Serbia: IMF&EBRD monitored restructuring of Power utility EPS; SWOT, risks and issues on the path

20. May 2015. / News Serbia Energy

It has been long known and widely discussed that public companies are a major issue of Serbian economy, and the entire society. They are often instruments in the realization of purely political goals. Their political instrumentalization is primarily reflected through their use for achieving the objectives of social policy. Public enterprises are convenient leverages for buying social peace, which, among other things, provides political support as well comments local experts in response to the fact why the International Monetary Fund pointed out the restructuring of public enterprises, as one of the most important determinants for the realization of the entire arrangement.

Putting the public enterprises in order is literally the highest economic and political priority. The Fiscal Council has warned more than once that our quite affected public finances cannot be cured if the public companies are not well organized, and it will happen if they are taken out from a great disorder and big consequences of political voluntarism. The experience gained during the operation of a whole series of governments has shown that in the country there were neither conditions nor chance that this priority issue would at least start resolving.

Therefore, the arrangements with the international financial institutions, such as the IMF and others, represent a blessing for Serbian economy and society. Political opportunism and all mentioned obstacles in terms of making the necessary changes, as far as they are concerned, do not come to the fore. They are primarily guided by economic rationality, and they agree to the political compromises only under pressure from the inside, when they see for themselves that well-conceived reforms could be stranded on the sandbank of hopeless political maneuver. From the economic point of view, i.e. from the point of view of general social welfare, the cooperation with the IMF is extremely helpful. They represent a valuable compressor which, with certain pressure, inserts elements of economic rationality in our politically contaminated, and so hopelessly politicized economic-system machinery.

EPS should be enabled to sell electricity at the price that will cover the costs, including the costs of investment maintenance and current recovery of the operational units and networks. Some funds should remain in EPS to finance the expansion, since no facility worth mentioning has been built for more than 25 years in the electric power industry. This could be achieved by price liberalization, i.e. setting EPS free from the political dictate when it comes to prices. EPS should also be freed from being coerced to supply electricity to those who do not pay, as well. If there are such organizations whose work is so important for the state and the society that the exclusion from the network is out of the question, the problem should be resolved transparently and directly by allocating the necessary subsidies from the budget for such purposes. EPS would have to stop being a tool of the social policy. This policy is so deviant. The poor, but also the wealthy are subsidized through low electricity prices. The latter even more than the first ones, because they spend more.

It has been stated in the newspaper that there are no less than 600 different directors in EPS. And if there were less than 600, it would still be too much. EPS is decentralized in the way that too much autonomy and less responsibility are given to the regional units. The headquarters of the company is almost powerless to implement some rationalization measures because, with constant resistance, there is too much power at lower levels, so it cannot accomplish what is necessary. EPS is needs corporatization. EPS at all levels requires the increase of the competence and responsibility. The Government of Serbia did not require from EPS business results vigorously enough, and it couldn’t be done because the Government put EPS in an impossible situation due to price policy and coercion to supply even non-paying customers. EPS should, therefore, first be allowed to be effective and then ask for results.

Potential savings are large, but authoritative decision-making levels for them must be motivated and responsible. If the clear lines of responsibility and positive incentives for better results vertically were established, EPS would be quickly freed of enormous surplus of employees, but also of the inconveniently large excess of directors. Procurements could be considerably rationalized since it is a fact that they used up too much funds.

According to the EPS the corporatization means several things. The first thing is redefining the organizational scheme of the company. This means the formation of certain sectors in order to make them fully qualified for the operations they are intended for, not to depend on others where they can perform the operations more efficiently on their own and, what is especially important, that some parts are circled so that the results can be measured and monitored without major difficulties. Secondly, management teams of these sectors have to be responsible, but also motivated enough for the results. Responsibility implies a wide operational autonomy – the results must be requested from the sectors, but without getting involved into the ways they are achieved. Thirdly, this change has to start from the top. The State, as the owner, must clearly set its requirements and operationalize them through criteria and indicators. The leading ones, being responsible and motivated, will demand the same from the sectors at lower levels. Fourthly, it must be followed by management professionalization. Experts and professionals would be at the manager positions instead of people from political parties. There shouldn’t be any restrictions for their salaries, but those expectedly high salaries had would have to be strictly related to the results of the unit they manage. Features and effects of corporatization can be summarized in three words: responsibility, motivation, autonomy.

The price of electricity had to be increased a long time ago. Fiscal Council has concluded that the EPS’s business with such price and delivery terms is unsustainable. Time is neither on the side of EPS nor the Government of Serbia, nor – most importantly – on the side of the consumers themselves. It cannot be in the interest of the customers, even if they are not quite aware of that fact, that for now and for a short time in the future they have low electricity prices, and that in the near future   such a breakdown of the system can happen, which would throw them far below the existing terms of supply. It is about choosing between two unpleasant options: unpleasant price increase in the present or much worse situation in not so far future.

Electricity price increase is an imperative. As strange it may sound, it is in the consumers’ best interest. Of course, only if the Serbian government finds a way to protect the funds collected by increasing the price from wasting on the irresponsible spending or on increasing the salaries that are already twice above the average. The fact that electricity consumers have low salaries is not the reason that the deadly irrationality should be retained in the system. The salaries will be even smaller in the near future, due to such irrationality, and the pension will be under the question. Keeping the politically dictated, literally essential parameters, such as price of electricity, can only accelerate our path to economic collapse.

The fact that change of electricity price will turn into a difficult political question is really bad news. It is one of the many points on which those things that are economically and rationally differ from what is politically profitable.

Social policy is not a matter of companies nor is it implemented at their level. Everyone should do their job. The companies have neither the knowledge nor the motivation, nor should they have the funds to carry out these functions. Equally important is the fact that social policy is drastically deformed when it comes down to the level of the company. When brought to that level, it cannot be directed. Low price of electricity is used by everybody, so those who really need help are not subsidized, but those who consume the most electricity, i.e. those whose income and property status are clearly above the average.

The State only needs to finally provide the business autonomy to EPS and not to prevent it from performing the operations which according to the law it can and it is allowed to perform by itself quite legitimately. The problem is the fact that the State probably didn’t dare to let EPS take measures, regarding the debtors, which are logical and justified. Who doesn’t pay the electricity, shouldn’t get any. Isn’t the same rule applied for bread and milk? And still, if the social interest is such that the electricity in some places cannot be cut no matter what (hospitals, kindergartens…), the State should allocate money from the budget in accordance with the law with which the prioritized consumers timely pay what they spent. If the State does not dare to get involved in some interests, even to the extent of allowing to EPS to deal with non-paying customers, then it means that it has abdicated in its basic function, i.e. protection of contracts and providing the financial discipline. A real market cannot exist without financial discipline, and the only one who can impose and keep it is the State. There isn’t a market without the State doing its job.

Prices and terms of delivery

The first moves should be related to the prices and terms of delivery. When prices are below economically determined and real calculated costs, there aren’t a real motivation for a significantly better operation, and is hard to imagine someone who will be truly inspired for the efforts made for greater achievements, if it is clear in advance that , due to imposed unrealistically low prices, they will end with a loss. The Government of Serbia didn’t understand that by imposing the prices that do not cover the costs, not only it interfere into the business substance of the company , but also discourages people who work there by conditioning even visibly lower performances from those which can be achieved without other improvements.

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