Croatia
Integrated State-Owned
Enterprises Framework
(iSOEF) Assessment
Europe and Central Asia I Equitable Growth, Finance and Institutions I
Macroeconomic and Fiscal Management Global Practice I The World Bank
May 2021
I CROATIA: Int r t d St t -Own d Ent rpris s Fr m work (iSOEF) Ass ssm nt
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I CROATIA: Int r t d St t -Own d Ent rpris s Fr m work (iSOEF) Ass ssm nt
Acknowl d m nts
This ss ssm nt is th r sult of th n l sis und rt k n b th World B nk
M cro conomics, Tr d nd Inv stm nt t m, und r th proj ct 164208. Th World
B nk Group t m w s l d b Josip Fund (S nior Economist) nd th m in uthors of
th r port r Josip Fund (S nior Economist), Al n Bob tko (Consult nt), Don to d
Ros (L d Economist), Sor n -Rodic B ciu (Consult nt), with contributions from
P dro Ari ti (S nior Public S ctor Sp ci list), Tuukk C str n (S nior For str
Sp ci list), Dominic P squ l P t ll (S nior Tr nsport Sp ci list), L mij M rij novic
(S nior Fin nci l M n m nt Sp ci list), Iwon W r ch (S nior Fin nci l
M n m nt Sp ci list), nd An M rtinis, Milj n V ld c, L n Zub r, Anto B jo,
T m r Mih ljcic (Consult nts).
Ov rsi ht w s provid d b G llin Andronov Vinc l tt , form r Pr ctic M n r,
nd Elis b tt C p nn lli, Countr M n r.
Th t m b n fitt d from th Glob l EFI SOE uid nc nd qu lit control l d b
Al x ndr Arrobbio (Pr ctic M n r), Ad nik Sh rif t O iol (Pr ctic M n r)
nd comprisin N t li M nuilov (S nior Fin nci l M n m nt Sp ci list), S w
Youn Min (Gov rn nc Sp ci list), Ci d m Asl n (L d D bt Sp ci list), nd F d rico
Gu l (Consult nt).
Th t m wish s to th nk p r r vi w rs for th ir dvic nd contributions: L r
S stovic (S nior Economist), C t lin P un (S nior Economist); Dusko V silj vic
(S nior Priv t S ctor Sp ci list), nd Sud rsh n Gooptu.
Th t m cknowl d s nd th nks th st ff of th Ministr of Ministr of th S ,
Tr nsport nd Infr structur (MSTI), Ministr of Fin nc (MoF), nd th Ministr of
Ph sic l Pl nnin , Construction nd St t Ass ts (MPPCSA) for th ir coop r tion nd
ssist nc nd for sh rin th ir vi ws nd inform tion. Th t m is lso r t ful to
th Or ni tion for Economic Co-op r tion nd D v lopm nt (OECD) nd th
Int rn tion l Mon t r Fund (IMF) for th ir subst nti l n l tic l work conduct d in
th fi ld of st t -own d nt rpris s own rship nd ov rn nc . Th OECD Guid lin s
on Corpor t Gov rn nc for St t -own d Ent rpris s (OECD: 2015) nd th World
B nk Corpor t Gov rn nc of St t -Own d Ent rpris s: A Toolkit (World B nk:
2014) r k sourc s nd r dr wn on throu hout this R port. Oth r r s rch nd
uid nc r r f r nc d in this Not nd r fl ct d in th footnot s, wh r ppropri t .
I CROATIA: Int r t d St t -Own d Ent rpris s Fr m work (iSOEF) Ass ssm nt
Cont nts
Executive Summary ................................... 1 ANNEX 1: Performance of SOEs owned
by the local government units ......... 53
CHAPTER 1 ANNEX 2: International benchmarking of
Introduction ......................................................... 7 selected SOEs in Croatia ................ 57
ANNEX 3: The system for obtaining profit
CHAPTER 2 remittances from SOEs requires
The SOE Landscape in Croatia ......................... 11 improvement ...................................... 59
2.1. Background and Recent Developments ANNEX 4: Types of ownership
model structure ................................ 60
in the SOE Sector .................................... 12
ANNEX 5: SOE ownership and governance
2.2. SOE Portfolio ........................................ 14
practice across OECD countries ..... 60
2.3. Performance of the SOE Sector .......... 18
ANNEX 6: Performance evaluation
2.3.1. Financial Performance ................... 18
and management of SOEs .............. 63
2.3.2. Operational Performance ............... 23
2.3.3. Service Delivery Performance ......... 23
Figures
CHAPTER 3
Figure 1: Integrated SOE
(iSOEF Module 2): Assessment of Fiscal Costs
Framework (iSOEF) ............................. 11
and Risks from the SOE Sector ...................... 29
Figure 2: SOEs account for a significant share
3.1. Fiscal Costs of SOEs ............................ 30
of economic activity ................................ 16
3.2. Fiscal Risks from SOEs ........................ 32
Figure 3: Evolution of SOE
profitability (2003-2019) ..................... 18
CHAPTER 4
Figure 4: Private firms are more profitable
(iSOEF Module 4): Corporate Governance
than SOEs in almost all sectors ......... 19
and Accountability Mechanisms ................... 36
Figure 5: Labor costs are higher in SOEs
4.1. Legal and Regulatory framework ......... 37 than in private firms (2019) .................... 22
4.2. Ownership and Oversight Function ..... 39 Figure 6: SOEs tend to be less efficient
4.3. Performance monitoring ...................... 42 than private firm s .............................. 23
4.4. Boards of Directors Figure 7: Productivity of SOEs was consistently
and Management ......................................... 45 lower than that of privately-owned firms,
4.5. Accounting, Reporting, Transparency (premia of privately-owned enterprises
and Disclosure ...................................... 46 compared to state-owned
4.6. Procurement .......................................... 49 enterprises) ............................................. 24
Figure 8: Subsidies are large, albeit declining
CHAPTER 5 over time ................................................... 31
The Key Reform Agenda .................................. 51 Figure 9: Financial indicators ............................ 35
I CROATIA: Int r t d St t -Own d Ent rpris s Fr m work (iSOEF) Ass ssm nt
Abbr vi tions
nd Acron ms
CEE Central and Eastern Europe
CERP Center for the Restructuring and Sale
CFRS Croa�an Financial Repor�ng Standards
COVID-19 Coronavirus disease 2019
CSB Croa�an Sta�s�cs Bureau
EBRD European Bank for Reconstruc�on
and Development
CROATIA EU European Union
Integrated
FINA Financial Agency
State-Owned GCR Global Compe��veness Report
Enterprises Framework GDP Gross Domes�c Product
(iSOEF) Assessment
HAC Hrvatske autoceste
HRK Croa�an Kuna
Tables
IFRS Interna�onal Financial
Repor�ng Standards
Table 1. Largest SOEs in Croatia (2019) ..........17 IMF Interna�onal Monetary Fund
Table 2: Top loss-making SOEs (2019) ........... 21 INTOSAI Organiza�on of Supreme
Table 3: Direct net impact on the general Audit Ins�tu�ons
government budget ............................. 30 iSOEF Integrated State-Owned
Table 4: Profit payments from SOEs Enterprises Framework
to the budget ........................................ 32 JSC Joint-Stock Companies
Table 5: Largest capital injections LLC Limited Liability Companies
and payments of called guarantees ......... 32 MAIC Mul�-Annual Infrastructure Contract
Table 6: A Framework for Mapping SOEs MoF Ministry of Finance
Related Fiscal Risks .............................. 33 MPPCSA Ministry of Physical Planning,
Construc�on and State Assets
Table 7: Share of vulnerable debt ....................... 35
MSTI Ministry of the Sea, Transport and
Table 8: Main regulatory framework
Infrastructure
for SOEs in Croatia .................................... 38
MSP Law Law on the Management of State Assets
OECD Organiza�on for Economic Co-opera�on
Boxes and Development
POE Privately Owned Enterprises
Box 1: Rebalancing fiscal priorities of SOEs PPA Public Procurement Act
which support environment-friendly ROA Return on Assets
mobility ................................................... 26 ROE Return on Equity
Box 2: HRVATSKE ŠUME – an SOE with high SAO State Audit Office
technical standards but suboptimal SOE State-Owned Enterprises
business model reflecting weaknesses
TFP Total Factor Produc�vity
ULC Unit Labor Cost
of the national corporate governance
VAT Value-Added Tax
framework ............................................. 42
WB World Bank
WBG World Bank Group
I CROATIA: Int r t d St t -Own d Ent rpris s Fr m work (iSOEF) Ass ssm nt
Ex cutiv
Summ r
This r port ppli s th n w World B nk int r t d SOE Fr m work (iSOEF) to ss ss Cro ti ´s
st t -own d nt rpris s s ctor nd its curr nt r form tr nds. The report provides one of the first
comprehensive applications of the World Bank’s new integrated SOE framework (iSOEF) in
Europe. Based on firm-level data, it provides analytical arguments indicating underperformance
of the Croatian SOE sector, which ultimately stems from corporate governance deficiencies. As
the report points to areas where reforms are of utmost importance and gives actionable policy
recommendations, it is intended to be used for deepening the policy dialogue in the area of SOEs
with Croatian authorities. The analysis covers non-financial companies with central government
ownership of at least 50 percent. Short analysis of local government SOEs is given in Annex 1.
Cro ti n st t -own d nt rpris s (SOEs) pl si nific nt rol in conomic ctivit . While the
number of companies owned by the state has been continuously falling since the 1990s when
the country embarked on its transition path from planned to market economy, the SOEs sector
continues to be relatively large in international perspective. It is estimated that SOEs owned by the
central government account for approximately 4 percent of total employment and 5 percent of
value added generated in the entire economy. If local government SOEs were also considered,
these ratios would both increase to 7 percent, which is in terms of employment higher than in
Central and Eastern Europe (CEE) countries, as well as many OECD countries.
In this cont xt, Cro ti n uthoriti s h v confirm d th ir commitm nt to r duc th SOEs
portfolio nd improv th ir corpor t ov rn nc fr m work, sp ci ll in th c s of SOEs
consid r d s of “sp ci l st t int r st”. Long-term state asset management reform efforts
intensified after 2013 with the intention to improve the SOEs management and reduce their fiscal
burden. Also, two reforms were introduced in 2017, pertaining to the restructuring of the Central
State Office for State Asset Management into the Ministry of State Assets, intended to foster a
more coordinated approach and give impetus to the restructuring and privatization of SOEs; and the
adoption of a new Corporate Governance Code. As of 2020, the Ministry of State Assets was
merged with the Ministry of Construction and Physical Planning, and these reforms are yet to yield
desired effects in terms of SOEs´ efficiency and return.
M in findin s of this r port indic t th t SOEs in Cro ti h v hi h r l bor costs, nd lso low r
productivit nd profit bilit s comp r d to priv t -s ctor firms. It was found that labor costs are
consistently higher in SOEs than in private companies, while labor productivity is consistently lower.
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Also, SOEs lag private companies in terms of technical efficiency. Furthermore, average return
on assets and equity in SOEs are lower than in private firms, and the spread between these two
groups has been increasing over time. Finally, the average employment cost to turnover ratio is
almost double in SOEs as compared to private firms. These findings hold for the economy as a
whole as well as for most sectors where SOEs operate. However, it has to be kept in mind that if
market activities of SOEs cannot be monitored separately from their activities related to public
policies, performance indicators and comparisons to private sector peers need to be analyzed with
caution. In that sense, international comparisons to similar SOEs operating in other countries are
warranted.
Fisc l costs nd risks of SOEs
Av il bl d t indic t th t SOEs h d sm ll positiv (dir ct) n t imp ct on th ov rnm nt bud t
ov r th p st thr rs. During 2017-2019, SOEs paid on average 0.7 percent of GDP in taxes and
0.2 percent of GDP in dividends, annually, while subsidies from the government budget to SOEs
amounted 0.5 percent of GDP. Most subsidies went to SOEs in industries showing elements of
natural monopoly and market failure, such as the transport sector, road companies and postal
services. At the same time, subsidies to SOEs in competitive sectors such as manufacturing and
tourism were minimal.
How v r, fisc l risks w r lso id ntifi d — xplicit nd implicit— l r l st mmin from SOEs´ d bt.
The stock of non-financial SOEs debt was around 12 percent of GDP in 2019, and three quarters
of this debt was concentrated in fifteen largest SOEs. Around 80 percent of this amount is already
included in general government debt, thus covering the risk of increased public debt in the event
of SOEs debt servicing default, but this would imply liquidity pressures on the budget. Moreover,
while for most SOEs debt riskiness does not seem high, earnings ratios of around ten percent of
SOEs do not seem high enough to cover interest expenses, suggesting that they may face servicing
difficulties. In addition, the unexpected shock due to the COVID-19 pandemic has put significant
pressure on performance of public companies linked to tourism, such as transport and road
management companies.
Ass ssin th full fisc l imp ct of SOEs in Cro ti r quir s b tt r d t . Besides subsidies, taxes
and dividend payments, other transactions between the central government and SOEs such as
budgetary net on-lending, tax deferrals and payment arrears, for which data is not readily available,
can also have an impact on the government budget. However, the lack of information on these
transactions hinders a more thorough analysis for assessing the full fiscal impact of SOEs in
Croatia.
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Corpor t Gov rn nc nd SOEs p id on v r / nnu ll
Account bilit
2017-2019
M ch nisms
D spit improv m nts ov r th r c nt rs,
0. 7 % 0. 2 %
of GDP in t x s of GDP in divid nds
th SOEs ov rn nc fr m work r m ins
w k nd Cro ti still l cks consist nt
ppro ch tow rds st t own rship in lin Subsidi s from th ov rnm nt
with int rn tion l st nd rds. Corporate bud t to SOEs
governance is a broad topic, covering a
0. 5 %
complex system of relationships between a
diverse range of stakeholders. This report
follows the iSOEF methodology for addressing
of GDP / annually
SOE corporate governance and focuses on
the state's ownership function and the legal
framework governing SOEs. Overall findings indicate a departure from internationally
accepted OECD principles in several key areas of corporate governance.
Th SOE own rship function in Cro ti h s b n tr dition ll fr m nt d mon
v rious ov rnm nt bodi s, which imp irs prop r ov rsi ht of th s ctor, nd
und rmin s ccount bilit . Croatia’s fragmented approach to state ownership
creates a conflict of interest between line ministries' responsibility for setting
sectoral policies and for managing SOEs day-to-day businesses. The Ministry of
Finance is not entrusted with key SOE ownership responsibilities, and the
oversight role over SOEs of special state interest, assigned to the new Ministry
of Physical Planning, Construction and State Assets (MPPCSA), is also shared
with line ministries. Besides, while the number of SOEs has been continuously
falling, further efforts over the next years will be needed to assess the efficiency
of subsidized SOEs in providing their services and to obtain further progress
through the on-going privatization proce ss.
Th s issu s continu to pr v il, d spit r c nt r inforc m nt of th SOE l l nd
r ul tor fr m work. The Law on the Management of State Assets (MSA Law) from
2018 is the main pillar of the current SOE legal framework in Croatia, providing a general
regulatory framework for the management of Croatian state assets. However, the Law
focuses on the management of different types of state assets, rather than on the
regulation of SOEs' functioning. The Parliament also approved in 2019 the Strategy
for Management of State Assets 2019-2025 (MSA Strategy), which lacks specific
objectives and indicators, and thus fails to provide a good roadmap for the
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implementation of the MSA Law. Overall, these and other significant recent reform
actions such as the adoption of the new Code of Corporate Governance have
proven so far insufficient to provide a sound SOE ownership policy and a reinforced
SOE corporate governance structure.
Th Cro ti n st t r m ins r l tiv l p ssiv own r, without n ff ctiv
monitorin s st m th t would k p SOEs´ bo rd nd m n m nt ccount bl
for th ir p rform nc . Many Croatian SOEs unilaterally define their mandates and
objectives, including financial targets, capital structure targets, and risk tolerance
levels, without prior approval or consultation with their line ministries. Since 2018,
SOEs must report —on a quarterly and annual basis— on their financial
performance and strategic plans to the MoF, MPPCSA and CERP by using the
so-called “Guidance for the Preparation and Submission of Business Plans and
Reports of Companies and Legal Entities that represent State Assets”. However,
SOEs are not required to submit such documents to their respective line ministries.
