IMPROVING THE GOVERNANCE OF STATE-OWNED ENTERPRISES IN THE ENERGY SECTOR
Why analyse the governance of the energy sector in SEE-9?
The energy sector has a crucial importance for any country, due to its status as a natural monopoly, the social sensitivity ofsocieties to any price increases (as popular protests against price-hikes across Europe at the beginning of 2022 haveshown111), and the large investments and financial interests at stake. At the same time, the State Capture Assessment Diagnostics tool identifies the sector112 as highly vulnerable to monopolization and hence prone to state capture risks. The countries from the region have faced multiple allegations for blocking gas market liberalization in favor of local oligarchic corporate networks and for the benefit of Russian gas suppliers.113 Thus, the sector becomes even more relevant to the energy dependent countries and unless properly governed it can undermine their independence and development. This justifies a closer look at the potential cases of energy corruption in South East Europe, to provide betterprotection from illicit internal and external influences.
The 2021-2022 rise in energy prices in Europe and globally, proved that good governance in the energy sector is a matternot only of energy security, but also of national security. However, most countries from the Southeast Europe region lack adequate energy security strategies, necessary to break the close interdependence between corporate and political interests. The main systematic governance problems, which could lead to significant losses of public wealth in the region’s energy sector are:
- Lack of strategic planning and coherent evidence based regulatory policy;
- Structural dependency on fossil fuels;
- Focusing of state and EU funding in large and non-sustainable projects, without derailed cost-benefit analysis or clear benefits for the society on the long term;
- Restricting free competition and excluding smaller players, though monopolization of certain segments in the hands of few well-connected companies (including the construction, maintenance and engineering of energy infrastructure);
- Financial mismanagement (including cross-subsidisation) resulting indebts of energy state-owned enterprises (SOEs);
- Political appointments in energy SOEs;
- Public procurement corruption risks due to use of non-transparent procedures, high level of single bidding, accepted use of SOEs’ internal public procurement norms and multiple allegations of bid rigging;
- Discrepancy between European principles, aims and commitments, and the national114
At the same time, substantial amounts of EU and national funding are foreseen to be distributed in both the Western Balkans and the SEE EU member states for the 2021-2027 period. This funding should be carefully monitored by energy regulators, competition and anti-corruption bodies, the civil society and the media, in order toavoid corruption, favouritism and fraud. EU level bodies, such as the European Commission, the European Anti- Fraud Office (OLAF) and European Public Prosecutor’s Office (EPPO) will play a key role in that regard.
EU funding for SEE member states
The European Union provided an unprecedented response to the coronavirus crisis though the adoption of the EU’s Recovery and Resilience Plan (2021- 2027). At itsheart is a stimulus package worth EUR 2.018 trillion. It consists of the EU’s long-term budget (Multiannual Financial Framework-MFF) for 2021 to 2027 of EUR 1.211 trillion, topped up by EUR 806.9 billion (EUR 750 billion in 2018 prices) through NextGenerationEU, a temporary instrument to power the recovery.115 Within this framework, several funds could be listed as having energy and green transitionfocus:
- The 2021-2027 Cohesion Policy (EUR 392 billion)116 focuses on five policy objectives, including a greener, low-carbon transitioning towards a net zero carbon economy. The net zero carbon economy objective is supported mainly through the Cohesion Fund (CF) and the European Regional Development Fund(ERDF).
- The Just Transition Fund, the first pillar of the Just Transition Mechanism (funded by ERDF and the European Social Fund – ESF)117, provides support for energy efficiency measures and closure of facilities involving fossil fuel production.118 The Just Transition Fund is estimated at EUR 19.2 billion, and is expected to mobilize around EUR 25.4 billion in 119
- Recovery and Resilience Facility, an instrument for providing grants and loans to support reforms and investments in the EU Member States;
- Horizon Europe, aimed to make sure the EU has the capacity to fund more excellence in research;
- Connecting Europe Facility, aimed to accelerate investments in Europe’s transport, energy and digital infrastructure networks;
- LIFE, aimed to achieve the shift towards a sustainable, circular, energy- efficient, renewable-energy-based, climate-neutral and resilient
Figure 5. EU programme funding as a share of 2020 GDP, in %
Source: EU funding: Bruegel, 2021; nextgeneration.bg; European Commission: Just Transition Fund, Horizon Europe 2020; REACT-EU; LIFE; Data on GDP: World Bank; Data on EU spending: European Commission.
Notes: For the Recovery and Resilience Facility 2021-2027 data includes Pillars 1 and 3 (Green transition and Smart, sustainable and inclusive growth). For LIFE, the amount displayed is the sum of EU contribution to each countries’ projects. For Horizon Europe (2021-2027) data is not available, data refers to predecessor programme Horizon 2020.
It is also important to note that the current and future planned EU funding related to energy, climate and greenactivities represents a substantial part of the 2020 GDP levels. In the four analyzed EU member states, for example, the Recovery and Resilience Facility 2021-2027 funds for Pillars 1 and 3 (Green transition and Smart, sustainable andinclusive growth) constitute between 2.3% and 3.75% of the 2020 GDP levels. REACT-EU (2021-2022) planned funds vary between 0.6% and 1.1% of the 2020 GDP levels.
The Modernisation Fund is another relevant instrument, which aims to support 10lower-income EU Member States in their transition to climate neutrality by helping to modernise their energy systems. The Fund will operate under the beneficiary Member States, in cooperation with the European Investment Bank (EIB), and the Investment Committee and the EC. The total revenues of the Modernisation Fund may amount to some EUR 14 billion in 2021-2030, depending on the carbon price.120
Figure 6. Modernisation Fund country budgets for 2021-2027, in EUR million
EU funding for the Western Balkans
For the Western Balkans, the foreseen funding relevant to the energy and green transition areas, could be identified in three major support schemes.
- The Economic and Investment Plan for the Western Balkans121 providing EUR 9 billion of grant funding, which is expected to mobilize additional EUR 20 billion for the region for the period 2021 – 2027 to support the long-term economic recovery of the region focusing on the priorities of the Union.
- The Commission’s Instrument for Pre-Accession Assistance III (EUR 8billion), which allocates 42% (or EUR 5.9 billion) from the funds to the priority of Green Agenda and Sustainable Connectivity for the period 2021-2027, which makes it the priority with the largest foreseen funding.122
- The Western Balkans Investment Framework (WBIF), which supports EU enlargement and socio-economic development since 2009, including projects inthe energy The framework finances infrastructure projects through grants and loans from participating financial institutions and 14 bilateral donors.123
WBIF total investment value, including co-financing (2009-) in the energy sec- tor as a share of 2020 GDP varies between 1% and 9% for Albania, Bosnia and Herzegovina,Montenegro and North Macedonia, and represents 18% on average of the 2020 government expenditure.
Figure 7. WBIF investment value (2009-) in energy as a share of 2020 GDP and government expenditure, in %
The IPA II funds dedicated to climate and energy also constitute between 2% and 7% of the 2020 government expenditure and around 1% of the 2020 GDP of the respective countries. This further confirms the need of careful monitoring of any future spending in the energy sector.
Public accountability and transparency of energy SOEs’ management
Key uncovered risks
Public accountability deficits in energy SOEs are visible in a number of cases, uncovered by investigative media reports, civil society reports or the audits of relevant public authorities across the SEE region. These issues contribute to a socio-political environment where financial mismanagement practices at SOEs are allowed to thrive and inefficient or damaging investment decisions are carried out. The absence of a solid legal framework and its consistent implementation are key factors that enable the limited financial transparency and widespread political meddling in the day-to-day management of SEE SOEs.
