Western Balkans 2020: State Capture Risks and Policy Reforms Executive Summary

In the past two decades, the Western Balkan countries have undergone considerable political, social and economic transformations. A number of outstanding challenges, however, remain, critical among which is the integrity of public governance. The matter of the rule of law in general and anticorruption in particular are now at the heart of the most consequential political project of the Western Balkans – their integration with Europe’s preeminent organisation, the European Union. SELDI’s contribution to the anticorruption agenda in the Western Balkans has been both specific and actionable, seeking to bridge monitoring, analysis and policy recommendations. The 2020 Regional Anticorruption Report looks into the legislative framework and developments in the practice of the institutions of the state – executive, legislature and the judiciary. The assessment of the regulatory and institutional factors enabling corruption in the region is not intended as a comprehensive inventory but rather emphasises some of the priority issues relevant to potential efforts for stemming common sources of corruption. The report provides a model for reporting on anticorruption progress by civil society in the Western Balkans.

SELDI’s monitoring tools provide data about changes in the actual proliferation of two types of corruption – administrative corruption (bribery), which affects individuals and businesses, and state capture (grand corruption) affecting the functioning of democratic institutions and government decision-making. With respect to the latter, the application of SELDI’s State Capture Assessment Diagnostics (SCAD) tool in the Western Balkans has revealed that there are considerable state-capture risks. State-capture pressure in the region still remains at high levels. The results show that none of the countries is close to full state capture, but there are critical impairments in the functioning of democratic and economic checks and balances.

SCAD findings indicate the presence of strong environmental enablers such as ineffective public organisations which lack integrity, impartiality and robust anti-corruption protocols. It also shows actual symptoms of business state-capture pressure, i.e. monopolisation happening at the national, sectoral or institutional level. Monopolisation pressure is the highest in Albania and Kosovo.1 Considerable levels are also recorded in BiH, Serbia, North Macedonia, and Montenegro. SCAD shows the symptoms of such developments in key economic sectors. One of these sectors is energy, due to its high levels of concentration, lack of transparency and inefficient corporate governance structure of state-owned enterprises, and lack of adequate regulatory oversight.

* Business state-capture pressure is centered on monopolisation pressure at the national, sectoral or institutional level. State capture enablers include institutional and environmental factors at the national level.

The degree to which corruption is tolerated by the general public is an important indicator of progress in the integrity of the public office. SELDI’s Corruption Monitoring System (CMS), which measures pettier forms of corruption (bribery), shows that the acceptability of corruption remains relatively high in the Western Balkans. Bosnia and Herzegovina (BiH), North Macedonia and Kosovo display higher acceptability than the rest. This also corresponds to certain levels of corruption pressure – the vast majority (82%) of people in the region who believe corruption is acceptable in principle expect to be asked for bribes. Even more importantly, more than half (62%) of those who do not accept corruption as the norm still think that they are likely to become victims of corruption pressure.

CMS findings show that compared to 2016 corruption pressure in 2019 increased in four of the six Western Balkans countries: Bosnia and Herzegovina, followed by Montenegro, Kosovo, and Serbia. Only Albania and North Macedonia have had a marginal decrease in corruption pressure. These results indicate that countries under more political pressure from the EU and a clear short-term goal on their EU accession horizon perform better.

Anticorruption legislation

In the range of legal anticorruption tools, the WB countries have achieved the most progress in the development of their statutory laws, including in areas such as preventing conflicts of interest, protection of whistle-blowers, and requirements for assets declarations by public officials. Overall, they have adopted the international anticorruption standards in their national legislations, including provisions about the bulk of the mandatory corruption offenses under the United National Convention on Anti-Corruption (UNCAC), as well as about some non-mandatory.

The regulatory activism in the Western Balkans was not the result of a feedback mechanism for the effectiveness of policies but rather a response to the growing demand for integrity in governance coming from the domestic public and international partners. The task now for the national governments is to keep up with the shifting manifestations and forms of corruption while maintaining regulatory stability and avoiding overwhelming the judiciary with rapid changes of the applicable laws.

A case in point is public procurement. During the last three years, the laws on public procurement have been revised frequently, indicating that policies are trying to keep up with various malpractices. In the Western Balkans, public procurement is an area of heightened corruption risk as it is used not only to procure goods and services for the public benefit but often to transfer public funds into private pockets. SELDI’s assessment of public procurement in the WB countries reveals that it is particularly adversely affected by factors such as tenders often designed to favor specific bidders, poor compliance oversight and enforcement of contract terms, overuse of negotiated procedures, a large number of tenders with only one bidder, etc.