SOEs sup rvisor bo rd pr ctic s h v b n r inforc d throu h r c nt
l isl tion, but ch ll n s r m in. A new framework was established by a recent
government decree in 2019 to improve the board nomination process for SOEs of
special state interest, which previously was lacking transparency and favored
political appointees. According to this new framework, SOE board and management
candidates must have adequate educational background, professional experience,
and no conflicts of interest. However, the nomination of independent or non-executive
members in SOEs continues being a rare practice, and SOE Boards are frequently
performing as formal bodies with little influence on strategic decision-making
processes and the appointment of management, as suggested by international
corporate governance standards.
Curr nt l ws nd r ul tions for th functions of ccountin nd disclosur of
Cro ti n SOEs ccounts r in lin with EU st nd rds. SOEs are required to
submit their annual financial statements and consolidated statements with the
respective accompanying auditor’s reports to the Financial Agency (FINA) for
statistical and other purposes and for public disclosure. Besides, financial
statements and other reports of SOEs are controlled by several external and
internal bodies, including state bodies, internal audit and control units of SOEs, and
independent external auditors. The highest audit institution in Croatia is the State
Audit Office (SAO), autonomous and independent in its work. During SOEs audits,
a particular attention is paid to the application of good governance and internal
control mechanisms. Large SOEs and those of special interest are also required to
have an external statutory audit, under the coordination of an audit committee.
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How v r, s v r l sp cts r l t d to this pr ctic still r quir improv m nts.
The accounting standards applied to SOEs in Croatia are either the Croatian
Financial Reporting Standards (CFRS) or the International Financial Reporting
Standards (IFRS). While the elaboration of annual reports and public disclosure
appear as adequate, significant departures from the IFRS are often found in
practice, justified by special laws (Lex Specialis) as in the case of transport-sector
SOEs. Also, while the Croatian Audit Law is in compliance with the European Union
(EU) standards and directives, the quality of SOE financial statements external
audits is uneven, since audit firms are sometimes selected on the basis of lowest
cost only, without considering quality aspects. The quality control of external audits
is carried out by the Ministry of Finance, and the disclosure of these data is limited.
K R form A nd
Su st d polic options nd r forms for th ov rnm nt’s consid r tion r
focus d on th own rship function nd th r l tion b tw n th st t nd SOEs,
tr nsp r nc , th priv ti tion pro r m, nd fisc l risk m n m nt. Th propos d
ch n s int nd to improv public s ctor fisc l m n m nt nd ccount bilit , s w ll
s li n SOE corpor t ov rn nc pr ctic s with int rn tion ll cc pt d st nd rds.
Own rship Function
Ownership policy.
It should clearly define state ownership rationale with explicit criteria and expectations
for all parties involved, including SOE shareholders, boards, management, auditors
and other key stakeholders and clearly allocate responsibilities. The ownership policy
should also define the criteria for establishing and terminating state ownership, and
set out the roles and responsibilities of SOEs, which can be used to guide
decision-making and help on protecting them from political interference.
Ownership institution.
The exercise of state ownership rights on SOEs should be clearly identified within the
state administration, either through a centralized model with a single ownership entity
or through the consolidation of a dual model where the ownership function is
adequately shared by a central-level body and corresponding line ministries. In that
sense, the role of the coordinating body, currently assigned to MPPCSA, could be
strengthened through a clear and focused mandate with a high degree of autonomy,
improved capacity and accountability, and effective SOE oversight. In the short-term,
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the capacity of the line ministries to effectively oversee the SOEs within their portfolio
should be strengthened through adequate training.
Priv ti tion Pro r m
Follow up of the government´s Privatization Program.
Privatization initiatives should be resumed based upon both the results of the efficiency
analysis of subsidized SOEs, and the new state ownership rationale for SOEs.
Effici nc An l sis nd Fisc l Risk M n m nt
Carry out an efficiency analysis of government subsidized SOEs.
An in-depth analysis is needed to evaluate the efficiency of subsidized SOEs in providing
their services and achieving appropriate value for money.
Development of an SOE fiscal risk management framework.
This framework—prepared and disclosed by the MoF—should identify the major risks
to the budget emanating from SOEs; assess their size and probability of occurrence;
identify any policy or other measures to mitigate these risks; and disclose the fiscal
risks to enhance awareness of fiscal policy trade-offs and bring transparency to the
entire budgeting process. The framework should take into consideration both direct
and contingent liabilities, as well as explicit and implicit obligations.
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Introduction
I CROATIA: Int r t d St t -Own d Ent rpris s Fr m work (iSOEF) Ass ssm nt
Introduction
1. This report applies the new World Bank integrated SOE Framework (iSOEF),
developed by the Equitable Growth, Finance and Institutions (EFI) practice
group, to assess Croatia's SOE sector comprehensively and its current reform
trends. The report provides one of the first comprehensive applications of the
World Bank’s new integrated SOE framework (iSOEF) in Europe, by providing first
a landscape of SOEs in Croatia, and then addressing key aspects for assessing
SOEs, namely: “Fiscal impact” and “Corporate Governance and Accountability
Mechanisms”. This multidimensional assessment looks at the interrelationships of
the challenges and opportunities faced by Croatian SOEs to propose holistic and
sequenced recommendations to strengthen their governance and performance.
2. The main objective of this iSOEF report is to identify ways to strengthen the
corporate governance of SOEs and consequently improve its performance.
The primary audience of the iSOEF is the Government of Croatia, in particular the
MoF, the Ministry of Physical Planning, Construction and State Assets (MPPCSA),
the Ministry of the Sea, Transport and Infrastructure (MSTI) and other relevant
stakeholders.
D t Av il bilit
3. Reliable financial data and selected economic indicators for SOEs in Croatia
are readily available on an annual basis. However, SOE transactions with the
central and local government budgets lack full transparency. All companies in
Croatia, both limited liability companies and corporations, that pay profit tax, are
obliged according to the Law on Accounting to submit annual financial statement
the Financial Agency (FINA). These statements are standardized and contain
detailed data from the balance sheet, profit and loss account, cash flow statement,
statement of changes in equity as well as economic indicators such as employment,
composition of investment, etc. However, SOE level data on transactions with the
central and local government budgets lack transparency. Namely, data on
outstanding state guarantees by firms are not publicly available, nor are the information
on tax arrears, deferred taxes, tax credits and, in most cases, intercompany lending
between SOEs. Also, while information on subsidies received from the budget are
collected and published by FINA, dividend payments to the budget by company can only
be found in annual reports of some companies. Finally, data on recapitalizations of
SOEs and privatization are not readily available.
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M thodolo
4. The report followed the new World Bank integrated SOE Framework (iSOEF)
and its respective guidance notes. As mentioned, the report relies on iSOEF
conceptual modules for assessing SOEs. In particular, it covers an overall landscape
of the SOE sector and provides an analysis based on two iSOEF modules capturing
key aspects of the SOE sector: “Fiscal Impact” (iSOEF Module 2), which offers an
assessment of main fiscal costs and risks from the SOEs sector in Croatia; and
“Corporate Governance and Accountability Mechanisms” (iSOEF Module 4).
Fi ur 1
Int r t d SOE
Fr m work (iSOEF)
SOE
L ndsc p
Corpor t
SOE Eff cts Fisc l Distribution l Gov rn nc
on M rk ts Imp cts Imp cts nd
Account bilit
M ch nisms
Politic l Communic tion
Econom
St t -Own d Fin nci l Institutions
S ctor-sp cific
or sp ci l Oth r s ctors (to com )
th m s
Anticorruption nd Int rit
CONTEXT
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Structur of th R port
5. The report structure is organized in the following 5 chapters: After the
introduction in Chapter 1, the overview of the SOEs landscape in Croatia is given in
Chapter 2. iSOEF Module 2 on fiscal costs and risks related to the SOEs sector is
covered in Chapter 3, followed by the iSOEF Module 4 on corporate governance
and accountability mechanisms in Chapter 4. Finally, Chapter 5 gives an action plan
for an improved SOEs sector with a series of options for reforms, focusing on a set
of sequenced realistic measures that could be implemented in the short and
medium term, aimed to improve SOEs corporate governance, while obtaining a
more effective oversight over their associated fiscal costs and risks.
I CROATIA: Int r t d St t -Own d Ent rpris s Fr m work (iSOEF) Ass ssm nt / CHAPTER 2
Th SOE L ndsc p
in Cro ti
I CROATIA: Int r t d St t -Own d Ent rpris s Fr m work (iSOEF) Ass ssm nt
2. Th SOE L ndsc p in Cro ti
2.1. B ck round nd R c nt D v lopm nts in th SOE S ctor
6. Since Croatia’s independence in 1991, the state footprint in the economy
through SOEs was significantly reduced but remains elevated. The main
privatization process took place during 1990s as the country embarked on its
transition path from planned to market economy. The adoptions of the Law on the
Transformation of Social Ownership in 1991, that facilitated conversion of companies
into joint stock companies or limited liability companies, marked the beginning of this
process. In this initial phase, close to 2900 out of 3600 companies were sold, often under
preferential arrangements to employees of respective companies. 1 The privatization of
many of the largest companies, except those deemed to be of strategic or special
state interest, was conducted in the late 1990s and early 2000s. However, divestment
process has not been finalized 2 and a large number of companies is still directly
controlled by the government. The central government currently holds a majority stake
in more than 100 companies, 3 either directly or indirectly, including SOEs’ subsidiary
companies and companies established by independent entities like universities or
institutes, while localgovernments hold around 800 companies.
7. SOEs owned by the central government play a significant role in terms of
economic activity, but there are concerns regarding their performance,
fiscal impact and corporate governance. SOEs owned by the central government,
which are the main focus of this report, account for approximately 4 percent of total
employment and 5 percent of value added generated in the entire economy. If we were
to include the local government SOEs, these ratios would both increase to 7 percent,
which is in terms of employment higher than in other countries in the Central and
Eastern Europe (CEE). 4 Also, OECD (2017) shows that most OECD countries have
notably lower shares of SOEs in total employment compared to Croatia. SOEs
commonly lag behind private sector firms in terms of productivity, labor efficiency and
productivity, and some are considered as a source of significant fiscal costs and risks.
This is compounded by the existence of weak SOE corporate governance practices,
departing from internationally accepted standards.
1 According to Druzic et al. (2003).
2 The Center for Restructuring and Sale —institution responsible for the management of shares and business stakes in SOEs not
considered of special interest for the Republic of Croatia— continues to hold public calls, public tenders or direct sales of companies
under its management.
3 Additionally, central government holds between 25 and 50 percent of shares in 20 companies and less than 25 percent in
around 270 companies.
4 See IMF (2019).
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8. In this context, Croatian authorities have confirmed their commitment to
reduce the SOEs portfolio and improve the corporate governance framework
in SOEs of special state interest. Long-term state asset management reform efforts
intensified from 2013 and intended to improve SOE management and reduce the
fiscal burden. The focus of the reforms was: (i) centralizing the asset management
function by establishing the Central State Office for State Asset Management; (ii)
building a central state asset registry; (iii) developing annual plans to operationalize
the integrated 5 year asset management strategy; (iv) taking an integrated approach
by forming part of the National Reform Program (NRP) documents (EU strategic
document) and country-specific recommendations (EU semester), and reporting
progress on a quarterly basis against the targets set out in the NRP; (v) developing an
information system for state asset management - ISUDIO (the development and
conceptual upgrade of the existing Central state asset registry data model and IT
applicative solution). Two reforms were introduced in 2017 to improve SOE manage-
ment by streamlining the state asset portfolio and to achieve better utilization and
higher returns from state assets: (i) The restructuring of the Central State Office into
the Ministry of State Assets, intended to foster a more coordinated approach and give
impetus to the restructuring and privatization of SOEs; 5 (ii) the adoption of the new
Corporate Governance Code, intended to improve the corporate management of SOEs
by introducing stricter criteria for supervisory board memberships in larger corporations
and incentivizing share-holder participation. As of 2020, the Ministry of State Assets was
merged with the Ministry of Construction and Physical Planning, in the process of
streamlining the number of ministries in the Government, and many of these reforms
are yet to yield desired effects in terms of efficiency and return.
9. The State Asset Management Strategy for the period 2019-2025 sets long-term
goals and guidelines for the management of state assets and it is operationalized
through annual state asset management plans 6. In that sense, the Annual Plan
for 2020 clearly stated that one of the strategic objectives of the state asset manage-
ment remains the continuation of the privatization of SOEs and the improvement of
management of SOEs and other legal entities of special interest to the Republic of Croatia.
The State Asset Management Strategy, however, still needs to be aligned with Croatia’s
2030 National Development Strategy which was recently adopted by the Government,
providing strategic guidance to all development policies and lower-ranking strategic
planning documents. Strong commitment of the authorities was confirmed by including
the SOEs reform agenda in the ERMII Action plan and the list of so-called post-entry
commitments in the context of Croatia’s adoption of the euro as a national currency.
5 Established by the Law on the Organization and the Scope of Ministries and Other Central Government Bodies (Official Gazette
93/16 and 104/16) on November 13th, 2016. Previously, the management of state properties was under the mandate of the Central
State Office for State Asset Management. The Central State Office was Established by the Law on Management and Use of Asset
Owned by the Republic of Croatia (Official Gazette 94/13). The Law also established the Center for Restructuring and Sales
(hereinafter CERP), and in January 2014 the State Office founded State Asset ltd.
The Strategy was approved by the Parliament in October 2019.
6 The Strategy was approved by the Parliament in October 2019.
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Croatia has committed itself to intensifying the sale of shares and stakes of companies
that are not listed as companies of special state interest and publish tenders for the sale
of shares/stakes in at least 90 companies in the period between July 2019 and June
2020. The latest report by the Center for Reconstructing and Sale shows that in 2019
the Government sold its share in 80 companies 7, mostly via public tenders or on the
capital market, bringing HRK 300 million or 0.1 percent of GDP in receipts for the state
budget. Furthermore, Croatia has committed to conduct a Review of Corporate
Governance of Croatian SOEs, a gap analysis of the existing corporate governance
regulation and practices in SOEs with respect to best practices in line with OECD
Guideline on Corporate Governance in SOEs and implement the recommendations for
improvement. In that context, Croatia has applied for technical assistance through the
Structural Reform Support Program of the European Commission with the main aim to
facilitate business efficiency and improve corporate governance. 8
2.2. SOE Portfolio
10. For the purpose of this analysis, SOEs are defined as non-financial companies
with central government ownership of at least 50 percent (as of 2019). 9, 10
Following this criteria, a total of 121 state-owned enterprises (SOEs) were identified as
currently operational. 11, 12 Information about the ownership structure is taken from two
key data sources in the following order of priority: the Croatian Statistics Bureau (CSB)
classification and FINA classification. FINA ownership data is less reliable than the CSB
data, as the former is provided by the business entities themselves, whereas the CSB is
responsible for conducting its own ownership classification following the official CSB
rules and principles. 13 Additionally, we include in our dataset a number of firms that are
classified as part of the general government sector according to the official CSB
ownership classification. 14 Finally, all companies that according to FINA database are in
liquidation or had no employees in 2019 have been excluded from the analysis.
7 The number of companies in CERP portfolio fell by 29 reflecting partial sale of shares as well as the fact that 29 companies have been
added to the state portfolio due to the termination of privatization contracts for companies sold under preferential arrangements
during 1990s following irregularities found in the privatization processes.
8 Five projects have been approved, three of which are still ongoing, delivered by the European Bank for Reconstruction and
Development (EBRD) and the OECD. The approved projects included: (i) Improving Governance of SOEs in Croatia, (ii) SOE
restructuring, (iii) Enhancing competences of supervisory board and audit committees in state-owned enterprises, (iv)
Activation of non-operating assets in state-owned enterprises, and (v) Improving the corporate governance of state-owned
enterprises.
