EnErgy govErnancE and StatE capturE riSkS in...

EnErgy govErnancEand StatE capturE riSkS

in SouthEaSt EuropE

rEgional aSSESSmEnt rEport

EnErgy govErnancE

and StatE capturE riSkS

in SouthEaSt EuropE

rEgional aSSESSmEnt rEport

team of SEldi experts

Martin Vladimirov, Analyst, Center for the Study of DemocracyDaniela Mineva, Research Fellow, Center for the Study of DemocracyDr. Zef Preçi, Executive Director, Albanian Center for Economic ResearchEugena Topi, Research Coordinator, Albanian Center for Economic ResearchLeila Bicakcic, Executive Director, Center for Investigative ReportingAna Hećimović, Policy Researcher, Partnership for Social DevelopmentVisar Vokrri, Expert, INSTITUTI RIINVESTAlban Hashani, Expert, INSTITUTI RIINVESTQenan Bardhaj, Deputy Director, Syri i VizionitBorjan Gjuzelov, Expert, Macedonian Center for International CooperationAna M. Lazarevska, Expert, Ohrid Institute for Economic Strategies andInternational AffairsDaniela Mladenovska, Expert, Ohrid Institute for Economic Strategies and International AffairsMisha Popovikj, Researcher, Institute for Democracy “Societas Civilis” – SkopjeAndrei Macsut, Junior Researcher, Romanian Academic SocietyMilica Kovačević, Center for Democratic TransitionBiljana Pejović, Center for Democratic TransitionMilena Gvozdenović, Center for Democratic TransitionStevo Muk, President of the Managing Board, Institute AlternativeDr. Jovana Marović, Research Coordinator, Institute AlternativeAna Đurnić, Public Policy Researcher, Institute AlternativeĐorđije Brkuljan, Center for Democratic TransitionDr Boško Mijatović, President, Center for Liberal-Democratic StudiesMarko Paunovic, Expert, Center for Liberal-Democratic StudiesEvren Aydoğan, Project Manager, Economic Policy Research Foundation of TurkeyCeren Zeytinoğlu, Former Expert, Turkish Economic and Social Studies FoundationItir Akdogan, Research Communication Director, Turkish Economic and Social Studies FoundationEsra Gurakar, Senior External Expert, Turkish Economic and Social Studies Foundation

Editors

Ruslan Stefanov, SELDI Coordinator, Center for the Study of DemocracyValentina Dimulescu, Senior Researcher, Romanian Academic Society, RomaniaAna Stojilovska, Researcher, Central European UniversityMunir Podumljak, Executive Director, Partnership for Social Development

SEldi would like to thank the following contributors for their feedbackand useful comments:

Dr. Maria Bozoudi, Executive Administrator, Business Advisory Councilfor Southeast Europe and Eurasia;Anika Heinmaa, Intern, Center for the Study of Democracy

This document has been produced with the financial assistance of the European Union and the Central European Initiative (CEI). The contents of this document are the sole responsibility of SELDI and can under no circumstances be regarded as reflecting the position of the European Union and the CEI.

iSBn: 978-954-477-281-9

2016, Southeast Europe Leadership for Development and Integrity (SELDI)cubn;d; Creative Commons LicenseAttribution-NonCommercial-NoDerivs 3.0 Unported

center for the Study of democracy5 Alexander Zhendov Str., Sofia 1113tel.: (+359 2) 971 3000, fax: (+359 2) 971 2233www.csd.bg, [email protected]

3

Southeast Europe Leadership for Development and Integrity (SELDI) is an anti-corruption and good governance initiative created by CSOs from Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Kosovo, Macedonia, Montenegro, Serbia and Turkey in November 2012. SELDI currently includes also partners from Romania and Moldova. SELDI contributes to a dynamic civil society in the region, capable of participating in public debate and influencing policy and decision-making process in the area of anti-corruption and good governance. The initiative established a coalition for the development and endorsement of a regional CSO strategy and action agenda and carries out good governance monitoring. SELDI raises public awareness and advocates reformist policies through Regional Good Governance and Anti-Corruption Policy Forums.

The report provides comparative assessment of national energy governance deficits and state capture risks in the Western Balkans and Turkey. It conducts a thorough review of the regulatory framework, the corporate and financial governance of SOEs, and the management of large-scale energy projects from the perspective of corruption pressures. The analysis proposes measures for increasing the effectiveness of public procurement, improving the corporate governance of state owned enterprises, boosting transparent management of large-scale investment projects and enhancing the accountability and independence of energy regulatory authorities.

SEldi coalition members:

Center for the Study of Democracy (CSD), Bulgaria, SELDI SecretariatAlbanian Center for Economic Research (ACER), AlbaniaHouse of Europe (HoE), AlbaniaCenter for Investigative Reporting (CIN), Bosnia and HerzegovinaPartnership for Social Development (PSD), CroatiaINSTITUTI RIINVEST, Kosovo“Syri i Vizionit”, KosovoMacedonian Center for International Cooperation (MCIC), Republic of MacedoniaInstitute for Democracy ‘Societas Civilis’ Skopje (IDSCS), Republic of MacedoniaOhrid Institute for Economic Strategies and International Affairs, Republic of MacedoniaCenter for Democratic Transition (CDT), MontenegroInstitute Alternative, MontenegroRomanian Academic Society (SAR), RomaniaCenter for Liberal-Democratic Studies (CLDS), SerbiaForum of Civic Action FORCA Pozega, SerbiaTurkish Economic and Social Studies Foundation (TESEV), TurkeyEconomic Policy Research Foundation of Turkey (TEPAV), Turkey

�

SEldi associated partners:

Albanian Media Institute (AMI), AlbaniaInstitute for Democracy and Mediation (IDM), AlbaniaCenter for Civil Society Development in BiH, Bosnia and HerzegovinaRegional Anticorruption Initiative (RAI) Secretariat, SEEInstitute of Public Finance, CroatiaLëvizja FOL, KosovoOrganization for Democracy, Anti-corruption and Dignity – ÇOHU!, KosovoThe Centre for the Analysis and Prevention of Corruption (CAPC), MoldovaThe Network for Affirmation of the NGO Sector – MANS, MontenegroBelgrade Centre for Security Policy (BCSP), SerbiaEducational centre – Krusevac, SerbiaProaktiv, Serbia

5

taBlE of contEntS

introduction ...........................................................................................11

1. analysis of the regulatory reform in the energy sector ...............15 Electricity market liberalisation challenges ........................................16

The challenge of implementing renewable energy and energy efficiency plans ............................................................. 2�

2. financial management of SoEs ......................................................27 Current ratio ......................................................................................28

Quick ratio ........................................................................................29

Liquidity ratio ....................................................................................32

Debt Ratio ........................................................................................3�

Long-term debt to total assets ratio .................................................36

3. corporate management of energy SoEs ........................................�1 Ensuring an effective legal and regulatory framework for SOEs ..........................................................................�2

The state acting as an owner ...........................................................�7

Transparency and disclosure .............................................................50

4. performance of public control and compliance bodies in energy ..................................................55 Energy regulators ...............................................................................55

State aid bodies ................................................................................63

Competition protection authorities ...................................................6�

5. public procurement and large energy infrastructure mismanagement and corrupt practices ......................................... 67 Transparency challenges ....................................................................67

Competition restrictions and state capture risks ..............................69

Concentration of public procurement funds .....................................79

recommendations ..................................................................................83

annex: list of the analysed SoEs ........................................................87

7

liSt of figurES

Figure 1. Current ratio of selected SOEs in the area of power production ................................................................. 28

Figure 2. Current ratio of SOEs in the area of power transmission ........ 29

Figure 3. Quick ratio of selected SOEs in the area of power production ................................................................. 30

Figure �. Quick ratio of SOEs in the area of power transmission .......... 31

Figure 5. Liquidity ratio of SOEs in the area of power production ........ 33

Figure 6. Liquidity ratio of SOEs in the area of power transmission ...... 3�

Figure 7. Debt ratio of selected SOEs in the area of power production ................................................................. 35

Figure 8. Debt ratio of SOEs in the area of power transmission ............ 36

Figure 9. Long-term debt to total assets ratio of selected SOEs in the area of power production .............................................. 37

Figure 10. Long-term debt to total assets ratio of SOEs in the area of power transmission ............................................ 38

Table 1. State of electricity market liberalisation in the Western Balkans and Turkey .......................................... 17

Table 2. Changes in energy laws (legislative volatility) ............................ 21

Table 3. State of implementation of selected energy acquis in the Western Balkans and Turkey by end of 2015 ............... 25

Table �. Political affiliation of board members of SOEs in SEE ............. �5

Table 5. Availability of reporting data published on the websites of energy SOEs .............................................. 51

Table 6. State of implementation of the Third Energy Package in the Western Balkans ............................................... 55

Table 7. Independence of the energy regulator ..................................... 56

Table 8. Way of appointment and source of budget of the energy regulator ............................................................. 58

Table 9. Level of salaries of energy regulator’s employees ..................... 60

liSt of taBlES

8

Table 10. Independence of state aid body ............................................... 63

Table 11. Proactiveness of the anti-monopoly body ................................ 65

Table 12. Planed and completed budget of EPCG in 2012 – EUR ......... 69

Table 13. Types of Public Procurement Procedures Followed in the Energy Sector (2010 – 201�) in Kosovo ......................... 72

Table 1�. Macedonia’s ELEM Procurement Contracts (2009 – 201�) ............................................................ 72

Table 15. Summary results for the 21 awarded public procurement contracts of GA-MA, Macedonian gas transmission and transmission system operator ............................................. 73

Table 16. Type of public procurement contracts in Montenegro ........................................................... 73

Table 17. Procurement contracts in Albania (2010 – 201�) – EUR .......... 7�

Table 18. Type of procurement contracts in BiH ..................................... 7�

Table 19. Value structure of type of procedures, Serbia, in % ............... 75

Table 20. Economic damage related to public procurement violations in the energy sector in Albania (2012 – 2015) ........................................................... 78

Table 21. Top three contracting energy SOEs in public procurement in Kosovo ............................................. 79

Table 22. Top three winning companies in public procurement in Macedonia ....................................... 80

Table 23. Value of contracts within BiH’s TOP 10 companies

winning procurement contracts (2010 – 201�) .......................... 80

Box 1. State capture risks in the gas market Macedonia .................... 20

Box 2. BiH’s complex decision-making among different levels of governance enable state capture risks.................................. 2�

Box 3. Albania’s struggle with electricity thefts .................................... 25

Box �. Examples of circumventing public procurement rules in Macedonia and Serbia .......................................................... 70

Box 5. Public procurement corruption risk cases in Kosovo and Serbia ................................................................ 75

Box 6. Regional state capture risks – the South Stream ..................... 76

liSt of BoxES

9

liSt of acronymS

app Aluminum Plant Podgoricaarmo Albanian Refining and Marketing of Oil companyBotaS Turkish Petroleum Pipeline Corporationcaa Competition Authority of AlbaniacEo Chief executive officercgES Montenegrin Electrical Transmission SystemcmEc China’s National Machinery and Equipment Import and Export CorpcotEE Montenegrin Electricity Market Operatorcv Curriculum VitaedErk State Electricity Regulatory CommissionEBrd European Bank for Reconstruction and DevelopmentEft Energy Financing TeamElEm Macedonian Power PlantEmS Serbian Transmission System OperatorEntSo-E European Network of Transmission System Operators for ElectricityEpcg Electric Power Company of MontenegroEpS Electric Power Industry of SerbiaErE Energy Regulatory Agency of AlbaniaEu European UnionEuaS Turkish Electricity Generation CompanyfErk The Regulatory Commission for Electricity in the Federation of Bosnia and HerzegovinaifrS International Financial Reporting StandardskEk Kosovo Energy CorporationkESh Albanian Power CorporationkoStt Kosovar Electricity Transmission, System and Market OperatormEpSo Macedonian Electricity Transmission System OperatornEEap National Energy Efficiency Action PlanniS Petroleaum Industry of SerbianrEap National Renewable Energy Action PlanoEcd Organisation for Economic Co-operation and DevelopmentoShEE Albanian Electricity Power Distribution System OperatoroSt Albanian Transmission System OperatorpEs Public enterprisespmupE Policy and Monitoring Unit of Public EnterprisespoEs Publicly owned enterprisesppp Public Private PartnershipsrErS Regulatory Commission for Energy of Republic of SrpskaSac State Aid CommissionSEE South East EuropeSEldi Southeast Europe Leadership for Development and Integrity

10

SoE State-owned energy enterprisetEdaŞ Turkey Electricity Distribution A.S.tEiaS Turkish Electricity Transmission CompanytEtaS Turkish Electricity Trade and Contracting Companytki Turkish Coal Enterprise

introduction

The present analysis aims at providing detailed comparative assessment of national energy governance deficits and state capture risks in the Western Balkans and Turkey. It follows upon the recommendations of SEldi regional anticorruption report’s key recommendation on focusing civil society attention in Southeast Europe on key corruption and state capture risk sectors, such as energy.1 The most recent policy literature on governance tries to define governance and state capture in a more grounded and measureable manner by referring to social allocation outcomes. In other words, whether the norm in the distribution of public resources is impartial and universal or if it tends to skew towards private, particularistic interests. The resource allocation tendencies (governance context) in each sphere are scrutinised2 in order to be able to tailor policy responses in accordance with the situation “on the ground”, which is why SELDI focuses on energy as a key public resource allocation area. As recent studies have pointed out, bad governance – a concept that includes administrative corruption, nepotism and state capture – constitutes a hindrance with regard to overall economic development since it may end up increasing societal costs and public debt or thwarting sound investments. More specifically, anticorruption policies in any sector have to be viewed as part of the larger governance context whereby the aims should be to reduce the opportunities and resources – such as discretionary power and material resources – for corrupt behaviour to occur and increase legal (such as efficient anticorruption laws and an effective judiciary) as well as normative deterrents, (societal norms upholding public integrity and government impartiality and a constant monitoring of deviations from these norms by non-state actors).3

In the Western Balkans and Turkey, reducing administrative opportunities for corruption is a crucial aspect for the larger governance context. This course of action would entail changes such as streamlining and decreasing bureaucracy, continuously liberalizing the economy, increasing fiscal and political transparency and improving e-government as well as the availability of data in general. In the same vein, reducing fiscal opportunities for corruption, such as discretionary government spending for large-scale projects with low social, but high private returns, is equally important. In this sense, there is a need to invest in improving budgetary

1 SELDI, (201�), Anti-Corruption Reloaded: Assessment of Southeast Europe.2 The three main ideal types of the universalism-particularism interaction are from best to worst:

ethnical universalism (the state is autonomous from private interests and resource allocation is fair), competitive particularism (the state is partially autonomous, there are various groups that compete in capturing the state and the allocation outcome if mixed) and patrimonialism (the state is “captured” by private interests which enjoy privileged access to state resources). Source: Alina Mungiu-Pippidi, Roberto Kukutschka, “Government Favouritism in Europe” in Mungiu-Pippidi, A. (ed.) (2015). The Anticorruption Report, Volume 3: Government Favouritism in Europe. Barbara Budrich Publishers, p. 11.

3 Alina Mungiu-Pippidi, Roberto Kukutschka, “European Union and Member States” in Mungiu-Pippidi, A. (ed.) (2013). The Anticorruption Report, Volume 1: Controlling Corruption in Europe. Barbara Budrich Publishers, p. 29.

http://anticorrp.eu/publications/volume-3-government-favouritism-in-europe/


http://anticorrp.eu/publications/first-anticorrp-policy-report-assesses-control-of-corruption-in-europe/

12 EnErgygovErnancEandstatEcapturErisksinsouthEastEuropE

and fiscal transparency by permitting, ideally, real-time online tracking of national and local government spending by relevant stakeholders. This is especially pertinent in regions – such as the one under scrutiny in the present report – where audit and control state agencies are weak or corrupt.�

This reasoning can be applied to any public sector, but the energy domain is especially pertinent because it is poorly analysed not only from a research point of view, but also from an anticorruption standpoint. As will be exemplified in the present analysis, opportunities and resources for illicit practices and/or outright mismanagement are ample, whereas internal constraints and external conditionalities advancing the reform process are still very weak in the Western Balkans. In Turkey, on the other hand, where energy reforms have advanced more and the public administration is better prepared, the opportunities for corruption rise as the resources available for distribution have increased exponentially with the rise of the economy.

The energy sector is one of the most strategic sectors for economic and social development in any country. Since energy is central to socio-economic activities, those individuals and institutions that control the access to the sources, transformation and distribution of energy hold significant power. Corruption in the energy sector can range from petty corruption to grand larceny by the political executives who award lucrative concessions or require state-owned utilities to sign unfavourable purchase agreements or manipulate policies to suit favoured parties.5

The public procurement variable and its specificities, in an already complex issue of energy governance, creates a variety of challenges for researchers in this field.6 Consequently, the academic literature on this particular issue is poor. Energy sector procurement is rather specific in comparison to the classic private – public entity public procurement. In liberalized energy markets, the energy sector has a bipolar role in the public procurement process: buyer (contracting authority) and seller (bidder). Opportunities for corruption appear in both of these roles. In cases where energy operators are also contracting authorities, due to the ease of regulatory procedures for sectoral contracting authorities (utilities regulation), corruption may be visible in the extensive use of restrictive procedures (lack of competition/limited access to the market); tailor made tenders (with highly individualized technical specifications); deviation in the contracts’ implementation (mostly works and supplies that are largely consumed by energy providers); failure to meet technical specifications or quality standards described in the tender’s terms and conditions; or fictional contracts (works, goods and services) that were never implemented.

� Ibid, p. 12�-125.5 An example presents the analyses of the management of key energy projects in Bulgaria in

Center for the Study of Democracy, (2011), Energy and Good Governance in Bulgaria. Trends and Policy Options; Center for the Study of Democracy, (201�), Energy Sector Governance and Energy (In)Security in Bulgaria.

6 Center for the Study of Democracy, (201�), Energy Sector Governance and Energy (In)Security in Bulgaria, p. 16.

introduction 13

The theoretical framework that guided this study relies on two distinctive academic theoretical frameworks on corruption. The first would be Robert Klitgaard’s definition: Corruption = Monopoly + Discretion – Accountability. The second theory taken into consideration was Mungiu Pippidi’s equation on control of corruption: Corruption (Particularism)/ Control of Corruption = Resources (Power/material resources) – Constraints (Legal/normative).

The energy sector, as stated earlier, holds specific socio-economic power that is exposed to almost self-explanatory corruption risks. However, determining the occurrence or actual appearance of corruption in public procurement and public institutions in this sector poses significant challenges. In addition to being one of the most vital economic sectors, energy is also one of the least transparent. Examining the existence and nature of particularistic practices in energy sector governance requires an understanding of the wider organizational setting in implementing different aspects of the state-owned energy enterprise (SOEs) management, and knowledge on the institutional framework dealing with the integrity and accountability of public procurement actors.

Among the most critical energy governance deficits are corruption practices in the purposeful mismanagement of SOEs,7 irregularities in the public procurement contracts, and slow progress in liberalising and de-monopolising the energy sector. These have been reinforced by the negative implications of conflicting external, non-EU economic and geo-political influence, and by the dependence of the ruling elite on party financing from companies operating in the energy sector. For example, the Russian support for large-scale energy projects across the region is exploited by local groups aiming to increase their wealth at the expense of the individual countries’ national energy policy priorities and citizens’ welfare.

7 An important subject of this analysis are the state-owned enterprises in SEE, which will be mentioned throughout the text. A detailed list explanation of explaining the role of these companies is given in Annex I.

The Western Balkan countries8 (Albania, Kosovo, Serbia, Bosnia and Herzegovina, Macedonia and Montenegro) and Turkey, as an EU candidate9 or potential candidate countries,10 are obliged to reform their energy sectors to reach Eu energy objectives, such as a low-carbon economy, increased security of supply, institutional transparency, a bigger share of renewables in final energy consumption, increased energy efficiency and, above all, the liberalisation of their energy markets. These goals require adequate institutional set-up, and respect for transparency and good governance principles. They are also useful guiding benchmarks, against which specific policy decisions in the countries under study can be assessed as to their universalistic (in the common interest) or particularistic (in private interest) character. The Western Balkan countries (Turkey is only an observer) are also Contracting Parties to the Energy Community Treaty,11 an international organisation dealing with energy policy that aims at supporting the adoption and implementation of EU energy policy among non-EU countries.

With regard to regulatory reform, an aspect that needs to be taken into consideration in this region is the so-called “implementation gap” between the formal adoption of laws and their enforcement in practice. The data available from Global Integrity on the Western Balkans indicates that the countries tend to establish a solid legal framework, but due to poor implementation, the legislation does not have the intended effects on curbing corruption.12 In this sense, the adoption of the EU energy acquis (Third Energy Package)13 might not be followed by proper

8 The Western Balkan countries originally also included Croatia, but Croatia was considered to have “left” the Western Balkan region after it became a member of the EU on 1 July 2013. This scope of the Western Balkans without Croatia is visible from EU’s position, but also from other stakeholders such as the European Investment Bank, EBRD and the scope of the Western Balkans Summit 2015 in Vienna. Sources: European Commission/Trade; European Investment Bank/Western Balkans; EBRD, (2013), Energy Sector Strategy; Europe Integration Foreign Affairs Federal Ministry Republic of Austria/Western Balkans Summit Vienna 2015.

9 Albania, Macedonia, Serbia, Montenegro and Turkey are EU candidate countries. European Commission/European Neighbourhood Policy and Enlargement Negotiations.

10 Bosnia and Herzegovina and Kosovo are potential EU candidate countries. This group of countries was promised the prospect of joining when they are considered ready. European Commission/European Neighbourhood Policy and Enlargement Negotiations.

11 Some of the more specific objectives of the Energy Community include: enhancing security of supply; increasing competition; attracting investment in power generation and networks; and creating an integrated energy market enabling integration with the EU market. Energy Community/Who are we.

12 Alina Mungiu-Pippidi, “The South Eastern Europe” in Mungiu-Pippidi, A. (ed.) (2015). The Anticorruption Report, Volume 3: Government Favouritism in Europe. Barbara Budrich Publishers, p. 53.

13 The Third Energy Package is a set of 3 regulations and 2 directives, all adopted in 2009 with the main aims of unbundling (separation of energy supply and generation from the operation of transmission networks), strengthening the independence of regulators, and increased transparency in retail and wholesale markets. Sources: Official Journal of the European Union L 211, 1�.08.2009. European Commission/Energy/Market legislation.

1. analySiS of thE rEgulatory rEform in thE EnErgy SEctor

http://ec.europa.eu/trade/policy/countries-and-regions/regions/western-balkans/

http://www.eib.org/projects/regions/enlargement/the-western-balkans/

http://www.eib.org/projects/regions/enlargement/the-western-balkans/

http://www.ebrd.com/downloads/policies/sector/energy-sector-strategy.pdf

https://www.bmeia.gv.at/en/european-foreign-policy/foreign-policy/western-balkans-summit-vienna-2015/

https://www.bmeia.gv.at/en/european-foreign-policy/foreign-policy/western-balkans-summit-vienna-2015/

http://ec.europa.eu/enlargement/countries/check-current-status/index_en.htm#pc




https://www.energy-community.org/portal/page/portal/ENC_HOME/ENERGY_COMMUNITY/Who_are_we

https://www.energy-community.org/portal/page/portal/ENC_HOME/ENERGY_COMMUNITY/Who_are_we



http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=OJ:L:2009:211:FULL&from=EN

http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=OJ:L:2009:211:FULL&from=EN

https://ec.europa.eu/energy/en/topics/markets-and-consumers/market-legislation


enforcement in each country since it would require in-depth reforms that may endanger the entrenched private interests benefitting from the status quo. The Energy Community dispute settlement mechanism offers important information on the level of compliance since 2008 with EU energy law: at the moment there are 12 open cases (both group and single-country) concerning the Western Balkan countries on various aspects of the Energy Community Treaty,1� which is a signal that full compliance with the Treaty is currently unattainable.