Specialised anticorruption institutions

The establishment of executive institutions with exclusive anticorruption competencies in the state capture environment of the Western Balkan countries faced a dilemma: too few powers would render them useless, which would further increase public distrust of government; too many, and they risk becoming tools for partisan political goals. Countries in the WB have sought to resolve this dilemma in different ways. In Kosovo, there is just an eight-person Office of Good Governance within the Office of the Prime Minister of Kosovo, which monitors the drafting and implementation of strategic documents against corruption. In Albania, also under the Prime Minister’s authority, there is a National Coordinator against Corruption. In Serbia, the arrangement is more elaborate: the Anti-Corruption Agency has a fairly broad remit (monitoring and policy making, conflict of interest resolution, initiating changes and adoption of regulations in the field of anti-corruption, coordinating other anticorruption bodies, etc.). The Montenegrin Agency for the Prevention of Corruption has a similarly broad mandate – the implementation of measures for prevention of conflict of interest, collecting and checking the reports on assets and income of public officials, receiving and acting upon whistle-blower reports, etc. In BiH, due to its complex set-up, there are 14 anticorruption bodies at all levels of government and all of them are established by a formal decision of the governments or parliaments and have their own jurisdictions.

Civil service integrity

Reforms aimed at enhancing the integrity of the public administration in WB countries, driven mostly by the European Union and the promise of EU accession, have resulted in all of the countries adopting civil service laws. There are various mechanisms for preventing and combating corruption among civil servants. For example, in BiH, these issues are regulated by numerous and autonomous laws for each of the specified levels of government. In Kosovo, on the other hand, there are no specific anticorruption provisions in the law on civil servants, but only in the Code of Conduct of Civil Servants and the anticorruption law. However, implementation of these mechanisms and repression policies remain rather weak and without tangible effect, thus creating fertile ground for unethical behavior to become acceptable. In all the WB countries, senior civil servants and particularly some special categories of civil servants employed in sectors of high corruption risk (police, tax administration, customs, etc.) are obliged to report their assets and incomes to competent institutions. However, the institutions in charge of the control of assets and incomes are mostly focused on elected public officials, rather than on civil servants. In almost all of the countries, there is a problem with dismissals that are annulled by the courts, indicating shortcomings in the implementation of warranted demotion or dismissal of civil servants.

Anticorruption enforcement: the judiciary

Although judicial reforms have been ongoing for more than a decade in all Western Balkan countries, they have not produced significant progress. The essence of these reforms has been limited to improving the legislative framework and other technical matters, followed by poor implementation and performance, especially as regards effective prosecutions and convictions – final convictions of public officials remain mainly in the single digits. This is particularly true for higher-level corruption cases, although exceptions have started to appear. The separation of powers and creation of an independent judiciary is hindered by the politicisation of the judiciary, undue influences and corruption – the legislative and executive power still exercise a strong influence on the judiciary election process and budget allocation. All of these issues present major hurdles on the EU accession path of the Western Balkan countries. The main deficiencies in the governance and functioning of the judiciary include:

  • influence of the legislative and executive branches in the selection and promotion of judges and prosecutors;
  • the bodies governing the judiciary and the prosecution are not appropriately separated;
  • the enforcement of the disciplinary accountability and of the codes of ethics for judges and prosecutors is still very limited;
  • public prosecutor’s offices lack resources, especially expertise in financial forensics;
  • management structures are unclear and competencies often overlap.

Anticorruption in the economy: the hidden sector

A significant hidden economy sector closely linked to corruption continues to plague the Western Balkans. The presence of this sector could be attributed to a plethora of causes, such as low tax morale; weak business environment and very high poverty levels; lack of trust in the institutions of government and high perceptions of corruption; high taxation and para-fiscal costs, in parallel to excessively coercive tax policy; insufficient inspections and audits; red-tape, burdensome severance payment system, and frequent changes of legislation.

High tolerance towards evasion of tax and social security contributions has been cultivated in the Western Balkans due to the perception that tax authorities and in general the public system are corrupt. According to 45.7% of the businesses in North Macedonia and 72.9% in Albania, corruption is the most important factor for the existence of the hidden economy. This leads the public to believe that taxes are not properly used for delivering better public services.

Western Balkan policy-makers have taken steps to introduce the compulsory use of written labor contracts on the main job but their efforts have remained largely unsuccessful, as the overall hidden economy levels continue to rise. This is due to the multiple alternative ways of evading the payment of health and social security contributions, such as under-declaring the amount of the received salary, or non-declaring secondary or part-time jobs.

The role of civil society

Throughout the Western Balkans, civil society organisations (CSOs) have increased both their expertise and their ability to utilise this expertise in a range of contributions to the anticorruption agenda. Their anticorruption impact is achieved through a variety of means – initiating legislative changes and benchmarks for good practices to increase transparency, accountability and integrity of public enterprises and enhancing the private business capacity to prevent and combat corruption.

Given their active role in promoting the integrity of the public office, it is all the more appropriate that CSOs should be held to the highest standards of transparency and accountability. Overall, while a growing number of CSOs advocate for good governance, there is little progress in taking steps to make themselves more transparent. A clear measure of this is the low number of CSOs that publish online annual reports. In some countries (e.g., BiH), there is no specific requirement for CSOs to publish operational and financial reports – the law requires them to be “transparent” without defining any specifics. In practice, only CSOs that apply for governments funds are obliged to provide reports on a regular basis.

