Politics

Numerous Recommendations Before Croatian Eurozone Membership Provided

June the 10th, 2021 - Croatian Eurozone membership depends on numerous factors, and the sorting out of the mess that is the portfolio of state owned companies is just one of the pressing ones.

As Poslovni Dnevnik/Ana Blaskovic writes, although some strides have been made, state-owned companies remain synonymous with political flattery, corruption scandals and, in general, just bad business. However, if Croatian Eurozone membership is to become a reality, and if the country wishes to join the Organisation for Economic Co-operation and Development (OECD), which are two strategic foreign policy goals of the government, Croatia will have to make serious efforts to sort out the mess in the portfolio of state-owned companies.

To this end, in the form of the OECD team, in cooperation with the European Commission and the Croatian authorities, a comprehensive diagnosis was made and the government was provided with a number of recommendations for improving corporate governance.

Three are key to a significant turnaround: centralising state ownership, professionalising governance, and harmonising the legal and regulatory framework through a new law on state-owned companies, the OECD said.

"The owners of these companies are taxpayers. The idea is that they should be accountable to the public as private companies are to their shareholders,'' said Charles Donald of the working group on state-owned companies and OECD privatisation.

"Although these recommendations aren't mandatory, they're the ''acquis'' for joining the OECD," Donald said.

Sanja Bosnjak, State Secretary of the Ministry of Physical Planning, Construction and State Property, assessed the guidelines as a benchmark and made sure to state that Croatia has committed itself to reforms in the state-owned enterprise sector in the action plan for joining the exchange rate mechanism.

"This is a symbolic start to work on reforms in this area that involve the entire administration," she said.

The value of state-owned companies is estimated at a massive 190 billion kuna, making up a whopping 47.2 percent of Croatian GDP in 2019. The (central) state owns 59 of them, of which 39 have special status. 19 are wholly or majority owned by the Centre for Restructuring and Sales (CERP), and two more companies are outside that umbrella. Beyond them is a constellation of 938 local state-owned companies. Most of them operate in the segment of transport, energy, construction, finance, telecoms, manufacturing, tourism and property/real estate.

While with about 260 state-owned companies per million inhabitants, Croatia can ''boast'' of being one of the record holders in the EU, as well as in the rest of Southeastern Europe where a similar phenomenon reigns, the problem is, in typical Croatian fashion - total and utter inefficiency.

The return on capital and revenue growth is lower than it is in the private sector, and with the exception of strategic companies, more than 80 percent of non-strategic ones have failed to reach even the median return on capital of the sector in which they operate, the OECD found.

With fragmented competencies, from ministries, the CERP to various agencies, the OECD recommends the establishment of a single body with adequate mandate and resources to coordinate stakeholders and end the current practice of unclear roles and, more importantly, blurry responsibilities.

The second recommendation for Croatian Eurozone membership is aimed at professionalising management through strengthening the role and powers of the supervisory board. The current election of members of supervisory boards is open to political staffing, varies by company, and the prescribed fees are typically not very attractive to professionals.

The recommendation is to establish professional and independent committees, as well as independent auditors, and to enable supervisory boards to set their own strategies and oversee management. In doing so, the OECD emphasises in particular that government officials and policy-appointed persons cannot by any means ever be considered independent experts.

Finally, a new law is needed that should harmonise the current legal framework and underpin reforms in the state-owned enterprise sector.

In addition, the list of recommendations for Croatian Eurozone membership includes increasing transparency, strengthening internal controls, setting clear financial and non-financial targets, and simplifying the legal framework and corporate structure of companies so that state-owned companies compete evenly with private ones in the same market.

For more on Croatian Eurozone membership and Croatian politics in general, make sure to follow our dedicated politics section.

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