The next section will analyse the major recurring governance deficits to be found in the transposition process of the energy acquis and its practical implementation, and discuss how corruption and state capture represent obstacles to the energy reform processes. Issues to be highlighted include the lack of energy policy consistency, the protracted energy market liberalisation, as well as some structural system issues that are slowing down the Eu approximation process. The following analysis tackles the resistance to energy market liberalisation, citizens’ vulnerability to the energy transformation process, lack of sufficient interest in investing in energy efficiency and renewables, as well as the state’s continuous protection of monopolies.

The electricity markets in the Western Balkans still maintain regulated prices for households, while in Turkey, eligible customers may choose to be supplied at either regulated prices or by a private company charging a market-based price (see Table 1). The maintenance of regulated power tariffs can be seen as a populist measure to prevent social unrest as the residential sector is most vulnerable to electricity price increases, especially if electricity widely used for heating purposes as well. No country has achieved full electricity market liberalisation, as the liberalisation process means allowing competition and limiting the grounds for dominant monopolies in state ownership. If a government cannot control the electricity prices anymore, it could lose public support during the next elections. It is clear that the primary concern for politicians is maintaining public support, particularly at a time of economic hardship.

Another non-compliance with the Third Package noticed across the region is in the lack of proper unbundling in the power sector. In this regard, the countries are either unbundled only on paper, or specific aspects of unbundling, such as separate financial statements in some countries, are still not in place (see Table 1). Unbundling is a herculean task for the countries, as it would reduce the role of monopolistic practices on competition and energy pricing. Attempts by the countries to delay this process can be seen as a populist move, but it also raises the question of whether state-owned companies were reluctant to face competition and lose revenue. In order to enable a competitive environment, which will lead to more competition and lower consumer prices, it is necessary to introduce new measures to modernise the obsolete electricity infrastructure. These changes require significant financial investments that

1� Energy Community website/Enforcement.

Electricity market liberalisation challenges

https://www.energy-community.org/portal/page/portal/ENC_HOME/AREAS_OF_WORK/Dispute_Settlement

analysisofthErEgulatoryrEforminthEEnErgysEctor 17

are ultimately borne by the citizens through their energy bills, which can contribute to widespread discontent. Therefore, politicians are prone to maintain the status-quo and push only for “on-paper” reforms in order to minimally satisfy the EU’s demands. On the other hand, the market opening per se will not automatically lead to more competition.

Таble 1. State of electricity market liberaliSation in the WeStern balkanS and turkey

Serbia

price regulation

Eligibilitymarket opening

unbundling

Prices of generation and supply to all customers are deregulated by the new Energy Law, with the exception of the price of universal supply to households and small customers. The deregulation of those categories depends on an assessment of the regulatory authority to be made before 1 May 2017 under the Energy Law.

All customers are eligible to choose their supplier as of 1 January 2015, including households and small businesses.

Households and small businesses have the right to be supplied under regulated prices, which has reduced the attractiveness of the liberalised market segment.

The Law stipulates that unbundling applied as of 1 June 2016. EMS, as a holder of a transmission system operation license, will continue performing this activity at the time of the entry into force of the Law. Unbundling of the distribution system operator is transposed, but not fully implemented yet. Since both EMS and EPS are fully state-owned companies, further measures need to be undertaken in order to ensure separation of control in line with the unbundling requirements of the Third Package.

kosovo

price regulation

Eligibility

market opening

unbundling

Regulated prices are available to all customers. There are no phase-out plans.

As of 1 January 2015, all customers are eligible to choose a supplier of their choice.

As a result of price regulation both in generation and supply of electricity, wholesale and retail market opening has not been implemented. In practice, KEK sells all the electricity produced at regulated prices to KESCO, which acts both as a regulated wholesale buyer and retail public supplier for all customers.

Kosovo does not fulfil the requirements for unbundling in the Third Package. The transmission system operator KOSTT is unbundled, as prescribed by the Second Package. Legal unbundling of the distribution system operator KEDS from the supply activity is in effect from 1 January 2015, when the licence for public electricity supply was transferred from KEDS to KESCO.


Таble 1. State of electricity market liberaliSation in the WeStern balkanS and turkey (continued)

albania

price regulation

Eligibility

market opening

unbundling

The new Energy Law deregulated the prices of generation and supply for all customers connected to 110 kV and above and for those with an annual consumption of over 50 million kWh. For other customers, the Law defines an action plan for deregulation until 31 December 2018. Customers connected to 0.� kV will remain regulated.

The eligibility status is formally granted to all customers, including those connected to the low voltage (0.� kV) network, but in practice switching suppliers is yet to come. The new Power Sector Law is not implemented in practice due to its missing secondary legislation, which is to be adopted in a transitional period of 1 year.

At the moment, only a small number of large customers get their electricity supply outside the regulated system of the public supplier OSHEE. For the remaining customers, the market is practically foreclosed during the transitional period. In practice, the monopoly Albanian Power Corporation KESH dominates the wholesale level as a wholesale supplier, while the monopoly OSHEE dominates on the retail level.

OST is legally unbundled in practice, which is not the case with the distribution system operator OSHEE. OST will be ownership-unbundled before the end of 2017. This is in breach of the Directive 2009/72/EC, as unbundling was supposed to be accomplished by 1 January 2015.

Bosnia and herzegovina

price regulation

Eligibility

market opening

unbundling

Regulated prices are available to all customers. No phase-out plans exist.

From 1 January 2015, Bosnia and Herzegovina is in line with Directive 2009/72/EC in terms of eligibility.

Trading still takes place between the dominant utilities and registered traders. The retail electricity market is divided along the borders of the four utilities. All consumers in Bosnia and Herzegovina (save two large companies) are captive.

The transmission system operation in BiH is legally and functionally unbundled from the generation and supply activities governed by the entities. But, the current system does not comply with the Directive 2009/72/EC. The unbundling of distribution system operators in the Federation of Bosnia and Herzegovina is not completed. The distribution systemoperators EP BiH and EP HZHB are unbundled from supply only in regard to accounts. In Republika Srpska, distribution system operators are legally and functionally bundled with the supply in all five distribution subsidiaries of EP RS, while only accounting unbundling is applied. The horizontally and vertically integrated power utility Komunalno Brcko covers both electricity distribution and supply in Brcko District.



macedonia

price regulation

Eligibility

market opening

unbundling

Regulated prices apply to generation. There are no activities to phase-out price regulation yet. Retail prices except for small customers and households are not regulated.

Eligible clients allowed to switch their final power supplier are those connected to the transmission network, as well as consumers connected to the distribution network with more than 50 employees and an annual turnover exceeding EUR 10 million. The amendment to the Energy Law from October 201� delayed the eligibility status for small customers and households, initially granted as of 1 April 201� and 1 January 2015 respectively. Households will be eligible from 1 July 2020. The prohibition for small customers and households to choose their supplier is a breach of the Treaty.

Only 2�1 large electricity consumers have been allowed to switch their final supplier and participate in the liberalised segment of the market. They are not allowed to be supplied at regulated prices.

Legal unbundling of the transmission network operator MEPSO has been implemented. Both distribution system operators hold a supply license for supply of last resort and supply customers at regulated prices. They do not publish their financial statements separately for each of their regulated activities, putting them in breach of the unbundling requirements.

montenegro

price regulation

Eligibility

market opening

unbundling

Generation prices are not regulated. Regulated end-user prices are available to all customers connected to the distribution network. After the adoption of the new Energy Law, price regulation for all customers will be eliminated with the exception of small enterprises and households entitled to universal service and vulnerable customers.

All customers are eligible to switch their final electricity supplier from 1 January 2015.

There are currently 25 active traders in the wholesale electricity market. In the retail market, there are currently only two licensed suppliers of end-customers in Montenegro. As of 2013, the electricity prices for the four customers connected to the transmission network are not regulated. Customers connected to the distribution network are still entitled to public supply at regulated end-user prices. The over-regulation of prices makes supplier switching unattractive.

The ownership of the transmission systems operator is legally unbundled from the generation and distribution companies in the country. Distribution, generation and supply are still bundled within EPCG. Three functional units have been established within EPCG, but their financial statements for the regulated activities are not separately prepared.


15,16,17

15 Serbia Energy Community Secretariat’s WB6 Country Report 11/2015, Albania Energy Community Secretariat’s WB6 Country Report 11/2015, Bosnia and Herzegovina Energy Community Secretariat’s WB6 Country Report 11/2015, Kosovo Energy Community Secretariat’s WB6 Country Report 11/2015, Montenegro Energy Community Secretariat’s WB6 Country Report 11/2015, Macedonia Energy Community Secretariat’s WB6 Country Report 11/2015, Energy Community Secretariat, (2015), Annual Report 201�/2015, Energy Community Secretariat, (2015), Energy Governance in Turkey.

16 Makpetrol’s core business is retail and wholesale of oil, oil products, natural gas and biodiesel. Source: Makpetrol.

17 European Commission, (2010), Macedonia 2010 Progress Report; European Commission, (2011), Macedonia 2011 Progress Report; European Commission, (2012), Macedonia 2012 Progress Report; European Commission, (2013), Macedonia 2013 Progress Report; European Commission, (201�), Macedonia 201� Progress Report; European Commission, (2015), Macedonia Report 2015.


Source: Country Reports 2011 – 2015.15

turkey

price regulation

Eligibility

market opening

unbundling

Wholesale prices are not regulated and are determined freely by market forces. The regulator determines the tariff charged by the wholesale supplier (TETAS) to the private distribution system operators for the purpose of covering electricity losses, public lighting and for sales to the supplier of last resort. On the retail level, eligible customers for supplier switching are supplied at unregulated prices. Eligible customers may choose not to exercise their eligibility right, so they can be supplied at regulated prices by a supplier of last resort. Supply tariffs for non-eligible customers are approved by the regulator.

The concept of eligibility in Turkey is linked to the level of consumption. It is defined as the right of customers that use more electricity than the level determined by the regulatory authority to freely sign a contract with a supplier. Every customer connected to the transmission network or the distribution network with a consumption of at least � MWh/year is currently deemed eligible.

The electricity market is around 85 % liberalized. The gas market, on the other hand, remains largely dominated by one large wholesale supplier and distributor, BOTAS.

The state-owned transmission system operator (TEIAS) was legally unbundled. After the enactment of Law No. �628, no vertically integrated undertaking has remained in place.

Macedonia’s example indicates a case of state capture risks by a monopoly on the gas market – the private company Makpetrol16 has a decade-long issue with the government about the ownership of the gas transmission pipeline, which is holding back the development of this sector.17 Makpetrol invested in the then state-owned pipeline and, as a result, demanded that it owns the transmission

box 1. State capture riSkS in the gaS market macedonia

https://www.energy-community.org/portal/page/portal/ENC_HOME/DOCS/3892297/255CDD43077E5561E053C92FA8C04F71.PDF

https://www.energy-community.org/portal/page/portal/ENC_HOME/DOCS/3892285/255C997FEDC43EBDE053C92FA8C00311.PDF

https://www.energy-community.org/portal/page/portal/ENC_HOME/DOCS/3892287/255CB6604E1246FFE053C92FA8C059FB.PDF

https://www.energy-community.org/portal/page/portal/ENC_HOME/DOCS/3892301/255D2565643C6DA2E053C92FA8C052DF.PDF

https://www.energy-community.org/portal/page/portal/ENC_HOME/DOCS/3892295/255CDD43076A5561E053C92FA8C04F71.PDF

https://www.energy-community.org/portal/page/portal/ENC_HOME/DOCS/3892295/255CDD43076A5561E053C92FA8C04F71.PDF

https://www.energy-community.org/portal/page/portal/ENC_HOME/DOCS/3892293/255CD192A789535AE053C92FA8C0F17C.PDF

https://www.energy-community.org/portal/page/portal/ENC_HOME/DOCS/3872267/23B450386A075E64E053C92FA8C0F69F.PDF

https://www.energy-community.org/portal/page/portal/ENC_HOME/DOCS/3894261/25824B882CF017E0E053C92FA8C0EE59.PDF

https://www.makpetrol.com.mk/zamakpetrol_en.asp

http://ec.europa.eu/enlargement/pdf/key_documents/2010/package/mk_rapport_2010_en.pdf



http://ec.europa.eu/enlargement/pdf/key_documents/2013/package/mk_rapport_2013.pdf

http://ec.europa.eu/enlargement/pdf/key_documents/2014/20141008-the-former-yugoslav-republic-of-macedonia-progress-report_en.pdf

http://ec.europa.eu/enlargement/pdf/key_documents/2015/20151110_report_the_former_yugoslav_republic_of_macedonia.pdf


18,19,20,21

18 Ana Stojilovska, (2011), Scanning Macedonia’s performance under the European Commission’s Progress Report’s Chapter 21: A race with obstacles? – Part II, Analytica.

19 Energy Regulatory Commission, (2015), Annual report 201�.20 Ana Stojilovska, (2013), Local gasification policies in Macedonia: exploring pioneer projects,

Analytica.21 Sonja Zuber, Ana Stojilovska, (2013), Analysis of the Law amending the Energy law of May 2013,

Analytica.

pipeline. This raises the question of how such an important issue for the Macedonian gas market has been put aside by the court. The interim compromise for the gas transmission network, which became a de facto permanent solution, is that both parties – the state and Makpetrol – founded the company GA-MA, in which they own equal shares.18 Makpetrol is the dominant gas market player with an exclusive agreement with Gazprom,19 which directly determines the gas price in the country, one of most expensive in the region. Apart from the worries about Makpetrol’s dominance, the process of gasification has been politicised. In fact, three local authorities in the country worked to develop their own local gas markets,20 two of which managed to build the local gas distribution network. Meanwhile, the changes to the Energy law stipulated that public private partnerships (PPP) for building new gas distribution systems require the Government’s approval, a fact that could prevent other such local projects.21 The unnecessary centralisation of the gasification process could be seen as a vendetta towards local authorities whose political party leadership differs from that of the central government (as was the case of the three abovementioned local authorities). This example indicates a possible misuse of institutional authority for political gains, all in the detriment of the commercial and residential sectors’ interests, since the introduction of natural gas for heating could replace the present inefficient use of electricity, fuelwood and oil, and thus alleviate energy poverty in the country.

box 1. State capture riSkS in the gaS market macedonia (continued)

Таble 2. changeS in energy laWS (legiSlative volatility)

country changes in the energy laws

Albania Albania has gone through several changes in the energy sector in the last decade. The law changed ten times in the years 2006 – 2011. Important updates to the law “On Power Sector” were made primarily in 2011, where some progress was made in the liberalization of the energy market. A new law was adopted in 2015 in which several elements are clarified in the framework of the Third Package implementation.

Kosovo The main changes took place in 2010. A couple of amendments, mainly those regarding the Third energy package requirements, were proposed in 201�, but the new amendments have not been adopted yet.

Bosnia and Herzegovina

The Law on Electricity in the Federation of Bosnia and Herzegovina (adopted in 2002, changed in 2005, 2009, 2011 and 2013) and the Law on Electricity in Republika Srpska (adopted in 2002, changed in 2003, 2007, 2009 and 2011) allow for access to regulated supply for all eligible customers, including large companies and without limitations.

http://www.analyticamk.org/images/stories/files/report/2011/043/11043policyreport.pdf

http://www.analyticamk.org/images/stories/files/report/2011/043/11043policyreport.pdf

http://www.erc.org.mk/odluki/2015.05.15_Godisen%20izvestaj%20za%20rabota%20na%20Regulatornata%20komisija%20za%20energetika%20na%20RM%20za%202014%20godina_FINAL.pdf

http://analyticamk.org/images/stories/files/briefs/Local_gasification_policies_FINAL.pdf

http://analyticamk.org/images/stories/files/briefs/13049-Policy_Brief_zakonot_za_energetika_2013.pdf


22,23,2�

Some countries, such as Turkey, have been very stable in their energy legislative framework with a minimal number of amendments, which may indicate strategic adoption of the laws or resistance to change

22 There has been also one amendment in 2016, but that is out of the timely scope of this research. Source: Official Gazette of Macedonia.

23 Official Gazette of Montenegro.2� EPDK reports.

Таble 2. changeS in energy laWS (legiSlative volatility) (continued)

country changes in the energy laws

Bosnia and Herzegovina

The federal and Republika Srpska regulatory bodies, FERC and RERS, respectively, adopted the necessary documents and created conditions for the liberalisation of the electricity market in Bosnia and Herzegovina in 201� (the Law came into force on January 01, 2015), but free choosing of the electricity supplier is not possible yet. In this situation, other suppliers cannot compete with the existing power monopolies in BiH.

The unbundling of the transmission system in BiH is transposed by the Law on Transmission of Electric Power, Regulator and System Operator in Bosnia and Herzegovina in 2002.

Macedonia The Energy law was adopted in 2011. Since it has been amended several times – once in 2011 concerning the Energy Regulatory Commission; two times in 2013 on a set of issues that included energy audits and energy controllers; two times in 201�, mostly about the Energy Regulatory Commission and energy audits respectively; and three times in 2015. The 2015 changes delayed the start of the implementation of the provision about mandatory energy performance certificates for private buildings and offices until the date of accession of Macedonia to the EU, and another delayed the full electricity market liberalisation.22

Montenegro The Law on Energy from 2010 was only amended once in 2013. According to that amendment, the funds that remain on account of the regulatory agency after the end of the business year become part of the Montenegrin budget revenues.23

Serbia The regulatory framework has significantly changed three times over the last 15 years. In 200�, 2011 and most recently in 201� new Laws on Energy were adopted. In addition to the Law, energy activities are strongly influenced by international agreements, such as the Agreement on Establishing Energy Community (2006) and Energy Agreement with Russia (2008). The current Energy Law has been adopted in late 201� in order to comply with the Third Energy Package and has not been amended since. The previous Energy Law was adopted in 2011 and has been amended twice in 2012.

Turkey The Electricity Market Law was adopted in 2001, with a new one in 2013. The Law on the Utilization of Renewable Energy Resources was adopted in 2005 and amended in 2010. Other energy laws on energy efficiency, natural gas, petroleum, liquefied petroleum gas, geothermal energy and nuclear energy were adopted in the period 2001 – 2013.2�

Source: Official Gazettes and Energy Market Regulatory Authority reports.

http://www.slvesnik.com.mk/

http://www.sluzbenilist.me/Naslovna.aspx


in light of the EU energy acquis (see Table 2). Frequent changes of key legislation as in the case of Bosnia and Herzegovina may indicate preparation for adopting the acquis or legislation violation to serve certain interests. A similar situation is also seen in Albania, as the law changed 10 times in the period 2006 – 2011.25 The most extreme case seems to be that of Macedonia, where in the period 2011 – 2015 the energy law was amended 8 times, among which at least two amendments had delayed the opening of the energy market and the implementation of strict energy efficiency standards consistent with the EU energy acquis. However, all countries from the Western Balkans, save Macedonia, made all consumers eligible on 1 January 2015 in compliance with the Third Energy Package enabling everyone to choose an electricity supplier of their choice (see Table 1). Macedonia took a clear step back by delaying full electricity market liberalisation through an ad-hoc decision that prevented small consumers and households to choose an electricity supplier until 1 July 2020. The Macedonian case is more than a populist one. For many local analysts it is an example of protectionist measures aimed at preserving the monopoly status of the existing electricity distribution company. No government body did any underlying analysis to prove or disprove the need for continued exclusion of small consumers from the liberalised market.26 Hence, Macedonia breached the Energy Community Treaty and the Energy Community Secretariat began an infringement procedure against the country. The Secretariat elaborated its opinion that the legislative turn has revealed the government’s direct attempt at protecting the monopoly status of the electricity distribution company.2728,29

25 Law on the Power Sector of the Republic of Albania (No. 9072).26 Additional information gathered through interviews with: Prof. Atanasko Tuneski, Faculty for

Mechanical Engineering, Macedonia, conducted on 15.12.2015; Sonja Risteska, Analytica Think Tank, Macedonia, conducted on 1�.12.2015; Dimitar Petrov, President of the Energy Regulatory Commission of Macedonia, conducted on 23.12.2015. None of the conclusions of the report can be attributed to them.

27 Energy Community, CASE ECS 02/15: MK/ELECTRICITY.28 European Commission, (2010), Bosnia and Herzegovina 2010 Progress Report; European

Commission, (2011), Bosnia and Herzegovina 2011 Progress Report; European Commission, (2012), Bosnia and Herzegovina 2012 Progress Report; European Commission, (2013), Bosnia and Herzegovina 2013 Progress Report.

29 European Commission, (2010), Bosnia and Herzegovina 2010 Progress Report; European Commission, (2011), Bosnia and Herzegovina 2011 Progress Report; European Commission, (2012), Bosnia and Herzegovina 2012 Progress Report; European Commission, (2013), Bosnia and Herzegovina 2013 Progress Report; European Commission, (201�), Bosnia and Herzegovina 201� Progress Report; European Commission, (2015), Bosnia and Herzegovina 2015 Report.

The inefficiency of energy governance in BiH has much to do with the country’s overall governance, which is complex and inefficient, as it takes place on at least two levels levels of decision-making: at the state and local entities level. The lack of cooperation and coordination between the entities hampers the development of a functioning energy market.28 As a result, BiH is one of the countries with the progress in transposition of the EU acquis. The EU constantly repeats both the need of a country-wide energy strategy and that there has been uneven development when it comes to strategic energy planning between the two entities.29 In order for BiH’s regulatory authorities to meet

box 2. bih’S complex deciSion-making among different levelS of governance enable State capture riSkS

http://ere.gov.al/doc/Power_Sector_Law_No_9072-_amended_on_26.11.2011.pdf

https://www.energy-community.org/portal/page/portal/ENC_HOME/AREAS_OF_WORK/Dispute_Settlement/2015/CASE_02

http://ec.europa.eu/enlargement/pdf/key_documents/2010/package/ba_rapport_2010_en.pdf



http://ec.europa.eu/enlargement/pdf/key_documents/2013/package/ba_rapport_2013.pdf







http://ec.europa.eu/enlargement/pdf/key_documents/2014/20141008-bosnia-and-herzegovina-progress-report_en.pdf

http://ec.europa.eu/enlargement/pdf/key_documents/2014/20141008-bosnia-and-herzegovina-progress-report_en.pdf

http://ec.europa.eu/enlargement/pdf/key_documents/2015/20151110_report_bosnia_and_herzegovina.pdf

2� EnErgygovErnancEandstatEcapturErisksinsouthEastEuropE

30,31,32,33

The EU reforms in the area of introducing renewable energy and energy efficiency are a great challenge for the Western Balkans and Turkey, as support for these policies often requires subsidies, ultimately increasing the electricity price for a populace that cannot afford it. In addition, badly managed subsidies by underpaid, demotivated and unprofessional national energy administrations create further opportunities for graft at multiple levels. This is further exacerbated by the lack of incentives at central government level. Proper energy efficiency and renewable energy policies are not favoured by the governments, as they could introduce decentralised ways of energy generation and distribution, which would dismantle monopolies and reduce politicians’ leverage in the system.

In the area of renewables and energy efficiency, the countries need to adopt action plans for concrete implementation of the energy acquis milestones, which refer to improving energy efficiency and achieving a certain share of renewables within overall energy consumption. An interesting pattern on the (non)adoption situation of these action plans in SEE is present: countries either adopt both plans or neither (see Table �). Because of this high non-compliance rate with the renewable energy acquis, the Energy Community Secretariat started a dispute settlement procedure against Albania, Macedonia and Bosnia and Herzegovina for failing to adopt the renewable energy action plans. The Secretariat began a procedure against Montenegro as well, which was dropped when the government retracted and quickly adopted a renewable energy action plan.3� The double non-adoption practice could be explained by two factors: a lack of political will supported by a reluctance to raise energy prices, or a lack of the implementation capacity needed to deal with these obligations. While both grounds are legitimate political concerns, they show the lack of implementation capacity needed for better governance policies.