The way forward: catalysing anticorruption in the Western Balkans

Slow and patchy anticorruption progress has allowed private interests to acquire a hold on Western Balkan governments resulting in state capture. Releasing governance from this grip can only be achieved by an alliance of stakeholders acting in concert: reform-minded policy makers, civil society and international partners, chief among which the European Union.

At the national level, it is necessary for public bodies in the Western Balkans to set up procedures for the effective prosecution of corrupt high-level politicians and senior civil servants. The analysis of SCAD data suggests that a key priority should be safeguarding and monitoring judicial independence and performance. The influence of the legislative and executive branches in the selection and promotion of judges and prosecutors should be normatively excluded or minimized. Countries where the majority of the judicial self-governing bodies are not elected among judges and by judges should adopt reforms increasing their voting power.

A proper balance between prevention and repression is especially important to strike when seeking to reduce the size of the hidden economy and its impact on corruption. Governments need to identify what incentivises employers and employees to engage in informal business activities; these would then be factored in when designing reforms for improving the business environment, the tax policy and the quality of the public services.

A critical issue in ensuring that governments are held accountable is the transparency of media ownership, newsroom independence and safeguarding media freedom from political interference. A particular focus in the governments’ efforts should be avoiding civil society capture, improving the corporate governance of state-owned enterprises, and the transparent management of large-scale investment projects. 

The advancement of the quality of public governance in the Western Balkan countries is now closely linked with the process of their integration with the European Union. The underlying conditions which influence integrity reforms are different in each country, making the EU the regional stabilising factor for these reforms.

For its enlargement strategy to allow it to continue being such a factor, the EU needs more active political engagement with the Western Balkans countries, providing them with a clear perspective for the future. Stronger engagement would, however, need to guard against several unintended consequences, which could make it counterproductive. It would need to ensure that the benefits of closer economic integration with the Union do not accrue exclusively to a small clique of privileged oligarchs, thus further exacerbating business state capture. The membership-related conditionalities on the integrity of governments need to be accompanied by equally strong domestic public demand for accountability, lest the dominant political actors choose the former as an excuse to disregard the latter. Engagement in the diplomatic arena with politicians and senior government officials would also need to be performed in a way that does not create the impression of political endorsement. The overall effect of this process should be to stand up to and neutralise the harmful effects of authoritarian influence in the region.

The European Union has now strengthened the contingency of the enlargement process by introducing negative and positive conditionality and including options such as suspension of negotiations and freezing of funds. SELDI welcomes the incorporation in EU’s approach to anticorruption in the context of accession of some of SELDI’s earlier recommendations, including the mainstreaming of anticorruption in a broader range of policies and not just in anticorruption institutions and the judiciary, and protecting the important EC–civil society relations, including their financial underpinning from unexpected distress. Still, the primacy of the rule law agenda for progress in any other area of development of the Western Balkans needs to be further emphasised, in particular by broadening the range of stakeholders engaged in both monitoring and advocating for good governance reforms. Only a public-private coalition involving both EU institutions and actors and local public and private institutions and individuals would be able to ensure the scaffolding of positive anticorruption developments, i.e., their irreversibility.

EU’s anticorruption assistance – both technical and financial – for the Western Balkans needs to be provided in synchrony with EU’s general policy messages. This is what is now expected from the Instrument for Pre-Accession Assistance (IPA) III. Given the findings of SELDI’s SCAD assessment of the intensity of state capture in the region, EU funding should incorporate the primum non nocere(first, do no harm) principle. In other words, it needs to ensure that it does not become counterproductive by strengthening clientelistic networks of corrupt politicians and privileged businesses which receive the lion’s share of EU-funded procurement.

The EU needs to continue monitoring anticorruption developments in partnership with civil society in the region. Independent corruption and anticorruption monitoring mechanisms are needed at all levels – from corruption risk assessment of policies to proof-reading of key legislation and analysing the efficiency of the internal anticorruption procedures in individual public institutions. In helping the countries deal with the latter, the EU would be well advised to mainstream innovative analytical instruments to guide its policies, such as the ones piloted by SELDI:

  • Monitoring Anticorruption Policy Implementation (MACPI) tool, which assesses the corruption resilience of institutions and identifies anticorruption policy and implementation gaps; and
  • State Capture Assessment Diagnostics helps identify state-capture vulnerabilities.

The European Commission would need to pay particular attention to safeguarding competition in sectors of high monopolisation pressure when implementing its investment plan for the region. The technical support, policy advice and EU funding should be directed towards anti-corruption and anti-monopoly efforts focused on critical sectors, such as energy, infrastructure, banking and telecommunications. The extension of advisory missions to the whole Western Balkans will also benefit the performance of the rule of law assessments; however, it is recommended that any case-based peer-reviews include civil society experts. The European Commission and the local EU Delegations should work together with local stakeholders to establish procedures for regular trial monitoring of corruption cases, as well as monitoring the progress of the judicial reforms.

Read the full report

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