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Public procurement and interstate agreements: How is the money of Serbian citizens spent?

Government of Serbia building; Photo: WIkimedia Commons

Budget execution in Serbia is a non-transparent process with plenty of room for abuse. The two channels through which the market is more often suspended in Serbia are public procurement and interstate agreements. The significance of this issue is reflected in the size of these expenditures – according to the latest available data, public procurement amounted to eight percent of the gross domestic product of Serbia, and interstate agreements for financing infrastructure projects exceeded the value of all tenders in the country last year.

The situation in some of the most important segments of budget execution at all levels is worsening, and relevant CSOs have been warning about this, but for now to no avail. The European Union, which values the fight against corruption in the accession process highly is not sending enough signals that the situation in Serbia needs to be improved.

Public procurement, provision of goods or services for public administration bodies, local self-government or companies majority owned by the state, are a large part of the Serbian economy.

According to the latest report of the Public Procurement Administration for 2019, approximately 122.000 such contracts have been concluded within a year, which amount to 440.5 billion dinars (3,75 billion dinars). This means that 8.14 percent of the then gross domestic product (GDP) went to public procurement.

If we add the interstate agreements Serbia concludes with other parties on top of that, about loans that sometimes imply a direct agreement with the contractors of the most important infrastructure projects, that amount is even higher. It is estimated that the value of those agreements last year alone amounted to about four billion euros.

Usually, it is precisely the interstate agreements that are considered to be the procedures that are most obviously used for evading the Law on Public Procurement. For example, the price of the Moravian Corridor (which is built precisely in this way), which will connect Belgrade-Niš highway with Miloš Veliki highway, was constantly rising. The estimated price of the road construction work has jumped from the original 500 million euros to 745 million, at least for now.

Deadlines for completion of work have been delayed several times, which became standard practice in most important state projects. Other infrastructure such as bridges, railroads, gas pipelines, should be added to this “famous” example since their construction is delayed while the prices are rising. The professional public is more and more warning about the potential problem of the so-called “corrosive capital”, the means of exploiting and further exacerbating weak governance in developing democracies.

Chinese loans “bear fruit”, but the reaction is missing

Program coordinator from the BFPE Foundation for a responsible society, Stefan Vladisavljev reminds us that this kind of deal-making in Serbia had been completely legal since 2009, but it raises the question to what extent it is legitimate. China is increasingly imposing itself as a creditor for infrastructure projects, which arouses the skepticism of the competent bodies of the European Union.

“A comprehensive agreement on cooperation in the field of infrastructure has been ratified in our parliament, and is treated as an international agreement, and thus, according to our Constitution, it has greater force than any national law. Based on it we can take out loans, hire Chinese (construction) firms contractually since it is regarded as a bilateral agreement. That is not against any law, but the problem is why do we decide to enter the public procurement process and choose Chinese partners for some projects, without any tenders, consideration, or competition, or without open calls or bids. By keeping up with the topic, I came to the conclusion that it is a matter of political motivation”, says Vladisavljev.

According to him, the political motivation of Serbia is a fast and easy economic development, which is something China can provide, unlike partners such as the European Union, whose assistance includes many conditions, primarily transparency of procedures.

“Instead of fulfilling those conditions (getting funds) from China without much conditioning, except to take a Chinese company as contractors. This modus operandi is similar in all countries that are part of the Belt and Road Initiative, and Serbia is just a very successful example of that initiative. We manage to avoid the problem of debt slavery, at least if the stats of our institutions are correct, unlike the negative examples primarily from Asia and Africa”.

The European Union had to create additional layers of “protection” for such actions, and Vladisavljev gives the construction of the Pelješac Bridge as an example.

“The Chinese company made the best offer for that project. The EU has realized that, if it does not limit it, Chinese companies that have state subsidies will be able to win absolutely every tender. In 2019, the EU introduced a screening mechanism for direct foreign investments, which means that any agreement that would be signed by a (special) regulatory body at the national level would be required to be reviewed. We are not obliged to do that because we are not a member state yet and the question is whether it will be part of a new cluster”, said Vladisavljev.

Even if such a body was formed in Serbia, it would be politically motivated and potentially only “say yes” to incoming investments, as is the case with Hungary.

In Serbia, with a centralized decision-making system, where the government “lives or dies” depending on how many new factories or kilometers of highway it will present to voters, the cooperation between Beijing and Belgrade represents a happy and harmonious “marriage”, concluded Vladisavljev.

What can the EU do?