9 Short performance analysis of the SOEs owned by the local government units is given in Annex 1.
10 The dataset is based on firm-level annual (unconsolidated) financial statements collected by the Croatian Financial Agency
(FINA) for the period 2003-2019. Throughout the report SOEs are compared to the private sector nonfinancial enterprises
(POE) established as either joint stock companies or limited liability companies. The annual FINA databases are comprised of
all business entities registered in Croatia, but legal entities classified as crafts and freelancers and financial institutions are
excluded from this analysis.
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The report also analyzes a subset of SOEs, the so-called commercial SOEs. Contrary to
sectors with elements of natural monopoly and market failure, such as some segments
of transport sector, road companies and postal services which exhibit high entry
barriers, and for which there is strong economic rationale for government provision,
commercial sectors are considered those in which entry barriers are small and
production activities do not generate externalities. The division of sector in the paper
was done in line with Dall’Olio et al. (forthcoming). This subsample counts 81
companies. 15
11. The portfolio of privately-owned firms in this analysis counts 83 thousand
companies. It also includes companies that operated as state-owned enterprises
before 2019, but have been privatized, as the analysis primarily focuses on assessing
the performance of companies currently owned by the state and comparing them to the
rest of the economy. For example, a hotel group company that was majority owned by
the state but privatized in 2018 is for the purpose of this report considered to be a
privately-owned company in the entire period analyzed.
12. The 121 centrally-owned SOEs being the main focus of this report account for a
significant share of economic activity in Croatia. Although the SOEs footprint has
been on a declining trend for years, centrally-owned SOEs still make up around 4
percent of employment and close to 5 percent of value added (Figure 2a). The share of
SOEs in value added and employment of all non-financial companies in Croatia is
high in energy, postal services agriculture and transport sector (Figure 2b). High
government presence in most of these activities can, to some extent, be explained by
network industry 16 features of these companies, strategic reasons and/or market
failure. By contrast, SOE presence is marginal in trade, mining, manufac- turing and
tourism. A high share of SOEs in the agriculture sector, usually not seen in developed
countries, reflects the presence of the company Hrvatske šume which is responsible for
managing forests owned by Republic of Croatia. Finally, significant SOEs share in
construction can be explained by the fact that the largest road and highway operators
11 Out of 121, 33 are classified as of special state interest, 19 are in the portfolio of Center for Restructuring and Sale (CERP), 8 in the
bankruptcy procedure and the rest are subsidiary companies of other SOEs or companies established by independent entities like
universities or institutes.
12 There are currently 39 legal entities of special state interest and the state as a majority share in 38 of them (Government holds 44.8
percent of national oil company INA d.d.). In addition to INA d.d., three financial companies (Croatian Bank for Reconstruction and
Development (HBOR), State Agency For Deposit Insurance And Bank Rehabilitation (DAB) and FINA), CERP and Hrvatske vode
established as institutions are not included in the analysis.
13 If the two sources do not match or when a firm is not listed in the CSB database, we also use publicly available data sources,
including companies’ official Internet sites and the webpage https://www.fininfo.hr/ (which contains information about the
ownership structure for the majority of firms registered in Croatia), and others.
14 Jadrolinija, Hrvatska radiotelevizija, Hrvatske autoceste (HAC), Hrvatske ceste, Autocesta Zagreb-Rijeka, HŽ Infrastruktura,
Dalmacijavino and a limited number of smaller SOEs.
15 Throughout the report, including charts and tables, SOEs always refers to this portfolio of 121 companies, while SOEs
Commercial refer to 81 companies.
16 Network industries are defined as those industries in which a fixed infrastructure is needed to deliver the goods or services to end
users, e.g. telephone or electricity cables and wires, railtrack, and airport runways.
15
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Fi ur 2 SOEs ccount for si nific nt
sh r of conomic ctivit
in Croatia, Hrvatske autoceste, Hrvatske ceste and
Autocesta Rijeka-Zagreb,17 are registered and
( ) Sh r of SOEs in tot l therefore accounted for as construction firms in
mplo m nt nd GVA official statistics, both national accounts and
business statistics.
EMPLOYMENT
4%
(b) Sh r of SOEs in tot l
mplo m nt nd GVA b s ctors
96% 100
90
80
70 Share in value added
60 Share in employment
50
40
30
20
VALUE ADDED 10
5% 0
ICT and financial…
Water supply
Manufacturing
Construction
Other services
Agriculture
Mining
Tourism
Real estate services
Trade
Energy
Postal services
Transport
%
95%
Note: Panel (a) is calculated as a ratio of GVA and employment of
SOEs taken from the FINA database and GVA and employment
for the total economy from the national accounts. Panel (b) only
SOEs takes into account data from the FINA database.
Other Sources: FINA, CBS.
17 As of 2021 merged with Hrvatske autoceste.
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13. The SOEs sector is dominated by several large companies, mostly operating in
network industries. In terms of revenues, the largest companies include the national
electricity company HEP with several of its subsidiary companies, the national
motorways company HAC, the national forestry company Hrvatske šume, as well as
the national postal company Hrvatska pošta and the national air carrier Croatia Airlines.
According to the most revent data (2019), fifteen largest companies account for almost
90 percent of revenues, 70 percent of employment and 75 percent of debt of all
centrally owned SOEs.
T bl 1. L r st SOEs in Cro ti (2019)
Type of
Rank (by Revenue Assets Debt Taxes
Firm name Sector legal Employment
revenue) (HRK mn) (HRK mn) (HRK mn) (HRK mn)
entity
1 HRVATSKA ELEKTROPRIVREDA - Energy Group 15,515 10,901 3 5,107 3 ,7 3 7 758
GRUPA
2 HRVATSKE AUTOCESTE D.O.O. Construction D.O.O. 2,22 3 2,707 3 8,858 20,3 58 20 3
3 HRVATSKE ŠUME D.O.O. Agriculture D.O.O. 2,02 3 7,885 2,545 171 227
4 HP - HRVATSKA POŠTA D.D. Postal services D.D. 1,640 9,281 1,909 278 239
5 CROATIA AIRLINES D.D. Transport D.D. 1,600 949 1,258 529 67
ICT and financial Statutory
6 HRVATSKA RADIOTELEVIZIJA 1,302 2,833 1,520 158 111
services Entity
HRVATSKA KONTROLA ZRAČNE
7 Transport D.O.O. 799 745 1,361 152 149
PLOVIDBE D.O.O.
8 AUTOCESTA RIJEKA ZAGREB D.D. Construction D.D. 700 38 4,031 5,083 14
9 JADROLINIJA D.O.O. Transport D.O.O. 692 2,162 1,652 184 71
10 JADRANSKI NAFTOVOD D.D. Transport D.D. 669 370 4,624 5 82
11 HRVATSKA LUTRIJA D.O.O. Other services D.O.O. 622 1,347 339 0 48
12 HŽ CARGO D.O.O. Transport D.O.O. 465 1,430 1,288 425 46
13 ZRAČNA LUKA SPLIT D.O.O. Transport D.O.O. 445 459 1,367 294 58
14 ZRAČNA LUKA DUBROVNIK D.O.O. Transport D.O.O. 420 558 2,352 249 57
15 PLINACRO D.O.O. Transport D.O.O. 349 272 4,522 1,142 27
Other national SOEs 4,612 18,951 112,561 12,242 690
Total 3 4,075 60,888 215,29 3 45,007 2,844
Share of TOP-15 SOEs in total (%) 86 69 48 73 76
Note: Companies are ranked by size of revenues from sales. Data for Hrvatska
Elektroprivreda – Grupa is an estimation based on FINA database and revised
consolidated financial statements of overall HEP Group and includes financial data
of group members which are registered as legal entities in Croatia.
Sources: FINA.
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2.3. P rform nc of th SOE S ctor
2.3.1. Fin nci l P rform nc
14. SOE profitability was generally low over the past decade, improving in
2013-2015 period, and coming to a halt since 2017. Böwer (2017) found that in
2012-2014 the profitability of Croatian SOEs ranked worst or second to worst in Central
and Eastern Europe. According to available data (Figure 3), SOE profitability started
improving in 2013, partly as a consequence of national economy recovery after 6 years
of recession. This improvement was spread across several major SOEs, particularly
from the energy, transport and construction sectors. However, profitability ratios came
into a new halt in 2017, and declined marginally in 2018 and 2019. A subset of SOEs
counting 81 firms that compete on the market with private sector companies (i.e. SOEs
operating in commercial sectors) have displayed lower profitability in almost the entire
period, as compared to the full portfolio of 121 SOEs.
Fi ur 3:
Evolution of SOE profit bilit (2003-2019)
ROA ROE
0.04 0.06
0.03 0.04
0.02
0.02
0.01
0 0
-0.01 -0.02
-0.02 -0.04
-0.03
-0.06
-0.04
-0.05 -0.08
-0.06 -0.1
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
SOEs SOEs_Commercial SOEs SOEs_Commercial
Note: ROA: return on assets; ROE: return on equity
Sources: FINA, World Bank staff calculations.
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15. While recent data available indicate that profitability is lower in SOEs than in private
sector firms across nearly all sectors, this needs to be interpreted with caution. While
key profitability indicators support this conclusion (Figure 4) one must consider that for
many SOEs strategic goals often go beyond profit maximization objectives. Furthermore, as
the largest SOEs operate in natural monopoly sectors they are not exposed to direct private
sector competition and their provision of public goods could affect their pricing decisions.
Therefore, lower profitability of SOEs compared to private sector companies does not
necessarily mean they are poorly managed but can point to the fact they are sometimes
responsible for conducting public policies and need to compromise profit maximization
objective in order to achieve them.18 That makes any comparison between the public and
the private sector less meaningful. International benchmarking against similar natural
monopolies is warranted in these cases (see Annex 2). However, focusing only on Croatian
SOEs operating in commercial sectors, the conclusion on lower profitability still holds and
the gap has recently increased. Moreover, this has been verified across nearly all economic
sectors. As shown in Figure 4b, the ROA is lower for these SOEs in comparison to private
firms. Also, among top 10 loss making SOEs three quarters of losses are generated by SOEs
operating in commercial sectors, as shown in Table 2.
Fi ur 4:
Priv t firms r mor
profit bl th n SOEs in
lmost ll s ctors 0.24
0.21
0.18
( ) ROA-ROE (2016-2019)
0.15
0.12
0.09
0.06
0.03
0.00
-0.03
2016 2017 2018 2019 2016 2017 2018 2019
ROA ROE
POEs SOEs SOEs_commercial
18 On the other hand, SOEs suboptimal performance can sometimes be linked to their soft budget constraint and political
interference, that can be interlinked. Namely, for SOEs operating in strategic sectors, the state will provide support in case of a
failure, especially if the management of the company was politically appointed. This can lead to moral hazard and distort incentives
for the management to control costs, be more efficient and improve performance of the company they operate.
19
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b) ROA-2019
0.08
0.06
0.04
0.02
0.00
-0.02
-0.04
-0.06
-0.08
Real estate services
Transport
Water supply
Agriculture
Manufacturing
Mining
Trade
Tourism
Construction
Energy
ICT and financial services
Other services
Postal services
POEs
SOEs
SOEs_commercial
b) ROE-2019
0.50
0.40
0.30
0.20
0.10
0.00
-0.10
Real estate services
Transport
Water supply
Manufacturing
Agriculture
Mining
Tourism
Postal services
Trade
Energy
ICT and financial services
Other services
Construction
POEs
SOEs
SOEs_commercial
Note:: POEs denotes privately owned enterprises. In panel (b) and (c)
outliers for commercial SOEs in construction and real estate sector
have been removed from the sample.
Sources: FINA, World Bank staff estimates.
20
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T bl 2. Top loss-m kin SOEs (2019) 19
Sources: FINA
EBIT
Taxonomy of ROA ROE
Rank Company name Sector (2019, in
sectors (2019) (2019)
HRK mn)
1 JADROPLOV D.D. Transport javno-javno -264 -0.59 -3.23
2 HŽ CARGO D.O.O. Transport javno-javno -125 -0.10 -0.12
3 CROATIA AIRLINES D.D. Transport javno-javno -55 -0.04 -0.20
4 VSI VODOVOD BUTONIGA D.O.O. Water supply 0 -35 -0.16 -17.73
5 SERVISNI CENTAR TROGIR D.O.O. Manufacturing 0 -33 -0.19 -0.48
4 HEP-TOPLINARSTVO D.O.O. Energy javno-javno -31 -0.02 -0.31
5 3. MAJ TIBO D.D. U STEČAJU Manufacturing javno-javno -29 -128.87 -0.92
ICT and financial
6 HT PRODUKCIJA D.O.O. javno-javno -18 -0.24 -0.74
services
9 VODOOPSKRBA I ODVODNJA D.O.O. Water supply 0 -16 0.00 -0.01
10 VODOVOD IMOTSKE KRAJINE D.O.O. Water supply 0 -15 -0.08 -4.25
7 PANEX D.D. Manufacturing javno-javno -13 -0.89 -0.83
8 DALMA D.D. Other services javno-javno -11 -0.11 -0.02
VINKOVAČKI VODOVOD I KANLIZACIJA
13 Water supply 0 -10 -0.01 -0.03
D.O.O.
14 VODOPRIVREDA ZAGREB, DD Construction 0 -10 -0.11 -0.25
15 UPRAVLJANJE SPORTSKIM OBJEKTIMA Other services 0 -10 -0.55 -98.53
16 VODOPRIVREDA DARUVAR D.D. Construction 0 -9 -0.25 -0.73
9 OV-ODRŽAVANJE VAGONA D.O.O. Manufacturing javno-javno -8 -0.06 -0.81
10 HEP UPRAVLJANJE IMOVINOM D.O.O. Tourism javno-javno -8 -0.04 -0.08
16. Low profitability of SOEs can be partly attributed to high labor costs, and
partly to low labor efficiency. Notably, average wages in SOEs are higher than in
the private sector. 20 In fact, particularly large wage differentials are observed in
transport, trade, real estate services, agriculture, energy and construction (Figure 5a).
However, differences are smaller if only commercial SOEs are taken into account.
Moreover, while wages are higher, labor efficiency is lower in SOEs than in the private
sector firms. On average, employee costs relative to turnover in 2019 were about
twice as high in SOEs than in private sector firms (Figure 5b). 21 However, as already
noted one needs to be cautious with the interpretation of these results as the turnover
in SOEs that mostly provide public goods may not reflect the full value of production.
In these cases, SOEs may report lower turnover relative to employee costs, without
necessarily indicating poor labor efficiency.
19 Company Panex has been privatized at the end of 2019 so was still marked as an SOE in the database for 2019.
20 Comparison in wages does not take into account the differences in the nature of work. (e.g. education level, tenure, etc).
21 Turnover in SOEs that mostly provide public goods may not reflect the full value of production, which warrants further analysis —for
example, in some cases transport services are subsidized. As a result, SOEs may report low turnover relative to employee costs,
without necessarily indicating poor labor efficiency.
21
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Fi ur 5:
L bor costs r hi h r in SOEs 20,000
th n in priv t firms (2019) 18,000
16,000
14,000
12,000
10,000
( ) Av r monthl cost
HRK
8,000
p r mplo 6,000
4,000
2,000
0
ICT and financial…
Real estate services
Transport
Water supply
Agriculture
Manufacturing
Mining
Other services
Postal services
Tourism
Trade
Construction
Energy
POEs
SOEs
SOEs_commercial
Sources: FINA
%
70.0
60.0 (b) Emplo m nt cost/Turnov r
50.0
40.0
30.0
20.0
10.0
0.0
ICT and financial…
Real estate services
Water supply
Transport
Agriculture
Manufacturing
Mining
Construction
Energy
Postal services
Tourism
Trade
Other services
POEs
SOEs
SOEs_commercial
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2.3.2. Op r tion l P rform nc
17. Technical efficiency of SOEs is lower compared to private companies in
most sectors. First, operational efficiency is calculated as total operating expenses
divided by total operating revenues, as an indicator of the efficiency of firms’ internal
business processes. The sectoral disaggregation suggests that spending efficiency is
particularly poor in SOEs in postal services, manufacturing and tourism (Figure 6). 22
Also, SOEs operating in commercial sectors are again less efficient than their peers
in private sector but also compared to the rest of the SOEs sector.