30 Bosnia and Herzegovina Energy Community Secretariat’s WB6 Country Report 11/2015.31 European Commission, (2011), Bosnia and Herzegovina 2011 Progress Report; European

Commission, (2012), Bosnia and Herzegovina 2012 Progress Report; European Commission, (2013), Bosnia and Herzegovina 2013 Progress Report.

32 Energy Community Secretariat, (2013, 201�, 2015), Annual Implementation Report 2012/2013; Annual Implementation Report 2013/201�; Annual Implementation Report 201�/2015.

33 Energy Community, BiH Gas.3� Energy Community/CASES 03-07/1�: AL, BH, MK, ME, UA/RENEWABLE ENERGY.

the requirements of the Third Package; there is need for legislative change on the state and entity levels.30 The complexity of the decision-making also had a negative impact on the development of renewables in the country.31 The existing framework for promotion of electricity generation from renewables remains divided at the entity level without any state legislation and lacking coordination, hindering cost-effectiveness in reaching the 2020 target.32 The Energy Community recommends the urgent adoption of an agreement for a state law that would set the conditions to implement the EU Third Energy Package provisions equally in the whole territory of Bosnia and Herzegovina.33

box 2. bih’S complex deciSion-making among different levelS of governance enable State capture riSkS (continued)

the challenge of implementing renewable energy and energy efficiency plans





https://www.energy-community.org/portal/page/portal/ENC_HOME/DOCS/2304177/0633975AD31E7B9CE053C92FA8C06338.PDF

https://www.energy-community.org/portal/page/portal/ENC_HOME/DOCS/3356393/0633975ADB887B9CE053C92FA8C06338.PDF


https://www.energy-community.org/portal/page/portal/ENC_HOME/AREAS_OF_WORK/Implementation/Bosnia_Herzegovina/Gas

https://www.energy-community.org/portal/page/portal/ENC_HOME/AREAS_OF_WORK/Dispute_Settlement/2014/03_07_14


Illegal connections to the grid and not paying electricity bills have been a continuous challenge for the Albanian energy system. This situation is a direct result of the high share of energy poverty, but the blame is on the corporate management of the energy companies, as they have allowed individual energy debt to pile up to unsustainable levels. The piling of debts, which is common also in other

box 3. albania’S Struggle With electricity theftS

35

Investments in energy efficiency are a necessity in order to save energy, and to reduce high levels of energy poverty that are widespread in the region, especially in the Western Balkan countries. Lack of implementation of the Energy Efficiency Directive will lead to less investment in energy efficiency measures, which means further deterioration of the low energy standards of citizens and increasing problems with rising number of defaults on the energy bills. In order to address energy poverty, there is the need for political will for implementing energy efficiency. Without a proper state programme, the vicious circle of energy poverty and energy inefficiency cannot be broken – citizens are too energy poor to invest in energy efficiency, but energy efficiency will address their energy poverty problem. The number of illegal connections to the main grid in Albania exemplifies the relationship between energy poverty and treating energy as a non-commodity.

35 In March 2016 Albania has adopted its NREAP; however this report does not include the developments in 2016.

Таble 3. State of implementation of Selected energy acquiS in the WeStern balkanS and turkey by end of 2015

Source: Energy Community Secretariat, (2015), Annual Report 2014/2015; Ministry of Energy and Natural Resources of Turkey, (2014), National Renewable Energy Action Plan for Turkey; Energy Community Secretariat, (2015), Energy Governance in Turkey.

country Serbia kosovo albaniaBosnia and herzegovina

macedonia montenegro turkey

nrEap(National Renewable Energy

Action Plan)

Adopted AdoptedNot

adopted35Not

adopted

NREAP submitted to the

Secretariat for review in January,

2016

Adopted Adopted

Second nEEap(Second National Energy

Efficiency Action Plan)

Adopted AdoptedNot

adoptedNot

adoptedNot

adoptedAdopted

Only one NEEAP

has been prepared so far

https://www.energy-community.org/portal/page/portal/ENC_HOME/AREAS_OF_WORK/Implementation/Albania


36,37,38

36 EBRD, (2013), Commercial Laws of Albania an Assessment by the EBRD.37 European Commission, (2015), Albania 2015 Report.38 European Commission, (201�), Albania 201� Progress Report.

SEE countries has often been misused by politicians to trade citizens votes in exchange for the abolition of their dues. EBRD estimates that the Albanian transmission system suffers from enormous distribution losses (approx. 30 % in 2011), which are the result of both theft (illegal connections to the grid) and technical difficulties. The distribution has also faced problems with the collection of electricity bills.36 One positive development has been that in 201� the bill collection rate increased to 92.6 %, compared to 83 % in 2013,37 which could also have been the result of the amendments to the Criminal Code classifying electricity theft as a criminal offence.38

box 3. albania’S Struggle With electricity theftS (continued)

http://ec.europa.eu/enlargement/pdf/key_documents/2015/20151110_report_albania.pdf

http://ec.europa.eu/enlargement/pdf/key_documents/2014/20141008-albania-progress-report_en.pdf

The existing energy governance deficits in the region have translated into poor or haphazard financial results for SoEs. The regulated (cross-)subsidy model, applied across the region, renders the SOEs̀ performance highly dependent on the State.39 The SOEs are forced by the energy regulator to sell below market price, thus accumulating tariff deficits and preventing the excess funds necessary to build new capacity or modernise existing energy facilities.

The artificial maintenance of energy prices at a low level, however, does not solve the existing problem of energy poverty, which needs to be addressed through energy efficiency measures and the access to alternative fuels. Energy poverty affects a large share of the population, while citizens are captive to the inefficient energy model – not only faced with the affordability question, but pressed by accessibility challenges due to spatial and technical limitations.

The main problems leading to a bleak financial outlook continue to be the intra-system indebtedness and inefficient governance, which represent a major financial drain undermining the financial health of the companies in the region. The resulting lack of capacity to manage large projects and to identify and mitigate project risks has led to management collapse of several SOEs, in favour of banks, service providers and subcontractors. Unpredictable cash in and outflows, due to the constantly changing regulatory framework and the siphoning of company funds through public procurement tenders, increases the credit risk and thus the borrowing costs for the SOEs. The latter discourages investment in infrastructure and efficiency, which undermines the energy security of the whole country.

To analyse the financial management of the energy SOEs, the report utilizes the standard financial performance ratios (current ratio, quick ratio, liquidity ratio, debt ratio and long-term debt ratio), as they can reveal patterns of bad financial management, and even potential corruption and state capture risks in energy state-owned enterprises (SOEs). The goal is to describe whether energy SOEs’ bad management is the product of simply incompetence, or whether it is rooted in corruption or general mismanagement.

The regional comparison of the five ratios shows that Serbia’s electricity supply company and electricity distribution system operator, EPS, and the Albanian Electricity Power Distribution System Operator, OSHEE, are the worst performers among the analysed SOEs, followed by Srbijagas, Termokos and Albanian Refining and Marketing of Oil company, ARMO,�0

39 Apart from Turkey, all Western Balkan countries have preserved artificially low electricity and natural gas tariffs at minimum for household consumers.

�0 Important to underline is that ARMO was privatised in 2008.

2. financial managEmEnt of SoEs


all of which also underperform in more than two ratios. The narrative explanation is given in the separate ratio parts. The common issue with these poor-performing SOEs is the vicious circle of selling energy below the market price and a poor collection of bills, supported actively or tacitly with the politicians use of these instruments to win votes at the expense of the profitability of SOEs, contributing to the companies’ inability to invest in their own capacities.

The current ratio of a company is the ratio of current assets to current liabilities. It shows the company’s ability to meet its short-term liabilities (debt and payables) with its short-term assets (cash, inventory, receivables). The higher the current ratio, the more capable the company is to pay its obligations. A ratio under 1 suggests that the company would be unable to pay off its obligations if they were due immediately.

When it comes to the current ratio, the most problematic state-owned companies are Serbia’s EPS, Albania’s OSHEE and the Belgrade distribution company, Beogradske elektrane, which are below the insolvency threshold of 1 during the entire analysed period (see Figure 1 and Figure 2). Also, the Albanian refiner, ARMO, the Albanian Power Corporation, KESH, the Serbian natural gas supplier, Srbijagas, and Macedonia’s power transmission system operator, MEPSO, experienced deterioration of their

current ratio

figure 1. current ratio of Selected SoeS in the area of poWer production

Source: Own calculations based on: Bosnia and Herzegovina: JP Elektroprivreda BiH, Annual Business Reports, JP Elektroprivreda, Annual Reports, Banja Luca Stock Exchange, Balance Sheets; Macedonia: MEPSO, Financial Statements and Independent Auditor’s Reports, ELEM, Financial Results; Turkey: Annual Reports of the SOEs and The Courts of Accounts (TCA) SOE Reports; Kosovo: Policy and Monitoring Unit of Public Enterprises at the Ministry of Economic Development of the Republic of Kosovo; Albania: National Registration Centre; Serbia: Business Registry Agency; Montenegro: the analysed companies by utilising free access to public information.

http://www.elektroprivreda.ba/eng/page/business-reports

http://www.ephzhb.ba/publikacije/godisnja-izvjesca/?lang=en

http://www.blberza.com/Pages/FinRepBalance.aspx?code=ERST&type=1&year=2012&semiannual=0

http://www.mepso.com.mk/en-us/ListanjeIzveshtai.aspx?categoryID=135

http://www.elem.com.mk/index.php?option=com_content&view=article&id=362&Itemid=166&lang=en


financialmanagEmEntofsoEs 29

liquidity positions in the last few years, leading to ratios below 1. The other major energy SOEs in the region have exhibited fluctuating liquidity levels, but have generally fared better than the above-mentioned companies.

figure 2. current ratio of SoeS in the area of poWer tranSmiSSion


The quick ratio is an indicator of the company’s short-term liquidity. The quick ratio measures the company’s ability to meet its short-term obligations with its most liquid assets. For this reason, the ratio excludes inventories from current assets, and is then divided by current liabilities. The quick ratio measures the amount of liquid assets available for each unit of current liabilities. The higher the quick ratio, the better the company’s liquidity position. In case the quick ratio is below 1, it means that the company has very limited access to liquid assets.

In regard to the companies’ quick ratios, all analysed Serbian companies (Serbia’s electricity supply company and electricity distribution system operator EPS, Serbia’s electricity transmission company EMS, Petroleaum

Quick ratio








Industry of Serbia NIS, Srbijagas and Beogradske elektrane, district heating company in Serbia) and Albanian Electricity Power Distribution System Operator OSHEE have a ratio below 1 in the whole analysed period (see figure 3 and figure 4). Deterioration in the past few years leading to threshold below 1 was experienced by the Albanian Refining and Marketing of Oil company ARMO, the Albanian petroleum company Albpetrol, the Albanian Power Corporation KESH, the Electricity Transmission System Operator in Macedonia MEPSO and Macedonia’s electricity generation company ELEM. Kosovo Energy Corporation had a quick ratio value below 1 in 2012 and 2013; Termokos in 2011 and 2012; and OST in 2010 and 2011.

figure 3. quick ratio of Selected SoeS in the area of poWer production


The electricity supply company and electricity distribution system operator in Serbia, EPS, and the Serbian natural gas company, Srbijagas, are among the companies with the highest fiscal risks (the potential need for the state to cover their losses), consistent with the worrying trend expressed in the charts on current and quick ratio. EPS’s problems are related to the uncontrolled outflow of money due to political influence and poor debt collection.�1 In a similar fashion, Srbijagas suffered huge losses as a result of uncollected receivables from the municipal heating plants. This situation’s main facilitating factor has

�1 Beta BIRN, Belgrade, Serbia Power Company Faces Bankruptcy.







http://www.balkaninsight.com/en/article/serbia-power-company-faces-bankruptcy


been the fluctuating and inefficient gas pricing policies applied from 2008 to 2012. The policies are responsible for around �0 percent of Srbijagas’ losses and debts. Another issue regarding EPS is that the number of its employees is higher than that of other, competitive companies, and their salaries are more generous compared to other companies active in the Serbian public sector.�2 A recent analysis states that these issues have an important political dimension – collecting debts from other state-owned companies could result in bankruptcy for some of the debtors, while an increase in the price of electricity would be politically expensive.�3

The data for albania shows similar financial governance risks in the state-owned energy companies even facing insolvency such as the Electricity Power Distribution System Operator in Albania, OSHEE, which has had 2 consecutive years of losses and high probability of default.�� The main issue is the inability of SOEs to collect the electricity bills from their customers – according to the World Bank almost 30 per cent of the electricity that entered the grid in 2013 in Albania was stolen. The

�2 Interviews with two energy experts, Srbijagas financial accounts and B92, Net salaries in EPS 79,000 dinars.

�3 Energy World, Serbia: IMF sees serious fiscal risks for Srbijagas and EPS, 27.01.2015�� The Albanian Law on Bankruptcy cites that if a company has a negative result for three years

in a row, it should go bankrupt.

figure 4. quick ratio of SoeS in the area of poWer tranSmiSSion


http://www.b92.net/biz/vesti/srbija.php?yyyy=2014&mm=01&dd=31&nav_id=806710


http://www.energyworldmag.com/27/01/2015/serbia-imf-sees-serious-fiscal-risks-for-srbijagas-and-eps/http:/www.energyworldmag.com/27/01/2015/serbia-imf-sees-serious-fiscal-risks-for-srbijagas-and-eps/








government had to launch a campaign against electricity theft, with a number of public arrests.�5 In February 2015 the government prepared a Power Sector Financial Recovery Plan to tackle the low collection rates, which contributed to the financial difficulties of the Albanian power distribution company (OSHEE).�6 The story behind OSHEE (which was CEZ Albania in the period 2009 – 201�) is even more complex. The Albanian regulatory authority revoked CEZ licenses for a distribution system operator on grounds of mismanagement after CEZ pressed charges against the Albanian state. The following Amicable Settlement Agreement between the government and CEZ resulted in financial damages for Albania worth EUR �79 million. After the Agreement, an Albanian state institution, the High State Audit pressed criminal charges against a minister for the first time in Albanian history concerning the financial damage resulting from the Agreement.�7

It is clear that the discussed companies are captive to the subsidy model, which means that the government gives them subsidies in exchange of keeping prices artificially low, and by doing so makes them and their customers dependent on the state or more precisely on the people in charge. This creates a long-term political trap as reforms are blocked by the unwillingness of newcomers to face voters anger over bill increases. They also do not have funds to make investments in capacities, which would improve the energy efficiency and save energy. This vicious circle is a typical situation in post-communist countries where the abolishment of subsidy schemes is very difficult to implement without popular discontent. That is why the core reforms that the EU acquis is suggesting form efforts to break this circle.

The liquidity ratio expresses a company’s ability to repay short-term creditors out of its total cash. The liquidity ratio is the result of dividing the total cash by short-term borrowings. It shows the number of times short-term liabilities are covered by cash. If the value is greater than 1, it means that the short-term liabilities had been fully covered.

Many SoEs in SEE are in a difficult liquidity position, as they show a liquidity ratio below 1 in the entire analysed period (see figure 5 and figure 6): Albanian Power Corporation, KESH, involved in production and marketing of petroleum products in Albania, Albpetrol, Montenegro’s electricity producer, distributer and supplier, EPCG, Serbia’s electricity supply company and electricity distribution system operator, EPS, Elektroprovreda BiH, Elektroprivreda HZHB, Kosovo Energy Corporation, Macedonia’s electricity generation company, ELEM, Montenegro’s electricity market operator, COTEE, Elektroprivreda RS, the Albanian Electricity Power Distribution System Operator, OSHEE, Macedonia’s Electricity Transmission System Operator, MEPSO, Turkey’s Petroleum Pipeline Corporation, BOTAS, Albanian Transmission System Operator, OST, Turkish Electricity Trade and Contracting Company,

�5 Balkaninsight, Albania Deputy Minister Axed for Not Paying Utility Bill, 17.12.201�.�6 World Bank, Albania Program Snapshot 2015.�7 Balkanblog, “CEZ” scandal, Minister of Energy and General State Advocate in Albania indicted,

1�.10.2015.

liquidity ratio

http://www.balkaninsight.com/en/article/albania-deputy-minister-sacked-for-not-paying-electricity-bill

https://www.worldbank.org/content/dam/Worldbank/document/eca/Albania-Snapshot.pdf

http://balkanblog.org/2015/10/14/cez-scandal-minister-of-energy-and-general-state-advocate-in-albania-indicted/http:/balkanblog.org/2015/10/14/cez-scandal-minister-of-energy-and-general-state-advocate-in-albania-indicted/


TETAS and Turkish Electricity Transmission Company, TEIAS. Also, Turkey’s Electricity Generation Company, EUAS, Turkish Coal Enterprise, TKI and Albanian Refining and Marketing of Oil company, ARMO have experienced reduction of its liquidity ratio leading to value below 1. Kosovo’s district heating company Termokos had values below 1 in 2011, 2012 and 2013.

figure 5. liquidity ratio of SoeS in the area of poWer production


The financial difficulties of the distribution system operator OSHEE (former CEZ) had a spill-over effect to Albania’s wholesale power supplier (KESH), as OSHEE buys electricity from KESH and sells it to tariff consumers. In fact, KESH had covered the losses of OSHEE even though that was the obligation of OSHEE itself. OSHEE was unable to cover their losses, due to the non-payment of electricity bills.�8 In a situation with a state-owned vertical system, an unfavourable liquidity ratio may happen due

�8 Serbia Energy, 18.08.201�.







http://serbia-energy.eu/albania-exclusive-kesh-power-company-is-preparing-for-new-market-model-and-new-investments-says-kesh-administrator-agron-hetoja/


to the covering of the costs from a company within the system with huge losses, which reduces the incentives for all other participating entities to improve their financial performance. Again, this case underlines the viscous circle of non-investment and prices set below their market value. It is not only an example of captivity of the state-owned companies, but it is detrimental for the development of the countries’ energy sectors and the social wellbeing of their citizens.

figure 6. liquidity ratio of SoeS in the area of poWer tranSmiSSion


The debt ratio is a financial ratio that measures the extent of a company’s leverage. The debt ratio is defined as the ratio of total debt to total assets, expressed in percentage, and it can be interpreted as the proportion of a company’s assets that are financed by debt. The higher this ratio, the more leveraged the company and the greater its financial risk. 1 is the threshold, whereas rates above 1 are considered problematic.

In regard to the debt ratio (see figure 7 and figure 8), only few companies display good standing with a ratio above 1 is the Albanian Electricity Power Distribution System Operator, OSHEE, in the period 2011 – 201�; BOTAS had a ratio of 1 in 2013, Turkish Electricity Trade and Contracting Company, TETAS, had a ratio of 1 in 2013 and 201�,

debt ratio








but higher than 1 in 2011; and Srbijagas which deals with transport, distribution, storage and trade with natural gas in Serbia had a debt ratio of 1 in 2012.

figure 7. debt ratio of Selected SoeS in the area of poWer production









Long-term debt to total assets ratio is a measurement representing the percentage of a corporation’s assets that are financed with loans and financial obligations lasting more than one year. The ratio provides a general measure of the financial position of a company, including its ability to meet financial requirements for long-term outstanding loans. A year-over-year decrease in this metric would suggest that the company is progressively becoming less dependent on long-term debt to grow its business and vice versa.

SOEs display a more mixed picture with regards to long-term debt, though as a rule there has been less developments in this regard (see figure 9 and figure 10). The increase in the long-term debt ratio over the analysed period is seen in the case of the electricity supply

figure 8. debt ratio of SoeS in the area of poWer tranSmiSSion


long-term debt to total assets ratio








company and electricity distribution system operator in Serbia, EPS, Turkey’s Electricity Generation Company, EUAS, the hydro economic enterprise in Kosovo, Iber-Lepenc, producer of electricity in Macedonia, ELEM, Petroleaum Industry of Serbia, NIS, Turkish Coal Enterprise, TKI, the producer, distributor and supplier of electricity in the territory of Republika Srpska, Elektroprivreda Trebinje, the Albanian Refining and Marketing of Oil company, ARMO, Turkey’s Petroleum Pipeline Corporation, BOTAS, district heating company in Kosovo, Termokos and Srbijagas.

figure 9. long-term debt to total aSSetS ratio of Selected SoeS in the area of poWer production









figure 10. long-term debt to total aSSetS ratio of SoeS in the area of poWer tranSmiSSion


On the topic debt, the case of Srbijagas is again notable, as the company experienced an increase in its long term debt ratio. In 2013, media reports revealed that the company’s debt consists of EUR 806.8 million in long-term loans, EUR 99.9 million in short-term loans and EUR 1�9.5 million in state guarantees.�9 In 201� the saga continued, with a debt of around EUR 205 million to Russian gas exporter Gazprom. The country consumes about 2.5 bcm of gas per year and relies mainly on Russian supplies via Ukraine and Hungary, making this debt relevant for the country’s security of energy supply.50 Srbijagas is widely seen not only as a poorly run company, but also captive in the government’s hands. Srbijagas was forced to sell gas at local market prices below their import price. So, even if they were able to collect bills for all the gas that they sold, they would still generate substantial losses. However, Srbijagas was unable to

�9 SeeNews, (2016), Serbian energy min sees no layoffs at restructured Srbijagas.50 The Moscow Times, (201�), Serbia Struggles to Pay Russian Gas Debt.







http://wire.seenews.com/news/update-1-serbian-energy-min-sees-no-layoffs-at-restructured-srbijagas-348773

http://www.themoscowtimes.com/business/article/serbia-struggles-to-pay-russian-gas-debt/510551.html


collect even those lower prices, as it was forbidden by the Government to cut gas supplies to municipal heating companies through Serbia and several state owned companies that failed to pay (Petrohemija, Azotara, MSK, Smederevo Steel Mill)51 a. Also, the Government forced Srbijagas to take over ownership of several major debtors, instead of pushing them to bankruptcy.52,53

Another pyramid of debts is the case of ARMO in Albania (Albanian Refining and Marketing of Oil Company), in which several orders of execution were deposited to the National Registration Center for several debts from banks and from Albpetrol based on a Court Decision (for EUR 30 million). ARMO’s known and declared loans in banks amount to USD �7.5 million, none of which is liquidated or paid, with the banks requiring confiscation of the company’s assets. In 2013 when ARMO was sold, USD 2�3.5 million of liabilities were recognised5� and currently the media provides a number which reach a level of USD 595 million of debts.55

Although the financial results of the wholesale gas and power suppliers have worsened as a result of the misguided pricing policies, the SOEs generally still have a stable long-term financial position. As was noted above, the positive outlook should be regarded with caution, due to the existence of numerous unknowns in relation to the companies’ long-term financial position in SEE. Above all, the companies’ liquidity has been squeezed, while new debt has been accumulated. The latter is especially true for the Serbian companies, Srbijagas and EPS, and increasingly for the Albanian Power Corporation (KESH) as well. The Macedonian power wholesale monopoly, ELEM, is also among the firms showing deteriorating financial indicators.56 The largest Serbian power and gas companies are the most exposed to short-term liquidity risks, as both firms have current ratios below 1, pointing to the danger that they would not be able to repay their short-term debts if they were immediately due. The debt ratio, on the other hand, shows that the SOEs are not extensively leveraged and under normal circumstances would be able to cover and/or refinance their debts.