Public procurement is an area in the EU accession process that is recognized as important, with Chapter 5 dedicated to it. The latest EC report noted moderate progress in this field, noting that recently adopted regulations on special procedures for infrastructure projects “are likely to seriously jeopardize the effective implementation of the Law on Public Procurement, as it allows exceptions for projects of special importance to Serbia.” In addition, the average number of offers per tender remained at 2.5, which is worse compared to 2017. CSOs are more often mentioning public procurement in the context of Chapter 23 as well, because they represent a potentially significant source of corruption.

According to Nemanja Nenadić, program director of Transparency Serbia, whether Serbia will face problems in the EU accession process depends on how seriously the representatives from Brussels will take their messages. He added that the progress reports have been warning for years about avoiding the Law on Public Procurement through interstate agreements and passing special laws.

’’That’s mentioned as a recommendation, however, Serbia did not act on the recommendations and it intensified the harmful actions, while no measures taken about it are noticed. We have not heard specifically what the EU will do if this practice does not change. It is possible that we got part of the answer through the lack of opening new chapters or clusters, but that is not clearly stated“, said Nenadić.

What the EU can do is condition the provision of financial support for infrastructure projects by applying rules and good practices in the public procurement process. According to the European Commission, the Law on public procurement is harmonized with the EU legislation.

’’That would be a specific measure and a clear message from the EU. I don’t know whether they will send such a message, but that would be logical. Project procurement would have to be done for the projects it finances, but it makes no sense not to apply the same practices to other loans or projects“.

Nenadić is, however, pessimistic about such a scenario since the companies from the EU started to evade the law through direct agreements with the state. On the other hand, investment banks have their rules and procedures, but which allow some competition.

’’The bank’s rules then apply, which usually guarantee less protection than the domestic law. According to bank rules, a high threshold for participating in a tender can be set, which can be considered as discriminatory, and when an appeal is filed, it does not go to domestic institutions, but to the bank’s bodies. It’s less of a problem than interstate agreements,  but the outcomes are the same“, added Nenadić.

Citizens need better proceedures, not the EU

The Center for Democracy and Human Rights from Toplica has been warning that certain changes to the Law on Public Procurement would lead to a situation in which its application would become an exception. The changes that have been in force since July 2020 have resulted in the fact that, only in the first six months of implementation, 46 contracts were concluded without the application of the law, while only one was concluded within the Law.

’’This catastrophic trend, which led to the ratio of 1 to 2.3 in favor of non-application of the provisions of the Law in just 6 months turn into 1 to 46, indicates all the absurdity of some of the key provisions of the Law, but also the intention of those who created new solutions to make procedures meaningless, expel competition from state affairs and turn public procurement completely into a zone of direct agreement between public officials and their business partners“, according to the statement of the Coalition for the Supervision of Public Finances.

Dragan Dobrašinović, a representative of that Coalition and the director of the Toplica Center for Democracy and Human Rights, said that Serbia conducted half a million public procurements without tenders in just half a year and that there is no interest in solving this problem within the EU, and therefore no persuasion that something needs to change.

’’That process is obviously stuck in place. However, more importantly – that is not important for us. What they think, write, say… That has no significance for us. The reports of the EC do not only have an expert perspective, but often a political one, which prevents them from saying directly what they see. That’s why I think that those reports are not relevant for us, but our reality instead, our everyday lives. Our data suggest that for every procurement conducted within the Law, there are 46 that are not conducted within the Law”, highlights Dobrašinović

According to him, a system has been created in which it is normal for the law to be suspended and for its application to become an exception.

’’Obviously, we are moving in the direction of avoiding everything that involves competition, the goal is a direct agreement, and the whole system is set so that’s not prevented. There is no greater source of economic corruption than public procurement, but there’s one that’s at least on its level – interstate agreements. That’s another reason why the EU is silent – and how not to be silent when the French, for example, got the project of building the Belgrade metro in that way. In the same way, they get ’our’ companies, only much smaller projects“, concluded Dobrašinović.

Silence on such phenomena does not surprise Dobrašinović, however, the silence of the domestic public which is harmed by non-market practices does.

’’Well I also wouldn’t have any complaints if I had companies that get projects worth four billions through direct agreements, and all this within the last year. European companies are part of a corrupt chain, and they have a significant influence on the decision-making of their own governments“, concluded Dobrašinović.

This article is published within the project “Supporting media freedom in Serbia in relation to the EU accession process”, implemented in cooperation with EUROPEUM Institute for European Policy and supported by the Ministry of Foreign Affairs of the Czech Republic. The views expressed in this article do not represent those of the EUROPEUM Institute or those of the Ministry of Foreign Affairs of the Czech Republic.

 

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