The OECD Guidelines on Corporate Governance of State-Owned Enterprises124 provide the key features of a solid regulatory framework that ensures efficient, transparent and accountable management of SOEs. While the sole existenceof a compliant legal framework does not in itself ensure the implementation of these rules, its absence provides a conduciveenvironment
Figure 8. Key uncovered governance risks for the management of the energy sector SOEs
Source: Center for the Study of Democracy, 2022.
for the lack of financial transparency and the political meddling in management decisions. There are a number of specific governance deficits for the four key governance risk categories that have been observed in the SEE-9 region (see Figure 9). These then in turn also impact public procurement integrity in the energy sector, which is one of the economic sectors worst affected by public procurement abuse in the region (discussed in a separate section).
Figure 9. Management risks in energy SOEs
Source: Center for the Study of Democracy, 2022.
EU membership does not necessarily coincide with lower governance risks in energy SOEs, as some non-EU member countries display a similar or even slightlybetter performance than EU members from SEE. In particular, Albania, Bulgaria, Croatia, and Romania show similar levels of financial transparency risk. Meanwhile,the risks related to political appointments show a high degree of severity across all countries, with the surprising exception of Hungary, where SOEs are more transparentabout their leadership. However, political appointments are an issue there as well. The following three subsections dive into the details of the four key governance risks.
Source: Research performed by R2G4P members.
Energy SOEs in SEE-9 are not transparent enough about their financial situation. The disclosed information is usually only partial, and it is often not provided in a timely manner, nor in an accessible way to the general public. Companies in a worse financial shape tend to be also less transparent. One way to improve their transparency is for them to go public, which has been the case for Romgaz and Hidroelectrica in Romania. After going public, they have begun publishing detailed reports in 2019 and 2020. Hidroelectrica has also included data on investment and development plans, as well as information on public procurement procedures and contracts. In Hungary, the MVM Group Ltd., which controls a significant part of the domestic electricity and gas distribution, publishes regular financial reports with cash-flow statements. Yet, not all of these reports, include data on public procurement.126 In another positive example, MOL Group, which is also a listed company, posts its financial statements and discloses the amount of shares each Board Member holds.127
While Hungary and some companies in Romania stand out as positive examples, there are major shortcomings in the rest of the nine countries. Albania, Bulgaria, and Croatia show relatively similar risk exposure, as they do not provide a great level of detail of the financial data of their SOEs. Financial data transparency remains particularly poor in Bosnia and Herzegovina, Montenegro, and Serbia. In Bosnia and Herzegovina, there is no information regarding business indicators, plans and results. The reporting on performance indicators is almost entirely restricted to annual business plans and annual reports, which are not readily available to the public.128 Meanwhile, although in Montenegro, SOEs are subject to the law on free access toinformation, which obliges them to proactively publish financial data on the salaries of officials, list of employees, annual reports, information on public procurement, publicregistries, etc. on their websites, this information is largely not available.129 For example, the main state-owned power generation and transmission company, EPCG, does not have its audit reports published since 2017.130 In Serbia131, even if some information on state companies’ business plans, number of employees, gross property value and older public procurement procedures have been made available, major concerns persist as these details are merely excerpts from the aggregated reports and are usually outdated.132
Appointment of CEOs and board members
The rules on the appointment of board members and other company leaders in energy SOEs are also unclear, especially when considering potential political influence. In some countries such as Croatia, there is even a membership fee or “party tax” whereas the appointed by (most commonly the ruling) political party board members are (unofficially) obliged to pay a significant part of their monthly salary to the party funds.133 Such appointees are more vulnerable to corruption risks as they aremore likely to accept bribes in attempt to recover the full size of their compensation.134
One of the consequences from the political meddling in the appointment of management boards in SOEs and regulatory authorities is the resulting lack ofprofessional expertise in the execution of difficult decisions in the energy sector. The widespread nepotism also contributes to an overall poor financial management and lack of transparency in decision-making. Hence, the business activities of SOEs inSEE-9 are often not in line with the companies’ objectives but serve the interests of other companies or individuals with strong political ties, at the expense of the SOEs’ financial performance. This has been the case, for example, of the Serbian state-owned power supplier, EPS135, as well as of the North Macedonian Energy Regulatory Commission where shareholders or former managers in private energy companies have been appointed as members.136 In addition, a former vice president137 of the regulator was appointed as the CEO of MEPSO, the state-owned power transmission company in North Macedonia, despite an objection to the decision by the country’s Anticorruption Commission.138 Romania is not an exception, with numerous allegations about the common practice of ruling political parties appointing party members on SOE boards.139
In Albania, the director of the state-owned electricity company OSHEE, Adrian Çela, was appointed as the leader of the Socialist Party campaign in Durres, for the parliamentary elections of 25 April 2021.140 Before leading OSHEE, Çela was Chairman of the Tender Commission in the Municipality of Durres. During this time, a lawsuit was filed against him by KLSH (Supreme Audit Institution) for abuses in public tenders.141 A second similar case is the candidacy of the director of the company KESH to become member of the Parliament, while he continued to exercise his function.142
In Bulgaria, the lack of transparency in the staffing procedures persists despite the adoption of the Law on Public Enterprises in 2019, which mandated education and experience requirements for appointment nominees, as well as a competition procedure for the Boards of Directors appointments in SOEs.143,144 Recent examples of politically tainted appointments refer to the selection of members and supporters of the former ruling party between 2009 and 2020, Citizens for European Development of Bulgaria (GERB), in the management boards of Bulgarian energy SOEs with 5-year terms, just before the 2021 election cycle. The appointments were announced in April 2021 without publishing detailed results of the carried-out selection procedures.145 In November 2021, the Minister of Energy from the caretaker government began a process of replacing the GERB-appointed directors and additional board members in the energy SOEs, which is likely to exacerbate even further the financial standing of enterprises. The replacement procedures were similarly non-transparent and avoided competitive appointments altogether, often leading to political battles in the boards of affected SOEs.146
An interesting example from Montenegro is the case of the President of the Board of Directors of the state-owned power supplier, EPCG, Djoko Krivokapić, who had a conflict of interest during his term, according to a decision of the Agency for Prevention of Corruption.147 During that three-year period, Krivokapić was both the president of the Board of Directors of EPCG and a member of the Board of Directors of Prva Banka, which is majority owned by the brother of the country’s President Đukanović. Mr. Krivokapić resigned from his post in Prva Banka, after the Agency for Prevention of Corruption passed its Decision on violation of Article 12 (Performing public functions in public companiesand public institutions) and Article 13 (Obligation to resign) of the Law on Prevention of Corruption. Furthermore, members of the Boards of Directors of SOEs were replaced, after a new government came into power in 2020. The new boards announced the introduction of stronger controls on financial operations and public procurement in order to prevent embezzlement that has been the subject of media investigative reports for years. The prosecution has filed criminal charges against former members of the government and the EPCG on suspicion of criminal association, abuse of power and illegal influence.148
The legal framework regulating the management of energy SOEs in the Western Balkans is not compliant with the OECD Guidelines on Corporate Governance of State-Owned Enterprises.149 The corporate governance regulatory framework is still under development in the region, although some improvements have been made in recent years. The EU member-states perform better in terms of applicable laws, however their implementation has also been assessed as limited and very slow.150 (see Table 2).
The often incomplete or fragmented or opaque legal setup for SOE management in SEE-9 provides a conducive environment for the thriving of financial mismanagement practices and other governance deficiencies. This in turn is a key contributor to the financial instability of SOEs in the energy sector and to the inefficient investment decisions and mismanagement of public funds. The non-compliance with the “Disclosure and transparency” principle of the OECD Guidelines presents a particular concern in SEE-9.
Table 2. Challenges to the application of the OECD Guidelines on Corporate Governance of SOEs
Regulatory framework relevant to the governance of SOEs
The law does not specify how SOEs should inform the public about the structure of their boards, investments made, or open tenders.
Bosnia and Herzegovina
2019 Law on Public Enterprises, developed with OECD support
Law on Companies applies
In place since 2012
In place since 2009
SOEs are subject to controversial provisions and requirements
Source: Research performed by R2G4P members.