A notable exception here is again Srbiajagas, which has accumulated an enormous debt to its owner, Gazprom, over the last five years, as it is paying one of the highest import gas prices in Europe and is mandated to resell the gas to its final clients at a loss. The Montenegrin wholesale power supplier, EPCG, has also been facing rising debt ratios, as households have accumulated more than EUR 13� million in unpaid electricity bills by early 2016. The company has also struggled to obtain payments from one of the largest power consumers in the country, the aluminium firm, KAP. To prevent KAP’s practice of non-paying its

51 Novosti, (2015), Debts of SOEs to Srbijagas.52 B92, (2010), Srbijagas bought Agroziv (chicken farm).53 Blic, (2009), Srbijagas took over glass factory.5� BIRN (2016), The backstage of the collapse of oil giant ARMO.55 Koha Jone, (2016), Debts, all ARMO assets on sale.56 Many of the SOEs have not yet published their annual financial reports for 201� and 2015

making the assessment of their current financial management almost impossible.

http://www.novosti.rs/vesti/naslovna/ekonomija/aktuelno.239.html:560839-Srbijagas-gomila-dugove


http://www.blic.rs/vesti/ekonomija/srbijagas-preuzeo-upravljanje-fabrikom-stakla-paracin/7cep2wq

http://www.reporter.al/prapaskenat-e-kolapsit-te-gjigandit-te-hidrokarbureve-armo/

http://www.kohajone.com/2016/05/25/borxhet-permbarimi-nxjerr-ne-shitje-te-gjitha-objektet-e-armo%C2%AD-s/

�0 EnErgygovErnancEandstatEcapturErisksinsouthEastEuropE

bills, under pressure from its private minority shareholders, the EPCG management board decided to halt their power supply in early 2013. Despite the decision, it was later discovered by the European Network of Transmission System Operators for Electricity (ENTSO-E) that the government continued to supply KAP with electricity procured by the transmission systems operator from the European electricity grid.57

57 Prelec, Marko (201�). Winners and Losers: Who Benefits from high-level corruption in the South East Europe Energy Sector? SEE Change Net.

In Southeast Europe, the considerable involvement of governments in the economy generates a number of red flags for potential conflicts of interest between public institutions and the business sector. The comprehensive assessment of the SEE region, performed by the Southeast Europe Leadership for Development and Integrity (SELDI), outlines three main recommendations for improving the overall anti-corruption environment and for generating tangible results in the fight against corruption. SELDI emphasises the need to increase the transparency of energy decision-making and the accountability of the corporate management in SOEs. One should also limit the intervention of the political elite in the governance of SOEs, which instead should focus its efforts on defining a clear energy regulatory framework and consistent long-term policy. The goals of transparency, accountability, policy consistency and effective management of critical public sectors are also part of the Western Balkans’ path towards joining the EU.

Overcoming energy governance deficits requires the consistent implementation of corporate governance standards in the management of SOEs. This is necessary to ensure that the companies are profitable, efficiently managed and corruption risks are avoided. Previous studies have indicated that better governance leads to positive externalities, impacting the SOEs’ operational performance in the sense that labour productivity, tariffs and, most importantly, the magnitude and quality of service coverage tend to improve. For improvement to occur, there must be a solid legal and ownership framework, professional board and staff, fiscal discipline, a good performance management and monitoring system and a high degree of transparency, both voluntarily (activity reports, disclosures) and during audits.58 With better governance comes better access to both national and international capital markets and, thus, to alternative financing sources that can be used to build infrastructure or provide critical services to an energy poor population. Furthermore, practice has shown that SOEs can actually save money via better governance and can therefore redirect their resources where they are most needed, such as critical infrastructure or projects aimed at increasing energy efficiency.59 Perhaps most importantly, better governance can also mean increased revenue for the state as a whole through annual dividends “cashed in” from financially strong SOEs.

All this cannot happen if there is mistrust due to opacity and/or suspected or overt corruption. The lack of transparency and the presence of corruption affects everything, from the SOEs financial viability and attractiveness (discourages investors by increasing risks) to its ability

58 World Bank Group, Corporate Governance of State-Owned Enterprises. A Toolkit, 201�, p. 16.

59 Ibid, p. 17.

3. corporatE managEmEnt of EnErgy SoES

http://documents.worldbank.org/curated/en/2014/10/20286791/corporate-governance-state-owned-enterprises-toolkit


to service its customers and to create overall wealth (misallocation of limited resources).

This part of the paper is devoted to analysing the compliance of the corporate governance of energy SOEs in the region with the internationally-approved OECD standards in order to establish whether they are governed by clear and transparent rules that follow a cost/benefit decision-making procedure, and whether there is political pressure on the management board to implement inefficient measures that benefit closely-related business interests. The deficits in the corporate governance of energy SOEs can be detected by analysing possible legislative gaps that can be used for fuelling political influence over corporative decision-making.

The analysis has shown that the OECD corporate principles are far from being respected in the Western Balkans and Turkey. In some cases, the legislative framework is set up, but its actual implementation is lacking. The countries’ institutions display an increased vulnerability to corruption and energy SOEs are the “special victim”, either seen as part of the spoils system or in a position to place manipulative or powerless persons, the SOEs generally suffer corruption scandals without any proper closure.

The OECD Guidelines on Corporate Governance of SOEs stipulate that the legal and regulatory framework for state-owned enterprises should ensure a level-playing field in markets where state-owned enterprises and private sector companies compete in order to avoid market distortions. In addition, a clear, stable and predictable legislative framework is essential for a sound corporate governance policy.

The operational autonomy of management boards and executives is a guarantee for the company’s independence. An effective legal and regulatory framework for SOEs is a key precondition for preventing the misuse of the control of the SOEs for political reasons. The state, together with the board members and executive, can annually agree on a set of performance indicators that need to be fulfilled by the management board and the company’s executive. The indicators should be different for the management board and executive, and must constitute the basis upon which the company as a whole will be evaluated at the year’s end. The rights and responsibilities of both parties must be balanced and clear in order to ensure good management practices in the company.60

In Serbia, according to the Law on Public Enterprises, the government cannot directly interfere with the day-to-day operation of SOEs. General laws and regulations for the private companies also apply to the public enterprises (PEs),61 with the exception of some state aid rules. The Law

60 Ideas based on the Energy Governance Workshop Report published by the Romanian Ministry of Energy and organized within the public consultation stage for a new Energy Strategy for Romania, � April 2016.

61 In Serbia the mentioned Law on Public Enterprises refers to SOEs are public enterprises or PEs.

Ensuring an effective legal and regulatory framework for SoEs

corporatEmanagEmEntofEnErgysoEs �3

on Financing Political Activities forbids the financing of political entities from public institutions, public enterprises, companies and entrepreneurs who perform services of general interest; institutions and enterprises with state capital; and other organisations exercising public authority.

The Law on Publicly Owned Enterprises in kosovo was amended to be in accordance with the OECD principles of corporate governance. However, the practice of corporate governance in state-owned enterprises (POEs) on the central level in Kosovo shows that the POEs62 are not independent from the Government. A study, supported by interviewed CEOs in Kosovo’s POEs, found that the chain of political influence goes through the board down to the company’s management.63

In albania, politicians also meddle with the work of SOEs, with the participation of high officials from ministries in company supervisory boards constituting a direct contradiction of provisions in the Law on Civil Employees no. 152/2013. The officials involved fall under the category of “Cabinet’s officials” and change with each new government, resulting in a political dimension and board inconsistencies.6�

A clear separation between the monitoring function of the state and its executive function is important for ensuring effective management of public funds within energy SOEs. In this sense, a practical measure would be to ensure no overlap of individuals in management and executive board members of companies.

In albania, there is a theoretical separation between the monitoring function, exercised by the board members, and the executive function, exercised by the CEO. In practice, however, the government can influence both these functions. The CEO is nominated by the supervisory board, but is de facto appointed by the government, allowing space for direct or indirect “instructions” by the government.65

The example of montenegro shows how government intervention allowed electricity theft from Montenegro’s electricity producer, distributer and supplier, EPCG, in order to secure continued supply of Aluminium Plant Podgorica (APP) after EPCG suspended delivery of its electricity. NGO MANS were the first to discover that the CGES, a Montenegrin energy transfer company, performed the technical part of the theft and that both the Government and the Energy Regulatory Agency knew about it from the start.66 According to Montenegrin civil society representatives this represents a case of high level corruption, as the laws and regulations were circumvented and an energy SOE used to cover up for an unprofitable enterprise, with the cost of the stolen energy provided from the state budget and profit of CGES.

62 The SOEs in Kosovo are called publically owned enterprises (POEs) as the law that defines them – Law on Publicly Owned Enterprises.

63 GAP, (2015), Management of Publicly Owned Enterprises in Kosovo.6� Parliament of Albania, 2013.65 Experts Interviews, (2016), SELDI.66 Bankwatch, (201�), Winners and losers: Who benefits from high-level corruption in the South

East Europe energy sector?

http://www.institutigap.org/documents/8557489987445884547.pdf

http://bankwatch.org/publications/winners-and-losers-who-benefits-high-level-corruption-south-east-europe-energy-sector

http://bankwatch.org/publications/winners-and-losers-who-benefits-high-level-corruption-south-east-europe-energy-sector

�� EnErgygovErnancEandstatEcapturErisksinsouthEastEuropE

According to the Elektroprivreda BiH, when it comes to independent decision-making in state-owned companies in Bosnia and herzegovina, daily activities are left to companies, but the line ministry makes the company’s major decisions. In turkey, the state effectively manages SOEs through explicit and direct instructions to CEOs.67 The Ministry and Parliament also work to maintain control of SOEs through their budgets, as the Ministry has the authority to demand a long-term budget instead of an annual one.

conflict of interest means that a public servant or official’s activity, which should be based on impartiality and objectivity, clashes with his or her private interests. To combat private interests in public office, a conflict of interest declaration coupled with an asset declaration is needed, with compliance ensured and corruption deterred through substantial penalties outlined in national legislation and properly enforced.

In albania, public sector CEOs are generally subject to the regulations and legal framework on conflict of interest in the Law for Conflict of Interests and Disclosure of the Assets. They need to prepare a yearly declaration within 90 days following the end of the year and submit it to the respective institutions.68

In Serbia, the Company Law envisages a fine or imprisonment of up to one year for violation of the conflict of interest regulations, or up to five years if the company suffered damage which exceeds around EUR 91,000. The law forbids members of the supervisory board and directors to use company assets for their own purposes, or use privileged confidential information in order to abuse their position.

Loose regulations for reporting conflict of interest may have contributed to ineffective enforcement, which occurs in Bosnia and herzegovina. While the corporate governance code and ethical code require the executive directors and board members to report property changes, it is left to their discretion, and neither party is required to submit a declaration of assets or conflict of interest.

Existing links between cEos of energy SoEs and a political party could have long-lasting implications on the companies’ independence and adequate use of their public budgets.

In kosovo, a vague legal framework and opaque selection process contributes to the use of boards in public companies as rewards for members of political parties. An analysis on SOEs’ boards published in 2011 by Kosovar Institute for Policy Research and Development, concluded that the ambiguous legal framework and the lack of transparency in selection process of candidates are the main sources of politicisation of

67 The instructions, which cover the duties and responsibilities of energy SOEs, are determined by legislation and each and every implementation is subject to the law, stated experts from EPDK interviewed on 8 October 2015.

68 Law No. 9367 7.�.2005 ‘On the Prevention of Conflict of Interest in Exercise of Public Functions’, amended with the Law No. 9�75, dt.9.2.2006 and the Law No. 9529, dt.11.5.2006 and with the Law 86/2012 dated 18.09.2012 and with the Law no. ��/201� dated on 2�.0�.201�.

http://www.hidaa.gov.al/ligji-nr-9367/?lang=en





SOEs.69 The current legal framework does not clearly define who “politically affiliated persons” are, allowing the government to exploit this loophole and appoint members with political background. The Kosovo Centre for Investigative Journalism “Preportr” published an investigative report in 201� showing that some 250 senior public officials, with background in political parties in power, are employed in decision making positions in state-owned entities in the energy sector in Kosovo. Widespread clientelism in energy companies is another issue. An article published by a local newspaper in Kosovo reveals that companies that supported the election campaign of the Democratic Party of Kosovo during 2008 – 2012 were awarded with lucrative contracts worth EUR 70 million.70

In Serbia, a similar situation is in place, as it has been common practice to divide public enterprises between political parties after elections. Members of supervisory boards and directors are usually party representatives. All three of the largest energy SOEs (EPS, EMS and Srbijagas) are run by political appointees, who are either high ranking officials or ruling party members, or are personally related to party leadership.71,72,73,7�,75

69 Kosovar Institute for Policy Research and Development, Public Management: Analysis of the Boards of Public Enterprises and Independent Agencies, 2011.

70 Kosovo Corruption Corporation KEK.71 Ekspres Online News Platform, 05.10.2013, R. Polisi.72 Info Arkiva, Online News Platform, LSI introduces the names of candidates for Tirana,

26.11.2010.73 Mapo Journal, October 1st, 2013, Nominations PS-LSI (PG �), B. Hoxha, Last accessed

20.05.2016.7� Profile of Bajazit Jašarević; profile of Branislava Milekić, “NEZAVISNI” KANDIDATI: HDZ, SNSD

i SDA preuzimaju kontrolu nad Regulatornom komisijom za energiju!, 2016.75 Besa Kalaja, Partia Epunes,201�, last accessed on 09.05.2016.

Таble 4. political affiliation of board memberS of SoeS in See

OSHEE and OST Albania,board member

Vice Minister, Ministry of Energy and Industry (MEI),Socialist Party Representative71

OST, Albania, CEO Previous Candidate for the Head of the Socialist Movement for Integration, Local Unit No. 11 Tirana72

OSHEE, Albania, CEO Previous Deputy Mayor in the Municipality of Durres,Albania, Socialist Party73

Elektroprivreda BiH, BiH Member of the Executive Board of ruling party in BiH (SDA)

Elektroprivreda RS, BiH Member of ruling party in Republic of Srpska (SNSD)

Elektroprivreda HZHZ, BiH Member of ruling party in BiH (HDZ)

FERK, BiH7� Close relative to the Co-president of ruling partyin Federation of BiH who is also member of Councilof Ministers in BiH (HDZ)

KEK, Kosovo, board member Мember of LDK (Democratic League of Kosovo) party75

http://www.kipred.org/repository/docs/Menaxhimi_Publik-_Analiz%C3%AB_e_Bordeve_t%C3%AB_Nd%C3%ABrmarrjeve_Publike_dhe_Agjencive_t%C3%AB_Pavarura__535599.pdf

http://www.kipred.org/repository/docs/Menaxhimi_Publik-_Analiz%C3%AB_e_Bordeve_t%C3%AB_Nd%C3%ABrmarrjeve_Publike_dhe_Agjencive_t%C3%AB_Pavarura__535599.pdf

http://preportr.cohu.org/en/investigations/Kosovo-Corruption-Corporation-KEK-54

http://www.ekspres.al/index.php?option=com_content&view=article&id=11155%3Aja-dikasteret-me-zministrant-e-rinj-te-emeruar-nga-rama-sipas-partive&Itemid=70

http://www.arkivalajmeve.com/LSI-prezanton-emrat-e-kandidateve-per-Tiranen.1046956870/

https://issuu.com/gazetamapo/docs/mapo_1_tetor_ok/4

http://imovinapoliticara.cin.ba/profil.php?profil=6

http://imovinapoliticara.cin.ba/profil.php?profil=176; Amarildo Guti

http://zurnal.ba/novost/19617/nezavisni-kandidati-hdz-snsd-i-sda-preuzimaju-kontrolu-nad-regulatornom-komisijom-za-energiju, last accessed on 09.05.2016

http://zurnal.ba/novost/19617/nezavisni-kandidati-hdz-snsd-i-sda-preuzimaju-kontrolu-nad-regulatornom-komisijom-za-energiju, last accessed on 09.05.2016

http://preportr.com/repository/docs/Preportr_10_alb_924124.pdf


76,77,78,79,80,81,82,83,8�,85,86,87,88,89,90

76 KOSOVAPRESS, Bordi i KEK-ut shkarkon nga posti Pranvera Dobruna-Kryeziu, drejtoreshë e menaxhimit, 2007, last accessed on 09.05.2016.

77 KOSOVAPRESS, Mjeku i bindur në fitore, Krasniqi fton qytetarët t’i bashkohen projektit të tij, 2009, last accessed on 09.05.2016.

78 Besa Kalaja, Partia Epunes, 201�, Op. cit.79 GAZETA EXPRESs, Vëllai i gruas së Lutfi Zharkut emërohet kryesues i bordit të “Ibër Lepencit”,

2015, Besa Kalaja Kalaja, Partia Epunes, 201�, Op. cit., last accessed on 09.05.2016.80 Labinot Balaj, LDK më e fortë se PDK: Zapton Bordin e “Ibër Lepencit”. Dumoshi rehaton

motrën, 2015, last accessed on 09.05.2016.81 Ibid.82 Ibid.83 NGOs “INDEP” and “GAP”, last accessed on 09.05.2016.8� NGOs “INDEP” and “GAP”, last accessed on 09.05.2016.85 Delegates of XV – Congress of VMRO-DPMNE, 2015, last accessed on 09.05.2016.86 Democratic Party of Socialists in Montenegro.87 Democratic Party of Socialists in Montenegro, accessed on 29.06.2016.88 Democratic Party of Socialists in Montenegro, accessed on 29.06.2016.89 Party Social Democrats in Montenegro, accessed on 29.06.2016.90 Party Social Democrats in Montenegro, accessed on 29.06.2016.

Таble 4. political affiliation of board memberS of SoeS in See (continued)

KEK, Kosovo, board member Мember of AAK (Alliance for the future of Kosovo) party76

KEK, Kosovo, board member Candidate for Mayor of Obiliq municipality77

KEK, Kosovo, board member Member of LDK (Democratic League of Kosovo) party78

Iber Lepenc, Kosovo, chair of board of directors 2008 – 2010

Advisor and close relative to the Minister of Trade and Minister of Infrastructure79

Iber Lepenc, Kosovo,board member

Close relative to the Chief of Staff of the Prime Minister80


Member of LDK Podujevë Branch Presidency81


LDK candidate for mayor in Mitrovicë municipalityin the 2013 elections82

KOSTT, Kosovo,board member

LDK candidates for the 201� parliamentary elections83

KOSTT, Kosovo,board member

VAKAT coalition candidate for the 201� parliamentary elections8�

ELEM, Macedonia,chair of the board

Member of the ruling party VMRO-DPMNE85

EPCG, MNE, board member Member of the Democratic Party of Socialists86



EPCG, board member Member of the main board of the party Social Democrats89

CGES, MNE, board member President of one of the local boards in Podgoricaof the party Social Democrats90

http://www.kosovapress.com/sq/arkiva/mjeku-i-bindur-ne-fitore-krasniqi-fton-qytetaret-ti-bashkohen-projektit-te-tij-88187/?old=1

http://www.gazetaexpress.com/lajme/vellai-i-gruas-se-lutfi-zharkut-emerohet-kryesues-i-bordit-te-iber-lepencit-131083/

http://gazetablic.com/ldk-me-e-forte-se-pdk-zapton-bordin-e-iber-lepencit-dumoshi-rehaton-motren/

http://gazetablic.com/ldk-me-e-forte-se-pdk-zapton-bordin-e-iber-lepencit-dumoshi-rehaton-motren/

http://www.institutigap.org/lajme/779

http://www.institutigap.org/lajme/779

http://vmro-dpmne.org.mk/?p=26461

http://www.dps.me/vijesti/3011-odrana-konstitutivna-sjednica-komsije-za-odrivi-ekonomski-razvoj-glavnog-odbora-partije, accessed on 29.06.2016

http://www.dps.me/vijesti/3011-odrana-konstitutivna-sjednica-komsije-za-odrivi-ekonomski-razvoj-glavnog-odbora-partije

http://www.dps.me/clanovi-clanice-savjeta

https://sdcg.me/index.php/aa/313-kenan-hrapovic and https:/sdcg.me/index.php/organizacija/glavni-odbor

https://sdcg.me/index.php/arhiva/item/334-podgorica


91,92

There is a clear and stable region-wide practice of placing individuals who are ruling-party members, or closely related to party members, in board positions of energy SOEs (see Table �). This practice is an indication of the spoils system, whereby the winning party awards its loyal members with attractive job positions in the administration and wider public sector, which distorts market competition and puts on management positions people with poorer qualifications.

One of the most prominent examples of the use of energy SOEs for party spoils came out of the wiretapping scandal in Macedonia. One of the audio recordings contained a conversation between the head of the prime minister’s cabinet and the now-former director of the electricity generation company, ELEM. The head of the cabinet insisted that ELEM’s director employs the people on a list made by the Minister of Interior. The director of ELEM protested, as he wanted skilled personnel for ELEM’s nuclear programme, but was told to employ only the persons on the list approved by the ruling party.93

The state should establish a clear and consistent ownership policy, ensuring that the governance of state-owned enterprises is carried out in a transparent and accountable manner, with the necessary degree of professionalism and effectiveness. A very important indicator of the proper work of CEOs in SOEs is the process of their hiring. Arbitrary layoffs and employment are a sign of poor public management, however cases indicating connections between CEOs and the ruling political parties are even more problematic.

A relevant element for analysis is the authority for appointing the supervisory board of the energy SOEs. For nearly all of the analysed countries, it is the Government or certain government officials. However, in the case of Montenegro’s electricity producer, distributer and supplier, EPCG, the government only proposes the board of directors.

91 Democratic Party of Socialist in Montenegro, accessed on 29.06.2016.92 Birgün, Tanıdıklara milyarlık maasş, 21.06.2006, accessed on 23.11.2015.93 Alsat TV, Government and ELEM Energy workshop.

Таble 4. political affiliation of board memberS of SoeS in See (continued)

CGES, MNE, board member Member of the Democratic Party of Socialists91

EPS, Serbia, CEO Member of the ruling party (Serbian Progressive Party).

Srbijagas, Serbia, CEOVice president of the second largest party in the Government (Socialist Party of Serbia).

EMS, Serbia, CEO Closely related to the Prime Minister.

TEDAŞ, Turkey,board member

Chief of Istanbul Police, appointed to the TEDAŞmanagement board92

the state acting as an owner

http://www.dps.me/clanovi-clanice-savjeta

http://alsat.mk/News/214472/vladata-i-elem-na-rabotilnica-za-energetika


In albania, Management Boards come almost entirely from the administration and/or ruling political parties. There are only a few individuals with a strong professional background, but they are still Ministry representatives, as in the last 20 years there has been an attempt to match high-level officials with management board’s positions. This coordination has been with the intention to ensure the correct flow of information9� and better management, but in most cases nepotism, political and/or private interests predominate hiring and nominations.

In Bih, the Supervisory Board members are appointed and dismissed by the shareholder-dominated Assembly. This is in accordance with the Law on Companies of FBiH, with the government approving the list of applicants for supervisory board members, who are then elected based on the government’s orders. The Supervisory Board is closely regulated by internal by-laws adopted by the supervisory board (if one exists) or assemblies. This board is responsible for hiring and firing directors, approving financial documents, and supporting the work of directors.

A notable feature of the system in turkey is that the election of the board is regulated by the “decree by three”, which is a type of governmental decree signed by President, Prime Minister, and the Minister responsible for the related institution. This method is supposed to limit opportunities for political influence in electing the board but practically does not preclude them. One safeguard mechanism in Turkey is that the Court of Accounts may investigate the budget of the Turkish Electricity Transmission Company, TEIAS, and Electricity Generation Company, EUAS, and propose a parliamentary surveillance mechanism over the board’s decisions. This enables the opposition to act as a legal means to investigate whether political and/or corporate pressures are present.