Fi ur 6: Sources: FINA
1.2
SOEs t nd to b l ss ffici nt 1.0
th n priv t 0.8
firms
0.6
0.4
Op r tin 0.2
xp ns s/op r tin r v nu s 0.0
ICT and financial…
(2019)
Agriculture
Energy
Construc�on
Manufacturing
Other services
Postal services
Transport
Trade
Mining
Real estate services
Tourism
Water supply
POEs
18. Average productivity levels are higher in private firms than in SOEs. Whether
measured in terms of output per worker, output per unit of capital, or total factor
productivity, average productivity levels of private sector firms exceeded that of
SOEs from 2005 to 2018 (Figure 7).
2.3.3. S rvic D liv r P rform nc
19. Quality of service provision by SOEs varies considerably among different
activities. The current section reviews the quality of services that are mainly or
entirely provided by SOEs in Croatia. While large investment and operational and
financial restructuring in the road sector companies over the last two decades have
22 Thismay be a result of strong competition that the SOEs in these sectors are faced with (except for the water supply sector) the
SOEs are exposed to strong competition. In sectors that provide public goods, such as water supply and some transport SOEs
revenues may not reflect the full value of services. Subsidies and other transfers from the government are included in revenues,
which helps to ameliorate this problem, although it cannot be known whether these transfers fully compensate for the revenues
foregone to lower the cost of services.
23
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resulted in significant improvement in the quality of road infrastructure and financial
sustainability of their business model, railways continue to exhibit inefficiencies in
service provision and the quality gap to best performers is on a rise. Water and waste
management practices also remain inefficient, with large water losses and low
recycling rates. On the other hand, electricity supply is of good quality despite
occasional interruptions during the main tourist season, while the postal company has
been successfully coping with market transformations induced by digitalization.
Fi ur 7:
Productivit of SOEs w s consist ntl low r th n th t of priv t l own d firms
(pr mi of priv t l -own d nt rpris s comp r d to st t -own d nt rpris s)
L bor productivit C pit l productivit
15 60
10 40
% %
5 20
0 0
2016 2017 2018 2016 2017 2018
TFP ULC
6 15
4 10
% %
2 5
0 0
2016 2017 2018 2016 2017 2018
Sources: World Bank staff estimates
20. Croatia’s transport infrastructure shows significant contrasts in terms of quality.
According to World Economic Forum’s 2019 Global Competitiveness Report (GCR)
Croatia’s road network is in the top five in the EU and was ranked 13th out of 141
countries surveyed. Such outcomes reflect substantial investments in highways in the
2000s. However, despite the quality of the road network, the rate of accidents and
fatalities is higher than the EU average. More recently, authorities have made additional
efforts in strengthening prevention of adverse outcomes by increasing penalties for
risky driving and effectiveness of traffic surveillance programs. The efficiency of railway
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services is, on the other hand poor, and Croatia was ranked 87th. The defining features
of Croatia’s current railway network is that it is old and slow. Significant underinvest-
ment, with priority on routine maintenance, combined with difficulties in modernizing
the governance of publicly owned railway companies has brought the railway infrastru-
cture in Croatia in a very poor technical status, with huge backlog of rehabilitation works.
Inadequate and excessively complex and costly infrastructure creates inefficiencies
compared to road-based modes and low speeds on Croatia’s railway network. This is
reflected in utilization of passenger transport which is very low by European standards
and falling. With additional investment Croatian railways have the potential to support
the transition to greener mobility for both passengers and freight.
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Box 1: R b l ncin fisc l prioriti s of SOEs which support nvironm nt-fri ndl mobilit
Croatia’s railway SOEs have the potential to underpin greener mobility for both freight and
passenger transport. However, they currently do not achieve this as competition from road
transport networks deprives the railway of demand. Approximately 84% of land-based
passenger-kilometers travelled in Croatia and 82% of tonne-kilometers for freight move via
road-based modes. Railways connectivity with neighboring countries remains poor and only 5%
of Core TEN-T railways network lines in Croatia have been completed. Road-dependent
transport accordingly accounts for 96% of Croatia’s transport sector CO2 emissions.
Croatia’s own Transport Development Strategy (2017-2030) identifies rail transport as critical to
achieving objectives around environmentally sustainable transport, public mobility,
international connectivity, and integration with the EU single market. However, the Government
of Croatia’s fiscal policy has historically prioritized road investment over “greener” railway
investment since independence. Between 1995-2017 Croatia invested approximately EUR
11.7 billion in its road network vs. EUR 1.6 billion in its railway network (7 times less in rail). On
average, between 2011 and 2016, EU member states invested EUR 110,349 per km of railway
network whereas Croatia invested EUR 23,065 (4.7 times less per km). This large and historic
imbalance of investment between roads and rail has understandably achieved the exact
opposite of the Transport Development Strategy’s stated objectives. There is an acute need to
rebalance fiscal priority towards rail sector SOEs if those objectives are to be met.
A potential starting point would be to gradually reallocate a larger share of proceeds from
Croatia’s fuel tax to the SOE assigned to managing railway infrastructure (HŽI). In 2019, fuel tax
provided about HRK 3.1 billion (EUR 411 million) in revenues. At present, HŽI receives 1/6th of
fuel tax proceeds (about EUR 70 million) with the balance allocated to roads sector SOEs.
Gradually scaling up HŽI’s portion and / or allocating HŽI the proceeds from increasing fuel tax
Source: Wold Bank Analysis of International Transport Forum Data and European Union Greenhouse
Gas Inventory as submitted to the United Nations Framework Convention on Climate Change (UNFCCC)
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further would support Croatia to achieve the objectives in its Transport Development Strategy
(2017-2030) and EU Green Deal objectives.
Obsolescence is the foremost constraint on effectiveness and efficiency of Croatia’s railway
SOEs. Approximately 58% of railway track-kilometres predate Croatia’s independence in 1991.
Approximately 30% of track kilometres date from pre-1980. Only about 10% of Croatia’s
network has been rehabilitated since EU accession. The current railway includes excessively
complex and costly infrastructure configurations that no longer serve an operational thesis.
Obsolescence drives high requirements for labor and correspondingly high fiscal costs that
constrain the railways potential. Most notably, obsolete signaling and traffic control requires
more than 2,500 additional staff to operate (i.e. manually) infrastructure at an extra fiscal cost
of EUR 45-50 million per year. This single cost category accounts for more than 1/3 of the
operating subsidies that Croatia’s infrastructure manager SOE (HŽI) receives from the
Government of Croatia.
There is need to both scale up and strengthen governance of capital programs that SOEs
manage. A key step would be to activate a Multi-Annual Infrastructure Contract (MAIC)
between Croatia’s infrastructure manager SOE (HŽI), the Ministry of Sea, Transport, and
Infrastructure, and the Ministry of Finance. This would provide the framework for governing a
multi-annual approach to funding and implementing large scale capital programs needed to
address obsolescence. The current approach of annualized capital funding and
project-by-project planning is catastrophic for assets that require long develop lead times and
a long-term approach to maintenance.
A function of the MAIC would be increasing certainty of resource allocation while providing
accountability for results. Reducing resource uncertainty is critical for capturing efficiencies
from the supply chain for railway goods and services – which tends to be long and complex.
Using longer duration contracts and providing suppliers with secure multi-annual pipelines can
enable investment along the supply chain. This in turn can help railway SOEs to capture ≈
10-20% efficiency savings in the capital programs. A new MAIC would also enable the
Government of Croatia to link the forthcoming National Railways Strategy and National
Railways Infrastructure Development and Management Plans with actions, key performance
indicators, and a long-term resource allocation needed for sector modernization and reform –
all of which would strengthen governance and effectiveness across SOEs.
.
21. Croatia’s electricity coverage and supply quality are high, but transmission
and distribution losses could be further reduced and costs for new businesses
lowered. According to the 2019 GCR, Croatia ranked among top performing countries
in terms of coverage of households having initial access to sufficient electricity.
However, based on available evidence there are still some populated rural areas where
access to electricity for households is limited. Supply quality is also high but there is
room for improvement compared to other EU members states with respect to electric
power transmission and distribution losses. The World Bank’s 2020 “Doing Business”
report paints a similar picture. It shows relatively high reliability of electricity supply and
transparency of tariffs, but also indicates that it is relatively expensive for a new
business to get electricity in Croatia.
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22. Progress towards a circulr economy and efficient wastewater management is
slow, despite large importance of natural capital for Croatia’s economy and
significant pressure on local capacities created by tourism. National and local
authorities have made some efforts on waste management policies, but recycling rates
remain well below the EU average and waste is still being mostly landfilled. Furthermore,
while the coverage of water services is high, the supply network needs to be
rehabilitated and upgraded. The average age of water pipes is more than 40 years,
and the system suffers from maintenance backlogs. This poses a threat to water
security due to high water losses, which undermine the financial sustainability of the
system both in terms of increased cost of production and forgone revenues.
23. Trends in the postal sector suggest that Croatian postal service company -
Hrvatska pošta, which is the only provider of universal postal services in
Croatia, has been successful in adapting its business model and service
delivery performance to transformations induced by digitalization and
increased competition. Technical progress led to a decrease in letter post volumes
and in an increase in e-commerce parcel around the EU. In response to these
developments, postal operators have been innovating their business models and
national postal regulations have changed substantially (EC 2015). According to
available data, the share of Hrvatska posta in total postal services provided has been
steadily increasing in recent years, suggesting that modernization and refocus from
traditional services has been successful (Naletina et al. 2019). However, there is no
information that would allow to assess users’ satisfaction with the services provided and
whether they meet their needs.
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Ass ssm nt of Fisc l
Costs nd Risks from
th SOE S ctor
I CROATIA: Int r t d St t -Own d Ent rpris s Fr m work (iSOEF) Ass ssm nt
3. Ass ssm nt of Fisc l Costs
nd Risks from th SOE S ctor
3.1. Fisc l Costs of SOEs
24. This section looks at the fiscal costs of SOEs by quantifying transactions
between the state and SOEs. Direct transfers from the state to SOEs include
subsidies, equity injections and payments of called guarantees issued to SOEs. On the
other hand, revenues increasing transactions for the budget include payments of taxes,
dividends and profit shares of SOEs. Indirect budget state support includes deferred
taxes, tax credits or tax arrears, non-payment of dividends and any other kind of
preferential treatment. Capturing both direct and indirect state support is equally
important for measuring fiscal costs of SOEs. However, this chapter covers only direct
transfers, due to a lack of publicly available data on indirect support.
25. According to available data, SOEs had a small positive (direct) net impact on
the general government budget over the past three years. Budget revenues
in the form of taxes and dividends paid by 121 SOEs analyzed in this report surpassed
direct transfers to SOEs. Over the last three years, SOEs have paid on average 0.7
percent of GDP in taxes and 0.2 percent of GDP in dividends, annually. On the other
hand, the companies have received subsidies worth on average 0.5 percent of GDP.
Therefore, the effect on the government budget was on average only 0.3 percent of
GDP annually in 2017-2019 period (Table 3). This can be considered rather small,
especially if one considers that SOEs´ total assets represented around 50 percent of
GDP in 2019. On taxes, twenty largest taxpayers account for more than 65 percent of
all taxes paid by the SOEs sector. Largest amounts of taxes are paid by companies in
the transport sector in the form of personal income tax and social contributions,
reflecting a high level of employment in these companies. On the other hand,
companies in the energy sector that are highly profitable also pay large corporate
income tax. Data on net on-lending are not readily available and therefore are not
included in the analysis of direct transfers between the budget and SOEs.
T bl 3. Dir ct n t imp ct on th n r l ov rnm nt bud t
in % of GDP 2017 2018 2019
1. Total taxes 0.7 0.7 0.7
2. Dividends 0.3 0.1 0.1
3. Total subsidies 0.5 0.5 0.5
4. Recapitalizations 0.0 0.0 0.0
5. Payment of issued guarantees 0.1 0.1 0.1
6. Net impact (1+2-3-4-5) 0.4 0.3 0.3
Sources: FINA, and government reports.
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26. Subsidies to SOEs included in the analysis showed a gradual decline over the
last ten years and were mostly directed to companies in transport, construction
and postal services sectors. Subsidies equaled roughly 0.5 percent of GDP in 2019,
a decline of 0.2 percentage point compared to 2009, which can be in part connected
with restrictions set by EU regulations for granting state support. Companies in the
transport sector received the largest amount of subsidies over the last two years
(Figure 8), and were followed by road companies in the construction sector. Most of the
subsidies in the transport sector are directed to railways companies for maintaining and
servicing the large network with mostly unprofi- table lines. National ferry service
company, and to a smaller extent national air carrier, also receive significant amounts
for servicing unprofitable lines between the islands and the mainland as well as between
largest cities in the country via air transport. Hrvatska posta also receives substantial
transfers from the state budget in the form of subsidies for covering the cost of
providing postal services
throughout the country.
Fi ur 8 Subsidi s r l r , lb it d clinin ov r tim
27. The amount of payments
from profits paid to the 1.0 Agriculture
budget by SOEs averaged
0.9 Construction
0.2 percent of GDP during
2017-2019. 23 At the same 0.8 Energy
time, the number of compa- 0.7 ICT and financial
nies required to pay out 0.6
services
Manufacturing
% of GDP
profits and dividends decli-
0.5
ned by about a third. The Mining
number of companies requi- 0.4 Other services
red to pay a share of profits 0.3 Postal services
averaged 27 over this period.
0.2
SOEs have generally paid Real estate services
less than the obligation set 0.1
Tourism
by the government, which is 0.0
Trade
2015
2016
2017
2018
2019
2015
2016
2017
2018
2019
on average about 55 percent
of the realized profit, depen- Transport
SOE POE
ding on the share of the Water supply
Republic of Croatia in their Sources: FINA, CSB
ownership. The main reas-
ons for the failure to pay the obligated amounts are to cover losses from previous years
or to retain profits in reserves. Companies succeed in reducing their payments below
obligated amounts in part because of the system´s shortcomings for determining which
SOEs are obligated to pay profit remittances to the budget, and for tracking and
enforcing payment.
23 Data on dividend and profit share payment are available only on the aggregated level. Therefore, the analysis as well as data in Table
4 reflect all payments made to the budget and not only by the companies in the sample.
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T bl 4. Profit p m nts from SOEs to th bud t
The number of Profit paid to
companies required to Realized profits of the Estimated payment government to meet
make a payment from companies required to obligation as decided obligations from
profit, as decided by make a payment from by the government, previous year (HRK
the government profit (HRK million) (HRK million) million)
2016 32 3,478 1,936 699
2017 27 3,680 1,752 1,154
2018 22 2,430 1,047 725
2019 15 2,464 1,503 1,145
Sources: World Bank staff calculations according to Decisions on the amount, manner and deadlines for
payment of funds of companies of special interest to the Republic of Croatia, Official Gazette NN 45/2016,
NN 50/2017, NN 48/2018, NN 63/2019 and FINA data.
28. Largest capital injections and payments of called guarantees issued to SOEs
by the state budget have been concentrated to a few companies. Based on the
available data, the most significant amount of funds has been provided to SOEs
operating in the transport sector (railways, airlines), 24 especially during 2012-2015,
with the aim to strengthen their equity base (Table 5). More recently, it was decided to
again financially support state-owned airline company Croatia Airlines d.d. as part of
its restructuring process, and HRK 250 million was planned to be invested in 2020. As
the company was hit hard by the COVID-19 pandemic given downturn in air transport
activity the amount of financial injection in 2020 was increased to HRK 600 million.