In Romania, in 2017 and 2018 there were repeated attempts by the parliamentary majority at the time to exempt around 100 SOEs from corporate governance rules via legislative amendments. The Constitutional Court declared160 these amendments as unconstitutional but despite this ruling, the parliamentary majority revived the debates in 2018. An analysis made by the Fiscal Council concluded that the 2019 deterioration of SOEs’ performance indicators and their net profit after six years of growth, was at least partially due to this legislative turmoil.161
In Croatia, the contract whereby the national oil producer INA was sold to the Hungarian MOL162 was disclosed to the public only 10 months after it was concluded.163 No formal and institutional consultations were carried out regarding the Croatian government’s declaration of intent in mid-2020 to purchase INA back from MOL.
Regulation, financial state and investment decisions
The unhealthy financial state of energy SOEs
Most energy SOEs in the region are in a precarious financial position, struggling with losses, high debt exposure, and inability to complete their investment programs. This in turn is contributing to an aging asset base and a further erosion of their financial position. These financial difficulties are particularly pronounced in fossil-fuel-based companies that have struggled to cope with constantly rising CO2, coal and natural gas prices. The coal power plants are often the worstperforming entities in a SEE-9 country but their financial state also cascades through the system as more profitable companies subsidize the losses of financial laggards. The rise in gas and electricity prices in 2021/2022 has considerably improved the profitability of SEE-9 SOEs but these are temporary factors that are likely to only gloss performance short-term, making it even more difficult to carry out necessary financial management reforms in the medium term.
- Key financial indicators
Energy SOEs in SEE-9 show a varying degree of financial vulnerability164, revealed by their large debt exposure and high debt ratios,165 as well as low liquidityand falling current ratios.166 The key contributing factors are the strong politicization of the energy sector and a number of structural and governance deficits. The efforts of governments to keep energy prices artificially low to avoid a social backlash come atthe expense of the financial health and political independence of SOEs, as well as the impartiality of regulatory authorities across the region. Governments use SOEs as political tools and keep them afloat using subsidies, which in turn allows mismanagement practices to thrive and foster an unhealthy corporate culture, wherethe management of SOEs does not act in the enterprise’s best interest.
Some of the more extreme examples of poor financial performance comes from Albania, where energy SOEs are in a deep financial crisis. Albania’s electricity distribution company, OSHEE, has the worst quick and current ratios among the nation’s three energy SOEs, both standing at close to 0.3 in 2019167, indicating severe liquidity issues. It also has an exceedingly high debt ratio, which cascades into impacting negatively the finances of the energy producer, KESH, which faces delayeddebt repayments from OSHEE. The financial statements of KESH, OSHEE and OST (the transmission system operator) indicate that the liabilities between each other amount to ALL 69.6 billion (about EUR 568 million).168
Figure 11. Key financial indicators for selected Albanian energy SOEs
Source: CSD based on data from KESH and OSHEE annual financial reports.
Other energy SOEs in the region have also seen their debt ratios rise, such as NEK and Maritsa East 2 in Bulgaria (respectively the country’s state-owned electricity-holding and largest coal thermal power plant), albeit the situation is not as severe as the case of Albania. Most SOEs remain within the comfort zone of up to 0.6, both inEU and non-EU countries. Nevertheless, acceptable levels of indebtedness do notspell an overall stable financial health, as some of the SOEs with healthy debt ratios are making considerable annual losses and have short-term liquidity issues. Serbia’sEPS is a good example, with its current ratio declining towards 1 in recent years,indicating a mounting default risk, as current liabilities are close to exceeding currentassets.
Figure 12. Debt ratios for selected SEE-9 SOEs
Source: CSD based on data from KESH and OSHEE annual financial reports.
Short-term liquidity issues are much more pronounced, with many SOEs having a current ratio significantly below 1, indicating that current assets are not enough to cover current liabilities if they all come due simultaneously, increasing the risk of atechnical default. NEK in Bulgaria is among the weakest performers, with its current ratio declining consistently over the past years and reaching a low of merely 0.16 in 2020. Like in many other cases across the region, part of the poor financial health ofNEK is due to the decision to get involved in a large-scale geopolitical project – the failed construction of a second Russia – back nuclear power plant in Belene.169
Figure 13. Current ratios for selected SEE-9 SOEs
Source: CSD based on data from KESH and OSHEE annual financial reports.
With the exception of Hungary’s MOL, fossil-fuel and especially coal-based SOEs tend to underperform compared to hydro and nuclear power generation companies. The underlying reason behind this diverging performance is the higher variable production costs of fossil-based power plants, linked also to the rising prices of carbon emissions. For example, the lignite fired Mátra Thermal Power Plant (TPP) in Hungary has seen its losses accelerate since 2017, whereas its net annual loss at over EUR 120 million in 2020 was three times higher than in 2017.170 In the same way, the two worst-performing energy SOEs in Romania are the Hunedoara and Oltenita Energy Complexes171, which are coal-based electricity and heat producers. Meanwhile, the hydro and nuclear generators, Hidroelectrica and Nuclearelectrica, have seen their financial performance improve significantly over the past several years on the back of rising wholesale prices. Similarly, in Bulgaria, the Kozloduy nuclear power plant (NPP) is showing strong profitability, while the lignite Maritsa East 2 TPP, the biggest coal power plant in SEE, has accumulated total losses of more than EUR 700 million before the 2021/2022 price increases alleviated losses temporarily.172
The cross-subsidization of SOEs undermines the investment program of more profitable firms and poses a long-term financial risk to their balances. Cross-subsidization is often possible when several state-owned energy companies are consolidated under the umbrella of a national major holding structure such as the Bulgarian Energy Holding (BEH) or Hungary’s MVM. In the latter case, the acquisition of the Mátra TPP by MVM in 2019 has weighed on MVM’s finances, as the holding company had to pay off the outstanding debts of the Mátra TPP amounting to HUF 75.14 billion (EUR 213 million).173 Similarly, BEH has been covering the debt and losses of the struggling companies within the group. For example, BEH has been covering the debt, amounting to over BGN 100 million (EUR 51 million) annually, of the Sofia district heating company, one of the biggest debtors of the state-owned wholesale gas supplier, Bulgargaz.174 The holding company has also been buying ETS quotas on behalf of state-owned Maritsa East 2 lignite plant as it struggles to cover the carbon costs on its own power generation as the price of carbon has increased.
The poor financial performance of energy SOEs is often the result of two key factorseroding their profitability – financial mismanagement and artificially low regulatedenergy prices. The low quality of financial management is often related to: 1)excessive staff size linked to party-politically motivated job- creation; 2) overly generous remuneration in comparison to achieved results; and 3) the mismanagement of public procurement. Excessive company spending on staff andprocurement eat into the SEE-9 SOEs’ revenues, which are already suffering from artificially low regulated prices on the domestic market and the failure to collectpayments from customers (mainly households or other state-owned entities). Instead of addressing the root cause for the SOEs’ financial problems, however, the approachof most governments in the region is to subsidize the ailing companies, which perpetuates and deepens the problem by allowing corporate mismanagement practices to solidify as part of corporate culture. The rationale behind this approach has been the fear of socialbacklash against high energy prices, which leads to price control mechanisms and the widespread use of subsidies to prevent the economic collapse of the SOEs in question. This closes a vicious circle of growing inefficiencies due to ignoring of market principles.
Figure 14. Common path dependencies affecting the operation of SEE-9 SOEs
Source: CSD, 2022.
