; JAT; Telekom, the telecommunications company; PTT, the post office; Belgrade Airport; and Srbijasume, the forestry company.

The eight currently employ 135,000 workers and according to the government's restructuring plans, will have to lay off more than 18,000.

Although the government has met with resistance from JAT, which is the first to face reforms, Serbian finance minister Mladen Dinkic is convinced the reforms will unfold more quickly and more easily with the other seven behemoths.

In the case of JAT, Dinkic says the overlarge workforce is the biggest problem.

"A 1,500-strong workforce would be optimal for this company this size, but JAT now has more than 3,700," he told IWPR.

Dinkic expects that the fiercest opposition to restructuring to come from the bulky but inefficient administrative sectors in EPS and NIS.

Figures from early April say 8,573 workers in the eight companies have already applied for voluntary redundancy, which comes with severance packages.

The government plan also envisages re-employing 9,800 laid-off workers in new companies to be formed after separating the companies' core and non-core activities.

Some of those non-core businesses are hotels and restaurants. For instance, JAT owns hotels in Belgrade, in the winter resort of Kopaonik and on Montenegro's coast. These have little or nothing to do with the airline's core business. The government hopes to create the 9,800 new jobs through the privatisation of these non-core business entities.

Many economists believe the government is underestimating the scale of the job cuts needed. They say one-third of the 135,000 workers in the public companies should be laid off but the government dares not admit this, fearing widespread industrial action.

Oil refinery workers in Pancevo have already staged industrial action in April in protest against planned cuts in NIS. As the refinery is one of only two NIS refineries in Serbia, petrol shortages quickly became apparent.

Despite these initial problems, the government insists there is no alternative to the restructuring programme.

Dinkic told IWPR the government intended to privatise all the companies currently undergoing restructuring in 2006 - and there would be no reprieve for those that failed to attract buyers.

"Companies for which there is no interest…by potential bidders will go into receivership," he said.

However, not all economists back the government's strategy. Vladana Hamovic, an economist at the Institute for Market Research, says the government had made "some sloppy and clumsy" moves, mainly by failing to take advantage of the experiences of other transition countries.

Hamovic says the government strategy of selling all the restructured companies to foreign buyers was mistaken.

She cited Slovenia as an alternative example. There, the government has retained ownership of key sectors in the economy through consortia of employees and the state. The workers own the firms, using capital supplied by and owned by the state.

"Slovenia has kept everything essential for the economy of the country, while we selling out our vital economic assets," said Hamovic.

Aleksandar Vlahovic, former privatisation minister and deputy for the opposition Democratic Party, DS, in the Serbian parliament, told IWPR he was also sceptical of the government's strategy.

Vlahovic said a government consisting of several heterogeneous political parties would not be able to carry through the tough business of restructuring of state public companies like EPS, NIS and ZTP.

"The government has been dragging its feet over the start of this process and the year 2004 was wasted completely," he said.

"It obviously doesn't have a common and clear restructuring plan which is why it makes mistakes and ministers give contradictory statements."

Economist Sasa Djogovic said another big mistake had been the government's decision to continue appointing managers and board directors to state public companies on the basis of political affiliation.

Like its predecessors, the ruling coalition parties - the Democratic Party of Serbia, DSS, G17 Plus, the Serbian Renewal Movement, SPO, and New Serbia, NS - had reached an agreement that specified which party would appoint senior executives to which public companies.

Djogovic said appointing top management for purely professional qualities would have helped the government to restructure the public companies more successfully.

Dinkic claims the government has reached a consensus on the restructuring of public companies, however.

"All the ministers have realised that it must be done, and we have no problems with the strategy and are clear which way to go," he said.

"After completing the privatisation and restructuring of public and state companies, we'll finally get out of this cul-de-sac into which the former regime led us into in the nineties. I expect the next two years to be much easier than this one."

Many economists are less certain. They point out that the real challenge will not come from transforming JAT, which is relatively small and potentially profitable, but tackling the other big state firms.

It is only then that it will become clear whether the government faces the risk of major social unrest.

Milenko Smiljanic, chairman of the Alliance of Serbian Independent Labour Unions, one of the biggest labour federations, said workers were not willing to shoulder the burden of reform alone.

He said it was wrong to say workers were slowing down reforms, "There are many people in the Serbian government who [also] are slowing it down, and many of those are in the sphere of shady capital and business dealings.

"It is the workers who are left with nothing and they are the ones who have been paying for it [the reform process] all already over the past 15 years."

Milan Culibrk is a correspondent for the Dnevnik newspaper in Novi Sad.