The law in kosovo stipulates that at least two members of the supervisory board must be experts. The law also states that members of the Board of Directors in public enterprises should not,95 at any time during the 36-month period immediately preceding the date of his application, have been an elected public official, a political appointee or the holder of a decision-making position in a political party.

Serbia’s Law on Public Enterprises demands one “independent” member in the supervisory board, who must not be member of a political party.96 It has been noted that provisions of The Law on Public Enterprises were breached on numerous occasions by the Government, especially regarding the election of supervisory boards and directors.97 While the Law came into force on December 25th 2012, EPS, EMS and Srbijagas made some appointments in March 2013 that were in accordance with the old law.98

9� I.e. The Vice Minister of Finance is part of SOE Boards to ensure the proper decision making as these bodies create public debt.

95 The Law on Publicly Owned Enterprises.96 Law on public Enterprises, Article 1�.97 Transparency Serbia, Effects of the new Law on Public Enterprises – politicization or

professionalization.98 Transparency Serbia, Appointment of directors and members of supervisory boards of public

enterprises.

http://www.kuvendikosoves.org/common/docs/ligjet/2008_03-L087_en.pdf

http://www.paragraf.rs/propisi/zakon_o_javnim_preduzecima.html

http://www.transparentnost.org.rs/index.php/en/activities/tekui-projekti/effects-of-the-new-law-on-public-enterprises-politicization-or-professionalization


http://www.transparentnost.org.rs/stari/images/stories/materijali/Efekti novog zakona o JP/Izbor direktora i clanova nadzornih odbora JP u skladu sa Zakonom o javnim preduzecima avgust 2014.doc



illogical hiring and firing can be an indicator of state capture or at least of political influence. The political ties of executives in Albania enable them to retain their jobs, regardless of the poor performance of SOEs, while good CEOs can be fired due to bad relations with Ministers or Prime Ministers.99 This was seen when executives in the Albanian Power Corporation, KESH, kept their positions despite the company’s negative financial performance for two consecutive years.100,101 A similar case was observed in Serbia when electricity supply company and electricity distribution system operator, EPS’s, Supervisory Board was disbanded by the Government in 201� without any explanation. Informally, the supervisory board was replaced because its president did not approve of the plans of the director, but the political party that stood behind the director was more powerful than one which supported the head of supervisory board.102 CEOs of SOEs in Kosovo are to be appointed by the enterprise’s board of directors, with article 21.� of the Law on POEs stipulating that the board shall conduct an open, transparent, and competition-based recruitment process. However, most of executives are affiliated with political parties in the government.103 In BiH, the Government can often decide on the dismissal of a member of the Supervisory Board. This process commonly results in a lawsuit, which frequently is ruled in favour of the dismissed member.

a lack of merit in the education, experience and background of cEos could imply a strategy to put in position of power persons who are easily manipulated by political and business interests.

In Serbia, research on the topic by Transparency Serbia indicates that in many cases, members of the Supervisory Boards’ vocations are completely unrelated to the SOE’s field of work.10� Serbia is not the exception, as this case is also seen in Albania, where the CEO of Albpetrol has a solid CV in managerial positions (from advertising to media companies), but his background has very little to do with the energy area.

An interesting finding regarding employment criteria involves Montenegro’s electricity transmission company, CGES. Conditions for the appointment of board members, the executive director and the secretary of this company are vaguely described in the company’s statute, possibly leaving them open to many types of professionals in order to serve a wider range of interests than those of the company.

An important indicator of potential corrupt practices in the corporate management of energy SOEs is the remuneration policy of their CEOs. Potential for corruption is created when the salaries of public CEOs

99 Gjergj Bojaxhi.100 Andi Beli.101 To be reminded is the fact that based on Bankruptcy Law of the Republic of Albania, if a

company has a negative profit for three consecutive years the direction is obliged to announce bankruptcy.

102 Danas, Progressives displace PLC from EPS.103 Koha Net, The appointment of Mustafa for Head of PTK enterprise occupation by PDK.10� Transparency BiH, Election of Directors and members of the Supervisory Board of PC in

accordance with the Law on Public Companies.

http://www.danas.rs/danasrs/ekonomija/naprednjaci_istiskuju_sps_iz_epsa.4.html?news_id=292851

http://koha.net/?id=27&l=45601




are less than those of CEOs in the private sector. However, exorbitant spending could be an indication of state capture, as the CEOs’ enormous salaries could be a tool for their “silence” in order to accommodate different political and business interests.

In the case of Albania, the remuneration policy of CEOs in energy SOEs, compared with other public and state owned companies, is deemed to be satisfactory compared to the average country level; however, when compared to companies in private ownership, the salaries are low. The average salary of a CEO in the public energy sector is roughly EUR 1000 a month, while the same position in the private sector receives 5 to 10 times more. Among the Albanian SOEs, the Albanian Transmission System Operator, OST, and the Albanian Electricity Power Distribution System Operator, OSHEE, have good remuneration in comparison with the public administration institutions, while the Albanian Power Corporation, KESH, has lower salaries.105

Kosovo’s remuneration policy for the CEOs of energy POEs is different, as article 22.2 in its Law on POE stipulates that remuneration should be able to attract highly competent persons. As a result of the strong discretionary power of SOEs’ boards of directors, both CEOs of Kosovo’s vertically integrated electricity company, KEK, and Kosovo Transmission System Operator and Electricity Market Operator, KOSTT, are currently being paid much more than the president and the prime minister of Kosovo.106

In the case of Montenegro, there is also a law that proportionately determines the salaries of the board members of SOEs based on the average national salaries. The former CEO of Montenegro’s electricity market operator, COTEE, reported a monthly salary of EUR 125� to the Commission for Prevention of Conflict of Interests.107 Members of the board of directors of Montenegro’s electricity producer, distributer and supplier, EPCG, receive remuneration in the amount of one average monthly salary in the enterprise, which ranges from about EUR 730.108

The OECD Principles of Corporate Governance expect high standards of transparency from state-owned enterprises. transparency is considered to be a prerequisite for securing good governance and preventing corruption. However, a high level of transparency is no guarantee that illicit or bad governance practices do not actually occur.

An indicator for the transparency and accountability of SOEs is the availability of their annual and financial reports on their website. In this respect there are some good examples – Montenegro’s CGES, Serbia’s EPS, NIS and Beogradske elektrane and the listed companies in BiH, publish both type of reports on their websites (see Table 5). Some of the least transparent are Kosovo’s Termokos, Montenegro’s

105 Experts (Business Community and Public Institutions) Interviews, SELDI.106 Kosovo Anti-Corruption Agency.107 Commission for the Prevention of Conflict of Interest.108 Interview with the representatives of EPCG.

transparency and disclosure

http://www.konfliktinteresa.me/new/evid_funkc/funkcioneri/EvidFunPrijavePrikaz.php?ID=Ozk_NjU9MyY6Pz43Pw,,&Godina=2015&Rbr=2

corporatEmanagEmEntofEnErgysoEs 51

Montenegro Bonus, and Albania’s OST, the Albanian Electricity Power Distribution System Operator OSHEE, Albanian Refining and Marketing of Oil company, ARMO, and Albpetrol, which have neither their annual nor financial reports published on their websites.109,110,111

109 The COTEE operations report, with the financial statements and Report of the independent auditor. However, this information was not found on the COTEE official website.

110 The COTEE operations report, with the financial statements and Report of the independent auditor.

111 KESH, ARMO, OST, OSHEE, Albpetrolsh.a, National Registration Center. While financial reports are not available on the website, they do exist in the National Registration Centre for all companies except ARMO and Albpetrol, which have not published the reports for 201�.

Таble 5. availability of reporting data publiShed on the WebSiteS of energy SoeS

company/document annual reports financial reports

kosovo

Termokos No No

Macedonia

ELEM Yes Delayed

montenegro109

COTEE Yes No110

EPCG No Yes

CGES Yes Yes

Montenegro Bonus No No

albania111

KESH Partly Yes

OST No No

OSHEE No No

ARMO No No

Albpetrol No No

Serbia

EPS, Serbia Yes Yes

Srbijagas, Serbia Partly Yes

NIS, Serbia Yes Yes

Beogradske elektrane, Serbia Yes Yes

Bih

Elektroprivreda BiH, BiH Yes yes

Elektroprivreda HZHB, BiH yes yes

Elektroprivreda RS, BiH yes yes

Source: Websites of the analysed companies.

http://www.potpredsjednikregraz.gov.me/biblioteka/izvjestaji?pagerIndex=6





albania’s Law no. 9273 from 2007 obliges SOEs to disclose their financial statements112 to the National Registration Centre with a specific deadline, which has generally not been respected by the companies. Albpetrol, involved in production and marketing of petroleum products in Albania and Albanian Refining and Marketing of Oil company, ARMO, currently do not have official public financial statements or audits in their historical extract.113 The CEO of Albpetrol has been secretive about requested information by the High State Audit with the justification given that the information was confidential. The Audit office rejected the excuse, as such secrecy does not apply to state owned company.11�

In kosovo, article 1�.3 of the Law on SOE prescribes that the central SOEs publish their financial and other management reports and decisions. Generally, disclosure of SOEs at the central level has improved since the establishment of the Policy and Monitoring Unit of Public Enterprises (PMUPE) within the Ministry of Economic Development, which is responsible for collection and publication of the central SOEs data.115 However, the situation is different when it comes to local POEs. In fact, the largest local SOE in the energy sector, Prishtina district heating company “Termokos”, has not published any of the above mentioned documents on their webpage. The company also kept its financial statements inaccessible for the public.

macedonia’s electricity generation company, ELEM, does not publicly share the complete list of its affiliates, subsidiaries, joint ventures and other related entities; and is lacking in published individual financial accounts of where they operate. ELEM’s audit reports are not published; while their financial reports are partly published and only cover the period 2010 – 2013.116

Serbia also legally stipulated the transparency of its SOEs in the Law on Public Enterprises, which has a section dedicated to ”work transparency“. PEs are required to publish on their website the approved annual business program and quarterly reports on the implementation of the annual business program, audited annual financial statements and the auditor’s opinion on those statements, the composition and contacts of the supervisory board and director, and other relevant documents. In practice, Serbia’s energy SOEs do not respect the Law on Public Enterprises. An analysis of the transparency of the 25 public enterprises in Serbia concludes that there were missing business programs, financial statements and quarterly reports on their websites.117

112 Law on Registration for National Center No. 9723, dated 3.5.2007, as amended by Law nr. 9916, dated 12.05.2008, the Law No. 92/2012 and Law No. 8/2015.

113 The historical extract is a summarising document for changes and relevant declarations to the state as by the law and concerning the National Registration Centre (such as board member changes, CEO changes, official addresses changes, capital increase or decrease, ownership changes, publishing of financial statements etc.)

11� High State Audit, 201�.115 Institute of Advanced Studies, Management of Publicly Owned Enterprises.116 Elem, Financial Results.117 Transparency Serbia, Effects of the new Law on Public Enterprises – politicization or

professionalization.

http://www.qkr.gov.al/nrc/documents/Ligji_9723.pdf

http://www.qkr.gov.al/nrc/documents/Ligji_9723.pdf

http://www.institutigap.org/documents/8557489987445884547.pdf

http://www.elem.com.mk/index.php?option=com_content&view=article&id=362%3Afinansiski-rezultati&catid=39%3Ainvestiranje&Itemid=1&lang=en



corporatEmanagEmEntofEnErgysoEs 53

In regard to transparency in Bosnia and herzegovina, all energy institutions are semi-transparent: financial reports are available, general information is available, but information on members of the managerial and supervisory boards and public procurement is unavailable. All three power utilities in BiH consider that public contracts on energy projects are confidential and should remain that way.

certification of financial statements is an important step to further verify the financial work of the public companies and indicate possible mismanagement. Evaluating cEos and the company’s performance are crucial for detecting corruption and stake capture risks. Regular audits could indicate such risks, making sure to take two factors into consideration: who performs the audits, and whether the government is involved or an independent entity.

In Serbia, SOEs are subject to the same accounting and auditing standards as private companies. SOEs are obliged by the Law on Accounting to submit their financial statement to the Agency for Business Registries. The agency publishes this data on its website, in the register of financial statements. There is no strict legal framework regarding external monitoring of an SOE’s performance. SOEs submit their quarterly reports on the implementation of business programs to the ministry. The Law on Public Enterprises also envisages accountability of the supervisory board: members of the board will be dismissed if the founder does not accept financial statements of the public enterprise, for example.118

albania reports that the legislation on auditing is well-applied. The financial statements of the energy SOEs are usually audited and certified by independent foreign and Albanian auditing companies. The internal audit is performed by a specialised structure within the company and reports to the supervisory body, which is supposed to report cases of fraud, corruption, etc.119 In Kosovo, the Law on POEs regulates financial statement audits and certifications. POEs are subject to an annual external audit that is to be conducted by an independent and qualified auditor.120

montenegro’s electricity transmission company, CGES, is audited by a large multinational firm. The last audit report was positive.121 The 201� report about Montenegro’s electricity producer, distributer and supplier, EPCG, found that the realised costs of distribution and public supply are significantly higher than those approved, while revenue from performing the regulated activity is lower than approved.122

The external audit reports are an additional indicator of the company’s overall performance on good governance. For optimal accountability and transparency, the reports should be publically available on the company’s website.118 Law on Public Enterprises.119 Law on the Financial Management and Control Nr. 10 296 Dated 08.07.2010.120 The Law on Publicly Owned Enterprises.121 Audit Report of CGES for 201�.122 Draft Report on the state of the energy sector in Montenegro in 201�.

http://www.kuvendikosoves.org/common/docs/ligjet/2008_03-L087_en.pdf


Most of kosovo’s energy POEs have been audited by qualified and well-known audit companies such as Deloitte, Grant Thorton, and Ernst & Young. The most common recommendations in all energy POE audits are related to the lack of implementation of the International Financial Reporting Standards. In addition, the performance of POEs will also be audited by the Office of the Auditor General. However, such audits are not regular and are mainly conducted on a random basis.123 In BiH, regular performance audits are completed in all state-owned companies by the top 5 large multinational companies (KPMG, Price Waterhouse Coopers, Deloitte etc.), appointed by the World Bank.

In albania, out of the 15 external audits, performed between 2011 – 201�, of the energy SOEs Albanian Electricity Power Distribution System Operator, OSHEE, Albanian Refining and Marketing of Oil company, ARMO, Albanian Transmission System Operator, OST, Albpetrol and the Albanian Power Corporation, KESH, 11 were with a qualified opinion, 1 refused to give an opinion (about OSHEE), while for 3 there is no information about the audit outcome.12� The High State Audit in its last audit about the Albanian Power Corporation, KESH, said that it is heavily indebted due to its role of electricity generator, which guarantees the purchase of electricity from a hydro plant according to regulated prices, and assigns responsibility to KESH for the import of electricity. The auditing process confirmed that there were cases of exaggerated remunerations that varied from EUR �32-1167 per meeting, in some cases without even attending the meeting.125

In Serbia, the State Audit Institution’s audit of 53 POEs (not only energy POEs) for the period 2010 – 201� found irregularities in applying the Law on Accounting and Auditing, as well as practices contrary to international accounting standards and in violation of the Law on Public Procurement and the Law on Public Enterprises. No POE received a positive financial review.126

123 Office of the Auditor General of Kosovo. See also The Law on Establishment of the Office of the Auditor General of Kosovo.

12� National Registration Centre/Authors work.125 High State Audit, 2015.126 Javna preduzeca, How is the public companies violate the law without consequences.

http://www.oag-rks.org/en-us/Function

http://www.oag-rks.org/repository/docs/ZAp-ang._638313.pdf

http://www.oag-rks.org/repository/docs/ZAp-ang._638313.pdf

http://javnapreduzeca.rs/06_kako_se_u_javnim_preduzecima_zakoni_krse_bez_posledica.php

While there are many public control and compliance bodies relevant to the governance of the energy sector, three of them are paramount: energy regulators, state aid bodies, and competition authorities. In order to analyse the performance of the energy regulator, one needs to focus on two dimensions: regulatory governance (the institutional and legal framework by which the regulator takes decisions) and regulatory substance (the quality of the decisions taken). The decisions taken by the regulator refer to effects of the market and monitoring rules, tariff setting, licensing methods, the existence of ex-post evaluations and consistency with legal rules and sound economic thinking.127

In the analysed countries, these on-paper “independent” bodies are weak and lack human and/or financial resources, or independent political will. Political and government influence is strong and often unmasked, meaning that the system of checks and balances is ineffective and showing clear politicisation and effected partisanship of the control system. Procedures on grounds of corruption charges have been initiated, but outcomes detrimental for the corruption risks offenders are rare.

A key aspect of the EU Third Energy Package is a strong independent regulator, since the regulator should take the energy regulatory decisions and not the government. A comparative visual depiction of the of the Western Balkan countries’ performance in implementing the Third Energy Package (see Table 6) indicates that Bosnia and Herzegovina and Macedonia are the only countries in SEE that do not show progress in regarding the acquis about its regulatory authority.

127 Nutu, O. (2010). The Romanian Energy Regulator (ANRE) A detailed Assessment, Romanian Academic Society, p. 8.

4. pErformancE of puBlic control and compliancE BodiES in EnErgy

Energy regulators

Таble 6. State of implementation of the third energy package in the WeStern balkanS

measure albaniaBosnia andherzegovina

kosovofyr of

macedoniamontenegro Serbia

Primary Law(s)

ComplementaryLegal Acts

OrganisedDay-ahead Market

http://www.contributors.ro/wp-content/uploads/2010/10/assessmentANRE.pdf


128,129,130

128 Parliament of Albania, 2015.129 Bosnia and Herzegovina State Electricity Regulatory Commission SERC, Regulatory Commission

for Energy of Republic of Srpska, Regulatory Commission for Energy in Federation of Bosnia and Herzegovina.

130 Bosnia and Herzegovina Energy Community Secretariat’s WB6 Country Report 11/2015.

Таble 6. State of implementation of the third energy package in the WeStern balkanS (continued)

Source: Energy Community WB6 Monitoring report 0303/2016.

measure albaniaBosnia andherzegovina

kosovofyr of

macedoniamontenegro Serbia

National Balancing Market

Regional Capacity Allocation

Price Deregulation

DSO Unbundling

TSO Unbundling

NRA Independence

Implementation ofInter-TSO Agreements

/ / / /

Critical Significant delay Insufficient progress Pending

Progress on track Significant progress Accomplished

Таble 7. independence of the energy regulator

country independence of energy regulator

Albania Legally yes,128 as the Board of Directors is appointed by the parliament with a five-year term limit. Selection criteria are prescribed by law and there is a legal ban for the top management to be engaged in political functions.

BiH State Electricity Regulatory Commission (DERK), which operates in the entire state, has jurisdiction over transmission system operations and international electricity trading, as well as over generation, distribution and supply of electricity for customers in Brčko District. Regulatory Commission for Energy of Republic of Srpska (RERS) and Regulatory Commission for Energy for Federation of BiH (FERK), operate in areas of Republic of Srpska and Federation of BiH respectively.129 The efforts for achieving independence are not sufficient.130

http://www.derk.ba/

http://www.reers.ba/

http://www.reers.ba/

http://www.ferk.ba/

http://www.ferk.ba/


https://www.energy-community.org/portal/page/portal/ENC_HOME/AREAS_OF_WORK/WB6/Monitoring

pErformancEofpubliccontrolandcompliancEbodiEsinEnErgy 57

131

The level of independence of the energy regulators in the analysed countries varies (see Table 6) but as a rule while fairly high on paper it is severely undermined in practice. By law Albania and Turkey are some of the best examples of independence in the energy regulator, since both countries have a legal prohibition for top management to execute political functions, to have interest in regulated utilities or to have an employment relationship with the energy sector.132 The energy regulators of Macedonia, Montenegro, Kosovo and Serbia seem to be partly independent; while BiH also needs to make additional efforts for improving the independence of its regulators.

Further preconditions that indicate the independence and functionality of the regulator on the energy market are the way of appointment of its members, the source of its budget and the level of salaries of the staff. The typical way of appointing the members of the energy regulator in SEE is by the Parliament on the proposal of the Government (see Table 8). The greater the influence of the government in deciding the regulatory authority’s staff, the greater the risk of political influence. Most worrying seems to be the case of Turkey, where the law from 2011 allows the respective ministry to monitor and inspect the regulator, which could seriously endanger its independence. Other slight variations on the typical appointment method of the energy regulator members are:

• a selection committee preselects candidates to be then appointed by the Parliament in Albania;

131 Energy Regulatory Commission of the Republic of Macedonia.132 Energy Community Secretariat, (2015), Annual Report 201�/2015; Energy Community Secretariat,

(2015), Energy Governance in Turkey.

Таble 7. independence of the energy regulator (continued)

Source: Energy Community 2015 report; Parliament of Albania, 2015.

country independence of energy regulator

Macedonia The political independence of the energy regulator is still an important challenge, as the Macedonian Parliament elects the members and the president of the Commission,131 and the ruling party gives an advantage to their candidates, which are often also members of this party. The actual president of the current regulator, Dimitar Petrov, elected in 2009 was the former vice president of the ruling coalition (VMRO-DPMNE).

Montenegro Legally and functionally independent, but insufficiently independent over its budget and internal organisation.

Serbia Legally and functionally independent, but insufficiently independent over its budget and internal organisation.

Kosovo Not compliant with acquis, no full budgetary autonomy.

Turkey Yes.

http://www.erc.org.mk/pages_en.aspx?id=83




• the Government’s proposal is based on the proposal of a special committee established by the Government in Serbia; and

• the board is assigned by the Cabinet in Turkey.

Regarding budgetary sources, the energy regulators in the SEE region often have their own budgets financed from fees for their services (see Table 8). It is common that the parliament approves the financial plan of the regulatory body, which could mean an oversight over the work of the regulator. However, in Kosovo the Ministry of Finance can decide on the energy regulator’s budget, regardless of its needs.

The gross salary level of the energy regulator employees in SEE increases as the number of employees increase for the energy regulators in Macedonia, Montenegro and Republika Srpska (BiH) (see Table 8). In Albania and the Federation (BiH) the number of employees has remained the same, but salaries have increased. Both of these are indicators of positive development, possibly strengthening the internal capacities of the energy regulator by increasing the number of employees or increasing their independence by having competitive salaries. On the contrary, in the case of there had been a reduction of their salaries Kosovo and Serbia had a reduction of their salaries and the number of employees. Most notable to underline is the case of Kosovo, where the Ministry of Finance has the authority to determine the regulator’s budget (see Table 10).

Таble 8. Way of appointment and Source of budget of the energy regulator

country Way of appointment Source of budget

Macedonia

The members and the president of the Energy Regulatory Commission shall be appointed and dismissed by the Assembly of the Republic of Macedonia at a proposal of the Government of the Republic of Macedonia, taking into consideration the equitable representation of members of all communities. (article 16, Law on Energy, Official Gazette 16/2011)

Own budget, financed from fees for licensing of energy operators and annual license fees for those who already have a license. ERC submits its annual financial plan for the next year to the national Assembly on approval. The Assembly adopts the financial plan where the total budget cannot exceed 0.1 % of the overall income of the operators for the budgeted year.

Albania

A selection committee pre-selects two candidates for board members, who are then appointed by the Parliament. Vacancies for Board members are subject to public announcement.

The budget of the Energy Regulatory Entity is financed by the application fee that applicants must pay when they apply for a license. The tariff for every energy activity is approximately 70 euro for MW.


Таble 8. Way of appointment and Source of budget of the energy regulator (continued)


Kosovo

According to the Law on the Energy Regulator, the Energy Regulatory Office shall be directed by a Board of five members, including a Chairperson. Board members shall be nominated by the Government and appointed by the Assembly of the Republic of Kosovo.