Misguided Regulatory Policy
Maintaining energy prices artificially below market levels is a common factor eroding SEE-9 SOEs’ revenue base. The key motive for maintaining such prices is to gain politically by keeping prices artificially low for households and social institutions. Governments maintain prices fixed by installing a regulated market that may encompass the whole domestic market, or key segments such as households and some business consumers, thus sometimes functioning in parallel to the free market. In a regulated market, the regulatory authority sets the prices instead of supply and demand dynamics on power and gas exchanges. Hence, exercising political influence on the regulatory authorities, mainly though the appointment of their members, is a key tool that SEE-9 governments use to control energy prices. In this context, delaying or in some cases even reversing the market liberalization process is used by the governments to maintain political control over energy pricing (see Box 11).
SEE-9 SOEs in power, gas and heating distribution are particularly affected by price controls, as the artificially low regulated prices and the inability to collect payments from some customers erode their revenue bases. In turn, their losses negatively impact the whole sector as unpaid liabilities lead to cascading financial difficulties in other companies including transmission operators and energy producers/suppliers.
The overhead reduction program launched by the Hungarian government in 2013 has significantly reversed the market liberalization process. The ultimate goal of the program was to control the rise of household consumer prices by reinstating regulated pricing for electricity, heating, gas and other utility retail services and ultimately, to enable the re-election of PM Victor Orban in 2014. This move came on the back of an intergovernmental agreement with Russia for reducing the price of gas imports under the long-term supply contract, which enabled a cut in domestic tariffs. The 2021/2022 Russia-incited energy price- hike for Europe, shows how such agreements turn into a political leverage tool for the Kremlin. A key step to implementing the program was a legislative change175 that gave more powers to the national energyregulator, MEKH, while reducing its political independence. A political appointment at the heart of the regulator had an instrumental role. Over 2013-2020, when the Parliament increased the powers of MEKH, the institution was presided by a former leader of the local office of the Fidesz party in Szeged.176, The legislation empowered MEKH to issue regulations on electricity and gas system tariffs, which can only be challenged in the Constitutional Court.177 Following the implementation of the overhead reduction program, the Hungarian companyFŐTÁV, dealing with district heating in Budapest, saw a sizeable 25% drop178 of its revenues compared to the 2008-2013 average.179
In December 2021, in view of the energy crisis in Europe and skyrocketing electricity prices, the energy regulatory authority in Bulgaria, EWRC, published a report assessing the new market trends and proposing an upward revision of domestic regulated electricity prices by 11.5% from January 2022. Immediately, the newly elected Parliament voted a moratorium on prices, in direct violation of the independence of the regulatory authority, citing EWRC’s close allegiance with the previous ruling party, GERB, as a key motive for the price increase. This move was followed shortly thereafter by the replacement of the members of EWRC and the introduction of legislative reforms regarding the functioning of EWRC, as well as other regulatory bodies. Such politically-motivated changes in the regulator have long tradition in Bulgaria and have resulted in serious state-capture pressures and the reduction of competition inregulated energy markets and beyond.180
Keeping artificially low regulated prices weighs heavily on the profitability of SOEs.The national governments in SEE-9 usually resort to two key strategies to offset thisfinancial pressure and to prevent the companies from defaulting:
1) direct state aid or 2) the redistribution of the profits of more successful SOEs to struggling entities. The provision of state aid often takes the form of direct cash injections, providing a loan with preferential terms, or debt write- off (see Box 12 on a case from Serbia).
Regardless of the form of government financial support for SOEs, there is one keycommon negative impact. The confidence of SOE management boards that public authorities will always step in to support the company in times of financial difficulty means that bad financial management practices are allowed to persist. So far,the efforts to tie EU or state aid provision with company restructuring plans have hada limited effect in SEE-9. For example, the Hunedoara and Oltenita Energy Complexes have received state aid in exchange for company restructuring. However,both of the cases have received criticism from the European Commission – respectively for constituting illegal state aid because they gave the company an unfair economic advantage181 and for a flawed restructuring plan, which did not ensure a sustainable decarbonization path for the entity.182
Srbijagas, the company dealing with production, supply and trade of gas in Serbia was struggling with severe debt issues until 2019, when its debt ratio reached a high-risk point of 2.5. Similar to other SOEs in SEE-9, its profitability was suffering from selling at artificially low prices and failing to recover payments from its customers. Nevertheless, its debt ratio dropped sharply in 2020 to a healthy 0.4, while short-term liquidity also improved. The reason for the improvement was that the Serbian government wrote off the company’s debt amounting to EUR 1.2 billion, converting the debt into capital.
Figure 15. Key financial indicators for Srbijagas
Source: Calculations based on company annual financial reports.
Weak financial discipline is a key factor that leads to excessive operational costs and hinders the profitability of energy SOEs. Apart from the mismanagement of publicprocurement, to be discussed separately, some of the most prominent financialmanagement issues identified are related to the maintenance of an excessive staff size and an overly generous remuneration.
The economic consequences of the financial mismanagement of energy SOEs weigh on taxpayers as SOEs do not contribute adequately to the state budget. In addition, governments need to allocate large subsidies and other forms of state aid to theailing companies without a sound economic assessment on how to restructure the companies and place them on a more sustainable financial basis. Imposing stricter competition rules and improving SOE’s transparency are a key step towards escaping this vicious circle. Romania provides a somewhat positive example, where pressure on the national government to implement EU competition law improved the transparency of SOEs, as well asincreased the independence from political influence of the companies’ management boards. The improvements in the regulatory environment have coincided with a gradual improvement of the financial performance of energy SOEs in the pastdecade.
A case from Bosnia and Herzegovina showcases well the political strings attached and corruption pressure that often come with employment opportunities at energy SOEs in SEE-9. Amir Zukić, the Secretary of the conservative Bosniac party SDA, was allegedly involved in trading with job positions at Elektroprivreda BiH. According to investigative media publications, the price for the job positions in the energy SOE ranged around EUR 8,000 – 10,000 and were conditional on become a member of the SDA party.183 This particular case, provides an example of extreme mainstreaming of political influence in SOEs’ day-to-day operations.
Political influence on company management
Maintaining artificially low prices to avoid a social backlash and supporting loss-making companies to avoid an increase in the unemployment rate serves political objectives at the expense of the financial health of energy SOEs. Political influence on the regulatory authorities leads to three key risks:
1) instating artificially low regulated prices; 2) creating a situation where conflicts of interest thrive; 3) eroding market competition.
Maintaining artificially low prices is often used as an instrument for tackling energy poverty in SEE-9 instead of more sustainable and effective measures such as targeted social support for energy poor consumers and incentives for the introductionof energy efficiency measures and the adoption of renewable-based decentralized energy supply solutions. Compared to the regulated prices approach, however, such measures require a long-term strategic vision for the development of the energy sector and do not provide immediate results, and hence politically favorable outcomes in the short run. As a result of the preference for direct political involvement in regulatory matters in SEE-9, the market rules can become tailored for well-connected market players, compromising the efficiency and integrity of decision-making and stifling innovation. The undue advantage could be to the benefit specific private companies, at the expense of the interest of SOEs and the taxpayers (See Box 14).
Political influence on the regulator could also be directed towards maintain their dominant or monopolistic position on the national market, thus allowing politicalcontrol over outsized financial flows outside the rules of public procurement. Historically, SOEs in SEE-9 have been vertically integrated entities controlling production, transmission and distribution of energy on the domestic market. The unbundling of these entities across the region, and the encouragement of new market participants to enter the sector has been a key element of aligning national energy policies with the EU. An independent regulator is a key guarantor for the practical implementation of the unbundling process and for the development of market competition, leading to better outcomes for consumers. The lack of independence of the energy market regulators from political influence risks that they turn a blind eye to SOEs that abuse their historically dominant position on the national market suppress private sector competitors.