T bl 5. L r st c pit l inj ctions nd p m nts of c ll d u r nt s
Source: MoF
in mil. HRK 2012 2013 2014 2015 2016 2017 2018 2019
Capital injections
Croatia Arlines d.d. 862.2 206.3
HŽ Cargo d.o.o. 190.0 168.2
HŽ Putnički prijevoz d.o.o. 190.0 278.4 796.7
Paid gurantees issued to SOEs
HŽ Infrastruktura d.o.o 35.3 55.8 135.5 138.6 227.7 216.2 212.0 201.7
HŽ Cargo d.o.o. 7.3 108.0 213.6 81.5
HŽ Putnički prijevoz d.o.o. 21.1 41.2 13.3 8.6 8.5
Croatia Airlines d.d. 165.0 160.1
3.2. Fisc l Risks from SOEs
29. Fiscal risks are factors that may cause fiscal outcomes to deviate from
expectations or forecasts. Fiscal risks emanating from SOEs can be organized in
the following broad categories:
24 Before EU entry, the government also assumed shipyards’ debt of more than 3 percent of GDP as a part of their restructuring and
privatization process. Also, in 2014 and 2018 the government has also recapitalized two SOEs - ĐURO ĐAKOVIĆ HOLDING d.d.
and PETROKEMIJA d.d. - which have been privatized. This data is not shown in the table.
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Explicit liabilities are those for which the state has contractual obligations. These can be
further divided into:
(i) direct (e.g., subsidies); and
(ii) contingent, which depend on the occurrence of an event, such as for example an
SOE defaulting on a loan guaranteed by the state,
Implicit liabilities are those for which there is a moral or political obligation for the
government to respond, even in the absence of a contractual obligation, to meet public
expectations. Such implicit liabilities can also be divided into:
(i) direct (e.g. the government assuming the cost of social security payments for
SOE staff); or
(ii) contingent (e.g., bankruptcy, expenses related to the sale/privatization of an SOE,
etc.).
T bl 6. A Fr m work for M ppin SOEs R l t d Fisc l Risks
STATE LIABILITIES DIRECT CONTINGENT
Explicit Obli tions Subsidi s St t u r nt s to non-fin nci l SOEs cl ssifi d s p rt of
(dir ct ov rnm nt (0.5% of GDP) c ntr l ov rnm nt s ctor (4.5 % of GDP)
li bilit und r l w or St t u r nt s to non-fin nci l SOEs cl ssifi d outsid
Lon t rm d bt for fin nci l
contr ct) c ntr l ov rnm nt s ctor (0.05 % of GDP)
r structurin of ro d
comp ni s (2.6% of GDP)
Implicit Obli tions Tot l d bt of non-fin nci l SOEs cl ssifi d s p rt of c ntr l
(mor l obli tion to ov rnm nt nd not cov r d b u r nt s (4.6 % of GDP)
m t public Tot l d bt of non-fin nci l SOEs cl ssifi d outsid c ntr l
xp ct tion or ov rnm nt s ctor nd not cov r d b u r nt s (2.1 % of GDP)
politic l pr ssur )
Un xp ct d SOE li biliti s ssoci t d with dv rs shocks ( . .
COVID-19 p nd mic)
Source: World bank staff estimates
30. There are substantial fiscal obligations – both explicit and implicit, largely
stemming from SOEs significant debt, but potential impact on the level of
public debt is mitigated by the fact that large amount of SOEs’ debt is already
part of general government debt statistics. Fiscal risks emanating from budget
transfers are relatively small because, as mentioned above, explicit budget subsidies
to SOEs are matched by taxes and dividends from SOEs. On the other hand, SOEs
debt obligations are relatively large, and although most of them are already included
in central government debt due to European System of Accounts (ESA) 2010 rules,
SOEs potential financial issues would lead to liquidity pressures for the central
government´s budget.
25 The lower the ICR ratio, the more the company is burdened by debt expense relative to earnings. An ICR of less than 1 implies that
the firm is not generating sufficient revenues to service its debt without making adjustments, such as reducing operating costs,
drawing down its cash reserves, or borrowing more.
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Assessment of Fiscal Costs and
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31. Main explicit risks are related to loans provided to road companies as a part of
their restructuring process and issued guarantees. The financial restructuring of
road companies started in November 2017 under a World Bank loan whose aim was
to support the strategy for their financial optimization. By the end 2018 more than
EUR 3.6 billion commercial financing have been mobilized. Part of the debt was
refinanced with the direct help of the government, which issued a bond on the
international market and then these funds were on-lent to road companies. The
overall impact of the operation in terms of saved interest payments for the sector is
expected to exceed EUR 400 million over the next 10 years. The government also
provided significant guarantees to SOEs. However, less than 0.1 percent of GDP of
issued guarantees to SOEs pertains to SOEs that are classified outside the general
government sector, meaning that only a small amount might affect the level of public
debt in case of non-payment.
32. Implicit risks can be related to remaining SOE liabilities as the government
was usually inclined to cover SOE losses. Non-financial SOEs´ debt not covered
by government guarantees stood close to 6.7 percent of GDP in 2019 —of which
around two thirds are part of general government debt), with only 20 SOEs
accounting for around 95 percent of overall debt.
33. Financial leverage does not seem excessive for most SOEs and debt riskiness
is in most sectors lower compared with private sector companies (Figure 9:
Financial indicators / a) Debt/Assets / b) Debt/Equity). However, around ten percent
of SOEs may face debt servicing difficulties as their interest coverage ratio (ICR) 25 is
less than one, indicating that earnings are not high enough to cover interest
expenses. Their total debt amounts to 2.9 percent of GDP and it is mostly concen-
trated to one company in construction sector - Hrvatske ceste, and three companies
in transport sector - HŽ infrastruktura, Croatia Airlines and HŽ Cargo. The latter two
companies also seem to be the most vulnerable among the companies with the
highest debt. In some sectors the share of vulnerable debt in total sectors debt is
relatively high but overall sector’s indebtedness is low, like in manufacturing (Table 7).
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Fi ur 9 Fin nci l indic tors
) D bt/Ass ts b) D bt/Equit
35 3.0
30 2.5
25 2.0
20
1.5
15
1.0
10
5 0.5
0 0.0
ICT and financial…
ICT and financial…
Real estate services
Transport
Water supply
Agriculture
Mining
Manufacturing
Total
Tourism
Trade
Construction
Energy
Other services
Postal services
Real estate services
Water supply
Agriculture
Mining
Transport
Manufacturing
Total
Construction
Energy
Other services
Postal services
Tourism
Trade
% %
POEs POEs
SOEs SOEs
Note: Outliers that are driven by small SOEs are not shown on the graph.
T bl 7. Sh r of vuln r bl d bt
Vulnerable debt of state SOEs (ICR<1) Vulnerable debt of all POEs (ICR<1)
% of vulnerable % of vulnerable
% of total #firms % of debt debt in GDP % of total #firms % of debt debt in GDP
TOTAL 13,2 26,0 2,9 4,0 31,3 12,0
Agriculture 33.3 9.6 0.0 5.7 17.1 0.3
Construction 25.0 26.8 2.3 3.7 44.6 2.3
Energy 5.1 29.4 0.3
ICT and financial services 1.9 86.4 2.2
Manufacturing 42.1 77.5 0.1 5.2 18.5 1.3
Mining 3.6 13.6 0.0
Other services 5.6 13.0 0.0 3.1 38.3 1.6
Postal services 2.8 1.5 0.0
Real estate services 4.3 33.9 1.1
Tourism 5.7 24.5 1.2
Source: FINA
Trade 14.3 100.0 0.0 3.8 16.0 1.0
Transport 15.0 40.7 0.5 6.2 32.8 0.6
Water supply 7.9 32.8 0.1
34. Additional support by the government might be required for the most
affected SOEs in 2021, especially if COVID-19 pandemic is not controlled
during the first half of the year. Unexpected shock of the pandemic has put
additional pressure on performance of some SOEs, especially those relying on
revenues from tourism, requiring state budget support. Companies in transport
sector including road companies have been hit especially hard, given decline in
tourist arrivals. As mentioned above, the government has in 2020 provided
large capital injection to Croatia Airlines, which was facing financial difficulties
even before the pandemic. Further budgetary support might be required in
2021 if the pandemic continues and tourism does not recover.
35
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Corpor t Gov rn nc
nd Account bilit
M ch nisms
I CROATIA: Int r t d St t -Own d Ent rpris s Fr m work (iSOEF) Ass ssm nt
4. Corpor t Gov rn nc nd
Account bilit M ch nisms
35. Good corporate governance is the foundation for stable, financially healthy SOEs
sector. Compared with private sector companies, SOEs face distinct governance
challenges that directly affect their performance. These challenges include multiple
principals, competing goals and objectives, excessive protection from competition,
undue political interference, and low levels of transparency and accountability. There is a
wide perception that SOEs are poorly managed and inefficient, mainly due to politicization
of management and suboptimal employment practices. 26 Therefore, effective
improvements on corporate governance can lead to higher returns on equity and
greater efficiency of Croatian SOEs. 27
36. Following the iSOEF methodology, this chapter assesses five dimensions of
Croatia´s SOEs corporate governance: legal and regulatory framework, ownership
and oversight function, performance monitoring, board of directors, and transparency
and disclosure. The analysis presented below focuses on SOEs related to the central
level of government.
4.1. L l nd R ul tor fr m work
37. In Croatia, SOEs operate mainly as joint-stock companies (JSC) or limited liability
companies (LLC). A small number of SOEs are statutory corporations, legal entities
with public authority, established by a particular statute. 28
38. Croatia has reinforced its legal and regulatory framework for SOEs in recent
years. The Law on the Management of State Assets (2018), hereafter named as
(MSA Law), is the main pillar of the current SOE legal framework, providing a general
regulatory framework for the management of Croatian state assets. It defines key
concepts, states the principles of asset management, outlines a plan for implemen-
ting them, and establishes the conditions under which state shares may be sold. The
Law transposes in the legal system of the Republic of Croatia the provisions of the
Directive 2014/42/EU of the European Parliament and of the Council of 3 April 2014
on the freezing and confiscation of cases and proceeds of crime in the EU. As such,
the Law focuses on the management of different types of state assets, rather than on
the regulation of SOEs' functioning.
26 Sonje and Petrovic (2016).
27 Claessens and Yurtoglu (2012).
28 Out of a total number of 121 fully or majority-owned enterprises: 81 operate as LLCs; 28 as JSCs (out of which six are listed on the
Zagreb Stock Exchange); and 12 are statutory entities.
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Accountability Mechanisms
Corporate Governance and
r t d St t -Own d Ent rpris s Fr m work (iSOEF) Ass ssm nt
39. In 2019, the Croatian Parliament also approved the State Assets Manage- ment
Strategy 2019–2025, which, however, fails to provide a good roadmap for
implementation of the MSA Law. The Strategy addresses all areas covered by the
MSA Law. However, it lacks specific measures and anticipated outcomes to achieve
its predefined objectives—for example, continuation of the SOE privatization
process, as well as performance indicators to track progress. Also, some of the MSA
Strategy's objectives, such as "strengthening business efficiency" or "strengthening
the Croatian economy" are too general and are not accompanied by specific
guidance for implementation. While the Strategy refers to the OECD principles and
materials, it fails to use them as a starting framework on which to build clearer and
more quantifiable goals. The Strategy describes the areas where state ownership is
desirable, including areas of special national interest where the public interest cannot
be precisely defined, areas subject to a high degree of complexity of different
interests, areas where the public interest is not satisfied or depends on one company,
or areas of infrastructure requiring significant capital investments. However, the
Strategy does not outline the concrete way these requirements are transposed in a
clear state-ownership rationale. Similarly, the Strategy presents provisions of the
2017 Corporate Governance Code for SOEs but fails to provide clear and concrete
directions for its implementation.
T bl 8. M in r ul tor fr m work for SOEs in Cro ti
Law / Regulation Date of Approval Key Provisions
The law provides general rules regarding the
appointment and remuneration of the Supervisory
Board and Management Board in line with the OECD
Companies Act November 1993
principles. The Company Law was revised in 2019 to
implement EU Directive 2017/828 (amendment of the
EU Shareholder Rights Directive).
The Act regulates the accounting practices,
bookkeeping documents and business books, the
Accounting Act January 2016 application of financial reporting standards, annual
financial statements, the audit and public disclosure of
financial statements of all companies, including SOEs.
Decision on adopting the The Code is designed mainly for SOEs of strategic
Code of Corporate interest for the Republic of Croatia, but the guidelines
Governance in which the December 2017 are recommended for all SOEs. The Code contains
Republic of Croatia has high-level corporate governance recommendations for
shares or equities the parties involved.
The Law stipulates the management of the assets
Law on the Management of owned by the Republic of Croatia and the powers of
May 2018
State Assets the role and responsibilities of the Ministry of State
Assets and Center for Restructuring and Sales.
Government Decision on The Decision contains a list of 39 SOEs and other legal
Legal Entities of Special entities declared of special interest for the Republic of
August 2018
Interest for the Republic of Croatia. No criteria to define ‘legal entities of special
Croatia interest’ are provided.
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Decree on the conditions
for Election and
The Decree set the conditions and the procedure for
Appointment of the
election and appointment of the members of
Members of Supervisory January 2019
supervisory boards and management boards of legal
Boards and Management
entities for the Republic of Croatia.
Boards of legal Entities for
the Republic of Croatia
Strategy for the The Strategy is adopted in accordance with Article 18
Management of State of the Law on State Asset Management and it sets
October 2019
Assets for the long term guidelines for the management of state
period 2019-2025 assets.
Decision on criteria for The decision is an improvement of the Decision on
Legal Entities of Special Interest for Republic of
determining legal entities of
February 2020 Croatia adopted in August 2018. However, the criteria
special interest to the
are rather unclear, and allow for a rather discretionary
Republic of Croatia approach towards state ownership.
The Act regulates various issues related to state
ownership at the level of line ministries. The line
Act on Internal ministries are responsible for proposing to the
Organization and Scope of 2020 Government to appoint members of general meetings,
State Administration Bodies supervisory boards and management boards, and for
general guidance and training of the SOEs
management.
Source: WBG staff consolidation.
40. In addition, the Government adopted a Decision on the criteria for determining
SOEs and other legal entities of special interest in February 2020. This Decision
is considered as a step forward in addressing the rationale for state ownership, as
compared to the previous one from August 2018. Nevertheless, the criteria included
in the Decision, which are referred to 39 central government SOEs and other legal
entities, are not following the international practice (OECD), and are not clearly
defined.
4.2. Own rship nd Ov rsi ht Function
41. Despite a recent attempt to enhance the role of the former Ministry of State
Assets, the ownership function of SOEs in Croatia remains fragmented among
different institutions, with an active role of line ministries. The attributions of the
former Ministry of State Assets were taken over by the new MPPCSA, established in
July 2020. Together with line ministries, the MPPCSA exercises ownership rights
over SOEs of special interests. However, its role is mainly confined to regular
monitoring and reporting on the management of state-owned assets, including the
monitoring of financial targets and capital structure objectives of SOEs. It is also
responsible for maintaining a dialogue with external auditors.
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42. The line ministries are responsible for representing the state and exercising
voting rights at the General Assembly and are involved in different degrees in
appointing and monitoring the activity of board members of the SOEs in their
portfolio. The relevance of line ministries was inherited from the former centrally
planned economy, where they were responsible both for providing the products or
services and for developing sectoral policy. Their role is currently regulated by the Act
on Internal Organization and Scope of State Administration Bodies adopted in 2020
(see Box 2 for an example). However, their ownership rights may overlap with
regulatory functions as most ministries must develop industrial, regional, and sectoral
policies according to government priorities. The number of SOEs that a line ministry
manages may vary considerably: some have ownership rights over many enterprises
such as the Ministry of the Sea, Transport and Infrastructure and Ministry of Economy
and Sustainable Development, while others have only one SOE under their purview,
such as the Ministry of Interior. Furthermore, it is not fully clear how many employees
are actively engaged in overseeing the activity of SOEs. Namely, staff responsible for
SOEs oversight is assigned to different organizational units and is usually engaged in
other tasks as well. The exception is the MSTI, where one advisor to the minister is
responsible only for the SOEs in the ministry’s portfolio.
