The government promised the EU of state-owned companies without party favoritism

In the four-year Reform Agenda, the government listed as one of the key priorities the reform of the regulatory framework that governs the operations of majority-owned companies with a special emphasis on the professionalization of management bodies, which will be achieved by introducing clear criteria for the selection of members of the board of directors in state-owned companies.

This step, as explained, is crucial for increasing the efficiency and responsibility of state-owned companies, which play an important role in stimulating economic development and strengthening the country's export component. This document does not state why there are no clear criteria for the selection of board members of state-owned enterprises, i.e. it is kept silent that for decades they have mostly been chosen according to the party's key.

The Government's Reform Agenda was sent to the European Commission (EC), which adopted it last week. Obtaining money from EU funds for various projects in health, education, transport, energy, state administration reform, etc. will depend on the fulfillment of these obligations, among which is the introduction of order in state-owned enterprises.

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Criteria according to OECD guidelines

The criteria for the selection of members of the board of directors in state-owned enterprises and their operations will be regulated by a separate law and in accordance with the Guidelines of the Organization for Economic Cooperation (OECD) for corporate governance in state-owned enterprises. June 2025 is defined by the reform agenda for the preparation of the law.

According to the OECD Guidelines, ownership rights should be clearly defined within the state administration and centralized in one ownership entity (company).

"If this is not possible, the relevant ownership functions should be coordinated by a designated body that has clear powers to act at the level of the whole of government," the guidelines state.

The government of Prime Minister Zdravko Krivokapić had established the company "Montenegro Works", which was supposed to manage all companies, but it was canceled by the government of Dritan Abazović after an analysis that showed that it was not financially sustainable.

The Reform Agenda stated that since 2010, when the Law on Improving the Business Environment entered into force, companies with majority state ownership have operated in accordance with the Law on Business Companies, which has led to a change in the way companies are regulated from public interest. However, this framework did not ensure sufficient transparency and control, which are criticisms that were also highlighted by the International Monetary Fund (IMF) in its 2022 report on Montenegro.

"The IMF states in its February 2022 report to Montenegro that 'the overall framework for monitoring the work of public enterprises is weak' and that 'strengthening monitoring can bring significant fiscal and economic benefits'. Inefficient and/or poor management of state-owned enterprises imposes significant economic and fiscal costs on the state. This is reflected through the activation of guarantees for the loans of certain state enterprises, the allocation of significant funds from the budget to certain companies... Emphasizing that bad management can cause serious economic and fiscal consequences, including increasing costs for the state through guarantees and subsidies," the document reads.

"The state does not have a clear supervision model"

It is further stated that the data from the period 2018-2023. show the growth of operating costs of state-owned enterprises, with the exception of 2020 due to the COVID-19 pandemic. Although some of these costs are related to specific events such as the bankruptcy of Montenegro Airlines, the analysis shows that inefficient management is the main cause of negative results.

For example, in 2021, the total net result of the operations of state-owned enterprises was negative in the amount of 4,9 million euros, but 2022 brought an improvement with a positive net result of 17,7 million euros.

"Compared to 2021, when half of the companies achieved a positive business result, in 2022 there was an improvement, so close to 60% of companies achieved a positive business result. The state, as the majority owner, does not have a clear model of supervision over the operations of state enterprises. For years, this supervision has been fragmented between several competent institutions, without a unified and standardized way of planning and reporting on the operations of state-owned enterprises," states the Reform Agenda, which indicates that despite positive developments in the operation of enterprises, there remains room for significant improvements in supervision and transparency. .

There will be stricter conditions for board members

In order to reduce fiscal risks and increase the economic potential of state-owned companies, it is planned to introduce a public register of state-owned companies, which will enable a detailed review of the financial status and audit results of these companies. The government document clarified that the register, which was first published at the end of February 2024, will cover all municipal companies by the end of 2024, and will be regularly updated with financial data and indicators such as liquidity, profitability and by 2026. solvency.

Another important measure is the amendment of corporate legislation or the adoption of a new law that will prescribe stricter criteria for the selection of members of the management and supervisory boards of state-owned enterprises. The Reform Agenda clarified that nominations will be based on an open, transparent selection process, with special emphasis on the expertise, experience and independence of board members. These changes will be aligned with the Organization for Economic Cooperation (OECD) guidelines for corporate governance in state-owned enterprises, which emphasize the need to separate ownership and regulatory functions of the state, greater accountability of boards of directors and improved transparency.

In addition to the professionalization of governing bodies, state-owned enterprises are expected to adopt high standards of transparency and corporate governance practices, which include regular reporting on business results and performance evaluation. In this way, the state as the owner gets a better insight into the business, which minimizes fiscal risks and improves the efficiency of the company.

In the Reform Agenda, it is clarified that the Corporate Governance Strategy, which will be adopted by the end of the first quarter of 2025, will provide clear guidelines on the ownership policy and management of state-owned enterprises, with the application of international standards and best practices.

The government expects that all these measures, along with the improvement of the regulatory framework and the professionalization of management, will significantly improve the business results of state enterprises and ensure their contribution to the sustainable economic development of Montenegro.

Better assessment of the impact of business operations on public finances

For better control of the work of companies, as stated in the Reform Agenda, it is planned to establish an efficient system of assessment, monitoring and reporting on the financial performance and fiscal risks associated with their operations. This system will ensure better control over enterprises that can potentially threaten the state budget, and provide tools for timely action.

"The fiscal risks that these companies may cause will be systematically assessed and monitored, with the publication of annual aggregate reports on the operations of state-owned companies, as well as statements on the fiscal risks that they may represent for the state budget," the document explained.

These reports will provide better insight into the financial condition of companies and their potential impact on public finances, thereby increasing transparency and accountability in the management of state resources.

As an integral part of this reform, risk management, internal audit and audit committees in state-owned enterprises also play an important role. Each of these companies, as planned, will establish an independent internal audit function and risk management systems, which will be aligned with internationally recognized standards and practices, as well as the EU Regulation on Internal Financial Control (PIFC).

The OECD guidelines call for the depoliticization of management boards

In the OECD Guidelines, in the chapter related to the composition and responsibility of the boards of directors of state-owned enterprises, it is stated that the state should ensure that these boards have the necessary powers, competences and objectivity to perform their functions of strategic direction, supervision over risk management and management control. Board members should act with integrity and be accountable for their actions.

"Mechanisms should be applied to avoid conflicts of interest that prevent a board member from objectively performing his duties and limit political influence on board processes. Politicians in a position to materially influence the operational state of a state-owned enterprise should not be board members. A predetermined 'cooling off' period should be applied to former politicians. Civil servants and other public officials may be on boards of directors provided they are appointed on the basis of professional merit and are subject to conflict of interest conditions," the Guidelines state.

It is stated that the boards of directors of state-owned enterprises should be assigned a clear mandate and ultimate responsibility for the success of the enterprise.

"The roles and duties of board members should be clearly defined by law, preferably through the law on companies. Board members should make decisions based on full information, in good faith, with care and responsibility, in the best interest of the company and shareholders, taking into account the interests of all interested parties," the Guidelines state.

It further states that boards of directors of state-owned enterprises should effectively perform their functions, review and guide corporate strategy, as well as supervise management based on broad mandates and shareholder expectations.

"They should have the power to appoint and dismiss the CEO, and to adjust management compensation levels to the long-term interests of the company and its shareholders. The composition of management boards should enable objective and independent decisions to be made, and all members, including state officials, should be appointed based on qualifications relevant to the sector and business profile of the company, with equal legal responsibilities," the Guidelines state.