Tomislav Jureković, the president of the Management Board of Croatia’s energy regulator HERA, was allegedly under the influence of Josipa Rimac, a member of the Croatian ruling party, HDZ, receiving bribes of some HRK 40,000 monthly (about EUR 5,000) over the2017-2019 period. In return HERA gave the status of privileged electricity producer to the company CEMP, an investor in the Krš-Pađene wind farm. This allowed CEMP to sell electricity to HROTE, a SOE purchasing electricity from renewable energy sources, at more than double the standard price for a period of 25 years.184
The appointment of Natasha Veljanovska as member of the energy regulator of North Macedonia, raised concerns about a potential conflict of interest, as she had previously served in the cabinet of the Deputy Prime Minister, Kocho Angjusev, who in turn has business interests in the energy sector.185 In particular, Angjusev is the CEO of FERO INVEST LLC, a company active in the electricity sector with 25 small hydro power plants.
In Bulgaria, the Energy and Water Regulatory Commission (EWRC) and the Commission for Protection of Competition (CPC) have seen theirindependence eroded by political meddling. One strategy has been to keep the members of these regulators in office, years beyond theirterm.186 One example of how such instruments of political pressure play in the government’s hands has been a complaint by the private company Overgas to the EWRC regarding the abuse of market power by BEH. As a result of the complaint the European Commission launched an investigation in 2013 that revealed BEH had been breaching EU antitrust rules. The European Commission found that BEH used the dominant position of its subsidiary Bulgartransgaz over gas transmission infrastructure to restrict the access of private companies in favor of another of its subsidiaries – Bulgargaz, the state-owned gas monopoly incumbent. However, only a limited number of companies in SEE-9 have the capacity to pursue their interests on the European level. The small share of complaints reviewed by the EWRC that were then submitted to the CPC for investigation in Bulgaria (4 out of 30 complaints submitted between 2019-2020) demonstrates the need for easier recourse to EU action.187
The precarious financial situation of SOEs in the SEE-9 has undermined their ability to invest in the maintenance and modernization of existing infrastructure and in new projects that improve their performance. Across Central and Eastern Europe, the energy transition process towards decarbonization requires an increase in the level of investment in the energy sector infrastructure above and beyond the investments necessary for simply maintaining its current capacity.188 This represents an important challenge for SEE-9 SOEs and a significant risk that the additional funds, which will be invested in the next decade, including such provided by the EU, might be wasted within existing and new state capture networks.
The financial constraints of SOEs in combination with the high ambition for the decarbonization and the modernization of the sector in SEE-9 require a consistent long-term investment strategy based on а comprehensive cost/ benefit assessment. State and EU funds play a key role in providing financial support, as well as a strategicdirection for the planned investments. The lack of a strategic vision in the national policy frameworks of SEE-9 countries and the absence of operational strategies with specific targets and priority investment focus areas contribute to the ad-hoc nature of SOE decisions. Most often, SOEs provide limited, sporadic or no information about their investment plans. Even in Hungary, where SOEs publish more detailed information on a regular basis, there is still no quantitative assessment of the specific investment projects. One positive example comes from Croatia, where Hrvatska Elektroprivreda d.d. (HEP) has developed a detailed 2030 investment strategy aiming at a flexible and sustainable production portfolio, aligned with the Integrated National Energy and Climate Plan. The strategy further includes specific steps for itsimplementation.189 The company adopted stricter corporate rules regarding transparency, timeliness, and accuracy of disclosing financial information as required by its listing on international capital markets and the need to attract the interest of potential investors.
Some of the largest, and hence most risky, investment projects in energy SOEs in SEE-9 are the result of intergovernmental agreements with foreign states, most notably with Russia and China. Such projects reinforce the geopolitical influence of such non-EU states and are often associated with domestic political andeconomic networks and corruption risks. The corruption risks of such projects have increased exponentially, as the Kremlin war in Ukraine has widened the rift between the EU and non-democratic third countries. The economic rationale of such investment projects often comes after geopolitical considerations and has typically been misaligned with national and EU energy and climate security objectives. The Russia-led TurkStream project (see Box 15) is a prime example in this respect. Affecting Bulgaria, Serbia, and Hungary, it has benefitted from and contributed to the further entrenching of oligarchic networks of influence consisting of both Russian and local private interests with close ties to the respective incumbent governments. These networks have pushed for the development of the project with the expectation that companies linked to them would receive lucrative (overpriced) public procurement contracts. It has resulted in a number of energy sector governance deficits. Moreover, in many cases such large infrastructure projects have become a keyfactor undermining the financial stability of SEE-9 energy SOEs by locking them into unprofitable investments that also go against their own strategic interests and increase their debt burden in the process.
Chinese investments in SEE-9 have also often been inconsistent with EU technical standardization and/or with the EU acquis on competition and publicprocurement. Environmental regulations have also often been ignored or projects havenot been compliant with the overall policy of decarbonization and sustainable growth. The increase of China’s economic footprint in SEE-9 has coincided with adeterioration of governance standards in the region. National governments, particularly in the Western Balkans, have provided Chinese contractors withpreferential treatment and state aid in the form of tax exemptions and the circumvention of labor standards. The more indebted a SEE country is to China relative to its GDP, the higher the likelihood that China leverages existing governance deficits to expand its economic and political influence.190
In many cases China-led investment projects in SEE-9 have reinforced national coal industries.191 The lignite-fired Stanari power plant in Bosnia and Herzegovina is a case in point. The EUR 600 million project, financed mainly by the China Development Bank, benefits from preferential regulatory treatment. National legislation has been changed to enable the transfer of concession rights for the nearby coal mine to the Energy Financing Team (EFT), which is developing the powerplant project. The company also gained an exemption from coal mining fees and areduction for the coal power generation concession fee from 3.6% to 0.2%. A Chinese company, Shanghai ElectricPower Engineering, was also the main contractor for the Možura wind farm project in Montenegro, which was marred by a corruption scandal linked to the absence of acost-benefit analysis. The concluded contract for the wind farm provided much higher subsidies than warranted for the project, implying a significantly higher than normal electricity production costs for the project worth EUR 90 million.192
The lack of transparency in the use of energy SOEs’ funds is another serious corruption risk. Such risks were at the heart of claims in 2021 that the Bulgarian Electricity System Operator (ESO) planned to allocate EUR 261 million from theNational Recovery and Resilience Plan (NRRP) to a contractor that had already concluded a framework agreement with ESO and that had been implicated in a scandal linked to receiving preferential treatment from the state-owned transmission firm. A former employee of the contractor, was the CEO of ESO at the time of the negotiation of the NRRP investment.193 A similar case in Srbijagas revealed that aspecific company with strong political ties was awarded the contract for the construction of the Belgrade-Valjevo- Loznica gas pipeline without a tenderprocedure.194
TurkStream in Bulgaria195
From its onset, the Kremlin designed the South Stream, and its successor the TurkStream pipeline, to serve its geostrategic interests in Europe and to further entrench its existing state capture networks and influence in SEE-9. The TurkStream project consists of two pipeline strings. The first delivers natural gas directly to the Turkish market, while the second enters into Bulgaria on its way to Serbia, Hungary, and Austria. Ultimately, it provided the Kremlin with the possibility to circumvent transit through Ukraine and to strengthen its dominant position on gas markets in the SEE region, thus enabling its war in Ukraine.
In January 2019, the Bulgarian gas transmission system operator (TSO), Bulgartransgaz, decided to build the Bulgarian leg of TurkStream after the shippers (Gazprom and the Hungarian-Swiss trader MET) committed to reserve 100% of the offered capacity on both the Turkish-Bulgarian and the Bulgarian-Serbian borders for a 20-year period.196 Bulgartransgaz estimated the costs of the new infrastructure at around EUR 2.4 billion with most of the funding coming directly from the Bulgarian TSO. The latter will be compensated from the future transit revenues from TurkStream, with 4.1% interest rate to be covered additionally by Bulgartransgaz. In addition, Bulgartransgaz would have to spend additional EUR 750 million in operational costs over the next 20 years of the transit contract. Gazprom will be paying transit fees worth around EUR 170 million per year,197 which is 70% more than the annual transit fee revenues that Bulgartransgaz used to receive from shipping Russian gas along the Transbalkan pipeline coming from Ukraine. The total transit revenue for the whole contractual period would bearound EUR 3.6 billion, which means that the project would break even only after around 15 years of operation.198
The Bulgarian government was also forced to forgo its ship-or-pay transit agreement with Gazprom valid until 2030 with guaranteed revenues of more than EUR 700 million until 2030 in exchange for the TurkStream transmission contract. Hence, the actual profit from the TurkStream pipeline could be lower than the one from theprevious agreement through Ukraine where the Bulgarian transmission operator had only small operational and maintenance costs.