43. The MSA Law from 2018 entrusts the MPPCSA with the management of state
assets. The Law defines the management of state assets as systematic and
coordinated activities and good practices by which the state rationally, transparently
and publicly manages state assets and related liabilities, on behalf and for the account
of citizens for the sustainable development of the Republic of Croatia. In practice, this
can take the form of: (i) exercising ownership rights and assuming ownership
obligations for state assets; (ii) concluding legal transactions resulting in the transfer,
alienation or limitation of these ownership rights and obligations; and (iii) determining
the use of such assets. According to the Law, MPPCSA must manage state assets
efficiently and reasonably, with the care of a competent owner, following the principles
of accountability, publicity, economy, and predictability. In practice, however, the
Ministry does not have clear responsibilities related to SOE’s corporate governance in
terms of setting objectives for SOEs, or for selecting, appointing, and monitoring the
activity of board members. The MPPCSA is also responsible for drafting key policy
papers, annual reports, and other state assets publications such as the State Asset
Management Strategy and the criteria for defining special interest enterprises,
amongst other aspects. 29 Lastly, the Ministry must also perform administrative
tasks related to physical planning, construction and housing; asset valuation; utility
management; and energy efficiency and renovation in the buildings sector, per the
Act on the Organization and Scope of State Administration Bodies.
29 Additionally, MPPCSA exercises direct ownership over Državne nekretnine d.o.o (the SOE in charge of managing the government's
real estate) and CERP.
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44. The MoF is not entrusted with key SOE ownership responsibilities in Croatia.
The MoF bears the responsibility to track and analyze annual and quarterly financial
reports of all 39 special-interest enterprises. It is also involved in adopting the annual
state dividend policy decisions and participates in all decisions and procedures that
have a fiscal impact on the Treasury, including the issuance of state guarantees for
SOE loans. However, the MoF has no role in setting objectives for these SOEs, or in
analyzing their performance against predefined objectives and indicators set
elsewhere within the government. The Ministry monitors the achievement of planned
targets and other policy effects by receiving performance reports that present a set
of financial indicators, such as liquidity, activities, profitability, indebtedness, among
others. The only other privy entities to these indicators are the MPPCSA and the
Center for the Restructuring and Sale (CERP). These reports take the form of Excel
tables that include numerous sheets of financial analyses extracted from the basic
financial statements. They are protected by code that can be accessed only by the
MoF, MPPCSA, and CERP.
45. Overall, the current fragmented approach to SOE ownership in Croatia can lead
to inefficiency and poor oversight. Political considerations can undermine SOE
efficiency, as line ministries are tempted to restrict or bypass the board and control
day-to-day operations, particularly when CEOs are appointed directly by the
government, which is a common practice. In competitive markets, having line
ministries serve as owners and be responsible for policy making for the sector as a
whole can create disadvantages for private sector companies or lead to allegations of
bias in pricing and procurement decisions. In addition, the fragmentation of
responsibility for ownership and monitoring of SOEs across several different agencies
can lead to a lack of adequate oversight of the SOE sector as a whole.
46. Globally, ownership arrangements have been evolving from a decentralized or
dual model toward greater centralization in order to strengthen ownership and
governance. While a degree of centralization still varies across countries (see
Annex 4), the underlying institutional arrangement is common: a well-coordinated
mechanism across all SOEs. The state has increasingly become an active and
professional owner of its assets, while giving SOEs operational independence and
managerial discretion. With that, SOEs are insulated from political influence and
interference in their day-to-day operations, keeping at arm’s-length from the state.
Under centralized ownership arrangements, countries either establish a central holding
company for an important portfolio of SOEs, or appoint a central coordinating
agency, often charged with monitoring performance or coordinating governance
practices across the SOE sector (for more detailed examples of well-established
centralized systems see Annex 5). 30
30 Corporate Governance of State-Owned Enterprises in Europe and Central Asia, A Survey; World Bank, July 2020.
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4.3. P rform nc monitorin
47. Croatian state, as the owner, has not yet established an effective monitoring
system to keep SOEs´ board and management accountable for their performance.
SOEs unilaterally define their mandates and objectives, including financial targets,
capital structure targets, and risk tolerance levels, without prior approval or
consultation with their line ministries (see Box 2 for an example). Nevertheless, they
tend to take into consideration the strategic plans issued by their respective line
ministry. Since 2018, SOEs must report on their financial performance and strategic
plans using the so-called “Guidance for the Preparation and Submission of Business
Plans and Reports of Companies and Legal Entities that Represent State Assets”,
—developed as part of an EU-funded project with the assistance of the EBRD. The
SOEs report their performance to the MoF, MPPCSA and CERP through quarterly
and annual reports 31 ; they also submit yearly and mid-term plans. However, it should
be noted that SOEs do not need to submit such documents to their respective line
ministries, as, according to available information, these institutions do not actively
monitor SOE performance, except for the Ministry of Sea, Transport and Infrastructure,
which has developed its own monitoring system, requiring SOEs to submit bi-annual
reports.
Box 2 HRVATSKE ŠUME – n SOE with hi h t chnic l st nd rds but suboptim l busin ss mod l
32
r fl ctin w kn ss s of th n tion l corpor t ov rn nc fr m work
Hrvatske šume and the Croatian forest industry
Forests are among Croatia's most valuable natural resources and they are largely state owned. An SOE Hrvatske
šume d.o.o., HŠ (Croatian Forests Ltd) a state owned-enterprise, is responsible for the management of 97 percent of
state-owned forests and forestland in Croatia, making it by far the largest industrial roundwood supplier in the
country. The forest sector is a significant part of the national economy and source of employment in Croatia,
especially in rural areas. In total there are approximately 53,000 people employed in the sector, including 35,000 in
the wood processing industry. Through its roundwood sales, the enterprise has a huge impact on the functioning
of the whole Croatian forest-based economic sector. 93 percent of total HŠ’s sales of roundwood goes to
processing and manufacturing industry mostly through long-term (up to ten years) supply contracts. 33
31 SOEs reporting to dedicated government bodies was first initiated in 2014 based on the Guidance for the Preparation and
Submission of Business Plans and Reports of Companies and Other Legal Entities of Strategic and Special Interest for the
Republic of Croatia.
32 This case study is based on the report Functional review, corporate governance, and benchmarking of the Croatian State Forest
Enterprise, Hrvatske Šume, World Bank, forthcoming.
33 The policy objectives of the timber sales system are defined, among others, as creating economic growth and employment;
ensuring creation of new value addition industries; contributing to the development of cooperation and competition among
wood industries; investment in new technologies and innovative products; contributing to a circular economy (incl. rural
small and medium enterprises); and ensuring the economic, social, and spatial cohesion of Croatia with the EU.
Contribution of public revenue or overall efficiency are not mentioned as objectives of the system.
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During the length of the contract, the companies are obliged to sign annual contracts that
regulate the quantities and prices of roundwood. The annual contracts specify the exact
types and quantities of roundwood traded between the parties. The annual prices are
formed by an administrative decision of the HŠ board of directors (BoD), not by markets
and the principles of price setting are not publicly disclosed. By signing a framework
contract, the contract parties accept the listed prices, valid for the given contract year.
While market conditions differ between countries, it can be estimated that this pricing
system, combined with a regularly changing wood allocation regime, has resulted in annual
revenue losses of EUR 40–50 million compared to wood prices in other countries in the
region. It has also hindered competition among wood industries and served as a barrier to
market entry, specialization, investment and innovation.
Corporate governance in HŠ
HŠ is a liability limited company, owned 100% by the state of Croatia through the Ministry
of Agriculture. The enterprise operates under a two-tier corporate governance system with
a Supervisory Board (SB) consisting in 5 members and a BoD with three members who are
on HŠ payroll. The Minister of Agriculture nominates the board members (all in the BoD and
two out of three in the SB while the remaining SB member is a staff representative) in a
rather non-transparent manner, and there are concerns that the board members and the
department heads are politically appointed. The Director General is also appointed by the
Ministry of Agriculture. The HŠ management board reports to the Croatian Parliament
through the Ministry of Agriculture. For the oversight of internal control, the SB appoints an
audit committee. The internal audits report to the SB and to the audit committee. HŠ has
been audited by an external local private firm external auditor. Also, the State Audit Office
has the general mandate of auditing the financial activities and performance of HŠ.
However, the Office has not audited HŠ financial performances since 2013. The BoD
prepares the financial reports, which are approved by the general shareholders meeting
(Minister of Agriculture) and published on the enterprise’s webpage. The financial reports
are subject to internal audits, and HŠ also prepares a publicly available annual report,
including the external audit report.
HŠ corporate governance is weakened by several factors: i) lack of well-defined roles and
responsibilities for the two boards which govern the company; ii) a non-transparent
nomination process for the members of both Boards, which does not ensure the
appointment of the most qualified candidates; iii) the absence of a performance monitoring
system for the management, including targets setting and monitoring. The generic
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qualitative goals and mandate of HŠ are not operationalized into indicators – financial or
physical – that can be continuously monitored. The Ministry of Agriculture does not
monitor the performance of HŠ management (SB and BoD), as no performance
agreements exists between the state shareholder, represented by the Ministry of
Agriculture, and the management of HŠ. Consequently, the management does not have a
system in place to regularly monitor the operational, financial, social, and environmental
performance of the company. Even the complex and rather bureaucratic roundwood sales
system has never been independently audited to assess how the official objectives are met.
Moreover, the current roundwood sales system is affected by a number of shortcomings in
the oversight of HŠ. There is only limited oversight by the Ministry of Agriculture, the State
Audit Office or other supervisory bodies responsible for ensuring HŠ compliance with the
rules and conditions agreed with the buyers and stipulated in applicable legal frameworks.
Anecdotal evidence from the processing firms indicate that the enterprise is not respecting
the contracts and that there are cases of undue collusion between HŠ officials and
selected firms. This situation is aggravated by the lack of an independent external review,
as currently buyers/ partners compliance with the agreed roundwood sales rules and
criteria is assessed only by HŠ employees.
The state should exercise in a responsible and active manner its ownership role, by
clarifying the responsibilities of the management bodies and monitor their performance.
Monitoring the performance of state-owned enterprises is a core function of the state as
the owner, and is needed to ensure transparency, accountability and the adequate use of
public resources. A performance-monitoring system should cover the institutions and
processes the state uses to monitor the financial and non-financial performances of HŠ,
based on performance agreements or contracts between the state and the management
of state-owned enterprises that include the objectives to be achieved and the relevant key
performance indicators. Currently, there are no performance provisions (e.g. contracts,
agreements, decrees) between the Ministry of Agriculture and the management of HŠ. Nor
are there key performance indicators (KPI) to monitor the financial and non-financial
performances of the enterprise. The State Audit Office conducts performance
assessments only every 4 to 5 years, which is not frequent enough to provide operational
guidance to the management. In the absence of agreed objectives and performance
indicators, this assessment does not have a clear baseline.
Source: Functional review, corporate governance, and benchmarking of the Croatian State Forest
Enterprise, Hrvatske Šume (2020), European Forest Institute.
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4.4 Bo rds of Dir ctors nd M n m nt
48 In line with the provisions of the Companies Act, Croatian companies can be
organized under a unitary or two-tier management system. SOEs tend to have
predominantly two-tier management system, with supervisory boards consisting of 3 to
7 members and management boards of one or more members. Based on available
information, 21 percent of board members are state officials and 19 percent are
employee representatives.
49. The rules for nomination and appointment of SOE board members are specified in
the Companies Act, the (CG Code), and the 2019 Government Decree for SOEs of
“special interest”. While the Companies Act and CG Code include general principles
regarding board members’ nomination (such as appointment by the shareholders
meeting, general competencies, etc.), the 2019 “Decree on the Conditions for Election
and Appointment of the Members of Supervisory Boards and Management Boards of
Legal Entities of Special Interest for the Republic of Croatia” sets the specific framework
for SOEs. According to this Decree, only management board positions are subject to
open competition. For management and supervisory boards of SOEs of special interest,
line ministries are required to follow a specific procedure for selecting candidates. The
procedure consists in conducting an interview and publishing the names publicly for
public consultation lasting approximately 15 days. Line ministries are required to send
the proposal, including the relevant documentation and analysis, for the selection of
candidates to the Government of Croatia. The board members are appointed by line
ministries at the proposal of the Government of Croatia, and their name must be
published on the website of the competent authority. This new framework was
established in 2019 to improve the nomination process which was previously lacking
transparency, with positions in SOEs boards being restricted to a pool of candidates
favoring political appointees.
50. The 2019 Decree provides for the requirements that candidates to the supervisory
board must fulfill. According to this, a candidate must be a university graduate (or
have completed an equivalent study program in a relevant discipline) with
knowledge of corporate governance, finance, and accounting. Furthermore, the
candidate must have at least five years of professional experience gained in
management positions for special-interest entities which the government is a majority
shareholder of and whose consolidated revenue in the preceding financial year is below
HRK 750 million. Alternatively, he/she must ten years of professional experience gained
in management positions for special-interest entities, which the government is a majority
shareholder of and whose consolidated revenue in the preceding year exceeds HRK
750 million. The successful candidate must have no conflicts of interest, per the rules of
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the Corporate Governance Code for Companies in which the Republic of Croatia holds
shares or interests. Similar criteria apply to candidates applying for a position to the
management board (for example, the candidate must have at least ten years of
professional experience in jobs that require an appropriate qualification level, of which
at least five years in management positions).
51. Nominating independent or non-executive members in SOEs is a rare practice.
Only listed SOEs are required to have an independent board member, per the
provisions of the Code of Corporate Governance of the Zagreb Stock Exchange, which
requires most board members (including the chairperson and deputy chairperson) to
be independent. To be deemed independent, a director must have no conflicts of
interest, such as being a significant shareholder (or the spouse or close relative of one),
having been a member of the company’s management board or any related companies
within the previous three years. Moreover, an independent director must not have been
an auditor, employee, or business partner of the company within the last three years.
52. The duties and responsibilities of SOE boards and management reflect unclear
corporate governance arrangements. They are defined in the Companies Act in
general terms in line with internationally accepted corporate governance practices.
However, in practice, the management board has a much stronger role, including the
responsibility to define the strategy, which is then presented to the board. In most cases,
the SOE board is rather a formal body with little influence in decision-making processes,
and no influence on the appointment of management members, as required by
international corporate governance standards.
4.5. Accountin , R portin , Tr nsp r nc nd Disclosur
53. Croatian SOEs are subject to several laws regulating preparation and disclosure of
financial statements and management reports, as well as the controls performed
by various external and internal bodies. The Accounting Act applicable from January
2016 and subsequently amended regulates the accounting practices and related
instruments, the annual financial statements, annual report, consolidation, the report on
payments to the public sector, as well as the audit and public disclosure of these reports.
Annual financial statements must be signed by the chairman of the board and all
directors. SOEs must also prepare annual management reports, which also include
non-financial information on development, operational performance, position and
impact of its activity on environment, social and worker matters, respect for human
rights, anti-corruption and bribery matters.
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54. SOEs are required to submit their annual financial statements and consolidated
statements with the respective accompanying auditor’s reports to the Financial
Agency (FINA) for statistical and other purposes and for public disclosure. FINA
keeps the register of annual statements of SOEs (as well as other business entities) in
electronic form, which is publicly accessible on FINA’s website. Furthermore, FINA is
required to inform the MoF on which enterprises published their non-financial
management report, and which did not, and this information is made available on the
MoF’s web site. In addition, according the Law on State Asset Management, SOEs are
required to submit a quarterly financial statement, annual plan, annual report mid-term
plan, mid-term report and other ad hoc reports as requested by the MoF, MPPCSA and
CERP . During 2016-2018, the MPPCSA published annually an aggregate report for the
SOEs of special interest, which however did not include the main financial information of
entire portfolio of these SOEs.
55. SOEs are controlled by several external and internal bodies, including state
bodies, internal audit and control units of SOEs, and independent external
auditors. The highest audit institution in Croatia is the State Audit Office (SAO),
autonomous and independent in its work. The tasks of the State Audit Office are
prescribed under the Act on the State Audit Office (2019) and include: review of
documents, reports, internal control systems, accounting, financial and other
procedures that are subject to audit. During SOEs audits, a particular attention is paid to
the application of good governance and internal control mechanisms. The SAO also
assesses the activity of internal audit and audit committee (see below) and verifies the
observance of the requirements included in the Anti-corruption Program. The state
auditor reports directly to the Croatian Parliament, the audited entity, and any
irregularities are passed on to the prosecutor’s office. Furthermore, the SAO is making
its reports publicly available on its website. The SAO audits are conducted in
compliance with the standards of the International Organization of Supreme Audit
Institutions (INTOSAI).