Own budget, financed from the fees col-lected by the Energy Regulatory Office for licensing and other activities. In preparing and submitting its annual budget, the En-ergy Regulatory Office shall comply with all the budget preparation and submission requirements determined in the Law on Public Financial Management. This pro-cedure allows the Ministry of Finance to decide on the budget of the Energy Regu-latory Office, regardless of its needs and the budget requested. As a consequence, the budget of the regulator was systemati-cally lower compared to its revenues.

Turkey

The executive board is assigned by the Cabinet. According to a law from 2011, the Ministry of Energy and Natural Resources has the authority to monitor and inspect the activities of the Turkish regulatory authority. This authority, how-ever, has not been used yet.

The EPDK’s budget is formed by its own revenues from licenses, publications, grants from international organizations at the electricity, natural gas, petroleum and LPG markets. EPDK’s budget is also formed by 25 % of the administrative fines issued by the institution and additional transmission charges corresponding to a maximum 1 % of the transmission rate for the electricity market. Sources of additional financing are the participation shares and visa charges at the natural gas, petroleum and LPG markets.

BiH

Selection of directors in the past was done by a commission composed of ministers and experts. But for the upcoming appointment of FERK’s director, the Government will choose one candidate and the Parliament will most probably elect it.

Regulatory Commission for Energy of Re-public of Srpska (RERS) and Regulatory Commission for Energy in Federation of Bosnia and Herzegovina (FERK) have their own budgets, which are financed from the regulatory proceeds and fees charged from energy operators, grants. The budget is ap-proved by the Parliament of Federation of BiH and Republic of Srpska respectively.

Serbia

The members of the Board are appointed by the Parliament as per the Government proposal. The Government’s proposal is based on the proposal of a special com-mittee, comprised of five members, which is established by the Government at the proposal of the Ministry of Energy.

The financial plan of the Agency is adopted by the Parliament. The Agency makes revenues based on its own activities (regulation and licensing).


133,13�,135

133 Financial report with a report on the work of the Energy Regulatory Agency for 2010.13� Financial report with a report on the work of the Energy Regulatory Agency for 2011.135 Financial report with a report on the work of the Energy Regulatory Agency for 2012.

Таble 8. Way of appointment and Source of budget of the energy regulator (continued)

Source: Interviews in BiH, Macedonian ERC annual reports; Montenegro: Article 45 of Law on Energy; Articles 26, 30 and 31 of Law on Energy. Albania: Guidelines in applying for a license, Energy Regulator Entity, 2010-2014; Law No.9584, dated on 17/07/2006, amended with Law No. 9845, dated on 17/12/2007 (Parliament of Albania, 2006); Turkey: Energy Community Secretariat, (2015), Energy Governance in Turkey; Kosovo: financial statements (2010 – 2014) of the Energy Regulatory Office; The 2015 Annual Implementation Report compiled by the Energy Community Secretariat, 1 September 2015.


Montenegro

Board Members are appointed by the Parliament on the Government’s proposal. The director and Deputy Director are selected by the Board, upon prior opinion of the Government.

Own budget, financed from license fees, with annual charges to obtain licenses for carrying out energy activities and charges for settlement of disputes.

Таble 9. level of SalarieS of energy regulator’S employeeS

level of salaries

country year

Salaries, social contribution and taxes on salaries

in Eur

total numberof employees

averageannual salaryper employee

Eur

Macedonia

2010 ��5,853 20 22,292

2011 �60,22� 23 20,009

2012 �67,668 25 18,706

2013 569,922 28 20,35�

201� 5�0,529 29 18,638

Albania

2010 336,808 32 10,525

2011 352,�09 32 11,012

2012 3�9,�53 32 10,920

2013 358,017 32 11,188

201� 361,311 32 11,290

Montenegro

2010133 232,080 25 9,283

201113� 702,1�0* 25 28,085

2012135 695,902 27 25,77�

http://www.skupstina.me/~skupcg/skupstina/cms/site_data/DOC24/675/ENERGETIKA_675.pdf

http://www.skupstina.me/~skupcg/skupstina/cms/site_data/DOC25/ZAKONI I IZVJESTAJI/15/Agencija za energetiku/00.pdf

http://www.skupstina.me/zakoni/web/dokumenta/zakoni-i-drugi-akti/289/97-2114-00-72-13-38.pdf





136,137,138,139

Besides these important indicators, there have been a number of cases in SEE when the regulatory body’s authority was put into question,

136 Financial report with a report on the work of the Energy Regulatory Agency for 2013.137 Financial report with a report on the work of the Energy Regulatory Agency for 201�.138 Regulatory Commission for Energy in Federation of Bosnia and Herzegovina FERK, Annual Report

2010, Annual Report 2011, Annual Report 2012, Annual Report 2013, Annual Report 201�.139 Regulatory Commission for electricity of Republic of Srpska, Proposed Budget 2010, Budget

2011, Budget 2012, Proposed Budget 2013, Proposed Budget 201�. http://www.balkaninsight.com/en/article/albania-speaker-accused-of-graft-in-arbitrage-case-09-08-2015.

Таble 9. level of SalarieS of energy regulator’S employeeS (continued)

Note: * Gross amount and gross allowance; Source: interviews in BiH, MK ERC annual reports; Montenegro: Article 45 of Law on Energy; Articles 26, 30 and 31 of Law on Energy. Albania: Guidelines in applying for a license, Energy Regulator Entity, 2010 – 2014; Law No. 9584, dated on 17/07/2006, amended with Law No. 9845, dated on 17/12/2007 (Parliament of Albania, 2006); Turkey: Energy Community Secretariat, (2015), Energy Governance in Turkey; Kosovo: financial statements (2010 – 2014) of the Energy Regulatory Office; Serbia: Annual Report of the Energy commission.

level of salaries

country year

Salaries, social contribution and taxes on salaries

in Eur

total numberof employees

averageannual salaryper employee

Eur

Montenegro2013136 670,222 28 23,936

201�137 732,379* N/A N/A

Serbia2013 960,000 38 25,263

201� 952,000 37 25,729

Kosovo

2010 397,13� N/A N/A

2011 372,�65 N/A N/A

2012 372,319 N/A N/A

2013 353,�15 27 13,089

201� 310,591 2� 12,9�1

BiH (FERK)138

2010 933,136 32 29,160

2011 955,19� 32 29,8�9

2012 1,928,2�3 32 60,257

2013 96�,122 32 30,128

201� 1,119,�85 32 3�,983

BiH (RERS)139

2010 876,3�3 30 29,211

2011 927,�89 32 28,98�

2012 963,882 33 29,208

2013 867,602 32 27,112

201� 919,299 32 28,728

http://regagen.co.me/wp-content/uploads/Predlog-Finansijskog-izvjestaja-sa-izvjestajem-o-radu-RAE-za-2013.-godinu1.pdf

http://www.skupstina.me/zakoni/web/dokumenta/zakoni-i-drugi-akti/920/957-6058-00-72-15-34.PDF

http://www.ferk.ba/_ba/images/stories/2011/izvjestaj_o_radu_2010_bosanski.pdf

http://www.ferk.ba/_ba/images/stories/2011/izvjestaj_o_radu_2010_bosanski.pdf

http://www.ferk.ba/_hr/images/stories/2012/izvjesce_o_radu_2011_hr.pdf

http://www.ferk.ba/_hr/images/stories/2013/izvjes_o_radu_2012_hr.pdf

http://www.parlamentfbih.gov.ba/dom_naroda/bos/parlament/propisi/El_materijali/prijedlog_budzeta_FERK-a_ 2013.pdf

http://fbihvlada.gov.ba/bosanski/zakoni/2014/zakoni/28.htm

http://www.reers.ba/sites/default/files/Prijedlog_Budzeta_RERS_2010_lat.pdf

http://www.reers.ba/sites/default/files/Prijedlog_Budzeta_RERS_2011_Lat.pdf

http://www.reers.ba/sites/default/files/Prijedlog_Budzeta_RERS_2011_Lat.pdf

http://www.reers.ba/sites/default/files/RERS_Budzet_2012_lat_final.pdf

http://www.reers.ba/sites/default/files/Prijedlog_Budzeta_RERS_2013_LAT.pdf

http://www.reers.ba/sites/default/files/Budzet_RERS_2014_lat.pdf

http://www.balkaninsight.com/en/article/albania-speaker-accused-of-graft-in-arbitrage-case-09-08-2015


http://www.erc.org.mk/pages.aspx?id=18http://www.erc.org.mk/pages.aspx?id=18


http://www.aers.rs/Files/Izvestaji/Godisnji/Izvestaj Agencije 2015.pdf

http://www.aers.rs/Files/Izvestaji/Godisnji/Izvestaj Agencije 2015.pdf


including accusations for taking bribes, misuse of official authority, clear interference of the government in the work of the regulator and other similar instances.

The Energy Regulatory Agency (ERE) of Albania was accused of taking bribes from CEZ, which had a controlling stake in Albania’s Electricity Power Distribution System Operator, OSHEE, in the period 2009 – 201�, in exchange for reducing the price at which the state-owned power producer Albanian Power Corporation, KESH, was selling electricity to CEZ Shperndarje. A few days after the alleged bribe, the ERE reduced the sale price of electricity from KESH to CEZ by 27 %. This decision may have cost KESH and the taxpayers tens of millions of euros, as KESH was heavily subsidized from the state budget.1�0 This case, if true in regard to the involvement of the regulatory agency, is a clear example of influencing the institution’s decisions. The negative consequences of this alleged deal would be felt by the state budget, as it has been used to subsidise the state-owned company Albanian Power Corporation KESH.

In Macedonia, the State Commission for Prevention of Corruption’s annual report for 2012 revealed that it had initiated an investigation about misuse of official authority by the President of the Energy Regulatory Commission of Macedonia and the members of the Commission. The investigation alleges that they misused their official position in 2011 and 2012 by allowing a legal person to perform an activity in the energy sector of public interest and to profit from that activity without having the proper license. The damage caused as a result of this illegal activity was worth almost EUR 13,000. The procedure is ongoing.1�1

The European Commission voiced criticism in Kosovo over the continued political meddling in the Energy Regulatory Office of Kosovo, which has faced strained budgets and chronic under-capacity.1�2 An interesting case is from March 2013, when the citizens participated in anti-corruption protests after the raise in energy prices. After the protest, the Economy Minister Besim Beqaj said that the government heard about the high utility bills, and that he had sent a letter to the Energy Regulatory Office asking for a final report. Upon receiving the report, the government said to undertake adequate measures.1�3 This is a clear example of a populist move to halt social unrest by attempting to maintain energy prices at an artificially low level.

In the case of Serbia, the government agreed that under its recent financial assistance programme with the International Monetary Fund, it will increase the transmission fee charged by Srbijagas, so that Srbijagas would have more resources to pay off its debt. However, this decision is neither in the mandate of the Government, nor Srbijagas, but requires the decision from the Regulator. The regulator was pressured by the Government into allowing this price increase although it is, according to

1�0 BalkanInsight, Albania Speaker Accused of Graft in Arbitrage Case, 08.09.2015.1�1 Annual report of State Commission for Prevention of Corruption of Macedonia 201�.1�2 EU progress report 2015 Kosovo.1�3 BalkanInsight, Kosovo Stages Mass Protest Over Corruption, 1�.03.2013.


http://www.dksk.org.mk/images/Drzavni_Programi/%D0%93%D0%9E%D0%94%D0%98%D0%A8%D0%95%D0%9D %D0%98%D0%97%D0%92%D0%95%D0%A8%D0%A2%D0%90%D0%88-2014-%D0%94%D0%9A%D0%A1%D0%9A.pdf


one interviewed lawyer, clearly excessive and not in line with the Law and EU regulations. Namely, Srbijagas is allowed to charge unreasonably high prices in order to make up for the losses it incurred in the 2008 – 201� period.1��

State aid bodies in the region deal with different sets of issues when it comes to their independence and functionality (see Table 9). One relevant corruption risk is the close connection between the state aid body and the finance ministry or the ministry responsible for energy issues, which is observed in the cases of Albania, Serbia and Montenegro. The Turkish state aid body also has close connection with a set of ministries, as it is in fact composed of representatives from ministries. Kosovo’s state aid bodies are not operational. The government is the state aid giver and there is a need for a strong body to monitor the process, which is difficult if the state aid body has limited independence. The Energy Community Secretariat initiated open infringement processes in Kosovo and BiH due to the failure to adopt and enforce state aid legislation.1�5 BiH has not adopted any legislation prohibiting state aid, resulting in non-compliance with Articles 6 and 18 of the Energy Community Treaty.1�6 Kosovo has also failed to adopt a Law within a reasonable time frame.1�7

1�� Interview with an energy expert and memorandum of Economic and Financial Policies between Serbia and IMF.

1�5 Energy Community Secretariat, (2013), Annual Report 2012/2013.1�6 Energy Community, 2010 CASE ECS 01/10: BH/COMPETITION.1�7 Energy Community, CASE ECS 07/11: KO/COMPETITION.

State aid bodies

Таble 10. independence of State aid body

country independence of state aid body

Albania

Not independent, has links to the Ministry dealing with energy. The State Aid Body (SAC) operates as an “ad hoc” decision making structure, which is invoked in cases when the ministry needs to discuss about its politics or changes that plans to make in the system. The SAC is composed of 5 members, which are appointed by the Council of Ministers for a �-year term. The Chairman of the SAC is the Minister of Economy. The SAC acts pursuant to the Law No. 937� and the Regulation “On the organization and functioning of State Aid.”

BiH

The Council is composed of eight members: three representatives appointed by the Council of Ministers BiH, two representatives appointed by the Government of the Republic of Srpska, two representatives appointed by the Federal Government and one representative appointed by the Brcko District Government. All members shall be appointed for a period of four years. Constitutive people must have at least two representatives in the Council.

Members of the Council elect a chairman and two deputies for a period of one year. Council members are elected among the recognized experts in the fields of economics and law.

http://www.imf.org/external/np/loi/2015/srb/061115.pdf

http://www.imf.org/external/np/loi/2015/srb/061115.pdf

https://www.energy-community.org/portal/page/portal/ENC_HOME/DOCS/2304177/0633975AD31E7B9CE053C92FA8C06338.PDF

https://www.energy-community.org/portal/page/portal/ENC_HOME/AREAS_OF_WORK/Dispute_Settlement/2010/1_10

https://www.energy-community.org/portal/page/portal/ENC_HOME/AREAS_OF_WORK/Dispute_Settlement/2011/07_11


1�8

One issue with the anti-monopoly authority in the analysed countries is the lack of assertiveness in initiating investigation cases. Hesitant application of competition laws and low levels of investigation by the respective authority for competition protection indicates that the bodies are weak and easily influenced by the government (see table 10). It shows that Albania, Turkey and Macedonia are among the better examples in regard to their anti-monopoly bodies’ activities. In the other countries, the anti-monopoly bodies have not been sufficiently active.

1�8 Energy Community Secretariat, (201�), Annual Report 2013/201�.

Таble 10. independence of State aid body (continued)

Source: Energy Community Secretariat, (2010), Annual Report 2010, Energy Community Secretariat, (2012), Annual Report 2012, Energy Community Secretariat, (2014), Annual Report 2013/2014, Energy Community Secretariat, (2015), Annual Report 2014/2015, Parliament of Albania, 2005; Kosovo’s Law on State Aid (Law No. 04/L-024); State Aid Council of BiH; Energy Community Secretariat, (2015), Energy Governance in Turkey.

country independence of state aid body

BiH

The status of Council members is incompatible with any direct or indirect, permanent or temporary duty or function that can put their independence at risk or create a potential conflict of interest. Council members may perform academic activities and work in professional and scientific bodies.

Macedonia

Not independent, concerns are raised over the practical use of the legally granted independence of the commission, especially in light of the need for its proactive role as promoter of competition and abolishment of competition barriers in the energy market.1�8

Montenegro Not independent, due to close links with the Ministry of Finance

Serbia

Not independent, closely related to Ministry of Finance. It is chaired by the representative of the same Ministry. The unit within the Ministry itself is also responsible for processing notifications on State aid and preparing the decisions of the Commission for State Aid Control on granting and recovering of State aid.

Kosovo

The State Aid Office is the administrative unit established within the Kosovo Competition Authority responsible for receiving, analysing and monitoring notifications of state aid measures. The work of the State Aid Office is constrained by a lack of office space and technical support. The State Aid Office supports the State Aid Commission (SAC), acting as a decision-making body on an ad hoc basis. Since the State Aid Office is not entirely operational, the SAC has neither assessed any state aid measure nor begun with any activities on the enforcement of state aid law.

Turkey

The Board of Monitoring and Control of State Aid is assigned with reviewing, monitoring and inspecting State aid in accordance with the agreements between Turkey and the EU. The Board has six members and a general manager of State aid. These members are representatives from the Ministry of Finance, Ministry of Industry and Trade, Ministry of Development, Treasury, Ministry of Economy and the Turkish Competition Authority.

competition protection authorities


https://www.energy-community.org/portal/page/portal/ENC_HOME/DOCS/722178/0633975AAE7F7B9CE053C92FA8C06338.PDF

https://www.energy-community.org/portal/page/portal/ENC_HOME/DOCS/1770178/0633975ABBDE7B9CE053C92FA8C06338.PDF



http://www.kuvendikosoves.org/common/docs/ligjet/Law on state aid.pdf

http://www.szdp.gov.ba/en/nadle%C5%BEnosti-i-organizacija




1�9

1�9 Some of the main Decisions of the AC:

Albanian Competition Authority. (2015). Decision No. 385, dated 03.12.2015 “Recommendations for the Energy Regulator Entity”. Tirana, Albania: ACA.

Albanian Competition Authority. (2015). Decision No. 388, dated 1�.12.2015 “Recommendations for the Energy Regulator Entity and the Transmission Operator System”. Tirana, Albania: ACA.

Albanian Competition Authority. (2005 – 2015). Legislative Framework. Tirana, Albania: ACA.

Albanian Competition Authority. (2008). Press Release 12.11.2008: On the Decision of the ACA, on some suggestions on the liberalisation and strengthening of the competition in the energy sector. Tirana, Albania: ACA.

Таble 11. proactiveneSS of the anti-monopoly body

Source: Energy Community Secretariat, (2015), Annual Report 2014/2015, EU progress report 2015 Macedonia; Energy Community Secretariat, (2015), Energy Governance in Turkey, Albanian Competition Authority 2005 – 2015.

country proactiveness of the anti-monopoly body

Albania

Well-established in the area since 2005. It conducted investigations about the structure of the energy markets and recommended change of the legal framework and changes in the activities of the regulatory body, SOEs etc.1�9 A more proactive approach would benefit the positive progress of the market.

BiH The anti-monopoly council has not assessed an anti-competition case.

MacedoniaThe anti-monopoly agency investigated a big cartel case in the energy sector and imposed fines for the cartel participants.

MontenegroNo practical use of competition law in regard to the electricity or gas sector in the past three years with the exception of a review of one merger.

SerbiaNo cases of the application of competition law in the energy sector since the establishment of the enforcement authorities.

KosovoNo enforcement activities for over a year and a half and only 1 member in office.

Turkey Well-established in the sector.



Public procurement is a key economic development tool and a means for redistributing national income.150 As such, it is highly prone to corruption, fraud, and other forms of abuse of public financial resources. Thus, increasing accountability for public procurement in the energy sector is a matter of particular importance for the citizens of any country.

The capital-intensive and highly centralised nature of large energy infrastructure projects results in a particular vulnerability to political pressures and corruption risks.151 Governance deficits and corrupt practices are often even more visible in large energy projects due to the substantial amounts of money involved, and the heightened potential socio-economic impact on citizens. These projects have the potential to carry inherent risks of influence on governments by individual interests, while often the corruption is not easily proven and goes unpunished.

Public procurement is traditionally vulnerable to corruption pressures in young democracies, especially when it involves large-scale tenders and limited competition, which is typical for the energy sector.152 In large energy projects, corruption is especially prevalent, as their construction requires significant investment, either from the state or from private companies. When these projects are managed by the state, they are financed by costly loan agreements, which are rarely sustainable in the long-run. This part of the paper will analyse public procurement in the energy sector and will point out red flags for corrupt practices. The conducted analysis in this part discusses the preference of SOEs for less competitive and non-transparent public procurement processes, which accommodate individual needs and political influences.

The lack of transparency in the management of public procurement is one of the clearest indicators of bad governance, as it prevents taxpayers from understanding the structure of public spending. In the analysed cases of large infrastructure projects in the Western Balkans and Turkey, a lack of transparency in the overall process is consistently seen, as the government agencies fail in most cases to make the project’s agreement,

150 One in four public procurement contracts in 201� was connected to the energy sector, which makes it one of the main cost centers for taxpayer money in the country. Center for the Study of Democracy, (201�), Energy Sector Governance and Energy (In)Security in Bulgaria, p. 10.

151 Center for the Study of Democracy, (201�), Energy Sector Governance and Energy (In)Security in Bulgaria, pp. 16-17; Center for the Study of Democracy, (2011), Energy and Good Governance in Bulgaria. Trends and Policy Options, p. 59.

152 Center for the Study of Democracy, (2011), Energy and Good Governance in Bulgaria. Trends and Policy Options, p. 67; Center for the Study of Democracy, (2010), The Energy Sector in Bulgaria: Major Governance Issues, p. �1.

6. puBlic procurEmEnt and largE EnErgy infraStructurE miSmanagEmEnt and corrupt practicES

transparency challenges


tender documentation and related regulations available to the general public. Although the data about public procurement contracts is usually publicly available, there is no or only limited energy-specific public procurement data, preventing further comparisons across sectors and countries in the Western Balkans.

In albania energy SOEs do not publish sufficient information on their websites about the tenders that they have issued. There is no open and editable data on the names of the winning companies and the individual values of the public procurement. The data on public procurement in the Serbian energy sector is also limited since aggregate data for the entire energy sector does not exist in the Public Procurement Office.

In montenegro, there is also no energy sector-specific data on public procurement and the winning companies involved. The annual reports on public procurement of the state-owned enterprises must be obtained through free access to information law in order to see how public funds are spent in the energy sector. The only reports that are compiled in Montenegro are the individual annual reports of contracting authorities,153 which they are not legally obligated to publish, and the integral report for all contracting authorities that is compiled by the Public Procurement Administration annually.15�

When analysing the reports of Montenegrin Electric Power Company (EPCG), Energy Transfer Company (CGES), Energy Market Operator (COTEE) and Montenegro Bonus, typical problems in public procurement were identified155 – a lack of transparency and accountability. The published data are therefore inaccurate and incomplete, and there is no database on contracting authorities that have violated the Public Procurement Law. The number of criminal charges is negligible,156 and competent institutions do not prosecute disputable cases.

An interesting finding about Montenegro that prevents the effective analysis of public procurement data, is the differences in reporting by the Public Procurement Administration and SOEs about the planning of public procurement. The PPA published an annual report on public procurement for 2012, identifying Montenegrin Electric Power Company, EPCG, as one of the contracting authorities with the biggest difference between its planned and completed budget for public procurement, with significantly higher amounts reported than was stated in its individual report (see Table 12).157

153 Contracting authorities submit their reports to the Public Procurement Administration by the end of February of the current year, for the previous year. These reports contain three parts, the so-called forms or patterns A, B, and C, which contain information on open procedures, the shopping method, and direct agreements concluded during one year.

15� According to the Article 118 of the Law on Public Procurement, the Public Procurement Administration compiles and publishes an annual report on public procurement by the end of May of the current year for previous year.

155 Institute alternative, “Corruption within the Law”, May 2015.156 For example, in 201�, the Public Procurement Administration received zero criminal charges

for suspicions of corruption, conflict of interest, and breach of anti-corruption rules. The Public Procurement Administration, Report on Public Procurement in 201�, May 2015.