The construction of the TurkStream pipeline demonstrated a number of man- agement deficits, including the lack of public consultations and a detailed cost-benefitassessment of the project, as well as public procurement, environ- mental, and labor irregularities. TurkStream was constructed in Bulgaria in a year’s time in 2020 by aconsortium led by the Saudi company ARKAS, with no prior experience on thisparticular market in Europe. As it later turned out many of the financing institutions and the sub-contractors for the implementation of the project changed to include Russian entities. The latter are likely to end up on US and EU sanction lists after the start of the war in Ukraine, considerably increasing the financial viability of the project in the long-run, which in turn would undermine the financial standing of the investorBulgartransgaz.199
The convoluted and opaque procurement process for the choice of an engineering, procurement, and construction (EPC) contractor lacked transparency and the tenders for bookings on the new pipeline have been pre-designed in such a way as to comply with EU rules on paper without guaranteeing real competition for bidders. Despite Bulgarian authorities’ claim that they precisely followed EU public procurement rules, no major company with experience in Europe applied.
The Minister of Energy in the Caretaker government between April and November 2021, Andrei Zhivkov, demanded publicly that the Bulgarian Energy Holding dismissed Bulgartransgaz’ Board of Directors following a report of the energy regulator revealing that Bulgartransgaz had accumulated more than EUR 0.5 billion in debt for the construction of TurkStream, increasing the company’s total debt to above EUR 2 billion. Moreover, the Bulgarian SOE failed to meet certain regulatory requirements, with some clauses of TurkStream contracts missing mandatory authorizations.200
PAKS II NPP in Hungary
A similar case in Hungary involves the project for the construction of the Paks II Nuclear Power Plant Units 5 and 6, with two new nuclear reactors (1.2 GW each) by the Russian company Rosatom for a total cost of EUR 12.5 billion. With current nuclear capacity in Hungary standing at 2GW, or over a fifth of total installed capacity in the country201, the potential increase to 4.4 GW upon completion of the project would mean that Russia would play an increasingly dominant role in the national power sector, which creates major energy security risks.
This project has been under development since the late 2000s (approved by unanimous parliamentary vote in 2009). Nonetheless, there have been no economic analyses of potential alternative options and the government failed to deliver evidence that the project would be profitable. In 2014, Hungarian Prime Minister Victor Orbán and Russian President Vladimir Putin signed an intergovernmental agreement about the construction of the new units, outlining the capacity of the reactors and the financing scheme, which essentially relies almost fully on Russian capital. A loan from the state-owned Russian bank, VEB (under EU and US sanctions after the start of the war in Ukraine), with a particularly high interest rate (4.5% during the implementation phase and 4.9% thereafter) is set to cover 80% of the total cost.202 The deal was a major surprise for many, as it had been prepared in total secrecy, without any public debates, lacking administrative and industrial justification. The management of the project has also been marked by financial deficits.
The procurement contract was awarded to Rosatom through a non-transparent and non-competitive tender procedure, essentially via bilateral closed-door negotiations only considering Rosatom as the main contractor. Moreover, the government of PM Orban resorted to extreme legislative measures to shield the Paks II project from public scrutiny, as key details from the contract were made secret for 30 years. The non-disclosure was enshrined in a law passed in 2015.203 The law cited unspecified national security interests and the protection of intellectual property rights in general as grounds for the blanket restriction that left no discretion for data controllers andrendered the option for judicial review of any refusal to gain access to information meaningless. The same year, the European Commission started an infringement procedure of the non-transparent procurement contract, which, however, was quicklyclosed in 2016. Although in 2019 parts of the contract became public, the Termination clause204 is still not available.
Meanwhile, hardly anything is known about the management of the construction works. The Paks II project has been directly controlled by the Prime Minister’s Office, taking it entirely out of public scrutiny. The government commissioner responsible for Paks II argued that the contracts oblige Rosatom to deliver turnkey blocs by the deadlines, thus the risks on the Hungarian side are minimized. Given the problems with Rosatom’s own projects (Baltic I, the Leningrad blocs, Novovoronezh II) and the weak Hungarian nuclear project management record, and the complexity of the project in terms of permits and other legal aspects, the prospects for cost overruns and significant delays in the commissioning of the project remain very likely. Paks II hasalready suffered considerable setbacks. By the end of 2020, the preparatory groundwork had been started and EUR 120 million had beendrawn down from the Russian loan. While the initial completion date was set to 2023, in late 2021 the construction license for the project was delayed by the national Atomic Energy Authority and the expected commissioning date was re-set for 2029. With the continuing war in Ukraine, the financial risks for the project increase. Corruption risks are also likely to rise, as Russian companies are likely to seek ways to circumvent imposed sanctions, trying to draw the Hungarian government in complicity in the process.
Countering governance deficits in the energy sector public procurement
Understanding public procurement corruption risks
Public procurement corruption in energy SOEs in SEE-9 typically involves the steering of a particular contract to a favored bidder. This is achieved by either avoiding competition or by tailoring technical specifications or sharing inside information about the application process. Misconduct could occur during all critical decision points in the procurement process – planning and advertisement of the call, proposal submission and selection, evaluation of the offers, contract negotiations and the actual implementation. Research has highlighted that misuse will not be eliminated by formal regulations alone, though these can help reduce risks. Yet, there is a need to also better understand the methods used for public procurement corruption in energy SOEs in order for this phenomenon to be tackled.205
As a first step towards analyzing the pre-conditions for procurement infringe- ments, it should be noted that the energy sector is particularly vulnerable to corruption and mismanagement, due to:
- The sheer size of the projects and the significant economic interests at stake;
- (Often naturally) lower competition and the monopolization of certain segments of the sector (including the construction, maintenance and engineering of energy infrastructure);
- Lack of transparency, public awareness and independent monitoring of the energy SOEs, coupled with limited access to information (sometimes due to reasons related to national security);
- Technical complexity of the sector.
Furthermore, as the analyses and practical examples have shown, the energy sector in SEE-9 is characterized by:
- Prevalence of non-transparent procedures;
- Relatively high level of single bidding;
- Accepted use of SOEs’ internal public procurement norms and rules, at the expense of using more general public procurement law regulations;
- Evidence of bid rigging.206
Thus, rigorous monitoring of the procurement integrity should be applied on energy SOEs in SEE-9. These monitoring mechanisms could be government-led (e.g. integrity plans based on a self-assessment of public institutions, the Romanian PREVENT system, etc.), or CSO-led (e.g. Opentender.eu).
Public procurement risks in the energy sector in Montenegro are assessed as part of the general area of risk “Financial planning and management” in the integrity plans, prepared by the public entities in the country. The Agency for Prevention of Corruption analyses the plans and makes recommendations for further policy improvements. According to the latest available 2021 report, the highest level of implementation of measures was achieved in the area of “Financial planning and management” (83.1% of measures were implemented), aswell as in “Management and governance” (82.4% of measures). The Agency further highlights the most common risks in the field of public procurement, according to the integrity plans – insufficient transparency, illegal influence, possibility of giving preference to certain companies through biased scoring (clientelism, nepotism, cronyism) or conflicts of interest, adjustment of technical specifications to the interests of certain companies, non-compliance with prescribed procurement procedures, etc. 207 The OECD Competitiveness Report for South East Europe 2021 confirms the benefits of applying corruption risk assessment (integrity plans).208
In the SEE-9 energy sector, there is evidence for substantial integrity gaps in public procurement. These gaps have undermined the principles of free competition and have eroded the trust in public institutions. See Figure 16 for a summary of the key public procurement irregularities observed in the energy sector of the region.