56. Large SOEs and those of special interest for the Republic of Croatia are required
to have an external statutory audit, under the coordination of an audit committee.
The Accounting Act stipulates that public interest entities, large and medium enterprises
as well as entities which fulfill at least two of the following conditions namely (i) value of
assets exceeding HRK 15 million (ii) revenues exceeding HRK 30 million or (iii) minimum
annual number of employed is 25, are subject to statutory audit. 34 The selection of an
independent auditor should take place at least three months before the end of the
reporting period to which statutory audit refers. 35 In addition to this, certain large-sized
34 Article 20, Law on Accounting (Official Gazette 78/15, 134/15, 120/16, 116/18, 42/20, 47/20).
35 Article 41, Paragraph 1, Law on Audit (official Gazette Article 68127/17).
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public interest entities 36 are required to engage 2 independent audit firms, which will
jointly issue an audit report and provide an opinion on the financial statement. 37 The
audit committee is responsible for selecting an external auditor, monitoring the external
audit of financial statements, as well as verifying the independence and objectivity of the
external auditor.
57. The accounting standards applied to SOEs in Croatia are either the Croatian
Financial Reporting Standards (CFRS) or the International Financial Reporting
Standards (IFRS). Micro, small and medium sized enterprises are encouraged to use
CFRS whereas large and special interest SOEs are expected to report using the IFRS.
SOEs are required to submit their annual financial statements for statistical and other
purposes by the end of April of the current year. Additionally, they have to publish their
annual reports and annual financial statements for the previous fiscal year (whether
audited or not) by the end of June of the current year. While the filling of the annual
reports and public disclosure appear as adequate, in practice, significant departures
from the IFRS are often evident. These departures are justified by special laws (Lex
Specialis) governing this subject matter and overruling the general law, as in the case of
transport sector SOEs.
58. The Croatian Audit Law is in compliance with the EU standards and directives. The
Croatian Law on Audit complies with the European Parliament Regulation No 537/2014 38
and of the Council dated April 16, 2014 that regulate the specific requirements
regarding the statutory audit of public-interest entities (repealing the Commission
Decision 2005/909/EC). However, in practice, the quality of the SOE financial
statements external audits is mixed. At times, audit firms are selected only on the basis
of the lowest cost, without considering quality aspects.
59. Starting in 2018, the function for ensuring the quality of external audits has been
transferred from the Audit Chamber to the MoF. 39 Within the MoF there is an
independent unit in charge of controlling quality by issuing work approvals and
supervising all certified auditors and audit firms. Quality control is done at least once
every three years for public interest entities auditors and audit firms and at least every
six years for other entities. The ministry’s website publishes the following supervisions
reports carried out during 2020: 40 (i) decisions on ordinary direct supervision, (ii)
decisions on direct extraordinary supervisions and (iii) decisions on indirect
supervisions. No data is available for 2019 financial year and the 2020 data is
incomplete as of the issuance of this report.
36 The PIE which employ more than 5,000 employees and have assets exceeding HRK 5 billion.
37 Article 43, Law on Audit (official Gazette Article 68127/17).
38 https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32014R0537.
39 Law on Audit (official Gazette Article 68127/17).
40 https://mfin.gov.hr/istaknute-teme/revizija/nadzor/rjesenja-o-izrecenim-nadzornim-mjerama/3059.
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60. Internal audit requirements are defined by the Law. 41 In Croatia, any publicly
owned commensal company or legal entity employing more than 50 staff and earning
more than HRK 400 million in revenues, needs to establish an internal audit unit. 42
The internal audit unit may be limited to having a single internal auditor or establishing
an independent internal audit unit with more staff. It is also possible for several entities
to establish a common internal audit unit by mutual agreement in order to jointly
perform internal audit activities. If there is an audit committee in place, the internal
audit needs to report to this committee; alternatively, the unit reports to management.
4.6. Procur m nt
61. The public procurement legal framework in Croatia has been continuously
improved since EU access in 2013. The legal framework consists of the Public
Procurement Act (PPA), the Act on the State Commission for Supervision of Public
Procurement Procedures, the Concessions Act, and the Act on Public-Private
Partnerships.
62. SOEs and their subsidiaries must comply with PPA, regardless of their commercial
orientation. PPA was initially adopted in 2011 and most recently amended in 2016 (OG
120/16) in line with relevant EU legislation on public procurement – Directive
2014/24/EU, Directive 2014/25/EU. PPA primarily establishes the rules regarding public
procurement. This legislation applies to transactions amounting to HRK 200,000 (VAT
excluded) for goods and services or HRK 500,000 (VAT excluded) for infrastructure
projects. PPA defines majority state-owned and fully corporatized SOEs as sectoral
procurers who can apply the Act as mentioned above. SOEs' subsidiaries must also be
in line with the Public Procurement Act's provisions if they qualify as public or sectorial
procurers.
63. Croatia has a centralized electronic public procurement system operated by the
National Gazette – the Electronic Public Procurement Classifieds of the Republic
of Croatia. The electronic submission of tenders has been mandatory in Croatia since
January 1, 2016. E-procurement in Croatia was fully implemented in April 2018, when
the use of e-ESPD became mandatory. Consequently, Croatia observes the OECD
principle regarding the integrity in public procurement which states that governments
should provide an adequate degree of transparency in the entire procurement cycle to
promote fair and equitable treatment for potential suppliers.
41 Law on Internal Controls System in the Public Sector i Rulebook on Internal Audit in the Public Sector, Official Gazette
78/15, 102/19 enacted November 2, 2019.
42 Rulebook on internal audit in the public sector, Official Gazette 42/16 i 77/19.
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64. The OECD principle regarding the public's ability to scrutinize public
procurement is also respected. PPA requires that before launching an open or
restricted procurement procedure for public works contracts or public supply
contracts and public service contracts above the EU thresholds, contracting
authorities must conduct market consultations for a minimum period of five days with
the interested economic operator on the draft procurement documents, in particular
for the subject matter of the tender, technical specifications, criteria for qualitative
selection, contract award criteria and special conditions relating to the performance
of a contract.
65. The Act on the State Commission for Supervision of Public Procurement
Procedures regulates the State Commission's competence to supervise public
procurement procedures and other issues relating to the State Commission's
activities. Any competing party, bidder, or economic entity interested in obtaining a
particular public procurement or framework agreement has the right compalin to with
the State Commission. This right applies both to entities that have been or could
potentially be harmed. Complaints can be filed with the State Commission either
directly or by registered mail. This is in line with the OECD principles regarding public
procurement, that require governments to ensure that potential suppliers have
adequate and timely access to review systems of procurement decisions and that
these complaints are promptly resolved.
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5. Th K R form A nd
66. Suggested policy recommendations and reforms for the government’s
consideration are focused on the ownership function and the relation
between the state and SOEs, transparency, the privatization program, and
fiscal risk management. The proposed changes intend to improve public sector
fiscal management and accountability, as well as align SOE corporate governance
practices with internationally accepted standards.
Own rship Function
67. Ownership policy. It should clearly define state ownership rationale with explicit criteria
and expectations for all parties involved, including SOE shareholders, boards,
management, auditors and other key stakeholders and clearly allocate responsibilities.
The ownership policy should also define the criteria for establishing and terminating
state ownership, and set out the roles and responsibilities of SOEs, which can be used
to guide decision-making and help in protecting them from political interference.
68. Ownership institution. The exercise of state ownership rights on SOEs should be clearly
identified within the state administration, either through a centralized model with a single
ownership entity or through the consolidation of a dual model where the ownership
function is adequately shared by a central-level body and corresponding line ministries.
In that sense, the role of the coordinating body, currently assigned to MPPCSA, could be
strengthened through a clear and focused mandate with a high degree of autonomy,
improved capacity and accountability, and effective SOE oversight. In the short-term,
the capacity of the line ministries to effectively oversee the SOEs within their portfolio
should be strengthened.
Tr nsp r nc
69. Ensure a consistent public disclosure of SOE financial information and
strengthen the external audit practice. While the completion of the annual reports
and public disclosure appear as adequate, there are significant departures from the
IFRS that are justified by special laws (Lex Specialis). Also, the MoF, currently in
charge of the external audit quality control function, could enhance the
transparency and disclosure of information.
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Priv ti tion Pro r m
70. Follow up of the government´s Privatization Program. Privatization initiatives should
be resumed based upon both the results of the efficiency analysis of subsidized
SOEs, and the new state ownership rationale for SOEs.
Effici nc An l sis nd Fisc l Risk M n m nt
71. Carry out an efficiency analysis of government subsidized SOEs. An in-depth
analysis is needed to evaluate the efficiency of subsidized SOEs in providing their
services and achieving appropriate value for money. Only based on high-quality data
and clear criteria for state ownership, a decision can be made whether an SOE should
indeed remain owned by the state.
72. Development of an SOE fiscal risk management framework. This framework —
prepared and disclosed by the MoF — should identify the major risks to the budget
emanating from SOEs; assess their size and probability of occurrence; identify any
policy or other measures to mitigate these risks; and disclose fiscal risks to enhance
awareness of fiscal policy trade-offs and bring transparency to the entire budgeting
process. The framework should take into consideration both direct and contingent
liabilities, as well as explicit and implicit obligations.
ANNEX 1: P rform nc of SOEs own d b th loc l
ov rnm nt units
Local government units currently hold a majority share in close to 800 companies, that
account for around 30 percent of the value added and roughly 40 percent of
employment of the entire SOEs sector in Croatia. The concentration in terms of
economic significance is less pronounced compared to the central government level as
fifteen largest locally owned SOEs account for around 40 percent of revenues and 30
percent of employment (Table A.1). However, there is much higher concentration of
debt as only three companies (Zagrebački holding, Vodoopskrba i odvodnja and
Zagrebački električni tramvaj) account for almost 70 percent of debt of all locally-owned
SOEs. Also, there is a much greater sector concentration as more than 500 companies
are registered in water supply and other services sectors often including local utility
companies but also sport clubs, development agencies or landscape design
companies. Therefore, analysis of locally owned SOEs in Croatia warrants a much
deeper analysis that goes beyond the scope of this report.
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T bl A.1 L r st loc ll own d SOEs in Cro ti
Revenue Assets Debt Taxes
Rank (by Type of legal Employm
Firm name Sector (HRK (HRK (HRK (HRK
revenue) entity ent
mn) mn) mn) mn)
1 ZAGREBAČKI HOLDING D.O.O. Real estate services D.O.O. 1,749 5,082 12,241 3,973 159
2 Energy
GRADSKA PLINARA ZAGREB - OPSKRBA D.O.O. D.O.O. 952 122 378 29 6
3 VODOOPSKRBA I ODVODNJA D.O.O. Water supply D.O.O. 454 1,178 4,796 13 40
4 Transport
ZAGREBAČKI ELEKTRIČNI TRAMVAJ D.O.O. D.O.O. 400 3,807 2,663 494 139
Statutory
5
GRADSKA LJEKARNA ZAGREB Trade entity 334 342 303 0 22
6
LJEKARNA SPLITSKO DALMATINSKE ŽTrade
UPANIJE Statutory entity 276 224 130 9 16
7 TERMOPLIN D.D. VARAŽDIN Energy D.D. 205 104 231 0 6
8 MEDIMURJE-PLIN D.O.O. Energy D.O.O. 201 66 234 0 3
9 GRADSKA PLINARA ZAGREB D.O.O. Energy D.O.O. 197 407 1,089 29 23
10
LJEKARNE SRCE Trade Statutory entity 179 165 57 0 7
11 HNK HAJDUK Š.D.D. Other services Š.D.D. 164 73 267 16 6
12 VODOVOD I KANALIZACIJA D.O.O. SPLIT
Water supply D.O.O. 127 460 2,677 30 14
Sources: FINA
13
LJEKARNE ZAGREBAČKE ŽUPANIJE Trade Statutory entity 126 96 38 0 6
14 ISTARSKI VODOVOD D.O.O. Water supply D.O.O. 126 293 661 0 10
15 VODOPRIVREDA VINKOVCI D.D. Construction D.D. 123 90 69 5 2
Other local SOEs 8,407 28,928 38,957 2,164 770
Total 14,019 41,437 64,792 6,761 1,230
Share of TOP-15 SOEs in total (%) 40 30 40 68 37
Fi ur A.1: Th p rticip tion of c ntr ll v rsus loc ll own d SOEs v ri s b
s ctor (2019)
) No. of SOE firms b s ctors b) SOE mplo m nt b s ctors
350 24
Thousands of persons
300 20 Centrally owned
Centrally owned Locally owned
250 16
Locally owned
200
12
150
8
100
50 4
0 0
Real estate…
ICT and financial…
Real estate…
ICT and…
Postal services
Mining
Agriculture
Tourism
Trade
Transport
Manufacturing
Water supply
Construction
Energy
Other services
Construction
Manufacturing
Mining
Trade
Agriculture
Water supply
Energy
Transport
Other services
Tourism
Postal services
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c) V lu dd d b s ctors
7
6 Centrally owned
Locally owned
5
HRK billion
4
3
2
1
0
Real estate…
ICT and…
Mining
Manufacturing
Trade
Construction
Agriculture
Water supply
Transport
Energy
Tourism
Other services
Postal services
Source: FINA
Similar to centrally owned companies, local SOEs that pay profit tax, are obliged
according to the Law on Accounting to submit annual financial statement to
Financial Agency (FINA). Therefore, standardized financial data are available, as
well as data on tax payments and subsidies received. As regards the latter, in 2019
local SOEs received subsidies in the amount of 0.3 percent of GDP, of which
around half was directed to one company in transport sector - Zagrebački električni
tramvaj d.o.o.. At the same time, local SOEs paid similar amount of taxes into the
budget, meaning that their net impact on general government fiscal balance was
broadly neutral. However, data on other possible sources of government support
are not readily available and substantial effort would be required to collect these
data from annual financial reports of companies (with no guarantee of success).
Available data suggests that locally owned SOEs lag behind performance of
centrally owned SOEs. Since 2013, local SOEs profit was continuously lower
compared to centrally owned SOEs and the gap remained broadly unchanged
(Figure A1, panels a and b). Moreover, operating efficiency is in most sectors below
centrally-owned SOEs although their labor costs are on average lower (Figure A1,
panels c and d). Financial leverage seems high for some companies which may
hinder investment capacities and lead to liquidity issues. This can be in particular
observed in real estate service sector reflecting indebtedness of Zagrebački
holding d.o.o. and in transport sector due the debt of Zagrebački električni tramvaj
d.o.o. (Figure A2, panels a and b). Finally, around 12 percent of overall local SOEs
have interest coverage ratio less than one but their total debt is not large (Table A2).