157 In 2012, final plan of the budget for public procurement for FU Distribution within EPCG was 66 778 766 euro, for FU Production 7� 263 632 euro and for Organizational Unit Energy Management �71 978 euro. Data from the individual report on public procurement of EPCG obtained through free access to information and the Report of Public procurement administration for 2012.

http://institut-alternativa.org/nabavke-u-crnoj-gori-korupcija-u-zakonskim-okvirima/

http://www.ujn.gov.me/en/2013/07/godisnji-izvjestaj-o-javnim-nabavkama-u-crnoj-gori-za-2012-godinu/

http://www.ujn.gov.me/en/2013/07/godisnji-izvjestaj-o-javnim-nabavkama-u-crnoj-gori-za-2012-godinu/

publicprocurEmEntandlargEEnErgyinfrastructurEmismanagEmEnt... 69

One common corruption red flag in the regional energy sector is the general restriction of competition in tendering. The contracting authorities often impose exclusive criteria in order to limit the amount of bidders for each contract. The exclusive criteria may often fit the profile of a very specific company that could be directly influencing the terms of the drafting process through the illicit transfer of funds or capturing the senior management of energy SOEs. In some cases, energy contracts can be exempted from the whole public procurement process and directly allocated to a well-vested private interest.158,159

The public procurement for large projects in the energy sector may be abrogated and replaced with laws or agreements between states or with international parties. This renders the process less transparent, which prevents more detailed analysis. The risk of state capture is heightened in large projects, as the influence of a major player’s interests has the potential to overshadow all rules of the game.

In Turkey, Serbia and Albania, a common corruption risk is that the energy tenders are implemented outside the general public procurement procedures, whereas in Serbia an exemption from the Public Procurement Law is provided to several energy companies: the Petroleum Industry of Serbia (NIS), which is owned by Gazprom; and the wholesale gas supplier, Srbijagas, in which gas is purchased under a long term agreement with Gazprom. Also not covered by the public procurement legislation are international agreements, such as the Serbian-Chinese arrangement for investments in the energy industry and projects fully-financed by international financial organizations. Public procurement procedures are circumvented in international agreements, presenting an additional national security risk related to the increase of foreign state influence in domestic affairs.160 In Albania, energy tenders were also part of extraordinary procedures. This means that the rules for fair and competitive public procurement may be circumvented. In Turkey, it is the case that energy, water, transportation and telecommunication projects have been exempted from the scope of the public procurement law.

158 Montenegrin Public Procurement Portal.159 Annual Public Procurement Report of EPCG for 2012, obtained through free access to

information.160 Public Procurement Law.

Таble 12. planed158 and completed budget159 of epcg in 2012 – eur

Source: Montenegrin Public Procurement Portal and Annual Public Procurement Report of EPCG for 2012.

2012 planned budget completed budget

EPCG 1�1,51�,376 86,168,07�

Public procurement administration 17�,575,�97 138,216,835

competition restrictions and state capture risks

http://portal.ujn.gov.me/delta2015/login.jsp?locale=en&

http://www.kjn.gov.rs/sw4i/download/files/cms/attach?id=82


In terms of competition among the bidders, the procedures for the award of public procurement contracts vary considerably. They fall into three major categories:161

• non-competitive procedures, where a limited number of bidders are allowed to submit a tender, after which negotiations take place. These include negotiation procedures with and without publication of the contract notice, a competitive dialogue procedure and a negotiation procedure following a special invitation. The extreme case of this procedure could be the direct invitation of a company to execute the contract without the publication of a contract notice.

• Semi-competitive procedures open for bidding to a limited number of interested parties only by an exclusive invitation from the contracting authorities.

• competitive procedures open for tender submission to all interested parties without the inclusion of special terms.162,163,16�

Public procurement with no competition and limited transparency may leave space for “pre-arranged” bids and bidders.

161 Center for the Study of Democracy, (2007), Corruption in Public Procurement: Risks and Reform Policies; Center for the Study of Democracy, (2011), Anti-Corruption in Public Procurement: Balancing the Policies.

162 China-SEE energy projects update.163 Law on realisation of an infrastructural project for building the magisterial gas pipeline Section

Klecovce – Block station 5, Official Gazette 13/201�.16� Law on realisation of an infrastructural project for building the magisterial gas pipeline Section

Klecovce – Block station 5, Official Gazette 13/201�.

The Serbian government planned a new 350 MW lignite unit at Kostolac in north-east Serbia, despite the fact that the Drmno mine suffered from heavy flooding in 201�, which raised security and environmental concerns. The new unit was planned with the signing of a deal in November 2013 as the second phase of a project by China’s National Machinery and Equipment Import and Export Corp (CMEC), the first phase of which involved the rehabilitation of the existing units at Kostolac and the installation of anti-pollution equipment. China and Serbia signed an intergovernmental agreement that allowed joint projects to avoid tender procedures according to the Serbian national legislation all together – a move which would not be allowed under EU law.162

Despite the fact that the South Stream project seemed a very distant possibility, Macedonia adopted a law about the construction of part of the national gas pipeline,163 through a shortened procedure that excluded broader discussion in the Parliament and with other stakeholders. The issue at stake is that usually such agreements should be concluded as part of a public procurement procedure. Another problematic aspect is that the law is unspecific in stating that in case of additional costs arising from the project, Macedonia will cover them,16� leaving a blank cheque for possible financial mismanagement. This section of the pipeline was also reported as one of the most expensive in Europe – around EUR 1.06 Million per km or around EUR 67.18 Million for 60 km. By comparing

box 4. exampleS of circumventing public procurement ruleS in macedonia and Serbia

http://bankwatch.org/sites/default/files/briefing-China-SEEcoal08Oct2014.pdf

http://www.slvesnik.com.mk/Issues/0e0a86554a5c4720bffdf951194f7072.pdf

http://www.slvesnik.com.mk/Issues/0e0a86554a5c4720bffdf951194f7072.pdf


165

In montenegro, the law prescribes the percentage of the use of direct agreement, the non-competitive procedure, to be 10 %, but in-practice, it is common that this percentage is higher. As defined under Montenegrin law, direct agreement is a public procurement procedure which entails an immediate arrangement between a contracting authority and a bidder and for which there is no legal obligation to be published.166 In fact, Montenegro’s electricity market operator, COTEE, violated the Law on Public Procurement since it had a higher percentage of direct agreements than prescribed by law in 2012, 2013 and 201�,167 but was not registered on the list of contracting authorities with the highest percentage of direct agreement usage in the Public Procurement Administration’s annual report. There is also no data for whether Montenegro’s electricity market operator, COTEE, paid fines prescribed by the Law for misusing this procedure. It is difficult to check if EPCG violated the Law in terms of direct agreement, because their annual reports on public procurement do not contain integral information. In fact, the Public Procurement Law is vague in terms of calculating the percentage of direct agreement usage, leaving a lot of space for misuse and corruption.

In macedonia, a contract from 2013 for provision of Services for creation and realisation of media campaign for promotion of the activities and investments of Macedonia’s electricity generation company, ELEM, proved to be problematic. Although the procurement method was an open procedure, the overly-specific requirements seemed ‘tailored’ for one single bidder. This agency, which ultimately won the contract is well-known as the government’s favourite for spending funds on public advertising of various government projects that are seen as a way for ‘buying’ pro-governmental favouritism among certain media.168

Tables 12-18 show the types of public procurement procedure in light of their competitive nature in the analysed countries. The competitive procedure through open procurement has been used in the biggest

165 TELMA, CODE: Why pipeline Klecovce Stip cost 75.7 million dollars, 29.03.2015.166 “Direct agreement represents an immediate arrangement between a contracting authority

and a bidder regarding the terms of a public procurement. The total annual value of public procurement of a contracting authority conducted by direct agreement may not exceed 10 % of its total annual executed public procurement budget in the previous year.” Article 30 of the Public Procurement Law, “Official Gazette of Montenegro”, �2/11 i 57/1�.

167 Public procurement report of COTEE for 2012; Public procurement report of COTEE for 2013’ Public procurement report of COTEE for 201�, all obtained through the request for free access to information.

168 Utrinski Vesnik, Naumovska, S., The Government Advertises, Republic Cashes, 15.02.2012.

the km and the costs of this new section and the existing gas pipeline in Macedonia, the new one would be 2.5 times more expensive per km.165

Both cases underline the cause and effect relationship between lack of competition and corruption risk, and expose state capture risks with pushing for projects outside of the regular tender procedures.

box 4. exampleS of circumventing public procurement ruleS in macedonia and Serbia (continued)

http://telma.com.mk/vesti/kod-zoshto-gasovodot-klechovce-shtip-chini-757-milioni-dolari

http://goo.gl/hTB4UL


number of contracts signed in the energy sector in Kosovo, in the case of Macedonia’s ELEM and GA-MA – the Macedonian gas transmission and transmission system operator, Albania, BiH and Serbia, while in Montenegro the contracts conducted as an open procedure are the highest in value. Red flags are raised for Macedonia’s ELEM, Montenegro and BiH where there is an increase of the least competitive (non-competitive) procedure over the years. It is notable that almost half of tenders of GA-MA were according to the least competitive procedure (non-competitive procedure type). Taking into account this non-competitive nature, there is a significant corruption risk involved in this type of transactions.

Таble 13. typeS of public procurement procedureS folloWed in the energy Sector (2010 – 2014) in koSovo

Source: Public Procurement Regulatory Commission (2015).

type of procedures 2010 2011 2012 2013 2014

Open Procedure 1,308 1,085 9�9 9�9 802

Closed Procedure 2 1 3 1 �

Design competition 2 0 0 0 0

Negotiated after publication of the contract 10 7 1 1 0

Negotiated without publicationof the contract announcement

12 11 �1 27 28

Price quotation 360 �16 ��7 �0� �37

Procedure on minimum amount 0 0 0 0 0

Total Number of Awarded Publicprocurement contracts

1,69� 1,520 1,��1 1,382 1,271

Таble 14. macedonia’S elem procurement contractS (2009 – 2014)

no. contracts: 2009 2010 2011 2012 2013 2014total n. contracts

(2009 – 2014)

total amount (Eur)

%

Open Procedure 38� �06 362 336 21� 209 1911 373,�32,008 �6.8%

Restricted Procedure 13 3 5 1 0 0 22 29,253,698 3.7%

Negotiated procedure without prior publication of a contract notice

39 37 29 82 137 70 39� 106,265,053 13.3%


Таble 15. Summary reSultS for the 21 aWarded public procurement contractS of ga-ma, macedonian gaS tranSmiSSion and tranSmiSSion SyStem operator

Source: Macedonian Electronic System for Public Procurement.

company/elements ofconcluded public procurement

type of procedurecriterion for contract

awarding

GA-MA

12 open;

9 negotiated procedures without prior publishing

of announcement

10 with lowest price;

11 with economically favourable offer

Таble 14. macedonia’S elem procurement contractS (2009 – 2014) (continued)

Source: Macedonian Center for International Cooperation (MCIC), own calculations based on the data from the Macedonian Electronic System for Public Procurement.

no. contracts: 2009 2010 2011 2012 2013 2014total n. contracts

(2009 – 2014)

total amount (Eur)

%

Negotiated procedure with prior publication of a contract notice

3 0 6 3 1 0 13 289,365,123 36.2%

TOTAL �39 ��6 �02 �22 352 279 2,3�0 798,315,882

Таble 16. type of public procurement contractS in montenegro

n. contracts:

2009 2010 2011 2012 2013 2014total n. contracts

(2009 – 2014)

total amount (Eur)

%

Open Procedures

3,635 1,769 2,55� 2,69� 2,995 3,028 16,675 1,82�,891,605 89.5�%

Shopping method

1,366 2,070 3,�75 1,729 2,330 2,771 13,7�1 89,1�6,080 �.38%

Direct agreement

51,051 57,5�2 57,963 5�,370 6�,579 70,659 356,16� 12�,080,862 6.09%

TOTAL 56,052 61,381 63,992 58,793 69,90� 76,�58 386,580 2,038,118,5�8

http://www.e-nabavki.gov.mk



Таble 17. procurement contractS in albania (2010 – 2014) – eur

Source: Public Procurement Agency (PPA) Reports 2010 – 2014.

no of procedures/amount

of fund/year2010 2011 2012 2013 2014 total %

Open Procedure1,738 2,266 1,97� 1,251 1,5�1 877

73.2%22,223,203,306 37,302,338,210 35,825,�60,329 36,375,�39,551 3�,16�,559,658 165,891,001,05�

Total Other proc3,2�� ,215 3,869 3,�39 �,67� 19,��1

9.1%875,689,878 5,029,�53,257 �,667,186,816 �,326,21�,179 5,7��,�16,969 20,6�2,961,099

Restricted Procedure0 1 0 0 1 2

3.7%0 8,33�,905,605 0 0 5,555 8,335,�61,105


0 1 0 0 0 10.2%

0 �30,739,886 0 0 0 �30,739,886

Negotiated procedure without prior publication ofa contract notice

196 1,713 1,736 1,713 2,121

13.8%5,6�0,202,135 5,903,078,523 5,920,922,979 8,202,656,551 5,566,688,557 31,233,5�8,7�5

Total 6,9�2 8,195 7,579 6,�03 8,336 28,212

Total Amount 28,739,095,319 �8,665,609,876 �6,�13,570,12� �8,90�,310,281 �5,�75,665,18� 226,533,711,889

Таble 18. type of procurement contractS in bih

Source: Open Public Procurement website of the Center for Investigative Reporting (CIN), Bosnia and Herzegovina.

contractnumber

2010 2011 2012 2013 2014total n. contracts

(2010 – 2014)

total amount (Eur)

%

Competitive Procedure

2 36 0 0 0 38 322,077 0.03%

Restricted Procedure

0 5 7 � 17 33 13,879,�69 1.37%

Open Procedure 85 1,175 1,032 1,152 1,282 �,726 763,805,�68 75.�9%

Negotiated procedure

13 172 369 389 �18 1,361 229,725,976 22.70%

Accelerated Procedure

0 2 0 2 6 10 3,937,�09 0.39%

Accelerated Restricted Procedure

0 0 0 0 � � 138,6�6 0.01%

TOTAL 100 1,390 1,�08 1,5�7 1,727 6,172 1,011,809,0�6

http://www.cin.ba/javnenabavke/


There have been a limited number of public procurement corruption cases in the region, most of which have not been completed yet.169,170

169 National newspaper “Zeri”, and opinion given from Anticorruption Agency.170 Kurir, Affair in the Energy Sector: Hamović and Lazarevic are a decade under investigation,

28.12.201�.

Таble 19. value Structure of type of procedureS, Serbia, in %

Source: Reports on Public Procurement in Republic of Serbia, 2009 – 2014.

2009 2010 2011 2012 2013 2014average

%

Open Procedure �3 57 5� 56 66 85 60

Restricted Procedure 18 12 16 10 10 6 12

Negotiated procedure without prior publication of a contract notice

31 2� 25 28 17 5 22


8 7 5 6 7 � 6

TOTAL 100 100 100 100 100 100 100

A distortion of competition may happen when tender criteria is leaked to bidders to help them develop a winning offer, or through the creation of fake competition. The tender of Kosovo Transmission System Operator and Electricity Market Operator, KOSTT, for “Installation of Metering groups at new commercial border between KOSTT/KEK/DSO” was annulled three times. On the third time, the Kosovo Anti-Corruption Agency annulled this tender due to suspicions that bid rigging happened.169

Another scandal regarding replacing the tender procedure with direct negotiation involved the major electricity trading company, EFT, and Serbia’s electricity supply company and electricity distribution system operator, EPS, for periodic trade with electricity. EPS was buying electricity at a higher than market price, with the deal agreed upon by direct negotiations. EFT belongs to the Serbian businessmen Hamović and Lazarevic, who have been related to other scandal ridden cases in the Balkans area. This shows state capture risks, which are very harmful for Serbia’s citizens, as they are covering for the losses of their state owned-companies through the state budget. Serbia tried to address this corruption scandal in 200� by forming an Investigative Committee whose president was today’s prime minister of Serbia, Aleksandar Vucic. The Committee examined the allegations, but found no evidence of wrongdoing. In 2013 the Minister of Energy submitted criminal charges against Hamović and Lazarević. The court proceeding is still pending.170

box 5. public procurement corruption riSk caSeS in koSovo and Serbia

http://old.zeri.info/artikulli/29759/undefined

http://www.akk-ks.org/repository/docs/opinion- KOSTT-dpkpp_0412201414205800.pdf


171,172,173,17�,175,176,177,178,179,180,181,182

171 Gazprom is a global energy company. Its major business lines are geological exploration, production, transportation, storage, processing and sales of gas, gas condensate and oil, sales of gas as a vehicle fuel, as well as generation and marketing of heat and electric power. Source: Gazprom/About Gazprom.

172 Reuters, Darya Korsunskaya, Putin drops South Stream gas pipeline to EU, courts Turkey, 01.12.201�.

173 European Commission, (2015), Turkey 2015 Report.17� Bulgaria was caught in state capture incident amending its Energy law to circumvent EU rules.175 European Commission, (2015), Turkey 2015 Report.176 European Commission, (2012), Turkey 2012 Progress Report; European Commission, (2013),

Turkey 2013 Progress Report.177 European Commission, (2013), Serbia 2013 Progress Report.178 European Commission, (2013), Serbia 2013 Progress Report; European Commission, (201�),

Serbia 201� Progress Report.179 European Commission, (201�), Serbia 201� Progress Report.180 European Commission, (2015), Serbia 2015 Report.181 European Commission, (2013), Macedonia 2013 Progress Report; European Commission, (201�),

Macedonia 201� Progress Report.182 Martin Vladimirov, (201�), Energy Security and State Capture Risks: South Stream as a case study.

The most widely regarded example of state capture in the energy sector is the development of the now-suspended South Stream gas pipeline.171 Macedonia, Serbia, and Bulgaria have encountered similar governance issues and difficulties in managing gas agreements with Gazprom and meeting EU rules on transparency and third party access.

After declaring the South Stream project “dead”172 in December 201�, Russia announced a new gas transportation project in cooperation with Turkey to replace South Stream, but its construction remains uncertain.173 Concerned that the issue of non-compliance with EU rules in Bulgaria17� will slip over to Turkey, the EU repeated twice in the last progress report on Turkey: “A fair and transparent gas transit regime in line with the EU energy acquis is needed to enable Turkey to play a major role as a gas transit country to the EU.”175 The EU was also already worried about the transparency of the gas transit regime, stating that Turkey had not made any development in improving this situation.176

In the case of Serbia, the country had adopted a Law on the South Stream Gas Pipeline and a decree on the spatial plan for its construction, both of which were to implement the Inter-Governmental Agreement between Russia and Serbia regarding the South Stream project.177 This agreement was problematic from the point of view of the EU since it was deemed incompatible with EU acquis,178 with the recommendation given for Serbia to stop working on the South Stream project until the Inter-Governmental Agreement was in line with the acquis.179 However, after the cancellation of the project, Serbia ceased the preparations.180

Macedonia’s story with the South Stream began formally in 2013, when an agreement with Russia was signed about a section of the South Stream pipeline, which was declared incompatible with Energy Community obligations by the EU.181

These examples show how a single project can have similar impact on the countries’ relation to the EU and EU law. The clash of EU rules and Russia’s interests is what stopped the South Stream project. A simple comparison of the South Stream project’s costs with Nord Stream, both with same diameter, shows that the South Stream project would have been more than 3 times more expensive per km in EUR,182 indicating that it may have started as a political project instead of an economic

box 6. regional State capture riSkS – the South Stream

http://www.gazprom.com/about/

http://ec.europa.eu/enlargement/pdf/key_documents/2015/20151110_report_turkey.pdf

http://ec.europa.eu/enlargement/pdf/key_documents/2015/20151110_report_turkey.pdf

http://ec.europa.eu/enlargement/pdf/key_documents/2012/package/tr_rapport_2012_en.pdf

http://ec.europa.eu/enlargement/pdf/key_documents/2013/package/brochures/turkey_2013.pdf

http://ec.europa.eu/enlargement/pdf/key_documents/2013/package/sr_rapport_2013.pdf

http://ec.europa.eu/enlargement/pdf/key_documents/2013/package/sr_rapport_2013.pdf

http://ec.europa.eu/enlargement/pdf/key_documents/2014/20140108-serbia-progress-report_en.pdf

http://ec.europa.eu/enlargement/pdf/key_documents/2014/20140108-serbia-progress-report_en.pdf

http://ec.europa.eu/enlargement/pdf/key_documents/2015/20151110_report_serbia.pdf

http://ec.europa.eu/enlargement/pdf/key_documents/2013/package/mk_rapport_2013.pdf

http://ec.europa.eu/enlargement/pdf/key_documents/2014/20141008-the-former-yugoslav-republic-of-macedonia-progress-report_en.pdf

http://analyticamk.org/images/Files/Conference_on_energy_security/Martin_Vladimirov_09582.pdf


183

The specific nature of the energy sector is conducive to the circumvention of highly competitive procedures.18� The opaque environment of public procurement in the energy sector185 is mainly based on the exclusive criteria for access and safety of energy sites, the effective technology monopoly at the micro level for a number of supplies, the ambiguous legal nature of energy export transactions, the lack of effective in-house financial audits, and the lack of monitoring and control exercised by the energy or other control bodies. The share of open procedures where a single tender has been submitted is indicative of the progressive establishment of discriminatory specifications. Open procedures (competitive procedure types), in principle, attract broad interest and the number of submitted tenders should typically be as high as possible. In the energy sector in SEE, however, preference is consistently given to non-competitive procedures for the awarding of public procurement contracts in comparison to the wider public procurement market.

On the other hand, public procurement with single bidding despite a competitive procedure type is a serious red-flag for corruption risk186 due to at least two factors: a) entry barriers – contracting authorities may have designed such tender specifications for a specific company or a combination of companies (which is more often the case) – and b) political embeddedness, i.e. tacit knowledge and relationships that allow politically connected firms to bid in tenders with difficult or impossible requirements that will later be amended or ignored through low implementation controls. Large contracts usually facilitate single bidding, as larger bids might have explicitly high thresholds that can be met by only a reduced number of companies, usually the biggest ones.

The existence of many exclusive agreements in the energy sectors in SEE countries reveals additional potential for undue favouritism in the selection of suppliers of goods and services to SOEs. High-priced arrangements may be tolerated in exchange for a counter-offer from the company-provider. The Albanian case shows that public procurement and concession procedures in the energy sector are not legally obliged to be

183 Ruslan Stefanov, Martin Vladimirov, CSD and Südosteuropa, (201�), Bulgaria and the South Stream Pipeline Project: At the Crossroad of Energy Security and State Capture Risks.

18� Center for the Study of Democracy, (201�), Energy Sector Governance and Energy (In)Security in Bulgaria; Center for the Study of Democracy, (2011), Energy and Good Governance in Bulgaria. Trends and Policy Options.

185 Also see list of the forms of public procurement abuse in Center for the Study of Democracy, (2010), The Energy Sector in Bulgaria: Major Governance Issues, p. �1.

186 Center for the Study of Democracy, (2011), Anti-Corruption in Public Procurement: Balancing the Policies.

one, including in the price sweeteners, meant to incentivise local players to circumvent EU rules on the territories, through which the project passes. Russia demonstrated its capacity to yield political influence on the countries in Southeast Europe and Black Sea regions by leveraging its dominant position on their energy markets.183

box 6. regional State capture riSkS – the South Stream (continued)


processed via the existing electronic platform. Allegations have been made for some energy SOEs in Albania, one of which is Albanian Electricity Power Distribution System Operator, OSHEE. Following accusations made by GEN-I, the Competition Authority of Albania, CAA, launched a probe against the power utility OSHEE. According to GEN-I Tirana, OSHEE, EFT and GSA colluded with each other concerning the tenders organised between January and July 201� to supply electricity. In December 2015, the Competition Authority decided to close the investigations on the case, outlining that no competition restriction was seen and suggesting internal or external audits to OSHEE for the case.187,188

In Montenegro, media attention was directed towards EPCG, which has paid more than EUR 15 million for consulting services since 2010, without calling for public tenders.189 Since the state is the majority owner of EPCG, this SOE was obliged to apply the Law on Public Procurement and call a public tender for these services. The Prosecution has formed a case on this matter, but no charges have been brought.