Figure 16. Public procurement irregularities observed in the energy sector in SEE-9
Source: CSD, 2022.
Use of restrictive tendering procedures and single bidding, resulting in higher cost for society
One of the most common corruption risks in the energy sector public procurement in SEE-9 relates to the use of restrictive tendering procedures, especially in the Western Balkans countries. For example, in Albania procurement procedures are conducted frequently with the participation of a single bidder not due to the lack of interest, but because the contracting authority has formulated the criteria in such a way as to preclude the entry of any other company except the predetermined winner. Open Data Albania identified 2682 cases of public procurement tenders that have been conducted since 1 July 2015 with only one operator participating in thecompetition209. Another alarming fact was that in 2017 a total of 31.8% of all procurement procedures in Al- bania were negotiated without prior announcement.210 The situation gradually improved after that, and the negotiated procedures withoutprior publication were reduced to 3.3% of the total awarded procedures in 2021.211 Moreover, according to the Albanian Law on Public Procurement 162/2020, a modifica- tion of the tender value after the conclusion of the initial contract is allowed. Thus, companies that won tenders because they submitted lower financial bids, often requested and received increases of the contract value of up to 20% later on, justified by unforeseen costincreases. Similarly, in North Macedonia some of the largest procurements212 were carried out through a nego- tiating procedure without a prior announcement.213 Meanwhile, Serbia utilizes a centralized public procurement system, introduced in 2012, permitting the signing of framework agreements with suppliers.214 Such aprocedure tends to favor the bigger players on the market, and might artificially lower competition in bidding.215 The law in these situations prescribes that the procedure shall be divided into lots, so that small and medium-sized companies might also participate. Still, there is lack of monitoring and assessment of the implementation of this provision.216 Although the relevant anti-corruption authorities are legally tasked with overseeing the legislative process in Serbia, the Anti-Corruption Agency stopped publishing its opinions in the area of public procurement in 2018.217 At the same time, the average number of bidders in 2019 fell to 2.5 down from an average of 8.5 per public procurement contract 15 years ago. Moreover, in 55% of the cases theauthorities received only single bids.218 These numbers show that the level of competition in public procurement in Serbia has gone down to a record low level, whichhighlights the lack of trust of the bidders in the public procurement system, and isindicative of an increased corruption risk.219
In North Macedonia, SV-Invest, a company, newly-formed in 2016 saw a quick rise in profit and revenues as it began winning major contracts from the REK Bitola coal plant complex. The company got its first tender in 2018 in a direct negotiation procedure, with the contracting authority citing emergency needs in order to bypass open tender legal requirements. The relationship between the plant and the contractor expanded from cleaning mining byproducts to a more lucrative renting of digging equipment. In 2018, the opposition accused REK Bitola’s management of awarding procurement contracts to SV-Invest due to the company’s close ties with the family of the Prime Minister Zoran Zaev. Although in 2021, SV-Invest declared insolvency, it was later revealed that a new company called Novomatriks has replaced SV-Invest in receiving most of the contracts from the coal plant. Both companies are registered on properties owned by the same person, and Novomatriks is owned by a former manager in SV-Invest.222
In Serbia, Transnafta a.d. contracted services without going through a tender- ing process, for the total amount of around EUR 257,000 for 2019 and 2020 (recipients included: Jugoinspect JSC, Belgrade; NIS JSC, Novi Sad and “DDOR Novi Sad”).223 The State audit institution analyzed the case and con- cluded that there has been a violation of the Public Procurement Law as it did not foresee any exceptions allowing such procedures. The procured services involved fire protection, quality control of crude oil facilities, and insurance.224
SEE-9 EU member states also exhibit a substantial share of public procure- mentcontracts in the energy sector signed after negotiated procedures without publication orafter a direct award. A review of the public procurement from 2015 to 2020 in all energysub-sectors in Romania revealed that there was a preference of the contractingauthorities to award contracts through less-transparent procedures. This is particularly evident in the electricity sector, where 42% of the contracts awarded in these five years used the negotiation without prior publication procedure. In the oil and gas sub-sector, the majority of contracts (34%) were awarded via open procedures, followed by negotiated procedures with bidders (31%). The average number of received offers perprocedure was three for both the electricity and the gas and oil sector. In the electricitysector, 19% of contracts were won by single bidders, while this share stood at 25% in the oil and gas sector. The overwhelming majority of contracts were awarded using the lowest price criterion (95% for electricity and 96% for oil and gas), thus avoiding the evaluation of qualitative, social and/or environmental aspects of tenders.This could lead to sub-optimal contract conditions and procurement results and fails totake into consideration the full complexity of energy projects, including theirenvironmental, social and other impacts. It should also be noted that in Romania a large number of contracts are signed as low value proce- dures, which could be awarded directly, without an open procedure.225,226
Figure 17. Types of procedures used in the energy sector in SEE-9 EU countries (2011 – 2021)
Source: Procurement data collected by GTI from the public procurement authorities’ webpages.
While in Hungary most contracts are awarded in an open competition procedure among bidders, there are still a significant number of awards where the competition isrestricted or completely eliminated. In the last 10 years, 67% of procurement contractshave been open, while more than 20% were negotiated without publication or had some other form of competition restrictions in place. In contrast, when analyzed by the value of the contracts, only 12.3% of the tenders involved restrictions.227 The introduction of e-procurement in 2018 made Hungary’s procurement system more transparent.228 Yet, the high proportion of single bidding is still a problem (39% of the total in 2018 and 27% in the energy sector229). Furthermore, most procurement contracts valued below the EU threshold230 are organized through special procedures with restricted availability.231
Lack of transparency, nepotism and favoritism are among the corruption risks that have haunted public procurement also in Bulgaria for years.232 Since 2006, bribes for public procurement contracts started to show signs of oligopolization and later – of state capture, as fewer and fewer companies had any access to the publicprocurement market.233 For example, the share of public authorities (buyers) in Bulgaria that provided over 60% of the value of awarded contracts to a single supplier is about twice as much as the respective share in Romania, Italy and Spain.234
A case in point of corruption risks in Bulgaria is the operation of a company in the Bulgarian energy sector that received more than EUR 204 million in the form of public procurement contracts between 2017 and 2020. EMU, the beneficiary, has been awarded these publicprocurement contracts, despite the fact that it bid, on certain occasions, prices 47% higher than its competitors. EMU delivered a number of services to the Electricity System Operator – one of the largest state-owned enterprises in Bulgaria.235 Some of the contracts were concluded through single-bidder framework agreements whose budget has been consequently surpassed by a large margin.236 In June 2021, the- then caretaker government declared that the case would be investigated by the State Financial Inspection Agency.237 In addition, in June 2021, ESO published a new tender for EUR 138 million that seemed to be designed to fit EMU’s profile. The tender concerned activities that had previously been awarded exclusively to EMU, making the company the only competitor with relevant experience. In addition, following previous patterns and contrary to legal standards, the tender documentation allowed yet again the signing of additional contracts on top of the framework agreement, opening the door to potentially exceeding the tender budget.238
Tailored technical specifications
Another common malpractice in the energy sector public procurement in SEE-9 is thetendency of SOEs to tailor the technical specifications so as to fit the experience of a specific bidder. To guarantee the success of this method, SOEs in the region useconsultants related to the pre-defined winner of the bid.