55
HRK
15,000
20,000
10,000
0
5,000
0
0.01
0.02
-0.01
0.015
0.025
-0.005
0.005
0
5
10
15
20
25
30
35
%
c) Av r
Agriculture 2008
POEs
POEs
SOEs
Total
Construction 2009
) ROA
SOEs_local
Energy
Agriculture 2010
Construction ICT and…
2011
SOEs
Manufacturing
SOEs
Energy
2012
ICT and financial… Mining
2013
Manufacturing Other services
Fi ur A2. Fin nci l l v r
) D bt/Ass ts (2019)
Mining 2014
Postal services
Other services 2015
Real estate…
Postal services 2016
SOEs_local
monthl costs p r mplo
Tourism
SOEs_local
Real estate services 2017
Trade
Fi ur A1. P rform nc of loc l SOEs l
Tourism
Transport 2018
Trade
Water supply 2019
(2019)
Transport
Water supply
%
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
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0
-0.04
-0.03
-0.02
-0.01
0.01
0.02
0.03
0.04
0.05
56
Agriculture
% 0.0
0.5
1.0
1.5
2.0
2.5
3.0
2008
Construction d) Op r tin
POEs
SOEs
Total 2009
Energy
b) ROE
2010
Agriculture ICT and financial…
2011
Construction Manufacturing
SOEs
2012
Energy Mining
2013
s b hind c ntr ll -own d SOEs
ICT and financial…
of most loc ll -own d SOEs is not xc ssiv
Other services
b) D bt/Equit (2019)
Manufacturing 2014
Mining Postal services 2015
Other services Real estate services 2016
SOEs_local
Postal services Tourism 2017
Real estate services
Trade 2018
Tourism
Transport 2019
Trade
xp ns s/op r tin r v nu s (2019)
Transport Water supply
Source: FINA
Water supply
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T bl A2. Sh r of vuln r bl loc l SOEs d bt
Vulnerable debt of local SOEs
(ICR<1)
% of
% of total vulnerable
% of debt
#firms debt in
GDP
TOTAL 13.4 12.9 0.2
Agriculture 20.0 39.4 0.0
Construction 9.3 44.4 0.0
Energy 10.8 13.3 0.0
ICT and financial services 2.9 0.3 0.0
Manufacturing 22.2 97.9 0.0
Mining
Other services 6.6 31.1 0.0
Postal services
Real estate services 2.8 0.0 0.0
Tourism 6.7 0.2 0.0
Trade
Transport 16.7 26.4 0.1
Source: FINA Water supply 21.2 39.7 0.1
ANNEX 2: Int rn tion l b nchm rkin of s l ct d SOEs
in Cro ti
Performance comparison of selected SOEs with their sectoral peers in other countries
indicates that in certain cases there is an ample space for their improvement. Such
conclusions are based on the tool developed by IMF for monitoring performance and
risks assessment of SOEs at the firm level (Baum et al., 2020). The tool includes two
blocks, one for static benchmarking analysis and the second one for risk analysis based
on forecasts of key macroeconomic indicators. Benchmarking block provides a set of
financial indicators calculated at the sectoral level and separately for a group of
developed and developing countries allowing one to compare selected SOEs financial
indicators with those of its sectoral peers in other countries. However, in some cases
comparison is limited by relatively high level of sectoral aggregation, like for road
companies.
Against this backdrop, and limiting the analysis to most important sectoral SOEs,
benchmarking was done for four Croatia’s SOEs; Croatia Airlines d.d., Hrvatska
elektroprivreda d.d., Hrvatske šume d.o.o., and Hrvatska pošta. What can be noticed is
that:
State-owned airline is in difficult financial position. As indicated by ROA and ROE
indicators the company is unprofitable and has one of the worst performances when
compared to sectoral peers in developed countries. In addition, its liquidity (the
current ratio) is well below one and appear very weak. On the other hand, its labor
cost per operating revenues seems adequate. Due to low profitability and lack of
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liquidity the government was planning to support the company in 2020 by granting
capital injection of HRK 250 million, which was increased to HRK 600 million due to a
dramatic revenue fall caused by COVID-19 pandemic. However, the company will
continue to pose significant fiscal risks for the budget.
Remaining companies are profitable, but Hrvatske šume significantly lags behind
their sectoral peers in terms of ROA and ROE and are close to bottom decile of
profitability distribution. Furthermore, while liquidity and solvency of these three
companies seems adequate, in case of Hrvatske šume 43 and Hrvatska pošta, labor
cost per operating revenues are comparably high.
Fi ur A: P rform nc b nchm rkin
30 12 2.5 70
10
20 60
8 2.0
75th
decile 10 6 50
4
50th 1.5 40
0 2
decile
0 30
-10 1.0
25th -2
decile -20 -4 20
-6 0.5
Average, 10
-30
last 2- -8
years -10 0
-40 0.0
Croatia HEP Hrvatska Hrvatske Croatia HEP Hrvatska Hrvatske Croatia HEP Hrvatska Hrvatske Croatia HEP Hrvatska Hrvatske
Airlines pošta šume Airlines pošta šume Airlines pošta šume Airlines pošta šume
ROE ROA Current ratio Labor cost per employee
Note: Benchmarks are represented by the median, top 75th and bottom 25th percentile of the distribution of each
indicator across developed countries in the sample (except for Hrvatske šume where full sample was used due to
lack of data) and for the respective sector. Red dots represent average performance of Croatia’s respective SOEs
over the last two years. Using the median, upper and bottom percentiles, allows to assess how the SOE compares to
the average and against the best and worse group of performers, while reducing the influence of outliers (Baum et al.,
2020). Source: IMF, World Bank staff calculations.
43 See Box 2 in chapter 4 on a discussion of corporate governance practices in Hrvatske šume.
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ANNEX 3: Th s st m for obt inin profit r mitt nc s from
SOEs r quir s improv m nt
By June 30 of each year, the government issues a decision on which SOEs are deemed
of “strategic and of special interest”, and for these, the amount of payment that should
be paid to the government out of profits realized in the previous calendar year. June 30
is the official deadline for the final submission of companies’ financial statements,
including their profit distribution plan, to FINA. For example, companies are required to
submit their decisions for profit distribution to FINA by the end of April of current year,
while in 2019 a government decision for tax year 2018 was issued on June 27, 2019,
only 3 days before the final deadline for the submission of financial statements. Although
companies can alter their profit distribution decisions after the April deadline, they
usually don't. Thus, the system of payment of profits to the budget does not enable
timely planning of payments for companies and transparent monitoring of payments by
public companies.
The government decisions state that the schedule of payments shall be fixed between
the MoF and the individual company concerned by the decision. This terminology
leaves room to adapt the timing of payments by each company so that the obligation to
pay does not jeopardize its liquidity. However, the lack of a deadline by which all the
required profits must be paid into the budget impairs control of the process.
Furthermore, while the MOF conducts regular analyses of SOEs financial performance
and determines companies that are obliged to make payments into the budget,
conditions for exemptions are not publicly disclosed. Some of the SOEs listed in these
decisions as “strategic and of special interest” are exempted from profit payment
requirements. In fact, any decision relating to the obligation to pay a share of profits to
the budget includes a list of the companies that are exempt from that obligation, usually
without explanation. Frequent changes are made in the list of companies required to pay
out of profits; the list was amended every year during the 2015-2018 period analyzed.
And the list of SOEs exempted from profit obligations (based on the previous year's
profits) is typically increased after the decision is issued. For example, in the second half
of 2016 the government exempted three additional companies from having to pay the
budget out of profits realized in 2015.
All in all, the systems for managing profit payments to the budget are poorly monitored,
insufficiently regulated and strongly subject to arbitrary changes in the list of payers,
without clearly defined rules governing when and under what conditions companies can
be exempted from the obligation to pay profits.
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ANNEX 4: T p s of own rship mod l structur
Ownership model Main features Countries
Centralized model One government institution carries out the Finland, France,
mission of shareholders in all companies and Sweden
organizations controlled by the state. This and Slovenia
institution can be either a specialized ownership
agency of a designated government ministry. It
sets up the financial, operational and technical
objectives, determines the relevant key
performance indicators, and monitors the
performance of the SOEs. Board members are
appointed centrally.
Dual model/twin The ownership function for each SOE is shared Czech Republic,
track by two government institutions – in most cases Estonia,
one-line ministry and the finance ministry. Germany,
Typically, one ministry sets financial objectives Italy
and another ministry formulates operational
strategy.
Coordinating Specialized government units act in an advisory Latvia, Lithuania
agency capacity to other shareholding ministries on
technical and operational issues; their most
important mandate is to monitor SOE
performance. Additionally, these agencies may
assist in policy-making, assist in privatization,
advise line ministries, and ensure disclosure of
Source: OECD (2018).
SOE information, including an aggregate annual
SOE sector report.
Decentralized No one single institution or state actor acts on the Romania,
responsibilities of the ownership function. The Croatia
public often perceives line ministries to be de
facto running the SOE as an extension of their
ministerial powers.
ANNEX 5: SOE own rship nd ov rn nc pr ctic cross th
OECD countri s
In recent years, there has been a growing trend across the OECD countries towards
establishing mechanisms for ensuring transparency and accountability of the state’s
exercise of ownership rights including developing a clear rationale for state enterprise
ownership, a centralized or coordinated state enterprise ownership function, and
regular and publicly disclosed aggregate reporting on the SOE sector. Many OECD
countries have now explicit ownership policies defining the overall objectives of state
ownership. Many have also adopted a centralized model for state ownership,
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Many have also adopted a centralized model for state ownership, established a central
holding company for an important portfolio of SOEs, or established a central
coordinating agency, often charged with monitoring performance or coordinating
governance practices across the SOE sector. See, for example, examples for Austria
and Sweden below. However, many others still maintain a decentralized model.
Austria
Since 1967 Austria has managed its SOEs through a single ownership entity, which has
undergone several transformations required to accommodate its mission: from
managing the first wave of privatisations (1987) to portfolio management starting in
January 2019. Austrian Holdings AG (ÖBAG) is a public holding company managing 11
SOEs accounting for almost 4 parcent of Austria’s gross domestic product and
generating EUR 13.7 billion euro in gross value added, while securing over 135,000
jobs. These include listed companies such as OMV AG, Telekom Austria AG and
Österreichische Post AG. Verbund AG, which is also listed, is managed by ÖBAG on
behalf of the MoF.
ÖBAG mission is to perform “active investment management in the best interests of all
Austrians. It takes targeted steps to promote growth and innovation and consolidate
Austria’s position as a place to do business.”
ÖBAG provides a constructive partner for its companies in the fields of strategy and
further investment and manages its portfolio with the utmost professionalism.
ÖBAG underlines the critical role of good governance. ÖBAG website clearly states
its duty to “comply with all legal regulations and to increase trust in the Austrian
capital market and in Austria as a place to do business through transparent
governance.”
Sweden
State-owned enterprises make up a significant part of the business sector in Sweden.
The Government has a mandate from the Parliament (Riksdag) to actively manage
state-owned enterprises to ensure the best possible long-term value performance and,
where relevant, to ensure that specifically adopted public policy assignments are
performed well.
As stated in the State Ownership Policy revised in 2020, “ it is of the utmost importance
for the Government that state-owned enterprises are actively and professionally
managed with long-term value creation as an overall objective. State-owned enterprises
have to take a long-term approach, be efficient and profitable, and be given the capacity
to develop. To promote long-term sustainable value creation in state-owned enterprises,
sustainable business is integrated into corporate governance. This means that
state-owned enterprises have to act in an exemplary way in the area of sustainable
business, and otherwise act in such a way that they enjoy public confidence. If
state-owned enterprises are to contribute to economic efficiency and
competitiveness throughout the country, the State has to apply good corporate
governance. “
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The Swedish government’s management principles mainly follow the OECD Guidelines
on Corporate Governance and Anti-Corruption and Integrity in State-Owned
Enterprises, which provide a predictable framework both for the State as owner and for
the state-owned enterprises.
Most of the enterprises are managed by the Ministry of Enterprise and Innovation, which
has a special investment management organisation for state-owned enterprises. The
Ministry of Enterprise and Innovation is also responsible for questions concerning the
state ownership of enterprises that require a unified ownership policy. Therefore,
OECD’s principles for active management and governance of state-owned enterprises
cover all state-owned enterprises.
To ensure active and professional investment management, the Government Office has
developed a number of tools and processes for their work. As part of this investment
management role, the Government Offices nominates directors, sets targets and tracks
and evaluates the enterprises’ operations. In the State Ownership Policy, the
Government sets out mandates and objectives, applicable frameworks and important
matters of principle relating to the governance of the state-owned enterprises. The State
Ownership Policy is applied in all enterprises with majority state ownership. In other
enterprises, i.e. those with minority state ownership, the state engages in a dialogue with
the other owners to have this ownership policy applied. Enterprises administered by
government agencies other than the Government Offices have to apply the State
Ownership Policy in a corresponding way.
The Government presents an annual report on state-owned enterprises to the
Parliament. The report is intended to describe state ownership and the value in
state-owned enterprises and to provide an account of how the management of state
ownership has developed during the year. The report also sets out how the enterprises
are achieving their targets and complying with the Government’s principles for
state-owned enterprises.
Across these countries procedures for creating an SOE are set forth either in laws on
the establishment of SOEs, or in the legal instrument establishing a specific SOE. The
procedures for terminating SOE ownership or divesting state shares are often of a
similar nature. To create an SOE, governments need to provide a rationale for the need
for state enterprise ownership (often the Parliament). In some cases, they need to come
up with a framework for operationalizing the new business. To terminate ownership,
governments usually must demonstrate that the rationale for ownership no longer
applies.
On performance monitoring, the emerging trend across OECD countries seems to be
moving towards promoting transparency and disclosure. Countries are increasingly
producing and disclosing online some form of aggregate reporting on SOEs. Most of
them include all, or the majority of, SOEs in the reports.
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ANNEX 6: P rform nc v lu tion nd m n m nt of SOEs
In SOEs, effective performance management must adopt elements from both public
and private sector best practices. The OECD, through its corporate governance
guidelines, has provided extensive suggestions regarding performance monitoring and
management. Its fundamental principle is that the state must act as an informed and
active owner, thus ensuring that SOEs' governance is transparent and accountable, with
a high degree of professionalism and effectiveness. From this principle, further
responsibilities of the state derive, such as:
1. setting and monitoring the implementation of broad mandates and objectives for SOEs.
2. creating monitoring systems that allow the ownership entity to audit and assess SOE
performance.
3. establishing a board remuneration policy that will advance the long-and medium-term
interests of the enterprise while attracting qualified professionals;
The first two are fundamental to performance management as a discipline, as they
concern the setting and monitoring operational objectives. The latter relates to how the
ownership entity must incentivize the boards of directors by requiring the fulfillment of
performance criteria.
Best practices for performance evaluation and management of SOEs Include:
Formalizing performance evaluation systems through performance contracts and
performance indicators. Performance contracts (or equivalents such as agreements or
memorandums) outline yearly performance targets and should be concluded between
the boards of directors and executive management. However, in a number of countries
(OECD, 2016) performance contracts are concluded between the ownership entity and
executive management, departing from the OECD Guideline II.B. that stipulates the
state should “allow SOEs full operational autonomy to achieve their defined objectives
and refrain from intervening in SOE management”. Performance indicators should be
clearly defined and cover both financial performance and non-financial performance
such as the delivery of public service obligations.
Auditing and reporting on performance. Reporting regularly on SOE performance at
both the company level as well as the sector level through aggregate reports is critical
for strengthening the accountability of the state as the owner and leads to improved
performance. A good practice to ensure the quality of reporting and accuracy of
information included in financial statements and annual report is to set up an internal
audit function and appoint an external auditor that report directly to the Boards of
Directors.
Linking evaluation of performance to executive incentives. In line with SOE Guidelines,
the SOE board should be responsible to oversee and incentivize the management.
Explicit and published pay-scales linked to performance allow for increased transpar-
ency and enhance SOEs capacity to attract and retain appropriate managerial capacity.
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R f r nc s
Bajo, Anto, Lana Zuber, and Marko Primorac (2018), Financial Performance and State-Owned
Enterprises: Summary and Main Findings, Institute of Public Finance, Zagreb, Croatia,
Baum Anja, Medas Paulo,Soler Alberto, Mouhamadou Sy (2020), Managing Fiscal Risks from State o
Owned Enterprises, IMF Working paper, WP/20/213,
Böwer, Uwe (2017),State-Owned Enterprises in Emerging Europe: The Good, the Bad, and the Ugly,
IMF Working paper, WP/17/221,
Dall’Olio Andrea, Goodwin Tanja, Langella Vicenzo, Orlowski Jan, Peña Patiño Fausto, Sanchez
Dennis, Tizzani Andrea, EFI SOE GLOBAL DATABASE: TAXONOMY OF SECTORS, World Bank,
forthcoming,
Družić, Ivo; Akrap, Anđelko; Barić, Vinko; Crkvenac, Mato; Čavrak, Vladimir; Gelo, Jakov; Grahovac,
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Source: www.123rf.com
1.foto: Roman Zaiets / 2.foto: Matthias Wolf/ 3.foto: alandy/ 4.foto: ©Denys Bilytskyi/
5.foto: ©Denys Bilytskyi/ 6.foto: Valentyna Gupalo 7.foto: Valentyna Gupalo 8.foto: Denys Bilytskyi 9. foto: scanrail
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