The High State Audit in Albania, upon discovering favouritism for several companies in pub-lic tenders, proposed 26 warn-ing measures as well as firing several employees of AlbPetrol for the irregularities observed in the tender procedures, including legal prosecution for the head of the company at the time.190 For the Albanian Power Corpo-ration, KESH, the 201� Report recommends 11 administrative measures directed at employees of the SOE and in particular the unit responsible for public procurement and tenders. Fur-thermore, the High State Audit recommended criminal charges

against KESH’s administrator, the Director of the Public Supply Division and the Director of Public Procurement Department, based on infringe-ments in the public procurement process for the 2012 – 2013 period. The abovementioned individuals were accused of violating the non-dis-criminatory rules of the public procurement procedure, which led to favouritism towards certain companies.191 The damage from misuse of public procurement in Albania has been considerable in the 2010 – 2015 period (see Table 20).192

187 Albanian Competition Authority, Decision 388, 1�.12.2015.188 BalkanInsight, Albanian Prosecutors to Quiz Former Energy Chief, 28.09.2015.189 Daily Vijesti, Prosecution investigates spending in EPCG”, 1�.05.2015.190 Report of the High State Audit on AlbPetrol sh.a.191 Report of the High State audit on KESH sh.a.192 Exchange Rate on the 31.12.2015, Bank of Albania, 137 ALL/EUR.

Таble 20. economic damage related to public procurement violationS in the energy Sector in albania (2012 – 2015)

Source: HSA reports 2010 – 2015.

yearEconomic damage caused by irregularities

in the procurement sector (Eur)192

2010 5,692,080

2011 3,1�6,109

2012 1,369,1�6

2013 1,535,212

201� 3,2�5,058

2015 2,58�,66�

http://www.caa.gov.al/uploads/decisions/VKK_388_Hetimi_thelluar.pdf

http://www.balkaninsight.com/en/article/former-electricity-distributor-heads-charged-over-procurement-of-the-electricity-imports-09-28-2015

http://www.vijesti.me/vijesti/tuzilastvo-ispituje-izvlacenje-para-iz-epcg-833556

http://www.klsh.org.al/web/pub/albpetrol_1609_1.pdf

http://www.klsh.org.al/web/pub/kesh_1178_1.pdf


Public procurement can be misused in a way that a particular bidder or bidders get the majority of public tenders, resulting in a concentration of public funds. This is deemed problematic because the funds may be misused for political reasons or nepotism.

Kosovo Energy Corporation, KEK, is not only the first contracting energy SOE in terms of value of public procurement contracts in Kosovo for the period 2010 – 201� (see Table 21),193 but also the biggest contracting authority in general for the same period.19�

In Macedonia, the electricity generation company, ELEM is the largest contractor in public procurement in Macedonia, with the four largest public procurement contracts in the country issued by ELEM. It has been related to a politically risky concentration of public procurement funds since most of ELEM’s high-value contracts have been concentrated in three suppliers. They shared 51 %, or EUR 19� million of the top 100 largest public procurement contracts, and a total of EUR 217,8 million or 27 % of ELEM’s total public procurement in the period 2009 – 201� (see Table 22). To further connect the dots the opposition party SDSM, via the revealed wiretapped conversations, claimed that two of the three companys’ owenrs were close to the Prime Minister and people from the ruling party VMRO-DPMNE.195

193 Public Procurement Regulatory Commission, Annual Reports on public procurement activities in Kosovo.

19� Public Procurement Regulatory Commission (2015).195 Libertas (2015). Who are the Businessman – Part of the Political Bombs?

concentration of public procurement funds

Таble 21. top three contracting energy SoeS in public procurement in koSovo

Source: Public Procurement Regulatory Commission: Annual Reports on public procurement activities in Kosovo.

value of contracts within kosovo’s top 52 procurement contracts (2010 – 2014) Euro

% within the top 52 procurement contracts

% of total procurement contracts

(2010 – 2014)

Kosovo Energy CorporationKEK Sh.A.

591,972,516 28.63% 2�.91%

KOSTT sh.a(Transmission, System and Market Operator J.S.C)

39,21�,292 1.90% 1.65%

Hydro Economic Enerprise”Ibër-Lepenc” J.S.C 9,180,277 0.��% 0.39%

Total value of contractswith these three companies

6�0,367,086 30.97% 26.95%

http://www.nytimes.com/2015/06/22/world/europe/macedonia-government-is-blamed-for-wiretapping-scandal.html?_r=0

https://krpp.rks-gov.net/Default.aspx?PID=Notices&LID=2&PCID=-1&CtlID=SearchNotices&stat=2&PPRCMenu_OpenNode=114

https://krpp.rks-gov.net/Default.aspx?PID=Notices&LID=2&PCID=-1&CtlID=SearchNotices&stat=2&PPRCMenu_OpenNode=114

http://goo.gl/yqvGgv


Таble 22. top three Winning companieS in public procurement in macedonia

Source: Center for Civil Communications (CCC) and Macedonian Center for International Cooperation (MCIC) own calculations based on data from the Macedonian Electronic System for Public Procurement.

value of contracts within

macedonian’s top 100 procurement contracts (2010 –

2014) in Eur

% within top 100

total value of contracts

in Eur

% of total value of ElEm’s procurement contracts

(2009 – 2014)

DGU Pelister Bitola DOO 109,667,665 15% 117,660,511 15%

DGTT Trans Met DOO 57,560,976 29% 66,868,30� 8%

DTPU Markovski Kompani DOOEL

26,903,285 7% 33,805,375 �%

Total value of contracts with these three companies

19�,131,925 51% 217,8�0,190 27%

Таble 23. value of contractS Within bih’S top 10 companieS Winning procurement contractS (2010 – 2014)

Source: Open Public Procurement website of the Center for Investigative Reporting (CIN), Bosnia and Herzegovina.

top winners ofprocurement contracts

value of contracts within Bih’s top 10 procurement contracts

(2010 – 2014)

% within the top 10 procurementcontracts

Rudnap d.o.o 212,2�2,511 25.27%

OPTIMA GRUPA d.o.o. 1�6,�3�,171 17.��%

BANOVIĆI d.d. rudnicimrkoguglja 158,335,�25 18.85%

Total value of contractswith these three companies

517,012,108 61.58%

Total value of contractsfor top 10 winning companies

839,576,202 100.00%

In Turkey, looking at the public procurement data for 200� – 2011,196 SOEs account for approximately one-fourth of the total value of all high value procurements.197 The selected five energy sector SOEs, with

196 The public procurement data is not fully publicly available in Turkey. The request to PPA to get the full data for the 2009 – 201� period was declined. Gurakar (2015).

197 Gürakar (2015) states that the total value of high value procurements conducted during the period of analysis, despite being relatively few in number (around 10 percent of the total number of contracts awarded), account for almost three-fourth of the total value of all procurements.


http://www.cin.ba/javnenabavke/


1,295 procurements, account for 6 percent of the total value of all procurements. Two thirds of these 6 percent share is claimed to have gone to politically connected firms such as those with owners/shareholders who are (i) members of the Parliament from the ruling party; ii) ruling party officials at the local level, such as a provincial head or a member of the provincial party organization; and iii) close relatives/immediate family members of ruling party officials indicated in (i) and (ii).198

unnecessary tenders (i.e. such which have not been warranted by needs, policy or strategic documents) may be an important indicator of corrupt behaviour and misuse of public funds. The risk is greater if the procedures employed are also not competitive. Another typical corruption risk in the analysed region is connected to instructions to buy. It means that SOEs may receive instructions to buy certain products or services. These may be overpriced, of insufficient quality or may never be delivered.

An example of instruction to buy is the corruption case related to EFT in BiH. According to the records collected by the Financial Police of the Federation of Bosnia and Herzegovina (FBiH), the heads of the Sarajevo-based State Company “Elektroprivreda Bosnia and Herzegovina” (EP BiH) signed a contract to sell their power surplus to EFT in 2009. The police filed criminal complaints against the-then management of EP BiH, a six-member Board of Directors and a six-member Supervisory Board. There’s a chance that the EFT managers will be found guilty of abusing their offices and embezzling around EUR �.1 million from the state-owned company.199 The issue, according to EP BiH, is that nearly 50,000 megawatt hours have never been shipped. It is an evident case of services provided with insufficient quality having big financial implications for the energy SOE in question.

198 Gürakar (2015) uses the Trade Registry Gazette of Turkey in order to find the owners/shareholders of the contract awarded firms. For methodological details see Gürakar (2015).

199 The Centre for Investigative Reporting in Sarajevo, High Voltage Business. 21.08.201�.

http://www.cin.ba/en/poslovanje-pod-visokim-naponom/

Some of the main obstacles to the implementation of effective energy reforms in the SEE region are the existence of persistent energy governance deficits related to corporate mismanagement of state-owned energy enterprises, the dependence and incompetence of energy regulators, and inconsistencies in energy policies. Improving the governance of the energy sector, including the functioning and management of state-owned energy companies in the SEE region is essential for achieving both effective anti-corruption results and progress towards EU integration. Improving the governance of the energy sector, including the functioning and management of state-owned energy companies, entails at a minimum the implementation of the following actions:

• increasing transparency and access to energy data. This is especially true in the case of data on spending and financial governance of SOEs in the energy sectors. To improve knowledge about the energy sector, an external independent annual energy policy review should be commissioned by the national parliaments and executed by special inter-party working groups, which includes the following: a) an assessment of energy policy performance vis-à-vis the stated priorities for the year, the programming budget, and the strategic goals; b) an evaluation of the financial condition of state-owned energy enterprises and an identification of the risks to the sector’s development, including required state guarantees and risks of hidden privatization; c) an outline of the priority areas for development of the energy policy during the next year.

• In terms of improving corporate governance of energy SoEs, a minimum set of information should be disclosed on SOEs websites, such as:200

1. The composition of the Management Board with information on CEOs: name and CV of each board member/CEO; date when they were appointed as members/CEOs; interest and asset declarations throughout their mandate; salaries received (including bonuses and other benefits); and their status (temporary or final);

2. The procedure through which the board members/CEOs were selected, as well as any finrings and their motives;

3. The company’s (non)financial indicators and their targets and, if the case may be, the reasons why these were not fulfilled;

�. The investment budget and its execution at least for the last 3 financial years;

5. The total personnel spending budget at least for the last 3 years (salaries, bonuses, trainings, travel reimbursements, etc.);

200 Based on discussion of the OECD Guidelines on Corporate Governance of SOEs – 201� Edition.

rEcommEndationS


6. The level of debt (both outstanding and extinguished) owed to the state, credit entities, commercial partners, operators etc.;

7. The value of the subsidies received from the state;8. A risk analysis of the sector in which the company is active;9. The whole of the external audit report;10. Annual report.

• Introducing compulsory corporate governance standards for energy sector state-owned enterprises, following the best international principles such as the OECD Guidelines on Corporate Governance of State-Owned Enterprises, is another important recommendation for the governments of the region to consider. SEE countries lack compliance and especially practical implementation of the majority of the OECD principles. The standards should ensure: reporting and disclosure of data and information regarding financial results, implementing the existing practices and methods, used by publicly traded companies; key financial indicators for monitoring and assessment of the operational management performance; as well as consistent and comparative over-time reporting of implemented programs and policies, including key indicators for monitoring their implementation and for allowing ex-ante, mid-term and ex-post impact assessment.

• reducing the political leadership’s direct involvement in the operational management of energy enterprises and instead focusing on policy development, the provision of public information, and control functions. The compliance with EU priorities and directives necessitates a shift in national energy policy away from its excessive focus on adding generating capacities and towards ensuring the stability and security of energy supply, reducing energy poverty, and improving energy efficiency.

• introducing international accounting standards in the reporting of energy SoEs, such as the international financial reporting standards (IFRS), which increases the transparency of transactions through unified disclosure procedures and allows for an easier comparison of the financial standing of different energy SOEs. Currently, annual financial accounts are not only often missing, but the reporting principles are also inconsistent in terms of reporting data and depth of analysis and disclosure.

additional action could be taken in line with:

• Introducing prioritization and selection of large investments projects in the decision-making process, based on clear and transparent procedures and fact-based analyses, synchronized with the EU priorities, and in-line with the capacity of national administrations. Governments should not be able to include the country in large-scale international projects without prior detailed planning and budgeting.

• Increasing the administrative capacity of national energy regulators, their independence from political and economic interests and their transparency and accountability to both the National Parliaments and the general public.

rEcommEndations 85

• Building consensus on long-term priorities, backed-up with national energy strategy, approved by major political parties, in line with EU priorities. Implement the EU Third liberalisation package as fast as possible in terms of both regulatory changes and institutional practices, and with a view of EU accession prospects.

In regard to the public procurement procedures above 5000 Euro by SOEs, it is necessary to publish the following set of information:

• Annual public procurement plans;• Pre-tender estimate: document on determining the estimated value of

the procurement;• The tender documentation: tender data sheet, evaluation and qualifica-

tion criteria, tender conditions, contract specifications, conditions, etc;• The award committee's report detailing its decision;• If the case may be, any contestation of the award procedure along with

the reasons for their acceptance/rejection by the public authority;• The final awarded contract (with the exception of confidential

information)• Any contract amendments (addenda) made during the contract's

implementation;• Final receipt document attesting the winner's satisfactory fulfilment of

its contract obligations.

KESH is Albanian Power Corporation, vertically integrated, which has the leading role and is the key producer of electricity in Albania. Internet page of KESH/company profile http://www.kesh.al/content.aspx?id=18

OST is Albanian Transmission System Operator. Internet page of OST http://www.ost.al/index.php/en/

ARMO is Albanian Refining and Marketing of Oil company which was privatised in 2008. Internet page of ARMO http://scimantics.com/armorefinery/about-armo/

Albpetrol is involved in production and marketing of petroleum products in Albania. Internet page of Albpetrol/About us http://www.albpetrol.al/en/about-us/

OSHEE is Electricity Power Distribution System Operator in Albania. Internet page of OSHEE/About us http://oshee.al/en/about-us/

Elektroprivreda BiH is producer of electricity for tariff consumers, distributor of electricity and supplier of electricity for tariff consumers in Bosnia and Herzegovina. Internet page of ElektroprivredaBiH/Basic information http://www.elektroprivreda.ba/stranica/opce-informacije

Elektroprivreda HZHB is producer, distributor and supplier of electricity in 35 municipalities in the Federation of Bosnia and Herzegovina. Internet page of Elektroprivreda HZHB/Company profile http://www.ephzhb.ba/o-nama/profil-drustva/?lang=en

Elektroprivreda RS is producer, distributor and supplier of electricity in the territory of Republika Srpska in Bosnia and Herzegovina. Internet page of Elektroprivreda RS http://www.ers.ba/index.php?option=com_content&view=article&id=9&Itemid=28&lang=en

Iber Lepenc is a hydro economic enterprise that supplies industry, water companies and agriculture with bulk water as well as produces power from the power plants Ibri and Lepenci in Kosovo. Internet page of IberLepenc http://www.iber-lepenc.org/?page=2,1,22#.VmLt0b-Jldg

KOSTT is Transmission System Operator and Electricity Market Operator in Kosovo. Internet page of KOSTT/About KOSTT http://www.kostt.com/website/index.php?option=com_content&view=article&id=150&Itemid=192&lang=en

KEK is vertically integrated electricity company in Kosovo. Internet page of KEK/Profile http://kek-energy.com/en/rrethKek.asp

Termokos is a district heating company in Kosovo. Internet page of Termokos/History http://www.termokos.org/en/about-us/history/

ELEM is producer of electricity in Macedonia. Internet page of ELEM/History http://elem.com.mk/index.php?option=com_content&view=article&id=76&Itemid=108&lang=en

MEPSO is Electricity Transmission System Operator in Macedonia. Internet page of MEPSO http://www.mepso.com.mk/en-us/Default.aspx

EPCG is electricity producer, distributer and supplier in Montenegro. Internet page of EPCG/About us http://www.epcg.com/o-nama/o-nama

annEx. liSt of thE analySEd SoEs

http://www.kesh.al/content.aspx?id=18


http://www.ost.al/index.php/en/

http://scimantics.com/armorefinery/about-armo/


http://www.albpetrol.al/en/about-us/


http://oshee.al/en/about-us/

http://www.elektroprivreda.ba/stranica/opce-informacije

http://www.ephzhb.ba/o-nama/profil-drustva/?lang=en


http://www.ers.ba/index.php?option=com_content&view=article&id=9&Itemid=28&lang=en


http://www.kostt.com/website/index.php?option=com_content&view=article&id=150&Itemid=192&lang=en



http://kek-energy.com/en/rrethKek.asp

http://www.termokos.org/en/about-us/history/

http://elem.com.mk/index.php?option=com_content&view=article&id=76&Itemid=108&lang=en


http://www.mepso.com.mk/en-us/Default.aspx

http://www.epcg.com/o-nama/o-nama


CGES is the electricity transmission company in Montenegro. Internet page of CGES/Electrical transmission system http://www.cges.me/en/about/electrical-transmission-system/overhead-line-network

COTEE is electricity market operator in Montenegro. Internet page of COTEE http://www.cotee.me/

Turkish Electricity Trade and Contracting Company (TETAS) is responsible for the wholesale distribution of electricity http://www.plunkettresearchonline.com/ResearchCenter/Contacts/view2.aspx?Industry=35&Contact=Turkish+Electricity+Trading+and+Contracting+Company+Inc.+%28TETAS%29

Electricity Generation Company (EUAS) is the largest electric power company in Turkey and it produces and supplies electricity throughout the country https://en.wikipedia.org/wiki/Elektrik_%C3%9Cretim

Turkish Electricity Transmission Company (TEIAS) is the electricity transmission company http://www.teias.gov.tr/eng/Status.aspx

Petroleum Pipeline Corporation (BOTAS) is the state-owned crude oil and natural gas pipelines and trading company in Turkey https://en.wikipedia.org/wiki/BOTA%C5%9E

Turkish Coal Enterprise (TKI) subsidiaries mine coal and the company is one of the biggest coal producers in Turkey http://www.mbdatabase.com/Basic-Information/Turkiye-Komur-letmeleri-Kurumu-TKI/57190

EPS is electricity supply company and electricity distribution system operator in Serbia. Internet page of EPS/About us http://www.eps.rs/Pages/Article.aspx?lista=Sitemap&id=�0

EMS is electricity transmission company in Serbia. Internet page of EMS/History http://www.ems.rs/about-us/background/?lang=en

Srbijagas deals with transport, distribution, storage and trade with natural gas in Serbia. Internet page of Srbijagas/Basic information http://www.srbijagas.com/o-preduzecu/osnovni-podaci.69.html

Beogradske elektrane is district heating company in Serbia. Internet page of Beogradske elektrane/About us http://www.beoelektrane.rs/about_us.html

Petroleaum Industry of Serbia (NIS) is a vertically integrated company which deals with exploration, production and refining, sales and distribution of a broad range of petroleum products http://www.nis.eu/en/about-us/company-information

http://www.cges.me/en/about/electrical-transmission-system/overhead-line-network


http://www.cotee.me/

http://www.plunkettresearchonline.com/ResearchCenter/Contacts/view2.aspx?Industry=35&Contact=Turkish+Electricity+Trading+and+Contracting+Company+Inc.+%28TETAS%29




https://en.wikipedia.org/wiki/Elektrik_%C3%9Cretim

http://www.teias.gov.tr/eng/Status.aspx

https://en.wikipedia.org/wiki/BOTA%C5%9E


http://www.mbdatabase.com/Basic-Information/Turkiye-Komur-letmeleri-Kurumu-TKI/57190


http://www.eps.rs/Pages/Article.aspx?lista=Sitemap&id=40


http://www.ems.rs/about-us/background/?lang=en

http://www.srbijagas.com/o-preduzecu/osnovni-podaci.69.html


http://www.beoelektrane.rs/about_us.html


http://www.nis.eu/en/about-us/company-information


annEx 89

SoE information internet page

KESH

Albanian Power Corporation, vertically integrated, which has the leading roleand is the key producer of electricityin Albania.


OST Albanian Transmission System Operator. http://www.ost.al/index.php/en/

ARMOAlbanian Refining and Marketing of Oil company which was privatised in 2008.


AlbpetrolInvolved in production and marketing of petroleum products in Albania.


OSHEEElectricity Power Distribution System Operator in Albania.


ElektroprivredaBiH

Producer of electricity for tariff consumers, distributor of electricity and supplier of electricity for tariff consumers in Bosnia and Herzegovina.


Elektroprivreda HZHB

Producer, distributor and supplier of electricity in 35 municipalities in the Federation of Bosnia and Herzegovina.


ElektroprivredaRS

Producer, distributor and supplier of electricity in the territory of Republika Srpska in Bosnia and Herzegovina.


Iber Lepenc

A hydro economic enterprise that supplies industry, water companies and agriculture with bulk water as well as produces power from the power plants Ibri and Lepenci in Kosovo.

http://www.iber-lepenc.org/?page= 2,1,22#.VmLt0b-Jldg

KOSTTTransmission System Operator and Electricity Market Operator in Kosovo.


KEKVertically integrated electricity companyin Kosovo.


Termokos A district heating company in Kosovo.http://www.termokos.org/en/about-us/history/

ELEM Producer of electricity in Macedonia. http://elem.com.mk/index.php?option=com_content&view= article&id=76&Itemid=108&lang=en

MEPSOElectricity Transmission System Operatorin Macedonia.


EPCGElectricity producer, distributerand supplier in Montenegro.


CGESThe electricity transmission companyin Montenegro.



http://www.ost.al/index.php/en/




























SoE information internet page

COTEEElectricity market operator in Montenegro. Internet page of COTEE.


Turkish Electricity Trade and Contracting Company (TETAS)

Responsible for the wholesale distribution of electricity.

http://www.plunkettresearchonline.com/ResearchCenter/Contacts/view2.aspx? Industry=35&Contact=Turkish+ Electricity+Trading+and+Contracting+Company+Inc.+%28TETAS%29

Electricity Generation Company (EUAS)

The largest electric power companyin Turkey and it produces and supplies electricity throughout the country.


Turkish Electricity Transmission Company (TEIAS)

The electricity transmission company. http://www.teias.gov.tr/eng/Status.aspx

Petroleum Pipeline Corporation (BOTAS)

The state-owned crude oil and natural gas pipelines and trading company in Turkey.

https://en.wikipedia.org/wiki/BOTA% C5%9E

Turkish Coal Enterprise (TKI)

Subsidiaries mine coal and the company is one of the biggest coal producersin Turkey.


EPSElectricity supply company and electricity distribution system operator in Serbia.

http://www.eps.rs/Pages/Article.aspx?lista=Sitemap&id=�0

EMS Electricity transmission company in Serbia. http://www.ems.rs/about-us/background/?lang=en

SrbijagasDeals with transport, distribution, storage and trade with natural gas in Serbia.


Beogradske elektrane

District heating company in Serbia.http://www.beoelektrane.rs/about_us.html

Petroleaum Industryof Serbia (NIS)

A vertically integrated company which deals with exploration, production and refining, sales and distribution of a broad range of petroleum products.










http://www.teias.gov.tr/eng/Status.aspx
















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