An investigation by the EU anti-fraud agency, OLAF, revealed that between 2010-2014 many public procurement procedures in Hungary were tailored in favor of the company Elios Innovatív Ltd. (mostly for the provision of LED lights at higher than market prices). OLAF noted that a whole network of companies and consultants with ownership or personal links to Elios were involved in the fraudulent scheme. Many calls for proposals were drafted so that only this particular company was eligible to tender. To create the illusion of competition, alternative offers were submitted from “straw” bidders. The investigators discovered that these alternative offers were created on the same computer as the winning bid, providing 7% or 12% higher prices so that Elios’s offer would win in each procurement. Furthermore, some of the external consultants who prepared the procurement offers had direct connection to Elios. The most prominent player was Sistrade Llc., owned by Endre Hamar, who was a co- owner of Elios until 2014 and was a business partner of István Tiborcz. Tiborcz was the CEO of Elios between 2009 and 2013 and its owner between 2014 and 2015; he is also the son-in-law of Prime Minister Viktor Orbán. Following the OLAF report, the Public Prosecutor’s Office started an investigation in 2018, but the police suspended it citing the lack of evidence of a criminal offense.
In 2019, the government removed the invoices for the projects carried out by Elios from the bundle of financial documents to be submitted for review to the EU, effectively sabotaging further investigation.
In Bulgaria, as in other SEE-9 countries, the use of tailored technical specifications isoften premised or excused by the insufficient administrative and technical capacity of contracting authorities. This has led to an increased tendency to outsource the process of tender documentation preparation to external consultants which, in turn, increases the risk of informal agreements (collusion) with the potential suppliers. In addition, the volume of public procurements in Bulgaria and in the other SEE-9 countries has increased exponentially in the past several years, increasing corruption risks associated with the many more tenders.239
Cancellation of tenders and disqualification of companies
The assessment of corruption practices in public procurement in Croatia240, Albania241 and North Macedonia242, has revealed another concerning practice in SOE tendering in SEE-9 – the unjustified cancellations of tenders and disqualifications of companies. The alleged objective is to eliminate competing bids and to ensure that the “designated”winner signs the contract. For example, often when a politically-connected company provides a price offer, which is higher than the one of any of the other competitors, the latter are disqualified on some (often minor) technical or administrative grounds, leaving the higher offer to legally win. Sometimes, if a suitable ground fordisqualification cannot be found, the whole procedure is cancelled and re-launched with different technical requirements, tailor-made for the “designated” winner. In some cases, no specific reasons were given. In addition to rigging the process of free competition in public procurement, with time such practices also lead to unnecessarilyand overly complex bidding requirements, which in themselves limit competition.
At the beginning of 2020, the largest utility project in the City of Velika Gorica was launched. The wastewater collection and treatment system had an estimated value of EUR 13 million and was managed by the local public company VG Vodoopskrba d.o.o. Two bidders competed in an open call from July 2020 – construction company Strabag and Elektrocentar Petek. VG Vodoopskrba announced soon after the closure of the bidding procedure that they were cancelling the tender because the best submitted offer (from Elektrocentar Petek) was higher than the estimated value of the procurement. However, alleged wiretaps released to the media seemed to show collusion talks between officials and Enektrocentar Peter, which led The Croatian State Prosecutor’s Office for the Suppression of Organized Crime and Corruption (USKOK) to start investigation against the owner of Petek, the then mayor of Velika Gorica and the former president of VG Vodoopskrba d.o.o. Shortly thereafter the collusion allegations were confirmed by two representatives from VG Vodoopskrba d.o.o. who admitted that, on the order of the mayor of Velika Gorica, they set up the tender in favor of Petek’s company. The Croatian State Prosecutor’s Office for the Suppression of Organized Crime and Corruption (USKOK) suspects that the people who worked on the public tenders adjusted the text of the procurement notice, after they received guidelines from Petek. As of October 2021, the case is still under investigation by USKOK.243 In the meantime, the wastewater public utility project has been re-tendered two more times and was still in court procedures as of the beginning of 2022.244
Some corruption schemes in public procurement in energy SOEs in SEE-9 rely on outright bribery. In many such cases the bribes for the evaluators or the voting members are concealed in the form of a commission or a fee for a service. Inaddition, bribes are used after the procurement contract signature, in order to hide the fact that the winning company has not delivered the equipment or service in the quantity and/or quality promised in its technical offer.
Bribery investigations have skyrocketed in Romania over the past decade on the back of the much more active role of the anti-corruption prosecution, the DNA. This has provided a good set of examples of how bribery schemes in the energy sector have been organized in thecountry.
A case in point is the largest hydro power producer, Hidroelectrica. In October 2013 Mihăilă Ioan, a member of the Supervisory Board and advisor to the Romanian Counsellor for the Minister Delegate for Energy, promised EUR 1.4 million to another member of the same council(the whistle blower in this case). The deal was to vote in favor of concluding a four-year bilateral contract for the sale of around 7 TWh of electricity to Energon Power & Gas S.R.L., for EUR 263 million, resulting in a financial damage to the company of almost EUR 40 million. Brădean Eugen, a member of the Board of Directors of the company and coordinator of the Marketing and Supply Department aided in the bribe attempt by concealing it as a commission agreement for services that would have been concluded by an offshore company and the SOE. Both defendants were sentenced to three years in jail in 2014 and 2015, respectively, for bribe taking and complicity to bribe taking.245
Similarly, in 2011, the Targu Mures branch of Romgaz awarded a public tender for the purchase of equipment for the gas thermal engines in Cojocna, Cluj County, to a consortium of three companies. In the framework of this contract, the director of the Romgaz branch was accused of receiving EUR 60,000 from a representative of one of the winning bidders, in order to accept and receive equipment (motor generator)which did not meet the requirements set out in the award documentation. The director, together with two members of the works reception commission, were further accused of signing a document on the receipt procedure for the electricity generator, resulting in financial damages of over EUR 500,000 for Romgaz (the equivalent to the value paid for the respective equipment). The case was concluded with acquittals in 2016, due to the fact that the evidence obtained by the Romanian Information Service through specific technical surveillance means was considered illegal.246
Creating ghost companies to win tenders
Often in SEE-9 energy tenders there are instances when a ghost company with no real economic activity or previous experience is created only to apply for specific tenders. These companies are usually registered with a small starting capital, and in several months succeed to win tenders worth millions. Their success is most often guaranteed by pre-existing political ties of the companies’ owners. Some of the companies also utilize fraud or other illegal administrative tricks to claim having substantial work experience in other countries, difficult to be verified by the national authorities. Moreover, the allocated tenders sometimes constitute a substantial share of the overall procurement portfolio of the respective contracting authority. This provides the newly established companies with further leverage and places the public bodies in a state of dependency, with little control over the quality of the provided services.
In 2018, the Albanian Transmission System Operator (OST) announced a tender for the construction of a new 220 kV high-voltage power line between Burrel and Peshkopi. Then on 30 October 2018 OST entered into contract with the tender winning company, DH Albania which claimed to be a branch of a foreign company, Dunwell Haberman. DH Albania was registered in the country on 18 July 2018, just three months before signing the contract with OST. The tender was worth EUR 11 million and accounted for about 30% of the value of all tenders conducted by OST in 2018. The capital of the winning company at the time of registration in Albania was only USD 1000.
In addition to the OST tender, in 2018 DH Albania won another tender worth EUR 18 million for the construction of a road intersection inTirana. Investigative journalists contacted the Department of Corporations in the state of Delaware, which verified that the foreign parent company Dunwell Haberman was also established very recently on June 25, 2018, just a few days before registering at the National BusinessCenter in Albania (Trade Registry). Hence, it did not have the 20 years of experience or the projects worth millions of dollars it claimed to win the tender. The Tirana Prosecutor’s Office started an investigation into the case, after the broadcast of the investigative show “Te paekspozuarit”. However, on 24 January 2020, the Tirana Court dismissed the investigation of senior officials of the Albanian Road Authority and the Transmission System Operator, claiming that these officials had no responsibility for verifying the documents submitted in tenders.247